The doctrine of privity is one of the most fundamental principles in English contract law. It states that only the parties to a contract can acquire rights or be subject to obligations under it. A third party - someone who is not a party to the contract - cannot enforce a contractual term, even if the contract was made for their benefit.
The House of Lords confirmed the privity doctrine in this leading case. Dunlop sold tyres to a distributor (Dew & Co) on condition they would not be resold below list price. Dew sold to Selfridge on the same terms, but Selfridge sold below price. Dunlop tried to enforce the restriction against Selfridge but failed - there was no contract between Dunlop and Selfridge. Viscount Haldane LC stated: 'Only a person who is a party to a contract can sue on it.'
This earlier case established the same principle. 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 but failed - he was not a party to the contract between the two fathers. The court held that a stranger to the consideration cannot enforce the contract. This case illustrates the close link between privity and the doctrine of consideration.
Do not confuse the doctrine of privity with the requirement of consideration. Privity asks: 'Are you a party to the contract?' Consideration asks: 'Did you provide something of value?' In Tweddle v Atkinson, the groom failed on both grounds. A person may be named in a contract but if they are not a party to it, they cannot enforce it - regardless of whether they have provided consideration.
The strict privity rule can produce unjust results. In Jackson v Horizon Holidays [1975], Mr Jackson booked a family holiday that was disastrous. He could recover damages for his own disappointment, but the strict privity doctrine meant his wife and children had no direct claim against the holiday company. The common law developed various workarounds to address these kinds of injustices, and ultimately Parliament intervened with the Contracts (Rights of Third Parties) Act 1999.
The Contracts (Rights of Third Parties) Act 1999 only addresses the 'benefit' side of privity - allowing third parties to enforce terms in their favour. The 'burden' side remains unchanged: a contract cannot impose obligations on someone who is not a party to it. This is a common exam trap.
Before the 1999 Act, the courts developed several mechanisms to mitigate the harsh effects of the privity doctrine. These common law exceptions remain important and continue to operate alongside the 1999 Act.
Where an agent contracts on behalf of a principal, the principal can enforce and be bound by the contract even though the agent was the contracting party. In a disclosed agency, the third party knows the agent acts for a principal. In an undisclosed agency, the third party does not know, but the principal can still 'intervene' on the contract once revealed. Agency is not a true exception to privity - the principal is treated as the real contracting party.
A party to a contract can assign (transfer) the benefit of that contract to a third party. The assignee can then enforce the contractual right against the other original party. Assignment can be legal (under s.136 Law of Property Act 1925, requiring writing and notice) or equitable. However, contractual burdens cannot be assigned, and some contracts contain clauses prohibiting assignment.
A collateral contract is a separate contract that sits alongside the main contract. In Shanklin Pier Ltd v Detel Products Ltd [1951], the pier owners asked the paint manufacturer (Detel) whether their paint was suitable. Detel assured them it would last 7-10 years. The pier owners then instructed their contractors to buy Detel paint. When the paint failed after three months, the pier owners sued Detel successfully on a collateral contract: Detel's promise about the paint's quality, supported by the pier owners' consideration of instructing their contractors to buy it.
If a contracting party can be treated as holding a contractual promise on trust for a third party, the third party can enforce it through equity. In Jackson v Horizon Holidays [1975], Lord Denning suggested (obiter) that Mr Jackson could be seen as contracting as trustee for his family. However, the courts have been reluctant to find trusts of contractual promises - it requires clear intention to create a trust, and a trust once created is irrevocable, which may not reflect the parties' intentions.
A third party who cannot sue in contract may have a claim in tort. The landmark case of Donoghue v Stevenson [1932] established that a manufacturer owes a duty of care in negligence to the ultimate consumer, regardless of any contractual relationship. Mrs Donoghue could not sue the cafe owner in contract (her friend bought the drink), but she could sue the manufacturer in tort for the decomposed snail in the ginger beer. This tort route bypasses privity entirely but requires proof of duty, breach, and damage.
| Mechanism | How It Works | Key Limitation |
|---|---|---|
| Agency | Principal enforces through agent | Must establish genuine agency relationship |
| Assignment | Transfer of contractual benefit | Cannot assign burdens; may be prohibited by contract |
| Collateral contract | Separate contract alongside main one | Must show consideration and contractual intention |
| Trust of promise | Contractual right held on trust | Courts reluctant to imply; irrevocable once created |
| Tort (negligence) | Separate duty of care in tort | Must prove duty, breach, causation and damage |
In an SQE1 question, if a third party wants to enforce a contract made before the 1999 Act, or where the Act has been excluded, consider each common law workaround in turn. Agency and collateral contracts are the most commonly tested. Always check whether the 1999 Act applies first before resorting to common law workarounds.
The Contracts (Rights of Third Parties) Act 1999 was enacted following a Law Commission report recommending reform of the privity doctrine. It allows a third party to enforce a contractual term in two situations, set out in s.1(1). It does not abolish the privity doctrine - it creates a statutory exception.
A third party may enforce a contractual term if the contract expressly provides that they may do so. For example, a contract between A and B stating 'C shall have the right to enforce clause 5' clearly satisfies s.1(1)(a). The third party must be expressly identified in the contract by name, as a member of a class, or by description (s.1(3)).
Even without express provision, a third party may enforce a term if the term purports to confer a benefit on them. This is the broader and more commonly tested limb. For example, a building contract between an employer and a contractor that requires the contractor to pay liquidated damages to a nominated subcontractor - the subcontractor can enforce that term under s.1(1)(b).
Section 1(1)(b) is subject to a crucial qualification in s.1(2): the third party cannot enforce the term if, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party. The burden of proof is on the promisor to show this. This is a key exam point - s.1(1)(b) creates a rebuttable presumption in the third party's favour.
The third party must be expressly identified in the contract, but need not be identified by name. They can be identified as a member of a class (e.g., 'employees of Company X') or by description (e.g., 'future tenants of the property'). Crucially, the third party need not exist at the time the contract is made. This means an unborn child or a company not yet incorporated can benefit from the Act.
Under s.3, when a third party seeks to enforce a term, the promisor can raise any defence, set-off, or counterclaim that would have been available had the claim been brought by the promisee. For example, if the promisee induced the contract by misrepresentation, the promisor can use that defence against the third party. Additionally, the promisor can rely on any defence, set-off, or counterclaim specifically relating to the third party, provided the contract expressly allows this.
Section 2 addresses a critical practical issue: can the original parties vary or rescind the contract to remove the third party's rights? The answer depends on whether the third party's right has 'crystallised'. Under s.2(1), the parties lose their right to vary or rescind without the third party's consent once any of three conditions is met.
Section 2(3) allows the parties to include an express term in the contract that permits them to vary or rescind without the third party's consent. This is common in commercial contracts. Additionally, under s.2(4)-(7), the court has power to dispense with the third party's consent where it cannot reasonably be obtained, or where it is just and equitable to do so, and may order compensation.
In an SQE1 scenario, always check whether the third party's rights have crystallised. If they have communicated acceptance or relied on the promise, the original parties cannot simply agree between themselves to remove the benefit. Look for facts showing the third party knew about the term and changed their position in reliance on it.
The parties to a contract can expressly exclude the operation of the 1999 Act entirely. This is extremely common in commercial practice. Standard exclusion clauses often state: '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 this contract.' The s.1(2) proper construction test also provides an indirect method of exclusion.
In practice, most commercial contracts exclude the 1999 Act. Always check the contract for an exclusion clause before advising that a third party has rights under the Act. If the Act is excluded, the third party must rely on common law workarounds instead.
The construction industry was a key driver behind the 1999 Act. In multi-party construction projects, subcontractors and professional consultants often have no direct contract with the building owner. Before the Act, the owner had to rely on collateral warranties to create direct contractual links. Under the Act, third party rights can be conferred directly, reducing the need for collateral warranties - though in practice, many construction contracts still exclude the Act.
Insurance is another area where the Act has practical significance. For example, a company may take out insurance covering its employees as additional insured parties. Under the Act, the employees (as identified third parties) may be able to enforce the insurance contract directly against the insurer, rather than having to claim through the policyholder.
In supply chain contracts and group company arrangements, the Act can allow group companies or downstream purchasers to enforce terms directly. For example, a parent company contracting with a supplier may include terms benefiting its subsidiaries. However, most sophisticated commercial contracts expressly exclude the Act to maintain certainty about who can enforce the contract.
| Section | Provision | Key Point |
|---|---|---|
| s.1(1)(a) | Express right to enforce | Contract expressly states third party can enforce |
| s.1(1)(b) | Term purporting to confer benefit | Subject to proper construction test in s.1(2) |
| s.1(2) | Proper construction test | Rebuttable presumption in third party's favour |
| s.1(3) | Identification | By name, class, or description; need not exist yet |
| s.2 | Variation and rescission | Consent needed once right crystallises |
| s.3 | Defences | Promisor can raise defences available against promisee |
| s.6 | Excluded contracts | Bills of exchange, employment, carriage of goods by sea |
For privity questions, follow a structured approach: (1) Identify whether a third party is trying to enforce or is having obligations imposed on them. (2) Check if the 1999 Act applies - is the third party identified, and does s.1(1)(a) or (b) apply? (3) Check for express exclusion of the Act. (4) If the Act does not apply, consider common law workarounds: agency, assignment, collateral contract, trust of promise, or tort. (5) Remember that the burden side of privity is unaffected by the 1999 Act.