Privity and Third Party Rights — SQE1 FLK1 Contract Law

Two sisters sign an agreement. Each promises the other to pay £5,000 to their nephew when he finishes his degree. He hears about it, and turns down a paid internship to finish on time. One sister pays. The other refuses. Can he sue her? No. He is named in that agreement, it was plainly made for him, and he still gets nothing.

That is privity of contract, the third topic in Contract Law. But there is a twist. One clause in that agreement decided it, and without it he would have had a claim. This episode is about who can enforce a contract, the routes the courts built, and the Act that changed the answer for almost everyone but him. Keep the nephew in mind. We come back for him.

Here is the route. The doctrine first, both sides of it, and why privity is not consideration. Then the workarounds the courts built before Parliament stepped in. Then the Contracts (Rights of Third Parties) Act 1999. Who can enforce, what defences the promisor keeps, and when the parties can no longer change their minds. Then the ways the Act is shut out, which in practice is most of the time.

Start with the rule. Only the parties to a contract can acquire rights or be subject to obligations under it. A person who is not a party cannot enforce a term, even where the contract was made entirely for their benefit. Everything else today is an exception to that, or a way around it.

The House of Lords settled it. A tyre manufacturer sold to a distributor on condition the tyres were not resold below list price. The distributor sold on to a retailer on those terms. The retailer cut the price anyway. The manufacturer sued the retailer and lost. No contract between them. Only a person who is a party to a contract can sue on it. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, 1915.

Half a century earlier, the same answer. The fathers of a bride and groom agreed that each would pay a sum to the groom. The bride's father died without paying. The groom sued the estate and failed. Not a party, and a stranger to the consideration. Tweddle v Atkinson, 1861.

That last phrase is where the confusion starts. Privity and consideration are different questions. Privity asks whether you are a party. Consideration asks whether you gave something of value. Two neighbours want their shared drive resurfaced. Only one signs the contract. The other pays half the price straight to the firm. The work is ruinous. Can he sue the firm? No. He paid, and he is still not a party.

Now the two sides of the doctrine. On the benefit side, a third party cannot acquire rights under a contract. On the burden side, a third party cannot have obligations imposed on them by one. The 1999 Act relaxes the benefit side only. The burden side has not moved an inch, and that is a trap the examiners set.

A software licence says the client's contractor shall maintain the system and shall indemnify the supplier for loss from improper maintenance. The contractor is named in the licence, but never signed it and never agreed to its terms. The supplier sues on that clause, and fails. A contract cannot bind a non-party, however clearly it is drafted.

The rule is clean, and it can be cruel. A man books a family holiday and it is a disaster. He is the only party, so he recovers for his own disappointment, and his wife and children have no claim of their own. Jackson v Horizon Holidays, 1975. That is why the courts built workarounds.

Five of them, and they still matter, because they run alongside the Act. One, agency. Where an agent contracts for a principal, the principal can enforce the contract. If the agency is disclosed, the other side knows. If it is undisclosed, the other side does not, and the principal can still intervene once revealed. The principal was the real contracting party all along.

Two, assignment. A party can transfer the benefit of a contract, and the assignee then enforces it against the other original party. A legal assignment under s.136 of the Law of Property Act 1925 needs writing and notice to the debtor. Notice, not consent. But burdens cannot be assigned, and plenty of contracts prohibit assignment outright.

Three, the collateral contract, a separate contract alongside the main one. Pier owners asked a paint manufacturer whether its paint was suitable, and were told seven to ten years. They then instructed their own contractors to buy it. The paint failed after three months. The owners sued the manufacturer and won, not on the sale, but on a collateral contract. Their consideration was specifying that paint. Shanklin Pier Ltd v Detel Products Ltd, 1951.

Four, the trust of a promise. Treat a contracting party as holding the promise on trust for a third party, and the third party enforces it in equity. The courts have been reluctant. It takes a clear intention to create a trust, and a trust, once created, is irrevocable.

Five, tort. Privity bars a claim in contract. It does not bar a claim in tort. A manufacturer owes a duty of care to the ultimate consumer, whatever the contractual chain. Donoghue v Stevenson, 1932. The decomposed snail in the ginger beer. Her friend bought the drink, so she had no contract with the cafe. She sued the manufacturer.

Each route has a price. Agency needs a real agency relationship. A collateral contract needs consideration and contractual intention. A trust needs a clear intention, and cannot be undone. Tort needs duty, breach, causation and damage.

Now the Act. The Contracts (Rights of Third Parties) Act 1999 did not abolish privity. It created a statutory exception to it. Under s.1(1), a third party has two ways in. The first is s.1(1)(a): the contract expressly provides that the third party may enforce the term.

Take a building contract for a block of flats. A clause says the construction company shall be liable to any purchaser of a flat for defective workmanship, and that any such purchaser may enforce it directly. A woman buys a flat, structural defects appear, and she can sue the construction company she never contracted with.

The second limb is the one that is actually tested. Under s.1(1)(b), even with no express provision, a third party may enforce a term that purports to confer a benefit on them. A group health policy says benefits are payable to employees who meet the eligibility criteria, and says nothing about employees enforcing anything. An eligible employee whose claim is rejected can sue the insurer directly.

But s.1(1)(b) comes with a catch, and the catch is s.1(2). The third party cannot enforce the term if, on a proper construction of the contract, the parties did not intend it to be enforceable by them. So the presumption runs in the third party's favour, and it is rebuttable. The burden lies on the promisor. Read the whole contract, not just the clause.

Then identification, under s.1(3). The third party must be expressly identified, but not necessarily by name. A class will do, such as employees of a company. So will a description, such as future tenants of the property. And here is the part people get wrong. The third party need not exist when the contract is made. A company not yet incorporated qualifies.

Test that. A developer's contract with an architect, signed in January 2024, warrants to any future owner or tenant that the designs are fit for purpose. A company incorporated in 2025 buys one of the houses, and damp appears. Can the company rely on the warranty? Yes. It answers a description, and it did not have to exist yet.

Two more points on section 1. The third party gives no consideration, and does not need to. And the right is direct: the third party sues in its own name.

So the third party has a right. What does the promisor keep? Section 3. When a third party enforces a term, the promisor can raise any defence, set-off or counterclaim that would have been available if the promisee had brought the claim.

Say a building contract makes the builder pay the landowner's tenant £500 a day in liquidated damages for delay. The builder is thirty days late, the tenant claims £15,000, and the builder then discovers the landowner fraudulently misdescribed the ground conditions. That answers the tenant's claim too, because the defence travels with the term.

Next problem. Can the original parties unmake the third party's right? Section 2 says yes, until the right crystallises. Three triggers, and any one is enough. One, the third party has communicated assent to the promisor, by words or conduct. Two, the promisor is aware the third party has relied on the term. Three, the promisor could reasonably have foreseen that reliance, and the third party has in fact relied.

Try it. A supply contract lets a retailer's named subsidiary buy components at a discount, and says it may enforce that clause. Three months later the subsidiary learns of it, wins a large order at prices only the discount makes profitable, and tells the manufacturer's sales team so when it orders. It has never said it accepts the clause. Can the original parties delete it now? No.

Assent was never communicated, and it does not matter. The promisor knows the subsidiary relied, because the subsidiary told it. The right has crystallised. Deleting it now needs consent.

Two ways out of that. Under s.2(3), the parties can write in an express term letting them vary or rescind without any third party's consent, and commercial contracts routinely do. And under s.2(4) and the subsections that follow, the court can dispense with consent that cannot reasonably be obtained, or where it is just and equitable, and can order compensation.

Now the part that decides most real cases. The Act is not mandatory. The parties can exclude it, and most commercial contracts do. The standard wording is blunt. A person who is not a party to this contract shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of it. Find that clause, and the analysis is over before it starts.

Back to the nephew. The sisters' agreement contained exactly that clause. Without it he would have had a good claim under s.1(1)(b). He is identified by description, the term is expressed to benefit him, and he need not have given anything for it. With it, the Act is gone. Nobody was his agent. Nothing was assigned. No separate promise, and no trust.

Some contracts sit outside the Act whatever they say. Section 6 takes out bills of exchange, promissory notes and other negotiable instruments. Contracts governed by the Companies Act, including a company's memorandum and articles. Contracts of employment, as against the employee. And contracts for the carriage of goods by sea, with limited exceptions.

A word on how SQE1 tests this. You will not be asked to recall case names or section numbers. You get a scenario, five answers, and one instruction: pick the best. So learn the rules and the order you apply them in. The names in this episode are memory pegs, nothing more.

If you keep only three. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, which is the rule itself. No contract, no claim. Shanklin Pier Ltd v Detel Products Ltd, where a promise made outside the sale contract became a contract of its own, and that is the workaround that most often wins. And Donoghue v Stevenson, because privity bars contract and never bars tort.

Four traps. One, the burden side. The 1999 Act relaxed the benefit side of privity and nothing else. A contract still cannot impose an obligation on a person who is not a party to it. If the third party is being made liable rather than trying to claim, the Act is not the answer.

Two, always look for the exclusion clause. Most commercial contracts exclude the Act, and the exclusion works. Check before you advise that a third party has rights. If the Act is out, the third party is back on the common law workarounds.

Three, do not confuse privity with consideration. Being named in a contract does not make you a party to it. Providing consideration does not make you a party either. Two separate questions, and you have to answer both.

Four, check whether the right has crystallised before you let the parties tear the term up. If the third party has told the promisor it accepts, or has relied to the promisor's knowledge, that right is fixed. And one point of method. Take the Act first, the workarounds second.

Quick check. A management company hires a security firm to guard a residential complex. Clause 4 says the firm shall ensure the safety of all residents. Clause 19 says the management company alone handles every complaint and claim. Clause 20 caps the firm's liability at the annual fee. An intruder gets in through a gate the firm left unlocked, and strips a resident's flat. The resident sues the firm on clause 4. The Act is not excluded.

Three candidate answers. One: the resident can enforce clause 4, because a term promising residents' safety benefits them. Two: the resident cannot, because the contract as a whole shows the parties did not intend residents to sue. Three: the resident cannot, because residents are not identified by name. Pause here if you want a moment.

The answer is two. A term that purports to confer a benefit on a third party is enforceable by them under s.1(1)(b), but s.1(2) qualifies it. The right does not arise if, on a proper construction of the contract, the parties did not intend the third party to enforce it. The burden of showing that is on the promisor.

Clause 19 routes every claim through the management company, and clause 20 caps the firm's exposure by reference to that company's fee. Both point to a scheme where the management company, not individual residents, sues. Option one takes s.1(1)(b) in isolation, and that presumption is rebuttable. Option three is right for the wrong reason. Identification by class is allowed under s.1(3), and residents of the complex is a class.

Five things to take away. One, only a party can enforce a contract, and the burden side of privity has not changed at all. Two, before the Act the courts built five routes around it: agency, assignment, collateral contract, trust of a promise, and tort. Three, under the 1999 Act a third party enforces where the contract says so. Or where a term purports to confer a benefit on them, and nothing in the contract says otherwise.

Four, the promisor keeps the defences it would have had against the promisee, and once the third party's right crystallises the parties cannot delete it without consent. Five, our nephew. He was named, the promise was for him, and he still lost, because one clause excluded the Act. Look for that clause first, every time. Next time, Express Terms and Incorporation.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.