English Law/Contract/Privity

Privity of contract is a sub-rule of consideration because it restricts who can enforce an agreement to those who have brought consideration to the bargain. In an early case, , it was held that because a son had not given any consideration for his father in law's promise to his father to pay the son £200, he could not enforce the promise. Given the principle that standing to enforce an obligation should reflect whoever has a legitimate interest in its performance, a 1996 report by the Law Commission entitled Privity of Contract: Contracts for the Benefit of Third Parties, recommended that while courts should be left free to develop the common law, some of the more glaring injustices should be removed. This led to the Contracts (Rights of Third Parties) Act 1999. Under section 1, a third party may enforce an agreement if it purports to confer a benefit on the third party, either individually or a member as a class, and there is no expressed stipulation that the person was not intended to be able to enforce it. In this respect there is a strong burden on the party claiming enforcement was not intended by a third party. A third party has the same remedies available as a person privy to an agreement, and can enforce both positive benefits, or limits on liability, such as an exclusion clause. The rights of a third party can then only be terminated or withdrawn without her consent if it is reasonably foreseeable that she would rely upon them.

The 1999 Act's reforms mean a number of old cases would be decided differently today. In Beswick v Beswick while the House of Lords held that Mrs Beswick could specifically enforce a promise of her nephew to her deceased husband to pay her £5 weekly in her capacity as administratrix of the will, the 1999 Act would also allow her to claim as a third party. In Scruttons Ltd v Midland Silicones Ltd it would have been possible for a stevedore firm to claim the benefit of a limitation clause in a contract between a carrier and the owner of a damaged drum of chemicals. Lord Denning dissented, arguing for abolition of the rule, and Lord Reid gave an opinion that if a bill of lading expressly conferred the benefit of a limitation on the stevedores, the stevedores give authority to the carrier to do that, and "difficulties about consideration moving from the stevedore were overcome" then the stevedores could benefit. In The Eurymedon, Lord Reid's inventive solution was applied where some stevedores similarly wanted the benefit of an exclusion clause after dropping a drilling machine, the consideration being found as the stevedores performing their pre-existing contractual duty for the benefit of the third party (the drilling machine owner). Now none of this considerably technical analysis is required, given that any contract purporting to confer a benefit on a third party may in principle be enforced by the third party.

Given that the 1999 Act preserves the promisee's right to enforce the contract as it stood at common law, an outstanding issue is to what extent a promisee can claim damages for a benefit on behalf of a third party, if he has suffered no personal loss. In Jackson v Horizon Holidays Ltd, Lord Denning MR held that a father could claim damages for disappointment (beyond the financial cost) of a terrible holiday experience on behalf of his family. However, a majority of the House of Lords in Woodar Investment Development Ltd v Wimpey Construction UK Ltd disapproved any broad ability of a party to a contract to claim damages on behalf of a third party, except perhaps in a limited set of consumer contracts. There is disagreement about whether this will remain the case. Difficulties also remain in cases involving houses built with defects, which are sold to a buyer, who subsequently sells to a third party. It appears that neither the initial buyer can claim on behalf of the third party, and nor will the third party be able to claim under the 1999 Act, as they will typically not be identified by the original contract (or known) in advance. Apart from this instance relating to tort, in practice the doctrine of privity is entirely ignored in numerous situations, throughout the law of trusts and agency.