Privity of Contract: Rule, Exceptions and Practical Applicat...

Introduction

Privity of contract is the rule that only the parties to a contract can sue on it or be sued under it. In other words, a contract creates rights and obligations only for those who made it. This keeps liability clear and ties contractual rights to those who provided consideration and agreed the terms.

The classic position was strict: a third party could not enforce a promise made for their benefit. Modern law in England and Wales now provides important exceptions, especially through the Contracts (Rights of Third Parties) Act 1999, alongside long‑standing common law workarounds such as agency, collateral contracts and assignment. This guide sets out the core rule, the role of consideration, the main exceptions, leading cases, and practical drafting steps.

What You'll Learn

• The basic rule of privity: who can enforce a contract and who cannot
• How privity relates to consideration (“consideration must move from the promisee”)
• When a third party can enforce under the Contracts (Rights of Third Parties) Act 1999
• Common law workarounds: agency, collateral contracts, trust of a promise, assignment, and damages for third‑party loss
• Key cases including Tweddle v Atkinson, Dunlop v Selfridge, Beswick v Beswick, and Shanklin Pier v Detel
• Practical drafting tips: third‑party rights clauses, opting out of the 1999 Act, and handling variation
• How to approach real‑world problems in supply chains, construction, and services contracts

Core Concepts

The Rule: Only Parties Can Enforce

• Privity means a contract binds and benefits only its parties. A non‑party cannot sue for its breach, even if they were meant to benefit.
• Tweddle v Atkinson (1861) is the classic statement: a son could not enforce a promise made between his father and father‑in‑law in his favour because he was not a party.
• Dunlop v Selfridge [1915] confirms the same principle and ties it to consideration: a person who has not provided consideration cannot enforce the promise.

Why it matters:

• It keeps responsibility clear. Businesses know who they owe duties to and who can sue them.
• It encourages proper contracting: if you want someone to have rights, put them in the contract or use the statutory route.

Consideration and Privity: The Link

• The rule on consideration—consideration must move from the promisee—works hand‑in‑hand with privity.
• A person who gave no consideration under the contract typically has no enforceable right. This was central in Tweddle and Dunlop.
• The link explains why, historically, third parties struggled to enforce promises that were clearly for their benefit.

Practical takeaway:

• If a client wants someone else to be able to enforce, either:
  • include them as a contracting party, or
  • give them rights under the 1999 Act, or
  • use a collateral contract or assignment where suitable.

Statutory Reform: Contracts (Rights of Third Parties) Act 1999

The 1999 Act creates a straightforward path for third‑party enforcement.

Core features:

• A third party can enforce a term if:
  • the contract expressly says they can (s.1(1)(a)); or
  • the term purports to confer a benefit on them (s.1(1)(b)), unless the contract shows the parties did not intend that result (s.1(2)).
• The third party must be identified by name, class, or description (s.1(3)), though they need not exist when the contract is made.
• Any defences, set‑offs or limitations in the contract that would have applied against the promisee can also be used against the third party (s.3).
• Parties cannot rescind or vary the contract in a way that removes or limits the third party’s right once the third party has assented or relied on it, and certain knowledge/reliance thresholds are met (s.2).
• Parties can opt out of the Act; many commercial contracts include an exclusion clause where appropriate.

Drafting tip:

• Be clear. Either grant rights to named third parties (or a defined class) and manage variation, or exclude the Act to keep rights within the contracting parties.

Common Law Workarounds (When the Act Does Not Apply)

Before (and still alongside) the 1999 Act, the courts developed practical routes around privity:

• Agency

  • An agent can contract on behalf of a principal, binding the principal even though not named as a contracting party.
  • “Himalaya” clauses can extend protections (e.g., exclusions/limits) to subcontractors if agency is established and the clause is properly framed (Scruttons; The Eurymedon).

• Collateral Contracts

  • A separate promise between A and C may sit alongside the main contract between A and B, allowing C to sue A (Shanklin Pier v Detel).
  • Useful where there is reliance on representations that induce entry into the main contract.

• Trust of a Promise

  • In some cases, contractual rights are held on trust for a third party, allowing enforcement in equity.
  • Beswick v Beswick shows the courts’ willingness to reach a fair outcome (the widow succeeded as administratrix; the trust analysis has also been discussed).

• Assignment and Novation

  • The benefit of a contract can be assigned to a third party (statutory assignment under s.136 Law of Property Act 1925 or equitable assignment). The burden generally cannot be assigned without consent.
  • Novation replaces one party with another by agreement of all concerned, creating a new contract.

• Damages for Third‑Party Loss

  • The “Albazero” line (The Albazero; Linden Gardens) allows a contracting party to recover for loss suffered by a third party in certain situations, e.g., where the parties contemplated that benefit or property would pass to a third party.

Key Examples or Case Studies

Tweddle v Atkinson (1861) 1 B & S 393

• Context: A promise to pay a sum to the groom, made between his father and father‑in‑law.
• Key point: The groom, as a non‑party who gave no consideration, could not enforce.
• Application: If you want a beneficiary to sue, rely on the 1999 Act or make them a party.

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847

• Context: Dunlop sought to enforce a resale price clause against a retailer who had no contract with Dunlop.
• Key point: Consideration must move from the promisee; non‑parties cannot enforce a contract.
• Application: Use agency or a direct contractual link (or the 1999 Act) to secure enforceability.

Beswick v Beswick [1968] AC 58

• Context: Uncle promised to pay an annuity to his nephew’s wife. She sued after his death.
• Key point: As administratrix of the estate, she secured specific performance; personally, she could not enforce as a third party under the old law.
• Application: Today, the 1999 Act would often provide a simpler route if properly drafted.

Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854

• Context: Paint manufacturer assured the pier owners of durability, leading them to instruct their contractor to buy the paint.
• Key point: A collateral contract between the pier owners and the manufacturer allowed enforcement.
• Application: Consider collateral warranties to give rights to end users or funders in construction and supply chains.

Nisshin Shipping Co Ltd v Cleaves & Co SA [2004] 1 Lloyd’s Rep 38

• Context: Charterparties provided for brokers’ commission. The broker claimed as a third party.
• Key point: A commission clause can “purport to confer a benefit,” enabling enforcement under s.1(1)(b).
• Application: Identify third‑party beneficiaries and be clear on dispute resolution that binds them.

Avraamides v Colwill [2006] EWCA Civ 1533

• Context: Claimants sought to enforce a refurbishment contract after a business transfer.
• Key point: The 1999 Act requires clear identification of the third party (by name or class). Vague references were not enough.
• Application: If you want a class to benefit (e.g., “end users,” “occupiers,” “successors”), define it precisely.

Chudley v Clydesdale Bank plc [2019] EWCA Civ 344

• Context: Investors sought to enforce a letter of instruction via the 1999 Act.
• Key point: Identification by description can suffice; the term must purport to confer a benefit on that class.
• Application: Don’t assume naming is the only route—description can work if the clause is clear.

Practical Applications

Contract drafting

• Decide early whether third parties should have rights.
  • To grant rights: include an express clause under s.1(1)(a), identify the third party by name/class/description, and confirm they may enforce. Manage variation under s.2 (e.g., require third‑party consent after assent or reliance).
  • To exclude rights: add a standard clause excluding the 1999 Act.
• Map the chain. In multi‑party projects, use direct contracts, collateral warranties, or specific third‑party rights to avoid gaps.
• Agency and “Himalaya” clauses. If subcontractors need the benefit of exclusions or limits, draft for agency or a clear extension clause consistent with case law and s.1(6) of the 1999 Act.
• Assignment vs novation. Use assignment for benefits (subject to notice and any contractual restrictions). Use novation to transfer both rights and obligations with consent.

Pre‑contract checks

• Identify all intended beneficiaries and consider whether they need direct rights.
• Review boilerplate. Many templates automatically exclude the 1999 Act—remove or tailor that exclusion if third‑party enforcement is desired.
• Dispute resolution. If a third party may enforce, ensure jurisdiction/arbitration clauses cover them.

Litigation strategy

• Choose the correct claimant. If a third party cannot sue, consider:
  • Does the 1999 Act apply?
  • Is there an agency or collateral contract?
  • Can the contracting party recover damages for the third party’s loss (Albazero/Linden Gardens)?
  • Would assignment or a novation solve the problem?
• Check defences and limits. Under s.3 of the 1999 Act, the promisor can rely on defences, exclusions, and set‑off that apply under the contract.
• Variation and rescission. Under s.2, be careful about changing a term once a third party has assented or relied in a way the promisor knew about (or ought reasonably to have contemplated).

Sectors and scenarios

• Supply chains: Manufacturers, distributors, and retailers should decide where rights sit. Collateral warranties and 1999 Act clauses can avoid weak links.
• Construction: Collateral warranties or third‑party rights schedules ensure funders, tenants, or purchasers can enforce key obligations (e.g., design warranties).
• Services and outsourcing: Consider whether affiliates or end users should have rights, and how limits and caps apply to them.

Summary Checklist

• Privity rule: only parties can sue or be sued on a contract
• Consideration link: “consideration must move from the promisee” (Dunlop)
• Statutory route: use the Contracts (Rights of Third Parties) Act 1999 to let third parties enforce
• Identification: name the third party, define a class, or use a clear description (s.1(3))
• Intention: clarify whether a benefit is intended to be enforceable; opt out if not
• Variation: manage s.2 consent/reliance issues before changing third‑party terms
• Defences: remember s.3 preserves contractual defences, set‑off, and limits against the third party
• Workarounds: agency, collateral contracts, trust of a promise, assignment, novation, and Albazero‑type damages
• Drafting hygiene: align third‑party rights with liability caps, exclusions, and dispute resolution clauses
• Due diligence: in multi‑party projects, check there is a clean enforcement route for each intended beneficiary

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