Chapter 5. The Doctrine of Privity of Contract

The doctrine of privity of contract is a fundamental principle in contract law which stipulates that only the parties directly involved in a contract have the legal right to enforce or challenge it. Under this doctrine, a third party not a party to the contract cannot gain rights or be subject to obligations arising from that contract.

Essentially, the rights and duties established by a contract are confined exclusively to the signatories — the individuals or entities that have entered into the contractual agreement.

This principle upholds the notion that a contract cannot confer rights or impose obligations on anyone outside of those who have mutually consented to the terms of the agreement.

Imagine a scenario where a homeowner, Alice, enters into a contract with a builder, Bob, to renovate her house. According to their agreement, Bob will complete the renovation for a specified price. Alice's neighbour, Charlie, prefers a different style of renovation and believes the work will negatively impact the value of his property.

Despite Charlie’s concerns, he cannot legally challenge the contract between Alice and Bob or demand changes to the renovation plans. This is because Charlie is not a party to the contract; he is a third party. The rights and obligations of the contract exist solely between Alice and Bob. Not being privy to their agreement, Charlie has no standing to enforce or contest the terms of their contract. This example demonstrates the core principle of the doctrine of privity of contract, which restricts the enforcement of contractual rights and obligations to the parties who have entered into the contract.

LEGAL EXCEPTIONS UNDER STATUTE

1.1 The Contracts (Rights of Third Parties) Act 1999 and its Impact on Privity

The Contracts (Rights of Third Parties) Act 1999 (CRTPA) significantly modifies English law’s traditional doctrine of privity of contract. This Act was introduced to address limitations of the privity doctrine, supplementing various standard law exceptions that had evolved. 

The CRTPA provides that a third party — someone not a direct party to the contract — can enforce a term of the contract under certain conditions:

• Express Provision for Third Party Enforcement: If the contract explicitly states that a third party may enforce a specific term.
• Terms Benefiting a Third Party: If a contract term is intended to confer a benefit on a third party, and it is clear from the contract that the parties intended this term to be enforceable by the third party.

For a third party to be eligible under the CRTPA, they must be explicitly named or identifiable as a class member intended to benefit from the contract. Interestingly, the third party need not have been in existence when the contract was made. The CRTPA is particularly useful when the contract is intended to benefit someone not directly involved in the agreement.

However, it’s important to note that the CRTPA does not allow third parties to be subjected to contractual obligations; it only enables them to benefit from a contract. This distinction maintains the foundational aspect of privity in that obligations under a contract are still confined to the parties involved.

Imagine a couple, John and Emily, planning their wedding and hiring a photographer, Sarah. Their contract with Sarah includes a clause stating that their parents, who are financing the wedding, are entitled to receive a set of the wedding photos.

Although John and Emily's parents are not parties to the contract between John, Emily, and Sarah, the CRTPA allows them to enforce this specific contract term. This is because the contract expressly provides that the parents (third parties in this case) may implement the term regarding receiving wedding photos.

In this scenario, if Sarah fails to provide the photos to the parents as stipulated in the contract, the parents have a legal right under the CRTPA to enforce this contract term despite not being direct parties to it.

This example demonstrates how the CRTPA can be used to confer enforceable rights on third parties who are intended to benefit from a contract.

1.2 Limitations of the Contracts (Rights of Third Parties) Act 1999 (CRTPA)

The CRTPA, while transformative, does not encompass all contractual relationships. 

Notably, it does not apply to certain types of contracts, including:

Employment Contracts. Agreements between employees and employers.

Articles of Association: These documents serve as the internal constitution of a company, detailing the relationship between the company and its shareholders.

Additionally, the CRTPA's applicability is contingent upon the terms of the contract itself. If a contract explicitly states that the CRTPA does not apply, then the rights provided by the Act are not extended to third parties. In practice, many commercial contracts are drafted explicitly with clauses excluding the application of the CRTPA to avoid unintended third-party rights.

1.3 Modifying Contracts with Third-Party Rights Under CRTPA

Under the Contracts (Rights of Third Parties) Act 1999 (CRTPA), specific restrictions exist on altering or nullifying a contract when it involves third-party rights. Suppose a third party has enforceable rights under a contract.

In that case, the primary contracting parties cannot change or terminate the contract to the detriment of the third party unless specific criteria are satisfied. These restrictions are in place to prevent undermining the third party's legally recognised interests. 

Specifically, the contract cannot be modified in a way that adversely affects the third party if:

• Consent from the Third Party: The third party must have explicitly agreed to the term that confers a benefit upon them. This agreement needs to be communicated to the contracting parties.
• Third Party's Reliance on the Term: The contract term must remain the same if the third party has already relied on it, especially if the promisor is aware of this reliance. This ensures that the third party's actions based on the contract are respected.
• Foreseeable Reliance by the Third Party: If it is reasonable to expect that the third party would rely on a particular term of the contract and acted based on this expectation, the term cannot be altered without considering the impact on the third party.

These conditions are designed to safeguard the interests and rights of third parties recognised under a contract. They ensure that once a third party's rights are established, they are not arbitrarily revoked or diminished by the actions of the original parties to the contract.

Suppose a software company, TechCorp, enters into a contract with a graphic design firm, DesignCo, to develop a new website. The contract includes a clause stating that a particular freelance photographer, Maria, will receive a credit and a specified payment for her photos used on the website. Although not a party to the contract between TechCorp and DesignCo, Maria is a third party with rights under the contract.

A few months into the project, TechCorp and DesignCo decided to change the website's design and use different photos, which would nullify Maria's credit and payment. However, Maria has already turned down other projects that rely on this contract.

In this scenario, TechCorp and DesignCo cannot simply rescind or alter the contract to remove Maria's credit and payment without her consent due to the following reasons:

• Maria's Consent: As the third party who has agreed to the terms benefiting her, her consent is required for any changes affecting her rights.
• Maria's Reliance: She has relied on the contract's terms by preceding other opportunities, and TechCorp and DesignCo are aware of this reliance.
• Reasonable Expectation of Reliance: It was foreseeable that Maria would rely on the contract terms and act based on this expectation.
• Therefore, under the principles of the CRTPA, Maria's rights and expectations must be respected, preventing TechCorp and DesignCo from unilaterally altering the contract to her detriment without her agreement.

REFINEMENTS TO THE PRIVITY DOCTRINE IN COMMON LAW

2.1 Agency and Its Relationship to Privity

In the context of agency, a principal delegates an agent to form contracts with third parties on their behalf. Typically, the contract is formed directly between the principal and the third party, making the agent merely an intermediary without party status. This aligns with …