Privity Of Contract

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A well-established principle of contract law (see: Contract) is that only the parties to the contract can make claims against it. The archetypal case is Dunlop v Selfrige in which Dunlop took action against Selfridge for breach a contract with an intermediary (see: Dunlop_v_Selfridge_(1945)). The House of lords ruled that Dunlop were not a party to the contract that was breached, and could therefore not enforce it.

Clearly it is fair that people should not incur obligations in respect of contracts to which they are not party and which offer them no benefits. However the principle of privity does mean that it is difficult to enter a contract that benefits a third party without taking out a separate contract with the third party. For example, in Woodar v Wimpey see: Woodar_Investment_Development_Ltd_v_Wimpey_Construction_Ltd_(1980) Wimpey contracted to pay £850,000 for land to Woodar, and £150,000 to a third party. When Wimpey tried to back out of the deal, they claimed that they could not be sued for the £150,000 because of privity. This claim was upheld by the House of lords. The case of Tweddle v Atkinson rested on the same issues (see: Tweddle_v_Atkinson_(1861)).

While there have long been specific statutes allowing third-party rights under contracts (motor insurance, for example) there were repeated calls for the law on privity to be reformed to extend the abilities of third parties in general to enforce a contract for their benefits The Contracts (Rights of Third Parties) Act (1999) goes some way towards this.

Briefly, a third party can enforce a contract if:

  • the contract specifically provides for this, and
  • the contract benefits the third party, and
  • the allowed third parties must be identified in the contract, and
  • the contracting parties consent to the provision for third-party enforcement.

The doctrine of privity poses particular problems for exclusion clauses in contracts (see: Privity and exclusion clauses).

UK LAW
Contract Law