Privity of Contract Reform
“It is important to emphasise that, while our proposed reforms will give some third parties the right to enforce contracts, there will remain many contracts where a third party stands to benefit and yet will not have a right of enforceability”
In 1996, the Law Commission published Privity of Contract: Contract for the Benefit of Third Parties. The proposals set out in this report were later legislated on the basis of, in the Contracts (Rights of Third Parties) Act 1999. The aim of this legislation was fundamentally to alter the law in relation to the concept of privity of contract, in order to grant third parties who were not parties to the original contract certain rights. The doctrine of privity of contract will be considered, and the effect on this of the C(RTP)A will be analysed. Finally, some consideration will be given to the question of whether the legislation has gone far enough in reforming the law of privity.
It has historically been a fundamental and central principle of contract law in England and Wales that only the actual parties to a contract can have either contractual rights or duties conferred upon them. This was established at common law in the case of Tweddle v Atkinson (1861). The doctrine was confirmed in the early twentieth century in the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd (1915). It is important at the outset to distinguish the doctrine of privity of contract from the possibility of a third party enforcing a collateral contract. These are quite distinct scenarios. Under the first (historically), the third party had no right to claim rights, nor to be held liable for the performance of contractual duties. In the second scenario, as was established at common law in the case of Shanklin Pier v Detel Products Ltd (1951), an actual contract might be found to exist between the third party and one of the parties to the contract. It is the former of the two situations with which the C(RTP)A 1999 is concerned. The two interests (as defined by McKendrick) which a third party can have in a contract to which he is not a party are both whether or not he can acquire rights under that contract, and whether or not the contract in question can impose any liabilities or obligations on him.[1] The most significant impact on this area was that of the C(RTP)A, which Trietel describes as ‘the most significant doctrinal development in English contract law in the twentieth century.’[2]
What, then, is the purpose of privity of contract? It is, rather obviously, to do with the perceived injustice of imposing rights or obligations as between two parties who have had no dealing, at least no contractual dealing. It is clear that if X and Y enter a contractually binding agreement, Y has not made any agreement with Z, and therefore there is no rationale for entitling Z to take enforcement action against Y. The justification for the doctrine flows from the fact that contractual obligations, unlike tortious ones, are voluntary.[3] As Ibbetson states, the ‘rule that a third party could not enforce rights arising under a contract has been a feature of English law since at least the thirteenth century.’[4] The distinction between the acquisition of third party rights and obligations in contracts and other exceptions to privity of contract has already been mentioned. These exceptions can be expanded beyond collateral contracts (as seen in Shanklin Pier v Detel Products Ltd (1951)), to include a trust of a contractual right, whereby a ‘right may be transferred by way of property, as, for example, under a trust’[5]; the assignment of contractual rights to a third party (as in, for example, Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994)); in cases of agency, where the agent is acting on his principal’s behalf, with the full authority of that principle, and concludes a contract (following Wakefield v Duckworth (1915), where the agent was operating within his authority, he ‘drops out of the picture and the contract is between the principal and the other contracting party); and cases where a claimant who is a third party suffers loss because of the negligent performance of the contract by a contracting party, as in the classic case Donoghue v Stevenson (1932).
The doctrine of privity, then, was a foundational principle of English contract law until the advent of the Law Commission’s report in 1996. The opening quotation, taken from that report, explicitly seeks to limit the implications of the reforms that would later find their way into the C(RTP)A 1999, and the consideration above of the centrality of the doctrine of privity to contract law generally, shows why these limitations were considered necessary. What is the impact on this doctrine of the C(RTP)A, and does this do enough to reform the law on privity?
The C(RTP)A states that ‘subject to the provisions of this Act, a person who is not a party to a contract may in his own right enforce a term of the contract if the contract expressly provides that he may … or the term purports to confer a benefit on him.’ Furthermore, ‘the third party must be expressly identified in the contract by name, of a member of a class or as answering to a particular description but need not be in existence when the contract is entered into.’[6] There are, then, two separate tests for enforceability. The first test is described by Burrows as the ‘simplest’, and so it is; it is a simple question of fact whether the contract expresses the third party may enforce a term of it.[7] An example of this explicit authorisation of the third party to enforce a term of the contract is where the contract states ‘X [the third party] shall have the right to enforce the following terms of the contract…’ The provision under this section is less restrictive than it might be because of the implications of section 1(3) which complements it, stating that the third party does not need to be named; it is sufficient for the third party to be the member of an identified class.
The second test of enforceability under the Act is, again in the words of Burrows, is concerned with the ‘implied’ conferral of rights on third parties (as opposed to the express conferral discussed above).[8] The reasoning behind including this second test for enforceability can be broken down into 3 key areas. The first concerns the issue of implied rights in contracts, brought into the contract by implied terms. It is considered that to limit third party rights is akin to restricting implied terms. In other words, the parties’ intentions are not always their express intentions. The same can apply to third parties. The second area of justification for implied third party rights revolves around the uselessness of a reform confined to an express conferral of rights, unless the contracting parties included some ‘magic formula’ in the agreement so as to fall within the scope of the first test.[9] Cases where third parties would be unaffected by the C(RTP)A 1999 if the reform was confined to expressly mentioned third parties include Beswick v Beswick (1968), in which A contracted with B to pay money to C; and Trident General Insurance Co Ltd v McNiece Bro (1988), in which liability insurance was taken out to protect third parties to the contract. Finally, the implied conferral of rights on third parties has been justified by the fact that the aforementioned ‘magic formula’ will only be used in informed, well drafted contracts, which many will not be, particularly in the consumer sphere where good legal advice is not affordable.
Do these two tests reflect the spirit of the opening quotation? It can certainly be seen how these two tests of enforceability have altered the doctrine of privity substantially, and in particular the second test of enforceability relating to implied third party rights. The Law Commission’s statement, however, suggests a balance, between maintaining privity for many contracts, and allowing third party rights in others. This balance can be seen to be aimed for by the existence of a rebuttable presumption of intention inherent in the second test of enforceability. This rebuttable presumption attains a further balance, between a sufficient degree of certainty between contracting parties, and sufficient flexibility. This flexibility was required in order for the C(RTP)A 1999 to apply to the potentially huge range of contracts for which it was intended. The presumption is set up by asking the question ‘when are the parties likely to have intended to confer a right on a third party to confer a term?’ If the answer is ‘where the term purports to confer a benefit on the expressly identified third party’, then the presumption is raised.[10] This, of course, can be rebutted by the ordinary contractual interpretation of an indication that the parties did not intend this. The balance can be seen to have been aimed for, at least, in the two tests of enforceability in the C(RTP)A 1999.
An illustration of how the tests would be applied to decided cases is offered by Trietel, who identifies the case of Jackson v Horizon Holidays (1975) as falling within the scope of the second test under section 1(1)(b). He observes that ‘if the person making the booking [for a holiday on behalf of a third party] supplied the names of the other members of the family when the contract was made, those other members would probably acquire rights under subsection 1(1).; but no such rights are likely to be acquired if a person simply rented a holiday cottage without giving any information as to the number or names of the persons with whom he proposed to share the accommodation.’[11] This, then, can be seen to be a limitation to the effect of the reform legislation. It is suggested by McKendrick that section 1 simply gives the contracting parties an incentive to make their intention clear, which, again, returns to the issue mentioned above about the need for well-drafted contracts.[12]
The C(RTP)A 1999 is a highly significant piece of reform legislation, which fundamentally alters a central doctrine of English contract law. It can be seen to represent the superiority of the doctrine of freedom of contract over that of privity of contract. The significance of the Act is that while it maintains the previous exceptions to privity of contract, contracting parties will probably make increasing use of the Act rather than these, as a matter of certainty. The effect of the Act is somewhat limited, however, by the continuing requirement of clarity in the construction of the contract, whereby a presumption of an intention to confer rights on a third party can be rebutted. The effect of this, however, is simply to encourage a clarity of intention on the part of the contracting parties.
BIBLIOGRAPHY
Statutes
Contracts (Rights of Third Parties) Act 1999
Cases
Beswick v Beswick [1968] AC 58
Donoghue v Stevenson [1932] AC 562
Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847
Jackson v Horizon Holidays [1975] 1 WLR 1468
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85
Shanklin Pier v Detel Products Ltd [1951] 2 All ER 471
Trident General Insurance Co Ltd v McNiece Bro (1988) 165 CLR 107
Tweddle v Atkinson [1861 – 1873] All ER Rep 369
Wakefield v Duckworth [1915] 1 KB 218
Secondary sources
Burrows, A. (2000) ‘The Contracts (Rights of Third Parties) Act and its Implications for Commercial Contracts (LMCLQ 540)
Ibbetson, D. (1999) A Historical Introduction to the Law of Obligations (Oxford: OUP)
Law Commission (1996) Privity of Contract: Contract for the Benefit of Third Parties (Law Comm 242)
McKendrick, E. (2003) Contract Law: Text, Cases and Materials (Oxford: OUP)
Smith, S.A. (1997) ‘Contracts for the Benefit of Third Parties: In Defence of the Third-Party Rule’, 7 OJLS 643
Trietel, G.H. (1999) The Law of Contract, 10th Edition (London: Sweet & Maxwell)
Trietel, G.H. (2002) Some Landmarks of Twentieth Century Contract Law (Oxford: OUP)
