Privity of Contract McKendrick Notes

Main Principles
y

G
eneral rule (common law): A third party can neither acquire rights, norbe subject of
a burden to a contract to which he/she is not party (this isknown as privity of
contract).
y

T
he former part of the rule, stating that a third party cannot acquirerights is
controversial and the courts have created a number of exceptions.
y

After much demand a reform act was implemented:

T
he Contracts(rights of third parties) Act 1999.
T
he Act provides a simple way forcontracting parties to give a third party the right to
enforce the terms of the contract.
T
he contracting parties are able to define for themselvesthe extent to which the third
party can enforce these terms (as theprinciple of freedom of contract is the main
philosophy that underpinsthis act).
y

T
he issue of whether a third party should be able to enforce terms is stillstrongly
debated.
o
S
hould a third party, who is not a promisee and who has providedno consideration
have contract rights?
y

T
he common law exceptions to the rule still stand although theirsignificance and
practicality has diminished following the 1999 Act.
y

A party who breaches contract and fails to confer a benefit on a thirdparty becomes
liable to the other party (not the third party).
T
he rightsof action of the other party to the contract are not affected by the 1999Act.
y

T
he issue of whether or not a contracting party can sue on behalf of athird party is
subject to debate.
y

T
he Act does not affect the general rule stating that obligations cannotbe imposed on
a third party.
T
here are some exceptions to this rule(small scope) and the rule is widely accepted.

A Note on
S
tructure of Contracts
T
here are many situations in which contracts involving a third party may arise.For
example a company (A) may contract with a building company (B) to builda
structure; the building company may then sub-contract some or all of thework to
another party(s) (O). According to the general rule, if A has contractedwith B and
then B has contracted with O then A does not have a right to bringan action against
O should O cause any damage.
T
here are many ways whichthe contract or contracts could be structured to resolve
this issue:-

1) B could be liable to A and then O could be purely liable to B, so in theevent of any

negligence A could sue B, who could in turn take an actionagainst O-

2) A could create a collateral warrantee contract with O giving A theright to take an

action against O in the event of negligence-

3) The third party right of action option:

A could insist that in thecontract between B and O, there be a clause which states
that A has aright of action against O.
T
his would be conferring a right of enforcement on a third party (A is the third party
in this case as theclause would be in the contract between B and O). A would be
able toenforce the term that O work with due care and diligence against
O.Contracting parties will usually consider which option best suits them.However,
the introduction of third party rights (as set out in option 3) needs tobe done with
care so as to not infringe on the rights and obligations set out bythe two contracting
parties in the first place.Establishment of the
G
eneral Rule (Common Law)
T
he general rule is that third parties have no right of actionCases:
T
weddle v. Atkinson (1861) 1 B&
S
393 or 121 ER 762 Queens BenchDunlop Pneumatic
T
yre Co Ltd v.
S
elfridge and Co ltd [1915] AC 847 House of LordsBefore these cases the common
law was unclear regarding the rights of bothparties as the courts had made varied
decisions.
T
hese two are credited bymany as securing the doctrine of privity in English law.

Tweddle v. Atkinson (1861) 1 B&S 393 or 121 ER 762

T
he children of John
T
weddle and William
G
uy were to be married.
T
hey madean agreement to each pay an amount of money to William
T
weddle, who wasto be married. In this contract there was a clause saying that
William
T
weddlehad the right to sue either party if they did not fulfil their obligations. William
T
weddle attempted to sue the executor of William
G
uys will (Atkinson). Hisclaim failed.Ratio: A third party cannot acquire contract
rights from a contract to whichthey are not party if they havent provided
consideration. As William
T
weddlehad provided no consideration the judges found it unnecessary to
considerwhether or not a third party could acquire rights (in the rare scenario) if
theydid provide consideration.
T
his aspect of the general rule needed to besolidified by Dunlop.
Dunlop Pneumatic Tyre Co Ltd v. Selfridge and Co Ltd [1915] AC 847, House of Lords
Dunlop, a tyre manufacturer, sold some tyres to Messrs Dew, a motoraccessories
agent. In the contract of sale it was stated that Dew must not sellthe tyres for below
the list prices. However, they were allowed to offerdiscounts to genuine trade
customers if the customer that they were selling toalso agreed to sell the tyres at
not lower than the list price. Dew sold tyres to
S
elfridge and Co Ltd.
S
elfridge then sold the tyres at below the list prices.Dunlop sued
S
elfridge for a breach of their obligation.(jus quaestitum tertio means a third party
right of action)
T
he House of Lords found in Favour of
S
elfridge: Only a person who is party toa contract can sue upon it. However, two
exceptions are noted A right maybe conferred on a third party via a trust. A third
party may act as an agent forone person who is party to the contract. If the
promisee has contracted as anagent for another party then that other party may be
able to sue.
T
he otherparty, not the agent must, however, supply the consideration for the
contract.