Chapter 4 in essence

1. The doctrine of privity restricts the parties who can sue or be sued on a contract. This means that: (i) a third party cannot sue for a benefit under a contract even though the parties intended to confer a benefit on him, and (ii) the contract parties cannot impose a burden on a third party by their contract.

2. Rule (i) follows from the traditional requirement that the party suing on a contract is the promisee and has given consideration for it. This bar against third party action, combined with the inability of the promisee to obtain a substantial remedy (because he has suffered no pecuniary loss), has attracted widespread criticism for creating a legal ‘black hole’ which defeats the intention of the contract parties to benefit the third party, causes injustice to the third party, and may result in unjust enrichment of the promisor. The rule is also criticised for generating uncertain and complex ‘exceptions’ and for creating difficulties in commercial life.

3. Section 1(1) of the Contracts (Rights of Third Parties) Act 1999 gives the third party a direct right to enforce a term (including exemption clauses) although he is not the promisee and has not given consideration for it, where:

  1. the contract expressly gives him that right; or
  2. the contract purports to confer a benefit on him (unless it is clear from the contract that the parties did not intend for the third party to sue (section 1(2)).

4. The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description, but need not be in existence when the contract was made (section 1(3)). However, Chudley v Clydesdale has allowed the third party to be identified by a process of construction.

5. Section 2(1) prevents the contract parties from varying or rescinding the third party’s right if the third party has:

  1. communicated to the promisor his assent to the term;
  2. relied on the term to the promisor’s knowledge; or
  3. relied on the term and the promisor can reasonably be expected to have foreseen this; unless the parties expressly explode this (section 2 (3)).

6. Unless otherwise agreed, the right acquired by the third party is essentially the right of the promisee to sue the promisor (section 1(5)), subject to minor variation (eg the third party cannot rely on UCTA and the promisor cannot rely on any counterclaim he has against the promisee).

7. Section 5 of the 1999 Act protects the promisor from double liability by reducing the third party’s claim to take account of any damages already recovered by the promisee in respect of the third party’s loss. However, the third party’s claim seems to be unaffected by any damages recovered by the promisee for his own loss.

8. The 1999 Act preserves pre-existing ways for third parties to enforce contractual obligations against the promisor, for example, via common law:

  1. contract rules which turn a third party into a contract party by finding:
    • a collateral contract between the promisor and the ‘third party’; or
    • that the ‘third party’ was really the principal on whose behalf the apparent promisee contracted;
  2. tort rules allowing a third party to claim for the negligent promisor’s breach of a duty of care, or shielding a third party from the negligence action of a contract party;
  3. trust rules which may regard the promisee as holding his right to sue on trust for the third party beneficiary;
  4. the promisee’s assignment of his right to sue to the third party; or
  5. statutory exceptions, most notably relating to insurance.

9. The 1999 Act is inconsistent with the traditional view of the doctrine of consideration as requiring enforceable undertakings to be paid for and only allowing promisees who have made the payment to enforce them. However, the 1999 Act is not inconsistent with the alternative view that consideration merely determines which undertakings are unenforceable, while the Act simply adds to the categories of parties who can sue.

10. The so-called legal ‘black hole’ is avoided where the promisee can claim specific performance or damages. The main basis for claiming such damages for the third party’s loss are:

  1. for contracts made in domestic and social situations (eg restaurant meals and family holidays); and
  2. the Albazero exception (which allows the promisee to sue for the third party’s loss where he intends to benefit a third party who has no direct contractual rights against promisor, but the precise scope is uncertain).
  3. There may also be some scope for arguing that the promisee can claim for his own loss on the ‘broad ground’ elaborated in Panatown.

11. A third party is bound by the contract of others insofar as he can be sued for:

  1. The tort of intentional interference with another’s contractual right. This may sound in damages at common law and an injunction at equity where it is still possible for the contract to be performed.
  2. Unconscionable conduct in exercising his legal right in respect of property acquired regardless of the claimant’s right, where he had undertaken to honour the claimant’s right when he acquired the property.
Back to top