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The contracts rights of third parties

‘‘[ The Contracts (Rights of Third Parties) Act 1999] does make an improvement to the law in that it reforms a doctrine which many parties regarded as unjust and commercially inconvenient''. McKendrick, E. (2009) Contract Law Palgrave, p.1380. Discuss

The classical theory of contract suggests that in order for a contract to be valid there must be an offer and acceptance, an exchange of some economic asset which confers a benefit and incurs a detriment. There must also be an intention to create legal relations i.e. the meetings of the minds, consensus ad idem. These rules are embedded into the doctrine of privity, in that the parties to a contract are those persons who reach an agreement. Hugh Collins has suggested that the rationale for the doctrine of privity is that ‘contractual responsibility can only arise when both parties consent to undertake the rights and responsibilities under it'. Thus, a third party cannot be allowed to sue nor be sued in a contract to which he is not a party even if it was made for their benefit. On the other hand, however, if one applies the principle of autonomy, it can be argued that if a contracting party intends to confer a benefit upon the third party, then the law by applying its technical nature .i.e. shaping contracts around the orthodox rules of offer and acceptance in order to preserve market individualism, essentially impedes the freedom of the individual as any promises which have been made by the parties should be binding, otherwise as Atiyah suggests ‘the individuals would be deprived of their freedom to place themselves under a moral obligation respecting their future conduct' (Craswell.R pg 20).

The technical application of the law is best demonstrated in the case of Tweddle v. Atkinson (1861) 121 ER. The contracting parties clearly expressed their intentions to confer a benefit upon the third party, but the courts however maintained strict adherence to the rules of privity and held that the formal requirements of a contract are a necessity and because there was an absence of 'consideration' (economic or some other benefit) the claim failed. Blackburn J, however, acknowledged that there was in fact ‘an exception' when the consideration involved family members, but despite his comment which had a hint of consumer-welfarism, in protecting the third-parties reasonable expectations and the justifiable reliance of the third-party upon the promise, he attempted to provide justice, for it may be argued that John Tweddle may not have gone ahead with the marriage if it was not for the incentive, which can be perceived to be good consideration. The strict adherence and the justification for the rule emphasized that there must be a mutuality of obligations between those enforcing a contract and having it enforced against them, which can be seen in the statement of Crompton J, in that ‘it would be unfair if a person were entitled to enforce a contract under which he could not, in turn, be sued'. In another case of similar facts, Errington v Errington & Woods [1952] the ratio demonstrated that within a unilateral contract, there is an implied promise not to revoke the right once the performance of the act has commenced. This, case was lacking mutuality, but yet it was enforced. The rule embedded in the doctrine of privity has therefore been criticized on the basis that ‘it failed to give effect to the intention of the parties which led to unjust results' G.H Treitel.), although, if John Tweddle and his father were joint promisees he could he fact bring an action in his own right alike the Beswick v Beswick situation.

In Beswick v Beswick [1968] AC 58, the judiciary attempted to take the same technical and formal approach. A contract was made between Mr.Beswick and his nephew, for a payment to be made to Mrs.Beswick for life, after his death. Following the death of Mr.Beswick, the nephew ceased to make the said payments to Mrs.beswick and she thus brought an action in compelling him to do so. The trial judge held, defending the privity rule that she was unable to receive the promised benefit because she was not a party to the contract. The court of appeal and the House of Lords, however established that she could in fact sue as the executor of her husbands estate, thus demonstrating a consumer-welfarist approach in finding a just and fair result, whilst concurrently preserving the doctrine of privity. If however, had it not have been for the House of Lords attempt in finding justice for Mrs.Beswick in another capacity of law, the doctrine of privity, would have allowed the nephew to escape his responsibilities to the contract and not pay the full amount for the business and still have benefited from it by keeping it and be unjustly enriched.

The doctrine was developed further in the commercial context in the case of Dunlop Pneumatic Tyre. V Selfridge and Co. Ltd .In a contract between Dunlop and Dew, Dew agreed to maintain Dunlop's price list. Dew & Co resold the tyres to Selfridge maintaining the price list. Selfridge, however, then resold the tyres below Dunlops price list. Dunlop sought to sue Selfridge under the contract between Dew & Co. The judgment of Lord Haldane, was that ‘only a person who is party to a contract can sue upon it, our law knows nothing of jus quaesitum terito [a third party right of action] arising by way of contract'. Lord Dunedin, in his dissenting opinion stated that the doctrine “makes it possible for a person to snap his fingers at a bargain deliberately made, a bargain not in itself unfair, and which the person seeking to enforce it has a legitimate interest to enforce”. Adams and Brownsword have suggested, by not allowing a third party right of action ‘it is one of the most important obstacles to the enforcement of an agreement' (Lecture Handout pg.1) and in the commercial nature of transactions such as this, there is a network of transactions and quite often there are more than two parties to the contract. By preventing Dunlop from enforcing a contract, a contract which he may have reasonably relied upon, thwarted his reasonable expectations, produced unfair results and was commercially inconvenient, because the doctrine essentially obstructed commercial convenience.

In addition, the same result can further be seen in the case of Donoghue v. Stevenson. The friend of the consumer was unable to sue the manufacturer on the basis of a defect in a product because there was no privity of contract. However, in order for a claim to be successful such as one of this nature, the third party could in fact sue the retailer, the retailer then sue the distributor and finally the distributor could sue the manufacturer. But, this method has been argued as ‘creating an unnecessary series of contractual claims and creates complexity' (Catherine. E pg).

So, common commercial practice demonstrates that there will be networks of contracts and some contracting parties usually carry out their contractual obligations owed to the other party via a third party. The controversy arises when the rule of privity was applied to cases in which persons such as agents, sub-contractors and employees attempted to rely on a term such as exclusion or a limitation clause in a contract as a defence to a claim brought by a party to the contract. In the case of Scruttons Ltd v . Midlands Silicones Ltd [1962] AC 446, a third party, namely the stevedores attempted to rely upon a limitation clause which limited liability to $500 in a contract between the carriers and the claimants. The courts adopting a formalist approach, decided that the stevedores could not be protected by the limitation clause, because they were not privy to the same contract. Lord Reid, however, responded with a realist approach in an attempt to find protection for the stevedores and stated that if a third party could establish that the employer had the authority to act on behalf of the third-party as their agent, then the third party could in fact take advantage of the exclusion or limitation clause, subject to meeting a criteria. So, the reasoning demonstrated that to ease commercial convenience a new category was recognized, for which the formal rules of offer and acceptance did not apply, although it was not accepted in this case.

The device of agency was thus adopted and accepted in the case of New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. Here, the facts were similar to the case above, where a third-party negligently damaged goods. The difference here however was that the third-party was protected due to a complexly drafted statutory provision, namely The Bill Of Lading. The formal rules were also applied of offer and acceptance, although strictly speaking there was no communication of the offer and acceptance, the courts in fact found a unilateral contract, the act of unloading the goods by the stevedores provided good consideration. It has, been suggested that the finding of a unilateral contract was in principle an attempt ‘to force facts to fit uneasily into the offer and acceptance framework to establish a just and fair result'. The principle Lord Wilberforce made clear, was that ‘privity must not be allowed to obstruct commercial convenience' (Adams.B pg 91), thus demonstrating a realist approach which was result-orientated and underwritten by commercial convenience, succumbing to market individualism ideology, but also preserving the traditional formal requirements of the classical theory of contract.

An agreement by B to accept from A part-payment of C's debt to B in full settlement may preclude B from suing C for the balance

It has been suggested that the courts approach have ‘over time become rather formulaic and divorced from the original notion of true agreement' (Mulchay pg50 ]5thed) and as a result of the judiciary's aim for need of certainty and predictability, it essentially undermined the autonomy of the will of the parties and has been argued that ‘it failed to give effect to the intentions of the parties which lead to unjust results' (G H, Treitel pg.66-81) as is demonstrated in these cases. Lord Diplock, who expressed his opinion in Swain v. Law Society (1983) 1 AC 598 as, “ananachronistic shortcoming that has for many years been regarded as a reproach to English private law”,

Under section 1 of the Contracts (Rights of Third Parties) Act 1999, provides a third party his own right if that the contract expressly allows for the third party to enforce rights (ss(1)(a)) and if the contract purports to benefit them they can also enforce the rights (ss.(1)(B). So, this part of the act satisifies the problems which third parties had with the common law and thus cases such as as Beswick v Beswick (1967) and Tweddle v Atkinson where it was established that it only parties to the contract can sue is satisfied

Furthermore, in the context of commercial transactions according to Beale and Dugdale 1975 ( mulchay pg 69) ‘the majority of firms use standard form cotracts when negotiating contracts' and it can be said that by virtue of s.1 of the 1999 act a person not a party to the contract (a third party) may in his own right enforce a term of the contract if according to s.1 (a) the contract expressly provides that he may. So it therefore, mitigates the need for complex drafting, simply by naming the person.

It has been suggested that these rules adhere to the rule of law in that it makes the law predictable and certain. On the other hand it has been argued that the strict adherence to these rules has often been the reason for injustice and inconvenience.

In accordance to section 2(1), it has been suggested that can it has limited the flexibility of contracts because if a third party has communicated it's consent, the contracting parties cannot vary or rescind the contract, which severly limits the power of the contrating parties according to (G,H Treitel).

From a formalist perspective it can be said that the doctrine of privity promoted certainty and Collins has argued that an ‘indeterminate range of liability' would result if there was no doctrine of privity. On the other hand, from a consumer welfarist and a market individualist perspective, there is the contention that the second rule is controversial because it produced unfair results, the will of the parties were disregarded.

On the other hand, it has been suggested that by allowing third parties to sue upon a contract to which he is not a party would ‘lead to an indeterminate range of liability' and since the law requires certainty and predeictability, by allowing third party rights, it would make the law uncertain and unpredictable.

Section 1(1) a, allows a third party to enforce a term of the contract where the contract ‘expressly provides that he may'. This has improved the situation such as Tweddle v Atkinson, because it gives effect to the intentions of the parties.

Partly for reasons of expediency, even the common law was forced to accept a number of real or apparent exceptions to the doctrine of privity1 in relation to:

  • (1) agency2; 

  • (2) assignment of choses in action3; 

  • (3) carriage of goods4; 

  • (4) commercial letters of credit5; 

  • (5) covenants concerning land6; 

  • (6) claims in tort7; 

  • (7) proprietary or possessory rights8; 

  • (8) registered companies9; and 

  • (9) sub-bailments10

Students guide to the law of contract Deeksha Bhana, Elsje Bonthuys, Minetter Nortje

Whincup, Michael (2006). Contract law and practice: the English system with Scottish, Commonwealth, and Continental comparisons. Kluwer Law International

McKendrick, Ewan (2007). Contract Law (7th Ed.). Palgrave Macmillan.

Mulcahy, Linda (2008). Contract Law in Perspective (5th Ed.). Routledge

Wakipedia- the whole of privity of contract including criticism by various academics and judges.

Issues in international commercial law - INFO ON EXCLUSION CLAUSES - GOOD BOOK.

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