3.2 Privity of Contract Lecture

General Rule

The Doctrine

The general rule at common law states that a contract creates rights and obligations only as between the parties to such contract. As a corollary, a third party neither acquires a right nor any liabilities under such contract. 

Rule of consideration

Consideration must flow from the promisee.  This rule although distinct from privity doctrines it often yields to same result as to be so connected.

Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520 – For example sub-contractors cannot sue a party to a contract as they lack the necessary consideration.

Right of Action

Although breaches cannot be enforced by 3rd parties, there are situations where a party to a contract can enforce a contract on behalf of a 3rd party.

Specific Performance

Beswick v Beswick [1968] AC 58 – If a contract is made between A and B but for a 3rd party (‘C’).  B can enforce the against A for the benefit of C.  Claims cannot however be made by C themselves.

Stay of Proceedings

Contract can provide covenants that prevent a third party being sued via a stay of proceedings.

Gore v Van Der Lann [1967] 2 QB 31 – Conditions to gain a stay of proceedings:

  1. The contract must provide for an undertaking by the promisor not to sue the third person, and
  2. The promisee must have a sufficient interest in the enforcement of the promise.

Damages

Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 - As a general rule, a contracting party can sue for damages only in respect of his own loss, and not for losses suffered by a third person.

Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68 – There is an exception however, where the third person had no alternate course of remedy available to make good the loss, commonly referred to as a situation of “legal black hole.”.

Exceptions to the doctrine

Statutory exceptions

There are numerous statutory exceptions to the doctrine of privacy of contract

The Contracts (Rights of Third Parties) Act 1999 provides provisions for a 3rd party to enforce a contract namely s.1 –

  1. Where the contract expressly provides for it, or
  2. Where the contract purports to confer a benefit on such a person.

There are however numerous problems with the statutes interpretation which are covered in the detailed chapter.

Common law exceptions

  1. Collateral contracts

Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 – When a contract between certain parties actually includes a 3rd party as a contracting party they are able to bring a cause of action.

  1. Trust

Dunlop Pneumatic Tyre Company Ltd v Selfridge and Company Ltd [1915] AC 847 – In contracts that create trust relationships, the beneficiaries can sue the trustees even though they are not direct parties to the contract.

  1. Assignment

Trendtex Trading Corporation v Credit Suisse [1982] AC 679 – A contracting parties can assign their rights under a contract (not liabilities unless there is consent), this beneficial interest will allow for suing under the contract.

  1. Agency

Wakefield v Duckworth [1915] 1 KB 218 – A principal not named in the contract may sue upon it if it was actioned by his agent.

  1. Action in Tort

Donoghue v Stevenson [1932] AC 562 – ‘The neighbour principle’ allows negligence claims to be made against 3rd parties.

  1. Restrictive Covenants

Tulk v Moxhay [1848] 41 ER 1143 – Restrictive covenants can benefit 3rd parties on the conveyance of land.

  1. Exclusion Limitation/Himalaya Clause

New Zealand Shipping v AM Satterthwaite Ltd (The Eurymedon) [1975] AC 154 – In bills of lading, contracts that extend liability limitations that benefit the carrier can extend to agents such as stevedores.


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