Chapter 4 – Privity and Third Party Rights

Essay question

Critically discuss the impact of the Contracts (Rights of Third Parties) Act 1999.

Essay question answer guidance

This question centres on the doctrine of privity of contract which states that generally only parties to a contract may enforce that contract. Whatever the merits of this rule it has sometimes caused difficulties, particularly contracts which are for the benefit of third parties. Some commentators argue that not to allow a third party to enforce a contract in such situations thwarts the intentions of the parties to the contract; whereas others argue that an intention to benefit a third party is not the same thing as having an intention to allow that third party to enforce the contract. Prior to the Contracts (Rights of Third Parties) Act 1999 the common law created various devices to sidestep the privity rule in these circumstances (see, for example, New Zealand Shipping Co. Ltd v A.M. Satterthwaite & Co Ltd, The Eurymedon (1975)). It would be helpful to outline some of these devices at this point. Nevertheless, these devices were complex and eventually, through the work of the Law Commission, the Contracts (Rights of Third Parties) Act 1999 was passed which, in certain circumstances, gives third parties the right to enforce a term of the contract. You should consider the test of enforceability (s.1) and wider issues such as overlapping claims (ss.4-5). Has this simplified the area or made it more complex? To what extent has the Contracts (Rights of Third Parties) Act 1999 improved this area of law? Are the previous common law devices still available (s.7)?

Problem question

Cliona Ltd is a property developer who is developing a piece of land on the outskirts of Reading. She enters into a building contract with Mary Ltd under which Mary Ltd is to construct a cinema on the land. This contract contains a prohibition on the assignment of rights under the contract and also states that the Contracts (Rights of Third Parties) Act 1999 is excluded. Cliona Ltd then sells the land and cinema to Suzanne Ltd but does not attempt to assign the rights under the building contract to Suzanne Ltd. To celebrate the sale of the cinema Cliona, the managing director of Cliona Ltd, books a holiday to Malta for herself and her family. Unfortunately, the holiday is a complete disaster and does not conform to the contract terms. Various issues have now also arisen with the construction of the cinema.

Advise the parties. Cliona Ltd and Suzanne Ltd particularly want your advice on whether Cliona Ltd can recover damages under the building contract with Mary Ltd. Would your advice differ if Suzanne Ltd had a direct contractual right against Mary Ltd?

Problem question answer guidance

This question centres on the doctrine of privity of contract which states that generally only parties to a contract may enforce that contract. The issue in relation to the cinema is that Cliona Ltd is a party to the contract and so can enforce it but, prima facie, may not have suffered any loss as it no longer owns the land and the normal rule is that damages for breach of contract are aimed at compensating the non-breaching party for any loss they have suffered. By contrast, Suzanne Ltd has suffered the loss but, prima facie, cannot sue under the contract as it is not party to it (the privity rule). Sometimes, of course, a third party will be able to enforce the contract using the Contracts (Rights of Third Parties) Act 1999 but that route is excluded on the facts. Can Cliona Ltd claim damages for the loss suffered by Suzanne Ltd? The general rule is that a party can only claim damages for its own loss (Woodar Investment Development Ltd v Wimpey Construction UK Ltd (1980)). However, there are exceptions and of particular relevance here is the St Martins Property exception (named after St Martins Property Corp. Ltd v Sir Robert McAlpine & Sons Ltd). You should consider the operation of this exception and the two grounds in that case: the narrow ground and the broad ground (where the loss is actually the loss of Cliona Ltd – see Lowick Rose LLP (in liquidation) v Swynson Ltd (2017)). The rationale for this exception is that it prevents the claim against Mary Ltd from falling into a legal black hole with neither Cliona Ltd nor Suzanne Ltd having an effective claim. For this reason the exception will not apply where Suzanne Ltd does have a direct contractual right against Mary Ltd (Alfred McAlphine Construction Ltd v Panatown Ltd (2001)). In relation to Cliona’s family holiday, Cliona may be able to claim her own loss and the loss suffered by her family on the basis of another exception created in Jackson v Horizon Tours Ltd (1975).