Privity of contract

Last updated November 27, 2023

The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon anyone who is not a party to that contract.^[1] It is related to, but distinct from, the doctrine of consideration, according to which a promise is legally enforceable only if valid consideration has been provided for it, and a plaintiff is legally entitled to enforce such a promise only if they are a promisee from whom the consideration has moved.^[2]

A principal consequence of the doctrine of privity is that, at common law, a third party generally has no right to enforce a contract to which they are not a party, even where that contract was entered into by the contracting parties specifically for their benefit and with a common intention among all of them that they should be able to enforce it. In England & Wales and Northern Ireland, the doctrine has been substantially weakened by the Contracts (Rights of Third Parties) Act 1999, which created a statutory exception to privity, providing, in certain circumstances, third parties the right to enforce terms of contracts to which they are not privy.

Third party rights

Privity of contract occurs only between the parties to the contract, most commonly contract of sale of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or corporation.

If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.

This, however, does not mean that the parties do not have another form of action: for instance, in Donoghue v. Stevenson – a friend of Ms. Donoghue bought her a bottle of ginger beer, which contained the partially decomposed remains of a snail. Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer was in breach of a duty of care owed to her. Accordingly, she was awarded damages in the tort of negligence for having suffered gastroenteritis and "nervous shock".

History

Prior to 1861 there existed decisions in English Law allowing provisions of a contract to be enforced by persons not party to it, usually relatives of a promisee, and decisions disallowing third party rights.^[3]^[4] The doctrine of privity emerged alongside the doctrine of consideration, the rules of which state that consideration must move from the promise, that is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed. 1833 saw the case of Price v. Easton , where a contract was made for work to be done in exchange for payment to a third party. When the third party attempted to sue for the payment, he was held to be not privy to the contract, and so his claim failed. This was fully linked to the doctrine of consideration, and established as such, with the more famous case of Tweddle v. Atkinson . In this case the plaintiff was unable to sue the executor of his father-in-law, who had promised to the plaintiff's father to make payment to the plaintiff, because he had not provided any consideration to the contract.

The doctrine was developed further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. through the judgment of Lord Haldane.

Privity of Contract played a key role in the development of negligence as well. In the first case of Winterbottom v. Wright (1842), in which Winterbottom, a postal service wagon driver, was injured due to a faulty wheel, attempted to sue the manufacturer Wright for his injuries. The courts however decided that there was no privity of contract between manufacturer and consumer.

This issue appeared repeatedly until MacPherson v. Buick Motor Co. (1916), a case analogous to Winterbottom v Wright involving a car's defective wheel. Judge Cardozo, writing for the New York Court of Appeals, decided that no privity is required when the manufacturer knows the product is probably dangerous if defective, third parties (e.g. consumers) will be harmed because of said defect, and there was no further testing after initial sale. Foreseeable injuries occurred from foreseeable uses. Cardozo's innovation was to decide that the basis for the claim was that it was a tort not a breach of contract. In this way he finessed the problems caused by the doctrine of privity in a modern industrial society. Although his opinion was only law in New York State, the solution he advanced was widely accepted elsewhere and formed the basis of the doctrine of product liability.

Exceptions

Common law exceptions

There are exceptions to the general rule, allowing rights to third parties and some impositions of obligations. These are:

Collateral Contracts (between the third party and one of the contracting parties)
Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)
Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighbouring land)
Agency and the assignment of contractual rights are permitted.
Third-party insurance - A third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums.
Contracts for the benefit of a group, where a contract to supply a service is made in one person's name but is intended to sue at common law if the contract is breached; there is no privity of contract between them and the supplier of the service.

Attempts have been made to evade the doctrine by implying trusts (with varying success), constructing the Law of Property Act 1925 s. 56(1) to read the words "other property" as including contractual rights, and applying the concept of restrictive covenants to property other than real property (without success).

in case of trust/beneficiary
in case of family arrangement
in case of acknowledgment of debts
in case of assignment of contract.

Statutory exceptions

In England and Wales, the Contracts (Rights of Third Parties) Act 1999 provided some reform for this area of law which has been criticised by judges such as Lord Denning and academics as unfair in places. The act states:

1. - (1) Subject to the provisions of this act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

This means that a person who is named in the contract as a person authorised to enforce the contract or a person receiving a benefit from the contract may enforce the contract unless it appears that the parties intended that he may not.

The Act enables the aim of the parties to be fully adhered to. In Beswick v Beswick , the agreement was that Peter Beswick assign his business to his nephew in consideration of the nephew employing him for the rest of his life and then paying a weekly annuity to Mrs. Beswick. Since the latter term was for the benefit of someone not party to the contract, the nephew did not believe it was enforceable and so did not perform it, making only one payment of the agreed weekly amount. Yet the only reason why Mr. Beswick contracted with his nephew was for the benefit of Mrs. Beswick. Under the Act, Mrs. Beswick would be able to enforce the performance of the contract in her own right. Therefore, the Act realises the intentions of the parties.

The law has been welcomed by many as a relief from the strictness of the doctrine, however it may still prove ineffective in professionally drafted documents, as the provisions of this statute may be expressly excluded by the draftsmen.

In Hong Kong, the Contracts (Rights of Third Parties) Ordinance provided for a similar legal effect as the Contracts (Rights of Third Parties) Act 1999.

Third-party beneficiaries

In Australia, it has been held that third-party beneficiaries may uphold a promise made for its benefit in a contract of insurance to which it is not a party ( Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd (1988) 165 CLR 107).^[5] It is important to note that the decision in Trident had no clear ratio, and did not create a general exemption to the doctrine of privity in Australia.

Queensland, the Northern Territory and Western Australia have all enacted statutory provisions to enable third party beneficiaries to enforce contracts, and limited the ability of contracting parties to vary the contract after the third party has relied on it. In addition, section 48 of the Insurance Contracts Act 1984 (Cth) allows third-party beneficiaries to enforce contracts of insurance.

Although damages are the usual remedy for the breach of a contract for the benefit of a third party, if damages are inadequate, specific performance may be granted ( Beswick v. Beswick [1968] AC 59).

The issue of third-party beneficiaries has appeared in cases where a stevedore has claimed it is covered under the exclusion clauses in a bill of lading. In order for this to succeed, three factors must be made out:

The bill of lading must clearly intend to benefit the third party.
It is clear that when the carrier contracts with the consignor, it also contracts as an agent of the stevedore. That is, either the carrier must have had authority by the stevedore to act on its behalf, or the stevedore must later ratify (endorse) the actions of the carrier.
Any difficulties with consideration moving from the stevedores must be made out.

The last issue was explored in New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd [1975] AC 154, where it was held that the stevedores had provided consideration for the benefit of the exclusion clause by the discharge of goods from the ship.

New Zealand has enacted the Contracts Privity Act 1982, which enables third parties to sue if they are sufficiently identified as beneficiaries by the contract, and in the contract it is expressed or implied they should be able to enforce this benefit. An example case of not being "sufficiently identified" is that of Field v Fitton (1988).

Related Research Articles

Specific performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. It is typically available in the sale of land law, but otherwise is not generally available if damages are an appropriate alternative. Specific performance is almost never available for contracts of personal service, although performance may also be ensured through the threat of proceedings for contempt of court.

Consideration is an English common law concept within the law of contract, and is a necessity for simple contracts. The concept of consideration has been adopted by other common law jurisdictions, including the US.

A third-party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract, despite not having originally been an active party to the contract. This right, known as a ius quaesitum tertio, arises when the third party is the intended beneficiary of the contract, as opposed to a mere incidental beneficiary. It vests when the third party relies on or assents to the relationship, and gives the third party the right to sue either the promisor or the promisee of the contract, depending on the circumstances under which the relationship was created.

A collateral contract is usually a single term contract, made in consideration of the party for whose benefit the contract operates agreeing to enter into the principal or main contract, which sets out additional terms relating to the same subject matter as the main contract. For example, a collateral contract is formed when one party pays the other party a certain sum for entry into another contract. A collateral contract may be between one of the parties and a third party.

Scruttons Ltd v Midland Silicones Ltd[1961] UKHL 4, [1962] AC 446 is a leading House of Lords case on privity of contract. It was a test case in which it was sought to establish a basis upon which stevedores could claim the protection of exceptions and limitations contained in a bill of lading contract to which they were not party. The Court outlined an exception to the privity rule, known as the Lord Reid test, through agency as it applies to sub-contractors and employees seeking protection in their employers' contract.

Winterbottom v Wright (1842) 10 M&W 109 was an important case in English common law responsible for constraining the law's 19th-century stance on negligence.

Tertius is the Latin word for "third", or "concerning the third". The term is used in contract law to refer to an interested third party not privy to a contract.

Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd, [1999] 3 SCR 108 is a leading Supreme Court of Canada decision where the court re-affirmed and expanded on the exception to the doctrine of privity first established in London Drugs Ltd v Kuehne & Nagel International Ltd, [1992] SCR 299.

A Himalaya clause is a contractual provision expressed to be for the benefit of a third party who is not a party to the contract. Although theoretically applicable to any form of contract, most of the jurisprudence relating to Himalaya clauses relate to maritime matters, and exclusion clauses in bills of lading for the benefit of employees, crew, and agents, stevedores in particular.

Beswick v Beswick[1967] UKHL 2, [1968] AC 58 was a landmark English contract law case on privity of contract and specific performance. The Lords, overruling the decision of Lord Denning in the Court of Appeal, ruled that a person who was not party to a contract had no independent standing to sue to enforce it, even if the contract was clearly intended for their benefit.

Tweddle v Atkinson[1861] EWHC J57 (QB), (1861) 1 B&S 393 is an English contract law case concerning the principle of privity of contract and consideration. Its panel of appeal judges reinforced that the doctrine of privity meant that only those who are party to an agreement may sue or be sued on it and established the principle that "consideration must flow from the promisee".

New Zealand Shipping Co. Ltd. v. A. M. Satterthwaite & Co. Ltd., or The Eurymedon is a leading case on contract law by the Judicial Committee of the Privy Council. This 1974 case establishes the conditions when a third party may seek the protection of an exclusion clause in a contract between two parties.

English contract law is the body of law that regulates legally binding agreements in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth, from membership in the European Union, continuing membership in Unidroit, and to a lesser extent the United States. Any agreement that is enforceable in court is a contract. A contract is a voluntary obligation, contrasting to the duty to not violate others rights in tort or unjust enrichment. English law places a high value on ensuring people have truly consented to the deals that bind them in court, so long as they comply with statutory and human rights.

Grant v Australian Knitting Mills, is a landmark case in consumer and negligence law from 1935, holding that where a manufacturer knows that a consumer may be injured if the manufacturer does not take reasonable care, the manufacturer owes a duty to the consumer to take that reasonable care. It continues to be cited as an authority in legal cases, and used as an example for students studying law.

Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. It is an important concept in contract law.

Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500 is an English land law and English contract law appeal decision. The case, decided by Denning LJ, confirmed positive covenants can supplant privity of contract in contracts to improve land and secondly a covenant should be implied where the contract shows an intention that the obligation would attach to the land. The case thirdly held in that context, a somewhat uncertain description of lands which was capable of being rendered certain by extrinsic evidence was sufficient to enforce the covenant.

Privity is a doctrine in English contract law that covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a "third party". Historically, third parties could enforce the terms of a contract, as evidenced in Provender v Wood, but the law changed in a series of cases in the 19th and early 20th centuries, the most well known of which are Tweddle v Atkinson in 1861 and Dunlop Pneumatic Tyre v Selfridge and Co Ltd in 1915.

The Contracts Act 1999 is an Act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby [removed] one of the most universally disliked and criticised blots on the legal landscape". The second rule of the doctrine of privity, that a third party could not enforce a contract for which he had not provided consideration, had been widely criticised by lawyers, academics and members of the judiciary. Proposals for reform via an act of Parliament were first made in 1937 by the Law Revision Committee in their Sixth Interim Report. No further action was taken by the government until the 1990s, when the Law Commission proposed a new draft bill in 1991, and presented their final report in 1996. The bill was introduced to the House of Lords in December 1998, and moved to the House of Commons on 14 June 1999. It received royal assent on 11 November 1999, coming into force immediately as the Contracts Act 1999.

Dutton v Poole (1678) is a landmark decision in the Court of Chancery.

Sprat v Agar is an early and landmark precedent and decision in third-party contract law, that is defeating privity of contract. It was one of a number of early cases in the development of how the writ of assumpsit came to allow third parties with no direct involvement to a contract could achieve standing to enforce benefits from a contract.

References

↑ Beatson, J; Burrows, A; Cartwright, J (2020). Anson's Law of Contract. OUP. p. Ch 21. ISBN 9780198829973 . Retrieved 2023-03-20.
↑ The Law Commission (July 1996). "The Law Commission Report No. 242: PRIVITY OF CONTRACT: CONTRACTS FOR THE BENEFIT OF THIRD PARTIES" (PDF). The Law Commission. The Law Commission. Retrieved 2023-03-20.
↑ Privity of Contracts: Contracts for the benefits of third parties (PDF), Law Commission, LC242
↑ Drive Yourself Hire Co (London) v Strutt,1Q.B.250(1954).
↑ High Court of Australia, Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 (8 September 1988)

Text of the Contracts (Rights of Third Parties) Act 1999 as in force today (including any amendments) within the United Kingdom, from legislation.gov.uk .
Beatson, J, Q.C. (1998). Anson's Law of Contract (27th Ed.). Oxford University Press ISBN 0-19-825262-5

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[1] Beatson, J; Burrows, A; Cartwright, J (2020). Anson's Law of Contract. OUP. p. Ch 21. ISBN 9780198829973 . Retrieved 2023-03-20.

[2] The Law Commission (July 1996). "The Law Commission Report No. 242: PRIVITY OF CONTRACT: CONTRACTS FOR THE BENEFIT OF THIRD PARTIES" (PDF). The Law Commission. The Law Commission. Retrieved 2023-03-20.

[3] Privity of Contracts: Contracts for the benefits of third parties (PDF), Law Commission, LC242

[4] Drive Yourself Hire Co (London) v Strutt,1Q.B.250(1954).

[5] High Court of Australia, Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 (8 September 1988)

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