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Privity of contract

Previous: Estoppel

A contract may now be made to confer a benefit on another person, according to the Contracts (Right of Third Parties) Act 1999. However, common law suggests that third parties may not enforce a contract which confers a benefit upon them. It is common ground between the two systems however that obligations may not be imposed upon third parties to contract.

Common law

The rule

Historically, in the case of Tweddle v Atkinson [1861], the common law privity rule was noted. A groom could not enforce a contract made between his father and the bride’s father to pay the groom some money, as consideration did not move from the groom. The third party to the contract, the groom, could not enforce the contract.

This was again confirmed in Beswick v Beswick [1967] where an aunt could not enforce a contract made between her husband and nephew for the nephew to pay the aunt £5 per week after the husband died (though the husband’s estate’s claim succeeded). Finally, in Dunlop v Selfridge [1915], Dunlop could not enforce a term in a contract with a distributor with the ultimate retailer of their tyres to be sold at list price or above only.

Lord Denning’s anarchy

In Jackson v Horizon Holidays [1975], Lord Denning attempted to allow recovery of benefits assigned to third parties of a contract. In this case, the purchaser of a package holiday (Jackson) was allowed to recover for his loss and the loss of benefit to his family for the holiday being of unsatisfactory holiday. Although Lords in the majority said recovery was allowed due to Jackson feeling bad for his family’s disappointment.

Back to normal

This judgment was promptly rectified in Woodar Investments v Wimpy Construction [1980]: Wimpy’s promise to pay a third party £150,000 on completion of the project was not enforceable by Woodar.

Assigning the benefits

Following the case of Linden Gardens v Lenesta Sludge Disposals [1994], a third party buyer was allowed to enforce a contract for liability due to defective building work. This was because the builder could foreseeable that the building was to be sold almost immediately and any defective building work would cause the third party to suffer loss. In Darlington BC v Wiltshier Northern [1995], the council, who was a third party to a building arrangement between a bank and the builders after commissioning the bank to contract with the builders, could sue the builder for defective building work.

Where liability has been assigned by deed to a third party, as in Alfred McAlpine Construction v Panatown [2001], the contractual party will be prevented from suing as to prevent double liability.

Employees as third parties

Following the usual rule of privity once again, in Scruttons v Midland Silicones [1962], stevedores, under contract with a carrier, were liable, and not protected by the limit of liability imposed by the main contract to supply. Yet in London Drugs v Kuehne and Nagel [1992, Canada], employees were protected from liability when carrying out the essence of their employer’s contract.

The Contracts (Rights of Third Parties) Act 1999

In this area of contract law, statue has intervened, with the Contracts (Rights of Third Parties) Act 1999. It allows 3rd parties to enforce benefits conferred upon them by contracts to which they are not party to. Burdens may not be assigned to third parties.

The content of the Act

Section 1(1) provides that a third party may enforce a terms where (a) expressly given such a right or (b) where the contract “purports to confer a benefit on him”. The third party must be designated either expressly or by belonging to a known class ( s 1(3) ), and the third party may only enforce the relevant term(s) of the contract if the parties intend such enforceability.

Once confirmed by s 1, the third party is treated as a party to the contract in that they have all usual contractual remedies at their disposal (s 3).

Unless the contract specifies otherwise, s 2(3) provides that the parties may not vary a contract which confers a benefit on a third party once (a) assent is given, or if the promisor believes that the contract may have been relied upon and the third party has foreseeably relied upon it.

According to s 5, if a promisee has already recovered for the third party, the third party may not then recover through double liability.

Controversy

The only apparent major issue with this statue could be seen if one attempted to apply the act to Alfred McAlpine Construction v Panatown [2001]. If a promisee recovers for the third party, the promisee can also recover for their share of any damage. However, there is no obligation for the promisee to rectify the third party’s loss. The court need only look at the promisee’s intention. It is submitted that an issue may also exist where variation of contract is prohibited just because a third party has a benefit included on them. This appears to undermine the contracting parties freedoms.

Next: Undue influence

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