Solicitors Qualifying Examination

Privity of Contract | Contract Law – Study For SQE1 Exam –

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Privity of Contract
Cannot sue for breach of contract unless (Dunlop Pneumatic Tyre Co v Selfridge &
1. Party to contract
2. Have provided consideration
E.g. say to daughter that will pay £1000 to someone who teaches her to drive +
driver wants money having taught her ~ has provided consideration (teaching
her) but was not privy to contract
Two key ideas:
1. A third party is not subject to burden by a contract to which he is not
2. A third party may (in certain circumstances) obtain a benefit from a
contract to which he is not party, and having provided no consideration
a. s 1 Contracts (Rights of Third Parties) Act 1999
b. Common law + other statutory devices for circumventing privity of
contract may still be used (s 7 C(RTP)A 1999)
Exceptions to Privity
• Not really exception to privity, as agent is never party to the contract in
any case
• Agent authorised (expressly or impliedly) by the principle to contract on
his behalf
• As though principle contracted with third party:
1. If agent within actual authority = principle bound
2. If agent within apparent / ostensible authority = principle
3. If agent outside actual/apparent authority = principle not bound,
but can ratify
• Valid agency relationship (Scruttons Ltd v Midland Silicones Ltd):
1. Principle named (stevedore is intended to be protected by limited
liability, as well as carrier)
2. Clear agent contracting on principle’s behalf (both for carrier itself
and stevedore)
3. Agent authorised (stevedore authorises carrier to act as agent)
4. Consideration from principle (from Stevedore)
• Accepted in New Zealand Shipping v A.M. Satterthwaite & Co. (The
Eurymedon) – Lord Wilberforce: 3 contracts, between shipper and carrier,
carrier and stevedores AND unilateral offer made by shipper to exempt
the Stevedores, made to stevedores through carrier as agent
o Unilateral contract formed on unloading = performance is
acceptance and consideration (thus fulfilling (4) above).
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• A has contractual obligation to B
• B assigns rights to C
• C may be able to sue A, not beyond the rights of B (Linden Gardens Trust v
Lenesta Sludge Disposlas Ltd)
Guarantor’s right of subrogation
• Where guarantor pays principle creditor for debt owed by debtor, he
takes place of the creditor and has same rights against the debtor
Contractual rights under trusts
• Right under a contract = chose in action = can be subject of a trust
• Beneficiary can enforce the benefit against the promisor
Collateral contract
• If court can establish a separate collateral contract between promisor and
third party, it can avoid difficulties of privity (Shanklin Pier v Detel
Products Ltd)
o Contract here: consideration from Pier to give instruction to
painter (contractor) to use Detel and from Detel the warranty that
the pain would last 7 years.
Tort Claims
• Claimant can elect between pursuing remedy in contract or tort
(Henderson v Merrett Syndicates Ltd)
• Tort claims have no privity of contract (Donoghue)
• Tort claims can be made for purely financial losses caused by a breach of
contract (Junior Books Ltd v Veitchi Co Ltd)
• Following this, it became a little easier for third parties to bring an action
for breach of contract + more difficult to recover financial loses in tort
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Judicial avoidance of privity
Contracting for another’s benefit
• Contracts made by A for the benefit of B
• Denning MR, in reliance on Lush LJ (Lloyd’s v Harper): A can recover all
that B would have recovered had the contract been made with B (Jackson
v Horizon Holidays)
• Lord Wilberforce disagrees (Woodar v Wimpey) – Jackson = specific
example where particular type of contract (family holiday, group
restaurant booking, hiring a taxi for a group) requires particular damages
o Lush LJ applies only to the rights of an agent to sue on a contract
where the contract gives him such a right
Linden Gardens Trust v Lenesta Sludge Disposals Ltd
• Employer contracts Lenesta to remove asbestos, both in knowledge that
would be leased to third party subsequently, Linden Gardens
• Their contract prohibits transferal of rights w/out consent of Lenesta
• Property leased to Linden, who find asbestos
• HELD: claim by Linden fails due to prohibition of transfer of rights in
St. Martins Property Corporation Ltd and another v McAlpine
• Ditto above
• Employer also party to legal action
• The Albazero: where A + B contract both knowing for the benefit of C,
A or B can sue on behalf of C
• This will only be applied where there is no alternative route for the third
party claim (McAlpine v Panatown – HoL [2001])
Statutory Exceptions
• Road Traffic Act 1988 – s 151: third party can make a claim directly
against insurance company
• Married Women’s Property Act 1882 – s 11: life insurance pay out on
trust for wife and children + enforceable by them
• Companies Act 2006 – s 33: shareholder A can sue shareholder B for
breach of company’s constitution
• Carriage of Goods by Sea Act 1992 – s 2: bill of lading = holder can enforce
contract of carriage as though party to it
• LPA 1925 – s 56(1): deemed not to have any revolutionary effect in
circumventing privity of contract, as chose in action of rights under the
contract not to be included within definition of property here i.e. taking
interest, even though not party to contract, does not apply to contractual
rights (Beswick v Beswick)
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The Contracts (Rights of Third Parties) Act 1999
• Contracts excluded from the Act (s 6):
o Employment contracts
o Contracts between company and members
• Third parties can, in certain circumstances:
o Enforce terms
o Rely on exemption / limitation clauses (s 1(6))
• Circumstances for third party enforcement/reliance (s 1(1)):
a) The contract expressly provides for third party enforcement (i.e.
says they can sue / have rights!)
b) A term purports to confer a benefit on him + does not appear that
the parties did not intend the term to be enforced by him (s 1(2))
• Dolphi & Maritime & Aviation Services Ltd v Sveriges
Angfartygs Asurans Forening, The Swedish Club [2009] – B
gets commission from settlement under contract between A
and B; settlement directly between A and C; can B claim
under A+C contract? – No, benefit to B must be one of the
purposes of their bargain, not incidental effect.
• However, once contract purports to confer benefit, it will be
difficult to rebut this under s 1(2) (Nisshin Shipping Co Ltd v
Cleaves & Co. Ltd)
• Nature of third party (s 1(3)) = expressly identified in contract by name,
member of class or by description, but need not be in existence when
contract entered into
o Must be expressly identified, cannot be constructive or implied
(Avraamides v Colwill)
• Same remedies available to third party as if he had been party to the
contract (s 1(5))
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Variation or rescission unavailable to contractors
• Where third party has right to enforce a term, parties may not
rescind/vary contract to extinguish/alter right without third party’s
consent if (s 2(1)):
a) Third party has communicated assent to term to promisor
• Words or conduct (s 2(2)(a))
• Assent by post effective on receipt (s 2(2)(b))
b) Promisor aware that third party has relied on term
c) Promisor can reasonably be expected to have foreseen that the
third party would rely on the term and the third party has in fact
relied on it
• No need for consent if cannot be reasonably ascertained
whether third party has relied on term (s 2(5))
• May be express term allowing parties to rescind/alter (s 2(3)):
a) Without consent; or
b) Where contract stipulates contexts where consent of third party is
required, different from s 2(1)(a-c).
• Court may dispense of need for third party’s consent if (s 2(4)):
a) Whereabouts cannot reasonably be ascertained
b) Mentally incapable of consent
Third party must not be in a better position than had they been party to the
• S 3(6) – if he had been party to contract and would not have been able to
enforce term, he may not enforce it under s1.
Promisor not to be subject to double liability
• S 5 – courts to reduce damages to third party if already damages to


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