Contract - Privity of Contract

What is privity of contract?

A contract only creates rights & obligations between the parties to it.

It cannot create enforceable rights on a 3rd party

No person can sue or be sued on a contract unless they are party to it

What is the combined effect of privity of contract & consideration?

No person can sue on a contract unless they:

- Are a party to the contract

- Provided consideration

What is the privity of contract doctrine regarding third parties?

A third party should not be able to obtain a benefit or suffer an obligation from a contract to which they are not a party

What are the common law exceptions to the doctrine of privity of contract?

- Agency

- Assignment

- Collateral Contract

- Actions in Tort

- Other judicial attempts to avoid the doctrine

When does an agency relationship occur?

Where one party is authorised, expressly or impliedly, by the principal to contract on behalf of the principal

Who is a contract made by an agent between?

The principal & the party/customer/consumer

What are the requirements to establish an agency relationship?

- The principal should be named

- Should be clear that the agent is contracting on the principal's behalf (but principal can still be bound even if this is not the case)

- Agent should be authorise to act as one - Agent's authority usually limited by the principal

- Consideration has moved from the principal

Is the principal bound by acts of the agent which are beyond the agents authority?

No - only by acts of the agent within the agent's authority

Will a principal be bound if the agent has not disclosed to the third party that they are an agent?

Yes, principal can still be bound

- The principal can enforce the contract even if their identity was not disclosed during the negotiation.

Is agency a true exception to the doctrine of privity?

No, the agent is never a party to the contract, the contract is always between the principal & the party.

Where Annie & Brendan have a contract, Brendan has contractual rights against Annie, and Brendan assigns their rights to Carl - who has rights against who?

- C can now claim against A using B's rights

- B has not assigned its obligations, so B owes obligations to A and A still has rights against B

What is the position if there is a non-assignment clause in the main contract?

Attempted assignment will be unsuccessful

- also possible to limit assignment to a small group of acceptable assignees

How can a collateral contract be an exception to the doctrine of privity?

- The court may find a collateral contract between the promisor and the 3rd party

- Promisor & 3rd party must have communicated with each other & exchanged consideration

Give an example of where a collateral contract was found?

- C employed contractors to paint a pier. It was a term of the contract that C specify the paint to be used.

- 3rd party paint supplier informed C their paint would last for at least 7 years. C instructed contractors to buy and use 3rd party's paint. The paint lasted 3 months.

- Held that there was a collateral contract between C and 3rd party paint suppliers, the consideration for which was, on the one hand, the warranty by 3rd party that the paint would last for 7 years and on the other, the instruction by C to the contractors to buy the paint.

How are actions in tort relevant to privity of contract?

- C who is not a party to a contract between A & B may be owed a duty by one of the parties, breach of which constitutes a breach of duty & gives C the right to sue for damages in tort

- Donoghue v Stevenson

What have actions in tort done to the doctrine of privity of contract?

Opened/widened the doctrine so that the doctrine is applied flexibly

What is the statutory exception to the doctrine of privity?

- The Contracts (rights of third parties) Act

- Allows a 3rd party in limited circumstances to enforce a term of a contract to which they are not a party

- EVEN if they have not provided any consideration

What does the contracts (rights of third parties) act NOT allow?

A contract to be enforced against a 3rd party

What kinds of contracts are excluded from the contracts (rights of third parties) act?

Employment contracts

Contracts between a company & its members

In what circumstances may a third party enforce a term of a contract to which they are not a party?

1. If contract specifically provides that the 3rd party can enforce a term of the contract

OR

2. Need not be specifically stated but..

a) The agreement purported to confer a benefit on that 3rd party

b) And it is not the case that the parties did not intend the term to be enforceable by the third party (ie parties may have intended the contract to be enforceable by them)

What is the rebuttable presumption under the Act when a term purports to confer a benefit on a third party?

this will be enforceable unless it is clear from the construction of the contract that the parties did not intend to confer such a benefit on the third party

eg express exclusion in the contract

What remedies can a third party receive for breach of contract?

Anything they could have received if they were a party

Can the parties to the contract rescind/vary the contract to extinguish the third party's rights without their consent?

if a third party has a right under the contract, the parties cannot rescind or vary the contract to eliminate their right without 3rd party's consent...

- if the third party has communicated his assent to the term to the promisor (words or conduct)

- or the promisor is aware that the third party has relied on the term

- or the 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."

But parties can contract out of this via an express term

When can third party's consent to losing their rights be disregarded?

- court can dispense with the third party's consent where their whereabouts cannot reasonably be ascertained

- where they are mentally incapable of giving their consent

- or where their reliance on the term cannot be reasonably ascertained

(although T may receive compensation for this)

How is a third party identified in regards to enforcing a contract to which they are not a party?

- can be identified by name, class, or description

- They do not need to be in existence at the time of the contract (could be an unborn child)