Privity of Contract: Rules, Exceptions and Practical Use

Introduction

Privity of contract sets a clear rule: only the parties to a contract can enforce its terms or be bound by them. A stranger to a contract cannot sue on it, nor can they be made subject to its obligations. This keeps contractual rights and duties within the group who actually agreed the deal.

The rule is closely linked to consideration. Traditionally, a person must both be a party to the contract and have provided consideration to enforce it. That strict approach caused problems in modern commerce, especially where contracts are intended to benefit someone outside the immediate parties.

Parliament addressed much of this with the Contracts (Rights of Third Parties) Act 1999. The Act lets third parties enforce certain terms when identified in the contract or where a clause confers a benefit on them, unless the parties make it clear otherwise. The result today is a two-step analysis: start with the common law rule, then ask whether statute or recognised workarounds allow enforcement.

What You’ll Learn

• What privity of contract means and why it matters
• How consideration and privity interact
• When a third party can sue under the Contracts (Rights of Third Parties) Act 1999
• The main common law routes around privity: agency, assignment, trust of a promise, collateral contracts, and Himalaya clauses
• How the courts approached privity in key cases, including Tweddle v Atkinson and Beswick v Beswick
• Practical drafting points, including when to exclude or grant third-party rights
• Litigation tips for identifying enforceable third-party claims or defences

Core Concepts

The privity rule: who can sue and be sued

• Only the parties to a contract acquire enforceable rights or obligations under it. A non-party cannot sue to claim a benefit under the contract, and cannot be sued on its burdens.
• Classic statements of the rule appear in cases such as Tweddle v Atkinson (1861) and Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.
• Privity is a two-way idea: it not only limits who can enforce benefits but also prevents imposing contractual burdens on strangers. If you want obligations on an outsider, they need to agree via their own contract (or a valid novation).

Consideration and privity

• The old rule combined privity with consideration: only a person who is a party and has provided consideration can enforce a promise.
• In Price v Easton (1833), the claimant could not sue on an agreement to pay him because he was not a party and had not provided consideration.
• Tweddle v Atkinson (1861) confirmed that an intended beneficiary could not sue where he had given no consideration and was not a party.
• This sometimes produced harsh outcomes where contracts were clearly intended to benefit a third party. The 1999 Act addressed that gap.

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

The 1999 Act creates a direct route for third-party enforcement in defined circumstances:

• When can a third party enforce?
  • If the contract expressly says they can, or
  • If the term purports to confer a benefit on them (unless the contract shows the parties did not intend third-party enforcement).
• Identification requirement:
  • The third party must be identified by name, class, or description (they need not be in existence when the contract is made).
• Defences and set-off:
  • The promisor may rely on any defences or set-off they could have used against the promisee, and any relevant terms (e.g., limits, exclusions, arbitration, jurisdiction) can apply to the third party.
• Variation and rescission:
  • Once the third party has assented to the term or relied on it in a way known to the promisor (or which the promisor should have known about), the contracting parties cannot vary or rescind that term without the third party’s consent.
• Exclusion:
  • The parties can exclude the Act entirely or specify when, and by whom, it applies.
• No burdens:
  • The Act does not impose obligations on third parties; it confers rights only.

Practical effect: well-drafted contracts can give a clearly identified class (e.g., subcontractors, group companies, or end-users) a right to enforce specific terms, including indemnities and limitations.

Common law routes around privity

Before, and alongside, the 1999 Act, the courts developed tools to deal with privity problems:

• Agency
  • An agent can contract on behalf of a principal, making the principal the true party with rights and obligations. This includes undisclosed principals in some circumstances.
• Trust of a promise
  • A promisee can hold contractual rights on trust for a third party, allowing the beneficiary to receive the benefit. This can be complex and depends on intention and certainty of trust.
• Assignment of rights
  • A party can assign contractual rights (not burdens) to a third party. A legal assignment under section 136 of the Law of Property Act 1925 requires writing and notice to the debtor. Obligations are not assignable; use novation if obligations must move to the new party.
• Collateral contracts
  • A separate, smaller contract can be inferred between a third party and a promisor to support reliance on statements that induced the main contract. Shanklin Pier Ltd v Detel Products Ltd [1951] is the leading example.
• Himalaya clauses
  • Carefully drafted clauses can extend protections (such as exclusions or limits) to non-parties like subcontractors. Scruttons Ltd v Midland Silicones Ltd [1962] refused such reliance; later, New Zealand Shipping Co Ltd v Satterthwaite (The Eurymedon) [1975] allowed it where the clause and structure properly created a contract with consideration for the third party.
• Tort and misrepresentation
  • A non-party may have claims in negligence for physical damage or personal injury (e.g., Donoghue v Stevenson [1932] AC 562), or for negligent misstatement where the Hedley Byrne duty is established. These are not contractual rights but can provide remedies when privity blocks a contract claim.

Key Examples or Case Studies

Tweddle v Atkinson (1861) 1 B & S 393

• Facts: Two fathers agreed to pay the groom (their son) a sum of money. The son was not a party to the agreement and gave no consideration.
• Held: The son could not sue. He was a stranger to the contract and had not provided consideration.
• Takeaway: The strict rule barred intended beneficiaries from suing before statutory reform.

Beswick v Beswick [1968] AC 58

• Facts: An uncle transferred his business to his nephew in return for a promise to pay the uncle a weekly sum during his life and then a smaller sum to his widow after his death. The nephew stopped paying the widow.
• Held: The widow could not sue in her personal capacity but could enforce the contract as administratrix of her husband’s estate. Specific performance was ordered.
• Takeaway: Privity barred personal enforcement, but procedural routes (as personal representative) allowed the promise to be upheld. Today, a properly drafted clause could allow the widow to sue under the 1999 Act.

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

• Facts: Paint manufacturer told the pier owner that its paint would last seven years, inducing the owner to instruct its contractor to buy the paint. The paint failed early.
• Held: There was a collateral contract between the owner and the manufacturer supported by consideration (the instruction to use the paint), allowing the owner to sue despite no privity with the manufacturer under the main contract.
• Takeaway: Collateral contracts can bridge the gap where privity would otherwise block a claim.

New Zealand Shipping Co Ltd v A M Satterthwaite (The Eurymedon) [1975] AC 154

• Facts: Stevedores sought to rely on a limitation clause in a bill of lading even though they were not parties to it.
• Held: A valid contractual structure and consideration meant the stevedores could rely on the clause. The clause functioned like a unilateral offer accepted by performance.
• Takeaway: With careful drafting and structure, third parties can obtain protections even at common law. The 1999 Act now offers a simpler route in many cases.

Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm)

• Facts: Charterparties provided for “brokerage commission.” The brokers were not parties to the charterparties.
• Held: The brokers could claim under the 1999 Act; the commission clause purported to confer a benefit and there was no indication of a contrary intention.
• Takeaway: The 1999 Act can give service providers a direct right to payment if the clause is clear and the third party is identified by name, class or description.

Practical Applications

• Decide early: exclude or grant third-party rights?
  • If you want to keep rights strictly between the signatories, insert an express clause excluding the Contracts (Rights of Third Parties) Act 1999.
  • If the deal is meant to benefit others (e.g., group companies, subcontractors, end-users), identify them by name, class, or description and state which terms they can enforce.
• Manage variation and rescission
  • If third-party rights are granted, set out how the contract may be varied or rescinded. Consider a clause confirming no variation affecting a third party’s rights unless they consent or until a stated trigger (e.g., no reliance or assent).
• Align remedies and procedures
  • Make clear that limits, exclusions, time bars, arbitration, and jurisdiction clauses apply to any third party enforcing under the 1999 Act.
• Use the right tool for the job
  • Assignment: transfer rights in writing and give notice to the debtor for a legal assignment (s.136 LPA 1925). Remember: obligations do not pass with assignment.
  • Novation: if obligations must move, use a three-party novation.
  • Collateral warranties: common in construction to give funders, tenants, and purchasers a direct contractual route against contractors and designers.
  • Himalaya clauses: extend protections to subcontractors or agents; today, combine with the 1999 Act for clarity.
• Litigation checklist
  • Are you a party to the contract? Did you give consideration?
  • Does the contract grant you rights under the 1999 Act? Are you identified by name, class, or description?
  • Has the contract excluded the 1999 Act?
  • Have you assented to or relied on the term (affects variation/rescission)?
  • What defences or set-offs can the promisor use? Are there limits or arbitration clauses that bind you?
  • If the contract route fails, consider agency, trust of a promise, assignment, a collateral contract, negligence, or misrepresentation.
  • Watch for double recovery issues if both a party and a third party sue over the same loss.

Summary Checklist

• Know the basic rule: only parties can sue or be sued on a contract.
• Link to consideration: traditionally, only someone providing consideration can enforce.
• Contracts (Rights of Third Parties) Act 1999:
  • Third party may enforce if expressly permitted or a term confers a benefit.
  • Third party must be identified by name, class, or description.
  • Parties can exclude the Act.
  • Defences, set-offs, and procedural clauses can apply to the third party.
  • Variation/rescission is restricted after assent or reliance.
• Common law workarounds:
  • Agency (including undisclosed principals).
  • Trust of a promise for a third party’s benefit.
  • Assignment of rights (s.136 LPA 1925) and novation for obligations.
  • Collateral contracts to reflect inducements.
  • Himalaya clauses extending protections to non-parties.
• Alternative causes of action: negligence and misrepresentation may assist non-parties.
• Drafting tips:
  • Be explicit about third-party rights (granted or excluded).
  • Align limits, forums, and notice provisions with any third-party enforcement.
  • Use collateral warranties or novations where needed.

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