Privity of Contract (OCR A-Level Law): Revision Notes
Privity of Contract
The basic rule of privity
Privity of contract is a fundamental principle established in Dunlop v Selfridge (1915). The rule states that only the parties who have entered into a contract can enforce the terms of that contract. This means that a person who is not a party to the agreement cannot sue to enforce it, even if the contract was made for their benefit.
This rule makes practical sense in many situations. After all, a person who did not agree to a contract should not normally be bound by its obligations. If you make an agreement with someone else about a third person, it would be unfair to hold that third person responsible for something they never agreed to.
However, problems arise when we consider the other side of the equation. What happens when a contract is made that is intended to benefit a third party, but that third party cannot enforce it? This can lead to significant unfairness.
The privity rule creates a paradox: while it protects third parties from being bound by obligations they never agreed to, it also prevents them from claiming benefits that were clearly intended for them. This tension between protection and fairness has shaped much of the law's development in this area.
Why the basic rule can cause problems
The case of Tweddle v Atkinson (1861) illustrates the potential injustice of the privity rule. In this case, a father and future father-in-law agreed that they would each pay a sum of money to the groom (Tweddle). When the father-in-law died before making the payment, Tweddle tried to sue the executors of the estate for the money that had been promised to him.
The court refused to allow Tweddle to enforce the promise. Even though the contract was clearly intended to benefit him, he was not a party to the original agreement between the two fathers. Furthermore, under the rules of consideration, Tweddle had not provided anything of value to support the promise, so he could not enforce it.
The Double Problem in Tweddle v Atkinson:
The court identified two fatal flaws in Tweddle's claim:
- Lack of privity: He was not a party to the contract between his father and father-in-law
- Lack of consideration: He had not provided anything of value in exchange for the promise
Either flaw alone would have been sufficient to defeat his claim. This highlights why privity cases can be particularly difficult for third parties to overcome.
This decision highlighted a genuine problem with contract law. Third parties who were meant to benefit from contracts were left without a remedy, even when the contracting parties had clearly intended them to receive that benefit. This unfairness led to calls for reform and eventually resulted in changes to the law.
Exceptions to the rule of privity
Statutory exceptions
Contracts (Rights of Third Parties) Act 1999
The unfairness illustrated in cases like Tweddle v Atkinson led to significant reform. Parliament passed the Contracts (Rights of Third Parties) Act 1999 to address this problem. This Act creates important exceptions to the privity rule and allows third parties to enforce contractual terms in certain circumstances.
Under the 1999 Act, a person who is not a party to a contract may enforce a term of that contract in their own right if:
- The contract expressly states that they may enforce it, or
- The contract purports to confer a benefit on them
How the Third Party Must Be Identified:
There is an important requirement: the third party must be expressly identified in the contract. This identification can be:
- By name (e.g. "John Smith")
- As a member of a class (e.g. "all employees of X Ltd")
- By answering a particular description (e.g. "the buyer's children")
The key is that someone reading the contract should be able to identify who the intended third party beneficiary is.
Worked Example: Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003)
Facts: Nisshin hired out their cargo ship to various companies to transport goods. Each hiring contract included a clause stating that a commission would be paid to Cleaves, who brokered the deals, even though Cleaves was not a signatory to the actual contracts.
Issue: When Nisshin refused to pay the commission, could Cleaves enforce the commission clause as a third party?
Decision: The court held that the burden of proof was on Nisshin to show that the parties did not intend for Cleaves to be able to enforce the term. Nisshin failed to prove this, so Cleaves could enforce the commission clause under the 1999 Act.
Key Principle: Once a third party shows they fall within the Act's requirements, the burden shifts to the contracting parties to prove they did not intend the third party to have enforcement rights.
However, the Act has limits, as shown in Avraamides v Colwill (2006). Avraamides had hired a bathroom company to refurbish his bathrooms, but the work was unsatisfactory. When the company had no assets, Avraamides tried to sue Colwill, who had taken over the company and its assets.
The Limits of the 1999 Act:
The Court of Appeal held that Avraamides did not qualify under the 1999 Act because he was not specifically identified in Colwill's contract to buy the company's assets.
This case establishes an important limitation: the Act requires clear identification of the third party in the contract itself. A third party cannot enforce a contract simply because they might benefit indirectly from it. There must be a clear intention to confer enforceable rights on that specific person or class of persons.
Law of Property Act 1925
Section 56 of the Law of Property Act 1925 provides another statutory exception to the privity rule, particularly in relation to property transactions.
Worked Example: Beswick v Beswick (1968)
Facts: A man agreed to sell his coal business to his nephew in return for weekly payments, with £5 per week to be paid to the man's wife after his death. The nephew paid once after the man died, then refused to make further payments.
Issue: Could the wife enforce the promise when she was not a party to the original contract?
Decision: The wife was able to sue successfully. She brought the claim in her capacity as administratrix of her late husband's estate, and was able to enforce the nephew's promise to pay.
Key Principle: Section 56 of the Law of Property Act 1925 can allow third parties to enforce contractual terms in property-related situations, providing an important exception to the privity rule in this specific context.
Common law exceptions
Before the 1999 Act, the courts had developed several common law exceptions to the privity rule. These exceptions remain important today.
Restrictive covenants
Restrictive covenants are promises that restrict how land can be used. The key case is Tulk v Moxhay (1848).
In this case, the claimant sold land with a restrictive covenant attached, which prevented the land from being built upon. The land changed hands several times until it was bought by the defendant, who wanted to build on it. The defendant argued that there was no privity of contract between himself and the original seller, so the covenant could not bind him.
The Significance of Equity:
The court held that the restrictive covenant was enforceable in equity. The claimant was seeking an injunction (a court order to stop building) rather than damages (money), and the court was willing to enforce the covenant to prevent the defendant from breaking it.
This distinction is crucial: equity looks beyond strict contractual relationships to prevent unfairness. By seeking an equitable remedy (injunction) rather than a common law remedy (damages), the claimant could enforce the covenant against a party with whom there was no privity of contract.
This established that restrictive covenants relating to land can bind subsequent purchasers, even though there is no privity of contract between the original seller and the later buyer.
Agency
The law of agency provides another exception. When one person (the agent) acts on behalf of another person (the principal), the agent can create contractual relationships between the principal and third parties.
The Eurymedon (1975) demonstrates this principle. A contract to ship machinery contained a limitation clause stating that any claim for damaged goods had to be brought within one year. When goods were damaged, the claimant brought a claim against a stevedore (a company that unloads ships) after a year had passed. The claimant argued that the stevedore was not privy to the shipping contract, so the limitation clause did not protect them.
The Agency Exception in Action:
The court held that the stevedores were party to the contract because they provided services (unloading the ship) as agents. The principle established was that consideration owed to a third party can be valid consideration for a new promise to another party.
Through the agency relationship, the stevedores could benefit from the limitation clause even though they were not direct parties to the original shipping contract. This shows how agency law can effectively create contractual relationships that overcome the privity barrier.
Collateral contracts
A collateral contract is a separate contract that exists alongside the main contract. This doctrine allows someone who is not party to the main contract to sue based on a connected promise.
Worked Example: Shanklin Pier v Detel (1951)
Facts: Shanklin Pier employed contractors to paint a pier. Detel, the paint manufacturer, told Shanklin that a particular paint was suitable for the job. Relying on this assurance, Shanklin instructed the contractors to use that paint. Within three months, the paint began to peel off.
Issue: Shanklin could not sue on the main contract with the contractors, but could they sue Detel directly?
Decision: The court allowed them to sue Detel on a collateral contract. The collateral contract was formed when:
- Detel made the promise about the paint's suitability
- Shanklin provided consideration by instructing the contractors to use that paint
Key Principle: A contract can be given as consideration by simply agreeing to enter into another contract, creating an enforceable collateral agreement. This provides a way around privity by creating a separate, enforceable contractual relationship.
Key Points to Remember:
- Privity of contract means only the parties to a contract can enforce it (Dunlop v Selfridge)
- The basic rule can cause unfairness when third parties are intended to benefit but cannot enforce the contract (Tweddle v Atkinson)
- The Contracts (Rights of Third Parties) Act 1999 allows third parties to enforce terms if they are expressly identified and the contract confers a benefit on them
- Common law exceptions include restrictive covenants (Tulk v Moxhay), agency (The Eurymedon), and collateral contracts (Shanklin Pier v Detel)
- The Law of Property Act 1925 s 56 provides another statutory exception, particularly for property transactions (Beswick v Beswick)
| Key Term | Definition |
|---|---|
| Privity of contract | The principle that only parties to a contract can enforce its terms |
| Third party | A person who is not a party to a contract but may be affected by it |
| Restrictive covenant | A promise that restricts how land can be used, which may bind subsequent purchasers |
| Collateral contract | A separate contract that exists alongside the main contract |
| Agency | A relationship where one person (agent) acts on behalf of another (principal) |
| Contracts (Rights of Third Parties) Act 1999 | Statute allowing third parties to enforce contractual terms in certain circumstances |