Privity of Contract: Principles, Consideration and Exception...

Introduction

Privity of contract is the rule that only parties to a contract can enforce it. In practice, that means a person who stands to gain from a deal made by others usually has no right to sue on that deal, even if it was made for their benefit. The rule sits alongside the requirement of consideration: traditionally, the person seeking to enforce a promise must have provided consideration, and must be a party to the agreement.

This produces clean lines around who can sue and be sued, but it can also cause hard results for intended beneficiaries, especially in modern supply chains. English law answers that tension with both common law techniques (trusts, assignment, agency, collateral contracts, so‑called “Himalaya clauses”) and the Contracts (Rights of Third Parties) Act 1999, which lets a clearly identified third party enforce certain terms.

This guide walks through the core rule, its connection with consideration, the 1999 Act, and the main cases, with practical drafting and litigation tips for students, SQE candidates, and junior practitioners.

What You'll Learn

• The core privity rule and why it limits third‑party enforcement
• How consideration and privity relate (and how deeds differ)
• The main common law workarounds: trust of a promise, assignment, agency, collateral contracts, and Himalaya clauses
• How the Contracts (Rights of Third Parties) Act 1999 works and when it does not apply
• Key cases: Tweddle v Atkinson, Dunlop v Selfridge, Beswick v Beswick, The Eurymedon, The Mahkutai, Nisshin Shipping v Cleaves, Chudley v Clydesdale Bank
• Practical drafting tactics and litigation checks to avoid dead ends

Core Concepts

The Privity Rule

• Only a party to a contract can sue on it. This is the classic statement from Tweddle v Atkinson (1861) and Dunlop v Selfridge [1915].
• The usual position is that the person who sues must also have furnished consideration (the price of the promise), except where the promise is made by deed.
• Effects:
  • Intended beneficiaries outside the contract have no direct contractual claim.
  • Promisors are not exposed to claims by strangers to the bargain.
  • Workarounds are needed where a benefit is meant for a third party.

Tip: Ask at the outset, “Is the claimant a party?” If not, check the 1999 Act and the common law routes below before looking to tort or statute.

Privity and Consideration

• Linked but distinct ideas:
  • Privity answers “who can sue?” (parties).
  • Consideration answers “who paid for the promise?” (traditionally, the promisee).
• Key points:
  • Consideration must move from the promisee. In Tweddle, the groom could not sue because he was neither a party nor a provider of consideration.
  • Joint promisees: where A promises B and C something, consideration provided by B can be sufficient to support the promise to both B and C (they sue together as parties to the same bargain).
  • Deeds: a party to a deed can enforce it without consideration, but the deed still does not create rights for a non‑party unless the 1999 Act applies.

Practical takeaway: if you want someone to enforce without giving consideration, either make them a party (or use a deed) or rely on the 1999 Act with clear wording.

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

The 1999 Act creates a direct route for non‑parties to enforce a term.

• When can a third party enforce? Section 1(1):
  • The contract expressly provides that they may; or
  • The term purports to confer a benefit on them, unless the contract shows the parties did not intend it to be enforceable by the third party.
• Who counts as a “third party”? Section 1(3):
  • Identified by name, class, or description (they need not exist yet).
• Remedies and defences:
  • The third party may claim any remedy that would be available to a party (s.1(5)).
  • The promisor may rely on any defence or set‑off that would have been available against the promisee (s.1(6), s.4).
• Variation or rescission: Section 2
  • Once the third party has assented to the term or relied on it, the original parties cannot vary or rescind in a way that removes the benefit without the third party’s consent (subject to agreed contract machinery).
• Scope limits (s.6, s.7):
  • The Act does not apply to certain contracts (e.g., bills of exchange, company articles, certain employment terms) and does not affect existing common law routes.

Drafting tip: if you want to avoid third‑party enforcement, include a “no third‑party rights” clause disapplying the Act.

Common Law Routes (alongside the Act)

• Trust of a promise: the promisee holds the benefit of the promise on trust for the third party, allowing the third party to enforce via the trustee. Often pleaded in older cases; the facts must show an intention to create a trust of the contractual right.
• Assignment: the promisee assigns its contractual right to the third party (subject to assignment formalities and any contractual prohibition).
• Agency: one party contracts as agent for a third party; with clear authority and intention, the third party can sue.
• Collateral contracts: a separate contract between promisor and third party sits alongside the main contract (common in sales of goods and construction).
• Himalaya clauses (carriage and logistics): clauses extending defences and limits to servants, agents, or subcontractors. After Scruttons v Midland Silicones [1962], The Eurymedon [1975] shows how clear words, agency, and consideration can make these clauses work. The Mahkutai [1996] shows that not every clause (e.g., a jurisdiction clause) will extend without very clear language.

Use these routes where the Act is excluded, unavailable, or where you need to pass defences and limits down a chain.

Key Examples or Case Studies

Tweddle v Atkinson (1861) 1 B & S 393

• Facts: Two fathers agreed each would pay money to the groom. The groom sued when payment failed.
• Decision: Claim failed. He was not a party and had provided no consideration.
• Takeaway: You cannot sue on a contract made by others simply because it benefits you.

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

• Facts: Dunlop sought to enforce a resale price undertaking in a contract between an intermediary and Selfridge.
• Decision: Claim failed for lack of privity and consideration. Only a party can sue, and consideration must move from the promisee.
• Takeaway: Reinforces the classic privity rule and consideration requirement.

Beswick v Beswick [1968] AC 58

• Facts: A nephew agreed with his uncle to pay the uncle’s widow a weekly sum. He stopped after the uncle died.
• Decision: The widow could not recover in her personal capacity (no privity), but as administratrix she obtained specific performance.
• Takeaway: Courts may grant specific performance to a personal representative, but this workaround is limited and fact‑sensitive. The case helped spur statutory reform.

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

• Facts: Stevedores sought to rely on an exclusion clause in a bill of lading.
• Decision: Clause effective. Through careful drafting, the carrier contracted as agent to confer a direct promise on the stevedores, who provided consideration by performing.
• Takeaway: A well‑drafted Himalaya clause can extend protection to non‑parties.

The Mahkutai [1996] AC 650

• Facts: A jurisdiction clause was said to bind stevedores via a Himalaya clause.
• Decision: It did not. The clause was not expressed to extend that type of term to the stevedores.
• Takeaway: Clear language is essential; not all terms will extend beyond exclusions and limits.

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

• Facts: Brokers sought to enforce a commission clause and arbitration clause under the 1999 Act.
• Decision: The term purported to confer a benefit; absent contrary intention, the Act applied. The third party could also rely on the arbitration clause.
• Takeaway: The Act presumes enforceability where a term benefits a third party, unless the contract shows otherwise.

Chudley v Clydesdale Bank Plc [2019] EWCA Civ 344

• Facts: Investors not named in a bank’s letter of instruction alleged the term benefited them.
• Decision: The investors were sufficiently identified by description; the term conferred a benefit, so the Act applied.
• Takeaway: Names are not essential; identification by class or description can be enough if the term benefits that class.

Practical Applications

• Drafting third‑party rights

  • Decide whether to switch the 1999 Act on or off. If off, include a “no third‑party rights” clause.
  • If on, identify the third party by name, class, or description and link them to the benefiting term.
  • State expressly that the third party may enforce, and set limits on remedies or caps if required.
  • Address variation and rescission (s.2): include a mechanism to obtain third‑party consent or to vary before rights crystallise.
  • Align dispute resolution: specify whether third parties can use arbitration or jurisdiction clauses.

• Supply chain and construction

  • Choose between collateral warranties and third‑party rights schedules. Warranties give privity directly; the Act avoids extra documents but needs precise drafting.
  • Manage insolvency risk by giving end clients direct rights against subcontractors or consultants.
  • Avoid double recovery: include wording to prevent the same loss being recovered twice by different claimants.

• Carriage and logistics

  • Use clear Himalaya clauses extending exclusions/limits to servants, agents, and subcontractors.
  • Build in agency language and ensure the third party provides consideration by performing services.
  • Be cautious with jurisdiction/arbitration clauses: they do not extend without clear words.

• Litigation checklist

  • Is the claimant a party? If not, can they enforce under the 1999 Act (s.1(1)(a) or (b)) and are they properly identified (s.1(3))?
  • Does the contract show a contrary intention that the third party should not enforce a “benefit” term?
  • Have rights crystallised (assent or reliance) so that variation/rescission requires consent (s.2)?
  • What defences, set‑offs, or limitation periods can the defendant raise (s.1(6), s.4)?
  • If the Act does not work, can you plead trust, assignment, agency, collateral contract, or a Himalaya clause?
  • Consider alternatives: tort, misrepresentation, statutory routes.

• Exam/assessment tips

  • Start with privity and consideration; then test the 1999 Act; then the common law workarounds.
  • Name and apply leading authorities succinctly to the facts.

Summary Checklist

• Privity rule: only parties can sue; non‑parties generally cannot.
• Consideration traditionally must move from the promisee; deeds remove the need for consideration for parties.
• Joint promisees can rely on consideration given by one of them.
• 1999 Act routes:
  • Express right to enforce, or a term that purports to confer a benefit.
  • Third party identified by name, class, or description.
  • Defences and set‑offs against the promisee are available against the third party.
  • Variation/rescission may require the third party’s consent once rights crystallise.
  • Some contracts are excluded from the Act.
• Common law tools: trust of a promise, assignment, agency, collateral contracts, Himalaya clauses.
• Cases to remember: Tweddle; Dunlop; Beswick; The Eurymedon; The Mahkutai; Nisshin; Chudley.
• Draft with care: turn the Act on/off deliberately, define beneficiaries, manage remedies and variation.
• In carriage cases, use clear agency and consideration wording for Himalaya clauses.
• Always check for double recovery and limitation issues.

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