Existence and formation of a contract - Privity of contract and rights of third parties

Learning Outcomes

This article outlines the common law doctrine of privity of contract and the significant modifications introduced by the Contracts (Rights of Third Parties) Act 1999. For the SQE1 assessments, you will need to identify when the traditional privity rule applies and when a third party can enforce a contract term under the 1999 Act. You must understand the conditions for third-party enforcement, including identification and the parties' intentions. This knowledge will enable you to apply the relevant legal principles to SQE1-style single best answer questions concerning contract enforceability by non-parties.

SQE1 Syllabus

For SQE1, your understanding of privity and third-party rights is assessed within the context of contract formation and terms. You need to know the default common law position and how the statutory exceptions operate.

As you work through this article, remember to pay particular attention in your revision to:

  • the basic principle of privity of contract
  • the circumstances under which a third party can enforce a contract term under the Contracts (Rights of Third Parties) Act 1999
  • the requirements for identifying the third party within the contract
  • the test regarding the contracting parties' intention for the term to be enforceable by the third party
  • the rules concerning variation or rescission of a contract where a third party has rights.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Under the traditional doctrine of privity of contract, who can sue on a contract?
    1. Only the parties to the contract.
    2. Any party who benefits from the contract.
    3. Only the party who made the promise.
    4. Anyone identified by name in the contract.
  2. Which section of the Contracts (Rights of Third Parties) Act 1999 allows a third party to enforce a term if the contract expressly states they may?
    1. Section 1(1)(a)
    2. Section 1(1)(b)
    3. Section 1(3)
    4. Section 2(1)
  3. For a third party to enforce a term under s 1(1)(b) of the 1999 Act (purporting to confer a benefit), what additional condition must usually be met?
    1. The third party must provide consideration.
    2. The third party must be expressly named in the contract.
    3. It must not appear on a proper construction of the contract that the parties did not intend the term to be enforceable by the third party.
    4. The contract must be in writing.
  4. How must a third party be identified in the contract to enforce a term under the 1999 Act?
    1. Only by their full legal name.
    2. By name, as a member of a class, or answering a particular description.
    3. Only as a member of a clearly defined class.
    4. They do not need to be identified if the benefit is obvious.

Introduction

A fundamental principle of English contract law concerns who is entitled to enforce the promises made in a contract. Generally, only the individuals or entities who are parties to the agreement can sue or be sued under it. This concept is known as privity of contract. However, this traditional rule can sometimes lead to outcomes perceived as unjust, particularly where a contract is clearly intended to benefit someone who is not a party to it. The Contracts (Rights of Third Parties) Act 1999 introduced significant exceptions to the basic rule.

The Traditional Rule: Privity of Contract

The core principle of privity is that a contract cannot confer rights or impose obligations on any person except the parties to the contract. This means that a person who is not a party (a third party) cannot sue to enforce a promise contained in the contract, even if that promise was intended to benefit them. Equally, the contract cannot impose liabilities on a third party. The classic authority often cited for this rule is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.

Key Term: Privity of Contract
The common law doctrine stating that only the parties to a contract are bound by it and can enforce its terms. It prevents third parties from suing or being sued under the contract.

Key Term: Third Party
A person or entity who is not one of the original contracting parties to an agreement.

This rule provides certainty but was criticised for potentially defeating the clear intentions of the contracting parties and causing unfairness where contracts were made for the benefit of a third party. While some complex common law exceptions developed (like trusts of a promise or agency), they were often difficult to apply. The main reform came through legislation.

The Contracts (Rights of Third Parties) Act 1999

The Contracts (Rights of Third Parties) Act 1999 (C(RTP)A 1999) created a major statutory exception to the doctrine of privity. It allows third parties to enforce contractual terms in specific circumstances, without needing to rely on the old common law exceptions (though these still exist). The Act does not abolish the doctrine of privity; it operates alongside it. The original parties can still enforce all terms of the contract.

Key Term: Contracts (Rights of Third Parties) Act 1999
An Act of Parliament that allows a third party to enforce a term of a contract in certain specified circumstances, creating a major exception to the doctrine of privity.

When Can a Third Party Enforce a Term?

Section 1 of the C(RTP)A 1999 sets out two alternative circumstances (or 'tests') where a third party can enforce a term of the contract:

  1. The Express Test (s 1(1)(a)): The contract expressly provides that the third party may enforce the term. This is the clearest way to grant rights. The parties explicitly state their intention for the third party to have enforcement rights.

  2. The Purported Benefit Test (s 1(1)(b)): The term purports to confer a benefit on the third party. This test is subject to s 1(2).

If the condition in s 1(1)(b) is met (the term appears to confer a benefit), there is a rebuttable presumption that the parties intended the term to be enforceable by the third party. Section 1(2) states that s 1(1)(b) does not apply if, on a proper construction of the contract, it appears that the contracting parties did not intend the term to be enforceable by the third party. The burden is on the contracting parties to show they did not intend enforceability by the third party if the term seems to confer a benefit.

Identifying the Third Party

For a third party to enforce a term under either s 1(1)(a) or s 1(1)(b), they must be expressly identified in the contract (s 1(3)). This identification can be:

  • By name (e.g., 'John Smith');
  • As a member of a class (e.g., 'subsequent tenants of the property'); or
  • As answering a particular description (e.g., 'the architect employed for the project').

Importantly, the third party does not need to exist when the contract is made (e.g., an unborn child or a company yet to be incorporated).

Worked Example 1.1

Developer Ltd contracts with Builder plc to construct an office building. The contract includes a clause stating: "Future tenants of the building shall be entitled to enforce the warranty regarding the quality of the heating system provided in Clause 15." Aria Ltd later becomes a tenant and discovers the heating system is faulty. Can Aria Ltd enforce Clause 15?

Answer: Yes. This falls under s 1(1)(a) C(RTP)A 1999. The contract expressly provides that future tenants (a class) may enforce the specific term (Clause 15). Aria Ltd, as a member of that class, can enforce the warranty directly against Builder plc, provided Aria Ltd meets the description of 'future tenant'.

Worked Example 1.2

Parent A contracts with Coach B for swimming lessons for their child, C. The contract states, "Coach B will ensure the pool environment is safe for Child C." Child C suffers an injury due to unsafe conditions. Can Child C sue Coach B under the contract?

Answer: Possibly, under s 1(1)(b) C(RTP)A 1999. The term purports to confer a benefit (safety) on Child C, who is expressly identified by description ('Child C'). Enforcement is possible unless, on proper construction, it appears Parent A and Coach B did not intend Child C to have the right to enforce the term (s 1(2)). Without evidence to rebut the presumption, Child C likely can enforce the term.

Remedies for the Third Party

If a third party has the right to enforce a term under the C(RTP)A 1999, they have the same remedies available as if they had been a party to the contract (s 1(5)). This includes damages, injunctions, and specific performance, subject to the usual rules governing those remedies.

Variation and Rescission of the Contract

Once a third party's right under the Act has 'crystallised', the original contracting parties' ability to vary or rescind the contract to remove or alter that right is restricted (s 2). Crystallisation typically occurs when:

  • The third party communicates their assent to the term to the promisor; 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.

After crystallisation, the contract cannot be varied or rescinded in a way that affects the third party's rights without their consent, unless the contract expressly provides otherwise or the court grants permission.

Exam Warning

Be careful to distinguish between the two limbs of s 1(1). Section 1(1)(a) requires express permission for the third party to enforce. Section 1(1)(b) requires a term purporting to confer a benefit, coupled with no contrary intention shown under s 1(2). Also, always check that the third party is expressly identified as required by s 1(3).

Key Point Checklist

This article has covered the following key knowledge points:

  • The traditional doctrine of privity states only parties to a contract can sue or be sued on it.
  • The Contracts (Rights of Third Parties) Act 1999 provides statutory exceptions to this rule.
  • A third party can enforce a term if the contract expressly allows it (s 1(1)(a)).
  • A third party can enforce a term if it purports to confer a benefit on them, unless the parties did not intend enforceability (s 1(1)(b) and s 1(2)).
  • The third party must be expressly identified in the contract by name, class, or description (s 1(3)).
  • A third party enforcing a term has standard contractual remedies available (s 1(5)).
  • The original parties' right to vary or rescind the contract affecting the third party's right is restricted once the right has crystallised (s 2).

Key Terms and Concepts

  • Privity of Contract
  • Third Party
  • Contracts (Rights of Third Parties) Act 1999
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