Privity of Contract Lecture

Introduction

Commercial transactions of modern times are no longer confined to individuals or simple sale-purchase deals. With the multiplicity of parties on one hand, and the various stages of performance on the other, contemporary commercial contracts have become a complex web. Needless to say, the consequences and enforcement of such contractual relations are difficult to decipher.

1. An example may be a contract between two parties – A and B – where A promises to pay B £5,000 against the construction of a water tank. B sub-contracts a part of the task to C for £1,000, which C completes. Upon non-receipt of £1,000 from B, C seeks to recover the amount from A. A denies the payment as there was no contract ever executed between A and C.
2. Conversely, while undertaking the task at A’s premises, C causes some damage to the site. A then seeks to sue C for contractual breach, which C refutes on the ground that A was not privy to its sub-contract with B. The complication further intensifies where the contract between A and B contains an exclusion clause seeking to exclude any liabilities on B or its associates for damage on site.
3. Another instance being where A (in its contract with B) agrees to pay £5,000 to C, for work done by B. Here, while the consideration flows from B, the benefit accrues to C. In the event of non-payment, C seeks to enforce the contract executed between A and B only.
4. Lastly, A and B (supplier) agree in a supply contract that C will bear all costs of materials supplied at the site, to which C has not consented or of which C is not aware. Later, upon non-payment, B seeks to recover the dues from C.

All of the above illustrate the nuances of the doctrine of “privity of contract” and its implications on commercial arrangements. While there are no straitjacket solutions, certain principles have evolved over time in common law and statute which attempt to provide a direction to the issue – explained in more detail below.

General rule

The doctrine

The general rule at common law states that a contract creates rights and obligations only as between the parties to such contract. As a corollary, a third party neither acquires a right nor any liabilities under such contract. This is what the doctrine of “privity of contract” enunciates and establishes as the overarching rule underlying any contractual relation.

The rule can trace its roots in classical Roman law, although later continental law came to recognise third-party rights of action – Zimmermann, The Law of Obligations (Oxford University Press 1996). Having followed this, English law too witnessed a journey of disarray – while the rule of no third-party rights or liabilities formed the foundation since as early as the thirteenth century (Ibbetson, A Historical Introduction to the Law of Obligations (Oxford University Press 1999)), evidenced in cases like Crow v Rogers (1724) 1 Str 591, decisions favouring third-party actions could be found in Dutton v Poole (1678) 2 Lev 210, and Carnegie v Waugh (1823) 1 LJ KB 89. In Pigott v Thompson (1802) 3 Bos & Pul 98, the treasurer could not sue on the agreement made with the commissioners.

The position was somewhat fixed by the triple rulings in Price v Easton (1833) 4 B & Ad 433, followed by Tweddle v Atkinson (1861) 1 B & S 393, later affirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847. In Price v Easton, the contract between Easton and another party provided for certain payment to Price against work done by such party. While the work was completed, Easton failed to pay Price, who then sought to enforce the contract. The court ruled that, as Price was not a party to the contract and no consideration moved from him, no rights of enforcement arose in favour of Price.

In Tweddle v Atkinson, concerning an agreement between John Tweddle and William Guy to pay certain sums to William Tweddle where the contract allowed the latter to sue either of them upon non-payment, the court disallowed such right of action as William Tweddle was not a party to the contract. This result was corroborated in Gandy v Gandy (1884) 30 ChD 57, and later in Dunlop Pneumatic Tyre Co, where a manufacturer sought to sue a subsequent dealer for sale of tyres in breach of a resale price undertaking given by the dealer to the intermediary wholesaler. The court held that only a person who is a party to the contract can sue on it or be sued, and thus no right accrued to the manufacturer to enforce that undertaking against the dealer. The court explained that “our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right…cannot be conferred on a stranger to a contract as a right to enforce the contract in personam” – Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, 853.

Despite some initial doubts raised in cases like Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500, and Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 QB 402, the doctrine was confirmed in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, and considered in Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (The New York Star) [1981] 1 WLR 138, and Amsprop Trading Ltd v Harris Distribution Ltd [1997] 1 WLR 1025. Both Scruttons and The New York Star dealt with the benefit of exclusion clauses in shipment contracts. The stevedores succeeded only in the latter case, where the carrier had contracted as their agent. Amsprop Trading was concerned with beneficial covenants relating to land and property vis-à-vis third persons.

Rule of consideration

The above line of cases hint at another rule ancillary to the main doctrine of privity of contract, that being, consideration must flow from the promisee in a simple contract. A promise made by deed does not require consideration. For a simple contract, “if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request” – Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, 853. Thus, while this rule of consideration is distinct and separate from the doctrine of privity, as upheld in Kepong Prospecting Ltd v Schmidt [1968] AC 810, the two rules may lead to the same result. A third party exercising a right under the 1999 Act need not have supplied consideration. For instance, in an arrangement of sub-contract, the employer cannot ordinarily sue the sub-contractor in contract for any damage or defect in the work – Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520. Conversely, the sub-contractor cannot bring an action for non-payment under the sub-contract against the employer either.

Right of action

It is worthwhile to highlight that what the doctrine prohibits is the right of action or enforcement in favour of or against a third party, and not beyond. That is, a contract may bestow benefits on a third party, although imposition of liabilities remains a bar. In the former case, the promisee may enforce his own contractual right for the benefit of the third party, by way of remedies such as specific performance, stay of proceedings and damages, as discussed below.

Specific performance

The leading case on this issue is Beswick v Beswick [1968] AC 58. In this case, John made promises to pay monies to Peter during his lifetime and an annuity of £5 a week to his widow thereafter, against acquisition of a certain coal delivery business from Peter. The agreement was made between Peter and John, where the wife was not a party. Upon death of Peter, John made one payment and refused to make any further payments to Peter’s wife, who then sought to enforce the agreement in the capacity of (a) administrator of Peter’s estate, and (b) in her personal right. The House of Lords discussed Robertson v Wait (1853) 8 Exch 299, and Lloyd’s v Harper (1880) 16 ChD 290, on recovery for another’s benefit. Damages would not adequately enforce the promise to pay the annuity. As administrator of Peter’s estate, his widow obtained specific performance of that promise.

Having said that, the claim made in her personal capacity (as a third person) was not accepted on the ground of the doctrine of privity. The order required John to pay the arrears and future instalments to the widow herself.

Stay of proceedings

This remedy is relevant where a contract provides for a covenant not to sue the third person. Where a party institutes a legal action against the third person in breach of such covenant, the other contracting party may seek to discontinue such proceedings by way of a stay order. This relief was granted in the case of Snelling v John G Snelling Ltd [1973] 1 QB 87, concerning the forfeiture on resignation of certain dues owed by a company to its directors (three brothers), which agreement was executed only between such brothers. The question thus arose whether one of the brothers could later sue the company for recovery of the debt after resigning, notwithstanding the agreement of forfeiture. The company along with the other two directors (by way of counterclaim) sought to invoke the agreement so as to stay the legal action and/or dismiss the recovery claim.

Having said that, the following conditions must be satisfied to obtain a stay – Gore v Van Der Lann [1967] 2 QB 31:

1. The contract must provide for an express or implied undertaking by the promisor not to sue the third person; and
2. The promisee must have a sufficient interest in the enforcement of the promise.

In the above case of negligence against a bus conductor, the promisee sought to invoke its agreement with the passenger excluding liability on injury to stay the action. The exclusion of liability for the passenger’s injury was ineffective under s.151 of the Road Traffic Act 1960. The court, finding neither an undertaking not to sue the conductor nor a sufficient interest in enforcing one, declined to order a stay of proceedings.

Damages

As a general rule, a contracting party can sue for damages only in respect of his own loss, and not for losses suffered by a third person – Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.

This rule, however, admits a narrow exception where the contract concerns property and the parties contemplated a transfer of the property to a third person or that he might suffer the loss in respect of it. The exception requires that the contractual arrangements gave him no direct remedy against the party in breach. The absence of a remedy, sometimes called a “legal black hole”, is not sufficient by itself – Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68, 79. The earlier conjoined appeals were Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4, and St Martins Property Corporation Ltd v Sir Robert McAlpine & Sons Ltd [1994] 1 AC 85, 115 – where the court held: “In such a case, it seems to me proper…to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach.”

The above position was followed in Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68, in relation to a construction contract. The House of Lords in Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 declined to recognise a general right to recover another person’s loss. It distinguished contracts such as family holidays. In Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468, the Court of Appeal upheld Jackson’s right to recover damages for losses suffered by his wife and sons from the travel company in relation to breach of certain accommodation conditions.

However, the position as regards such right of recovery of damages by the other contracting party (without having suffered any loss) differs where the third person may have an independent right to claim (GH Treitel, ‘Damages in Respect of Third Party Loss’ (1998) 114 LQR 527). This is the reasoning on which the refusal of the claim for damages in Alfred McAlpine Construction may be differentiated from the allowance in the above cases. In Alfred McAlpine Construction, the court held that there was no justification for Panatown to recover damages on behalf of the landowner, when the landowner had its own cause of action against the builder under a duty of care deed. In Forthwell Ltd v Pontegadea UK Ltd [2026] UKSC 33, the Supreme Court distinguished the narrow exception from a suggested broader ground based on the promisee’s interest in performance. It left open whether the broader ground forms part of English or Scots law.

Exceptions to the doctrine

The rule that a third person has no right to enforce a contract to which he is not a party is not absolute, as it is qualified by a number of exceptions, arising in common law and statute:

Statutory exceptions

Some of the earliest statutory exceptions can be found in s.56(1) of the Law of Property Act 1925 (which concerns interests in land and did not entitle the widow to sue personally in Beswick v Beswick), s.11 of the Married Women’s Property Act 1882 (life policies for a spouse or children), s.14(2) of the Marine Insurance Act 1906 (insurance on behalf of other persons interested), and s.148(7) of the Road Traffic Act 1988 (indemnity for persons or classes of persons specified in a motor policy). Also, s.2 of the Carriage of Goods by Sea Act 1992 vests in the lawful holder of a bill of lading, subject to s.2(2), all rights of legal action permissible under the contract of carriage, notwithstanding that he was not a party to it when originally drafted. Section 2 also covers the person entitled to delivery under a sea waybill and the person entitled to delivery under a ship’s delivery order, within the terms of the order. Under the Third Parties (Rights against Insurers) Act 2010, an insured person’s rights against an insurer may pass to the person to whom the insured incurred liability in the insolvency circumstances specified by that Act.

The Contracts (Rights of Third Parties) Act 1999

A statutory exception in England and Wales and Northern Ireland lies in the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act), which came about pursuant to the Law Commission deliberations and report of 1996 (Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242, 1996). The enactment was devised to remedy the uncertainties and ambiguities surrounding the doctrine and its exceptions in common law, more particularly that depriving a third person of such enforcement right has unwarranted results: (a) eroding the intention of the original contracting parties, (b) a situation of dichotomy where the person who has suffered loss is left with no remedy while one who can sue has no damage, (c) the promisee, although able to seek redress for the third person, may choose not to do so, (d) injustice to third-person interests, and (e) overall inconvenience to the commercial domain (Law Commission Report, paras 3.1–3.28). Scotland has its own Contracts (Third Party Rights) (Scotland) Act 2017.

The 1999 Act allows a third person to enforce a term of a contract in either of two circumstances (s.1):

1. Where the contract expressly provides for it; or
2. Where a term purports to confer a benefit on such third person.

For either of the conditions, the third person must be expressly identified in the contract by name, as a member of a class or by description (even if not in existence at the time). Such class or category may be references to stevedores, tenants, owners, family, future spouse, a company yet to be incorporated, or unborn child, or a description of characteristics (A Burrows, ‘The Contracts (Rights of Third Parties) Act and its Implications for Commercial Contracts’ (2000) LMCLQ 540). Notably, such identification must be specific and express, so it cannot be inferred from words which identify no such person or class – Avraamides v Colwill [2006] EWCA Civ 1533. The person need not be named individually or know of the contract when it is made (Chudley v Clydesdale Bank plc [2019] EWCA Civ 344).

Further, either route can cover negative rights as specified in s.1(6), such as the right of exclusion or limitation of liability (Himalaya clause) – the subject matter of much dispute in common law (discussed in the section on Himalaya clauses below). Enforcement is subject to the other relevant terms of the contract. The third person has the remedies that would have been available to him as a contracting party (ss.1(4)–(5)).

The Australian decision in Trident General Insurance Co Ltd v McNiece Bros (1988) 165 CLR 107 concerned a common law exception for insurance. Under s.1(1)(b) of the 1999 Act, the right is allowed only where the term “purports to confer” benefit on the third person, such that consequential or incidental benefits are not covered – Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening [2009] EWHC 716 (Comm). The Court of Appeal considered the scope of this test further in Chudley v Clydesdale Bank plc [2019] EWCA Civ 344, holding that a term must purport to confer a benefit on the third party in the sense that the benefit must be an object of the contract rather than merely an incidental consequence of its performance.

Also, the condition does not enable a third-person action where the intention of the contracting parties appears to the contrary in the contract (s.1(2)). In Secretary of State for the Home Department v Public and Commercial Services Union [2024] UKSC 41, the Supreme Court held that a trade union could enforce terms for deducting subscriptions from wages. Once a term purports to benefit an expressly identified third party, enforceability is presumed unless the contract, objectively construed, shows a contrary intention. This rebuttal was invoked unsuccessfully in the case of Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), where it was asserted on the ground that the third person had a right of action otherwise, so that such right under the 1999 Act was not necessary. Likewise, in Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) [2005] EWCA Civ 519, it was argued that allowing third-person action would be inconsistent with the sequential contractual structure in place between the charterer, owner and receiver (following from para 7.18 of the Law Commission Report discussing whether third-person actions should be able to cut through the custom of chain contracts prevalent in the construction industry). The court, however, ruled that simply a sequential arrangement of contracts does not negate third-person right, without evidence that the parties intended that result. This is further affirmed in Far East Chartering Ltd v Great Eastern Shipping Co Ltd (The Jag Ravi) [2012] EWCA Civ 180. In the construction context, the Court of Appeal in Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373 construed an exclusion of liability for asbestos in consultants’ appointments and collateral warranties.

Moreover, under s.2 the parties need the third person’s consent to rescind the contract or vary it so as to extinguish or alter his entitlement if he has communicated assent to the promisor, or has relied on the term and the promisor knew of or could reasonably have foreseen that reliance. Assent sent to the promisor takes effect on receipt. An express term may reserve the power to vary or rescind or specify when consent is required. A court or arbitral tribunal may dispense with consent in the circumstances set out in ss.2(4)–(5) and may order compensation. While this opens up the potential for third-person legal suits on one hand (N Andrews, ‘Strangers to Justice No Longer: The Reversal of the Privity Rule Under the Contracts (Rights of Third Parties) Act 1999’ (2001) CLJ 353), the 1999 Act seeks to balance the case for contracting parties too, through provisions on defences, set-off and counterclaims available to the promisor (s.3), avoidance of double liability (s.5), promisee enforcement rights (s.4), and exceptions to third-person action (s.6). Section 8 provides for arbitration where the right is subject to a written arbitration agreement or the third person exercises a right to arbitrate.

Section 6 excludes contracts on negotiable instruments, the statutory contract between a company and its members, and specified limited liability partnership documents and agreements. Section 6(3) prevents a third party enforcing a term against an employee, worker or agency worker under the relevant contract. It does not prevent enforcement against the employer. Section 6(5) excludes the contracts for carriage of goods by sea defined in s.6(6) and carriage of goods by rail or road, or of cargo by air, subject to the specified international conventions, but allows a third party to rely on an exclusion or limitation of liability in such a contract.

All in all, the 1999 Act (although an exception) does not abrogate the doctrine of privity of contract, which continues to remain the predominant overarching rule governing contractual relations. Additionally, the 1999 Act preserves rights and remedies which exist independently of the Act (s.7(1)) (E Peel, Treitel on The Law of Contract (15th edn, Sweet & Maxwell 2020)).

In practice, the 1999 Act may be excluded by express provision in commercial contracts. Construction contracts, including JCT and NEC forms, can instead give specified beneficiaries rights to enforce particular terms.

Common law exceptions

Collateral contracts

This exception is much conflicted as it depends upon the finding of the court of a contract in existence where the claimant is an actual contracting party, and not a third person. It was brought to test in the case of Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854. In this case, the defendant represented that certain paints were suitable for use in re-painting of the pier with a life of seven to ten years. Relying upon this, the plaintiffs instructed their contractors to use the paint to re-paint the pier, but the paint was found to be unsuitable and having a much lesser life. The court was thus concerned with deciding whether such representation could be reckoned as a warranty between the plaintiff (owner of the pier) and the defendant (paint manufacturer), where the original sale and purchase of paint was not undertaken between them. Such a collateral contract was found to be existing in this case.

Whether or not such collateral contract exists depends upon evidence of the generally applicable constituents of a valid contract, namely: offer, acceptance, intention to create legal relations and consideration, as in Shanklin Pier above. Where any of such elements is absent, there is no collateral contract – Independent Broadcasting Authority v EMI Electronics (1980) 14 Build LR 1.

Trust

The way for this exception was paved by the ruling in Dunlop Pneumatic Tyre Company Ltd v Selfridge and Company Ltd [1915] AC 847, 853, where it was held that although privity of contract does not allow third-person action, such a “right may be conferred by way of property, as, for example, under a trust.” This was affirmed in Les Affreteurs Reunis v Walford [1919] AC 801. In this case, Walford (broker) negotiated a contract between the charterer and the ship owner, containing a stipulation as regards certain commission payable to Walford. Upon failure of such payment, Walford sued the ship owner. By agreement the case proceeded as if the charterer had been joined. The court found that the parties intended the charterer to hold the promise of commission on trust for Walford.

Caution should, however, be exercised not to confuse this exception with that of a simple contract executed for the benefit of a third person. Not in every such contract involving a third-person beneficiary is a trust of contractual right created. This was highlighted in the case of Re Schebsman [1944] Ch 83, 89. Schebsman’s employment was terminated with a company, following which he entered into an agreement with the company for certain payments against such termination. The payments, in the event of his death, were to be made to his wife and daughter. After his death his trustee in bankruptcy claimed the payments for the estate. The court had to consider whether the contract created a trust in favour of the wife and daughter.

The court ruled that no such trust was created, as “It is not legitimate to import into the contract the idea of a trust when the parties have given no indication that such was their intention. To interpret this contract as creating a trust would…be to disregard the dividing line between the case of a trust and the simple case of a contract made between two persons for the benefit of a third. That dividing line exists, although it may not always be easy to determine where it is to be drawn.”

Thus, aside from receipt of benefit by the third person, the general character of trust and an intention to create one must be established – Green v Russell [1959] 2 QB 226. The above proves the potential ambiguity surrounding the application of the exception from a practical perspective.

Assignment

As such, a contracting party can generally assign his rights under the contract to a third person. An absolute legal assignment under s.136 of the Law of Property Act 1925 must be in writing under the hand of the assignor, with express written notice to the debtor. An assignment that does not meet those requirements may take effect in equity. Transferring contractual liabilities requires the parties’ consent to a novation. Having said that, a mere right to litigate or sue for damages cannot be so assigned, unless the third person has a commercial interest in assuming such right, as enunciated in Trendtex Trading Corporation v Credit Suisse [1982] AC 679. Moreover, defences of the promisor and the extent of remedy available to the third person would be as what was contemplated and applicable under the original contract – Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079.

Agency

This exception can be traced from the Dunlop Pneumatic Tyre Company Ltd case, i.e. a principal not named in the contract may sue upon it if the promisee really contracted as his agent, and consideration was directed personally or via the promisee in the capacity of an agent. An undisclosed principal may generally sue or be sued if the agent intended to act for him and acted within his actual authority, subject to the terms of the contract. The agent may also sue or be sued (Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199, 207). Where the agency is disclosed, whether the agent undertook personal liability depends on the agreement – Wakefield v Duckworth [1915] 1 KB 218.

Action in tort

In the event of a breach of duty of care, an independent claim for negligence can be instituted by the person having suffered the loss, even if he has no contract with the defendant, provided the defendant owed him the duty in question. This can be best asserted through the case of Donoghue v Stevenson [1932] AC 562, where despite the claimant having no contractual relation with the ginger beer manufacturer, the House of Lords allowed her claim in negligence to proceed to proof.

A similar stance in the domain of tort was witnessed in Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520, where the pursuer’s claim in delict against a nominated sub-contractor for a defective floor was allowed to proceed to proof (contractually possible only via the main contractor). However, Junior Books has been significantly limited by subsequent authority and is now widely regarded as decided on its own particular facts. In Murphy v Brentwood District Council [1991] 1 AC 398, the House of Lords confirmed that pure economic loss arising from defective construction is not generally recoverable in tort. The more recent case of Linklaters Business Services v Sir Robert McAlpine Ltd [2010] EWHC 1145 (TCC) declined to strike out a negligence claim between parties to a sub-contract. Nonetheless, action in tort continues to be a significant avenue for third-person actions where contractual remedy may otherwise be barred due to the doctrine of privity, as where a solicitor’s negligent delay in preparing a will deprived intended beneficiaries of their legacies – White v Jones [1995] 2 AC 207.

Restrictive covenants

In an example of sale and purchase of land, any terms of conveyance will generally be confined to the seller and the buyer, and not extend to subsequent buyers or owners. Having said that, a restrictive or negative covenant such as a bar on use of the land for commercial purposes or on constructing permanent fixtures on the land may be carried forward with the land and enforced against subsequent owners by a person entitled to its benefit. In the usual case the covenant must benefit identifiable land and be intended to bind successors. Registration rules determine whether it binds a purchaser, ordinarily by a notice in registered land or a Class D(ii) land charge for a covenant created after 1925 over unregistered land. This was upheld in Tulk v Moxhay [1848] 41 ER 1143.

Exclusion/limitation/Himalaya clause

The question whether or not a third party could take the benefit of an exclusion or limitation clause extended to it by a Himalaya clause in a contract, more particularly in a contract of carriage, has been the subject of much judicial debate (E McKendrick, Contract Law: Text, Cases and Materials (10th edn, Oxford University Press 2024)).

In the early case of Elder Dempster v Paterson Zochonis [1924] AC 522, where oil was damaged by bad stowage in relation to a contract between the claimant and the carrier, the court extended the exclusion in the bill of lading to the ship owner, notwithstanding the absence of any direct contract of the ship owner with the claimant. The ship owner received the goods as bailee on the terms of the bill. A different basis of protection was considered in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, which enumerated several requirements for such an extension of an exclusion clause to a third person, such as a stevedore, namely: (i) the bill must make clear that the stevedore is intended to be protected, (ii) the carrier must contract as the stevedore’s agent for that purpose, (iii) the carrier must have authority to do so, or the act must be capable of effective ratification, and (iv) the difficulty as to consideration from the stevedore must be overcome. In this case, a drum of chemicals was damaged by a stevedore during carriage under a contract between the carrier and the claimant. The court ruled that, as the stevedores were not parties to the carriage contract, they could not avail themselves of the exclusion clause.

The agency analysis in Scruttons was applied in New Zealand Shipping v AM Satterthwaite Ltd (The Eurymedon) [1975] AC 154, where the Himalaya clause was held to be capable of protecting third persons. The case facts were similar to the above cases, concerning liability of a stevedore under a bill of lading executed between the shipper and the carrier. The court found a new contract between the shipper and the stevedore, separate from and collateral to the main contract of carriage. Unloading the goods supplied the consideration. The above reasoning based on agency and collateral contract was affirmed in the New York Star case – Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd [1981] 1 WLR 138.

In relation to exclusive jurisdiction clauses too, as evidenced in the Pioneer Container case [1994] 2 AC 324, the terms of a sub-bailment could bind the owner of goods. In this case, the shipper allowed the carrier to sub-contract the carriage on any terms. The carrier then sub-bailed the goods to the ship owner under certain bills of lading, which contained an exclusive jurisdiction clause providing for Taiwan to be the forum to determine any disputes. The Privy Council held that the exclusive jurisdiction clause in the bills of lading was binding and enforceable against the shipper too. On the contrary, such a jurisdiction clause did not extend to the ship owner under a generally worded Himalaya clause from a contract between the shipper and the carrier. This was so because only the liability clause (and not the jurisdiction clause) extended to the ship owner from the original contract – The Mahkutai [1996] AC 650.

The swing of law, however, stands settled to a certain extent by the 1999 Act, which expressly provides for the extension of negative clauses (protection), where applicable, to third persons (s.1(6)). It should also be noted that where an exclusion clause arises in a consumer contract, the Consumer Rights Act 2015 (which replaced the relevant consumer provisions of the Unfair Contract Terms Act 1977) may apply to assess the fairness of the term in question. Section 62 of the 2015 Act makes an unfair term non-binding on the consumer, and s.65 prohibits a trader from excluding or restricting liability for death or personal injury resulting from negligence. Section 7(2) of the 1999 Act disapplies s.2(2) of the Unfair Contract Terms Act 1977 where the negligence is a breach of a contractual obligation and the person seeking to enforce it relies on s.1 of the 1999 Act.

Conclusion

It is clear that the doctrine of privity of contract is an established norm, and third-person action or right to enforce a contract to which he is not a party is an exception to the general rule. This position remains unshaken, notwithstanding the debate around the redundancy of the doctrine in the contemporary commercial context, as advanced by Flannigan, who condemned the doctrine as being an error and inconsistent (R Flannigan, ‘Privity – the End of an Era (Error)’ (1987) 103 LQR 564).

The above view is refuted by the school of advocacy defending the doctrine, including inter alia observations in response to and criticising the Law Commission arguments for reform, by Stevens, Smith and Kincaid (R Stevens, ‘The Contracts (Rights of Third Parties) Act 1999’ (2004) 120 LQR 292; SA Smith, ‘Contracts for the Benefit of Third Parties: In Defence of the Third-Party Rule’ (1997) 17 OJLS 643; and Kincaid, ‘Third Parties: Rationalising a Right to Sue’ [1989] CLJ 243).

On another note, the implementation of the doctrine has been much turbulent, owing to the uncertainty and ambiguous contours of the common law exceptions. Although much has been sought to be streamlined through the 1999 Act, early experience suggested the legislation was underused – H Beale, ‘A Review of the Contracts (Rights of Third Parties) Act 1999’ in A Burrows & E Peel (eds), Contract Formation and Parties (Oxford University Press 2010). An express exclusion can prevent enforcement under the Act.

Moreover, in terms of the second limb of the test under s.1 of the 1999 Act, the position continues to be determined by courts on a case-by-case basis on the proper construction of the contract – T Roe, ‘Contractual Intention under Section 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act 1999’ (2000) 63 MLR 887. De Rhune advises express exclusion of the 1999 Act, so as to avoid enforcement by third persons where the contracting parties intend to do so – J de Rhune, ‘Contracts (Rights of Third Parties) Act 1999’ (2000) The Legal Executive 22. An express exclusion is unnecessary where the requirements of s.1 are not met. An exclusion of the Act alone does not displace rights arising independently of it.

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