The doctrine of privity in outline

It is proposed to introduce the doctrine of privity in outline in Part A. In Part B, the purposes behind the Contract (Rights of Third Parties) Act 1999 (hereafter “the Act”) will be analysed in light of judicial criticism levelled against the privity doctrine and the Law Commission's proposals. In Part C, the extent to which the Act has been successful will be discussed.

Part A - Privity

The Act 1999 was granted Royal Assent on 11th November 1999. It came in the wake of criticisms levelled by the Law Commission in its report on privity of contract in 1996. The doctrine of privity was a tightly thread principle of contract law that prevented third party beneficiaries to a contract from enforcing the said contract - whether by benefiting from rights or enforcing the performance of obligations. Put another way, it was the legal conclusion of the principle that consideration must move from the promisee.

Privity was never an absolute rule. An often quoted example of an exception to the rule can be found in the law of equity. Where A promises B to pay C, such a promise is capable of being viewed as a trust for C's benefit, with B as the beneficiary. C, in such a case, though not privy to the promise, could sue B to enforce it, where such a promise constitutes a trust.

Another example where third parties have legal remedies in respect of agreements between others is where a solicitor acts negligently in the execution of a will. So, where a solicitor negligently drafted a will such that the intended beneficiary thereof was unable to enforce it, that beneficiary would be able to sue the solicitor notwithstanding his not being included in the agreement that a will should be drafted.

Other examples abound, both in common law and statute, and indeed for the very reason that the privity doctrine could be circumvented, a minority of consultees to the Law Commission consultation paper opposed reform.

Part B - The Purposes Behind The Act

Section 1 of the Act provides that third parties are able to enforce rights accorded them by a contract concluded between people other than that party. This is notable in terms of what is omits. The privity doctrine, as stated above, deprived a third party both from being burdened by and benefiting from a contract to which he was not privy. However, the Act only sought to reform the latter aspect of the doctrine. This is because “it would be an unwarranted infringement of a third party's liberty if contracting parties were able, as a matter of course, to impose burdens on a third party without his or her consent.”

The first and perhaps most convincing rationale for reform of the third party rule is the long-standing cornerstone of contract law: that the objectively discernible intentions of parties to a contract should be capable of being enforced. The overriding purpose of contract law is the enforcement of promises and contracts, enabling parties who intend to create legal relations to have those relations recognised by the law. It is at once therefore interesting and paradoxical that the third party rule, which is flatly inimical to this principle, should have survived for so long, even in the attenuated form into which it was cast by the various exceptions mentioned above.

The second driver towards reform of the rule has already been hinted at above: injustice caused to third parties as a result of their not being able legally to enforce their rights. When A and B enter into a contract which benefits C, that contract causes in C a legitimate expectation of entitlement as to the benefit purportedly conferred. Often that expectation may inform C's actions such that he relies on the benefit expected. If the law is not capable of ensuring that C receives this benefit, then it will have failed C. The above is a necessarily simplified example which assumes that the parties to the contract are in full and unchanging accord with each other as to the contractual terms. However, as the Law Commission pointed out, those situations in which the parties wish to vary the contract raises difficult issues that oppose the first and second rationales for reform. The question of which rationale (effecting parties' intentions or preventing injustice to third parties) should prevail thereby raises itself. This is further discussed below.

The third rationale is that perverse injustice which ensues from the rule. In the case of Beswick v Beswick, the promisee was a widowed administratrix to an estate. She was unable to sue as a widow (in her personal capacity) owing to lack of privity, but was able to sue in her capacity as administratrix - albeit for only nominal damages. The Law Commission encapsulated it neatly, “the person who has suffered the loss cannot sue, while the person who has suffered no loss can sue.”

A fourth distinct rationale is the fact that the old rule was complex and artificial (as Beswick demonstrates). The influence of tort and trusts law upon the rule's exceptions were ingenious devices for overcoming the harshness of the rule. However, the sheer volume of exceptions and the frequent the artificiality of analysis deployed in judicial reasoning meant that the rule was unwieldy and complex. This lead to widespread criticism at home and abroad, by judges and academics alike. It is further suggested here that the complexity prevalent in cases concerning the third party rule added a further barrier to justice: namely the almost inevitable requirement of legal advice for what could be a simple matter. Parties were left incapable of resolving issues themselves given the sheer complexity of the law and had to pay for costly legal advice. However, not everyone could afford this, and as such, it is suggested that many cases will have either been badly argued or did not make it to court.

Part C - The Act's Success?

A) The Intentions of the Parties

Stevens advances a forceful criticism of the Act and the rationale for reform at the same time: where A promises B to pay C if B paint's A's, then it is not the intention of the parties that are frustrated, but rather B's and only B's. If B paints A's house, A's intention to have his house painted is satisfied; B's intention to paint it has been satisfied too. The only intention that is frustrated is B's - of C's being paid. Indeed, the third party rule aspect of the privity doctrine was judicially criticised by Steyn LJ in Darlington BC v Wiltshire Northern Ltd as being contrary to the intentions of the party. But there is a subtle gap between what was proposed by the Law Commission and what Steyn LJ said as regards parties' intention. The Commission were concerned with the frustration of the parties' intentions (which can occur in certain cases, but not in the one sketched above by Stevens), whereas all that Steyn LJ stated was that there is no reason in law, logic or policy why the intentions expressed in the contract should not be effectively enforced. Steyn LJ is therefore stating that the parties' intentions are paramount and should be enforced, whereas the commission are going further and stating that the law actually frustrates that intention; in other words: Steyn LJ did not necessarily think that the law always frustrated that intention.

In light of this, it seems that the Act went further than judicial criticism in providing for the enforcement of rights by third parties even where it is not necessarily both parties whose intentions are frustrated.

B) The Intentions of the Parties vs. Preventing Injustice to Third Parties

A second connected point regarding the intentions of parties is worth examination. Whereas the Act gives the promisor (A) the ability to defend himself against a suit by C with those defences which would have been available to him as against the promisee (B) in a normal contract, it does not give A those defences which would have been available to B as against C. To use Stevens' example,:

“B agrees to sell his business to A in return for A paying B's wife C £100,000. B falls out with his wife and they agree to divorce. C learns of the agreement between A and B and informs A that she assents to the payment being made to her. B is no longer free, contrary to his current intentions, to renegotiate the deal with A so that it is he who is paid and not his wife.”

Here, B's current intentions are not to have his wife paid by A. Yet, since C has assented to the agreement, her right has therefore become irrevocable by A and B. The Act, by making C's right irrevocable frustrates the present intentions of B. This raises the issue mentioned above as to which course of the action the court should take: should it provide the third party with the effective legal redress to which she s entitled as a result of her irrevocable contractual rights, or should the (now changed) intentions of B be enforced? The two are now mutually exclusive in a way that the Act has made self-defeating when we consider the purposes behind reform.

On the one hand, the intentions of the parties is paramount and the pre-Act law could not hope to enforce that intention in light of the privity rule. However, on the other hand, the rights of the third party and the injustice caused to that party must be prevented. As a result of the Act's setting up a system whereby third party rights can become irrevocable, the competition between these two principles is now a “zero-sum game”: either the third party benefits, or the present (changed) intentions of the original party is enforced.

  1. Preventing Injustice to the Third Party

It's of particular concern where the third party has relied upon the agreement, which is a problem recognised in pre-Act caselaw. Stevens argues that the only person who has a legitimate expectation of the performance of a promise is the promisee: “It may be queried how deserving of sympathy a party who relies upon a promise made to someone else is. Such a person runs the risk that it will not be kept.” However, it is respectfully argued that this analysis is not convincing. We all run risks that promises will not be kept. Even the promisee runs the risk that the promisor will not perform the contractual terms, yet we would instinctively and persuasively argue that where there is no performance, the promisee a) had a legitimate expectation of performance, and b) is deserving of sympathy. To put it differently, it is not the case that in order to have a legitimate expectation, you must not be running any risk. Indeed, the very reason that the law of contract exists and is effective is that it is capable of resolving disputes when a risk run by a party realises itself to the detriment of that party, thereby providing remedies to that party. On this basis, it is arguable that the Act has done much to alleviate the injustice (which does exist) caused to third parties (subject to the “zero-sum game” argument above).

  1. Perversity

Though the case of Beswick caused many difficulties, the Act was it is argued, capable of resolving, to a large extent, the problems raised by that case. Section 4 of the Act states that “section 1 does not affect any right of the promisee to enforce any term of the contract.” This resolves the issue because it would have enabled the widow in Beswick to enforce the terms as an administratrix and therefore would have therefore been entitled to more than the small amount of damages to which she was entitled in that case.

E) Complexity, Artificiality and Uncertainty

As mentioned above, the law was very complex before the Act, owing in part to the fact that there existed so many exceptions to the rule, fusing as they did other areas of law within the third party rule. Further the application of those exceptions cause many difficulties which were experienced by judges and academics alike.

As to complexity, the Act did not actually remove all of the exceptions to the rule. This will undoubtedly continue to cause difficulties as the parallel application of old and new regimes almost invariably do. Given this, the law is not likely to be certain as the Act will live a parallel life to a very different body of developed and complicated law. Stevens argues that the fear experienced by the Law Commission in this regard was unwarranted because the law, he essentially argues, was not artificial. However, it is argued that the law, for example in Beswick, was indeed artificial (as it involved “splitting up” a person and reaching an unjust result). Further it was, as mentioned above, a judicial criticism levelled at the pre-Act law of privity that it produced artificial judgment which should be avoided. Since the Beswick-type situation has been removed from the law, it is argued that certainly this aspect of the artificiality has certainly be addressed successfully by the Act.

Conclusion

The doctrine of privity has been reformed in important ways that respond to the criticisms levelled against it by judges. However, the Act is now a hodgepodge of the multifarious and connected aims that drove reform in the first place, creating a zero-sum game between its most important objectives. The law remains complex and uncertain owing to the continued survival of the old common law exceptions. However, at the very least, the Act addressed the judicial concern over artificiality, and in the case of Beswick, injustice.

Bliography

  • Stevens, R., “The Contract (Rights of Third Parties) Act 1999” (2004) Law Quarterly Review 292

  • Poole, J., Contract Law, (Oxford, 2003)

  • Rickett, C., “The Constitution of Trusts: Contracts to Create Trusts” (1979) 32 CLP 1.

  • Bridge, M., “Privity of Contract: Third Parties” (2001) Edin. L. Rev. 85

  • Report on Privity of Contract Contracts for the Benefit of Third Parties (Law Com No 242, 1996) Accessible at http://www.lawcom.gov.uk/docs/lc242.pdf

  • Beswick v Beswick [1968] AC 58.

  • Darlington BC v Wiltshire Northern Ltd [1995] 1 WLR 68

  • Tweddle v Atkinson (1861) 1 B & S 393

  • Re Clay's Policy [1937] 2 All ER 548;

  • Smith v Hughes (1867) LR 6 QB 597.

  • The Eurymedon [1975] AC 154.

  • Ross v Caunters [1980] Ch 297.

  • The Contract (Rights of Third Parties) Act 1999