THIRD PARTY RIGHTS

The Contracts Act 1999 has made a fundamental change to English contract law. The doctrine of privity of contract
consisted of two general rules:
1. (it had not been affected by the 1999 Act) A third party cannot be subjected to a burden by a contract to which
he is not a party.
N.B.(1) it’s a tort for a third party, without lawful excuse, to interfere intentionally or recklessly with a contract between
A and B, either by persuading A to break his contract or by preventing A to perform his obligations under the contract.
N.B.(2) a third party who acquires property in the knowledge that that property is affected by a contract between two
other parties, is bound by the terms of that contract (Tulk v Moxhay).

2. A person who was not a party to a contract could not sue upon the contract in order to obtain the promised
performance, even in cases where the contract was entered into with the very object of benefitting him.
This second rule applied both
- Where the claimant was seeking to assert a positive right under the contract (to be paid a sum of
money)
Beswich v Beswich
Peter Beswich sold his coal round and the goodwill of his business to his nephew, in return for a promise
to pay £6 10s per week to Peter for the rest of his life and afterward £5 a week to his widow for the rest
of her life. Peter died, and the nephew ceased making the payments to the widow, who brought an
action. She failed in her action because it was in her own name and she was not privy to the contract.
But she happened to be the administratrix of her husband’s estate (she acquired the rights of the
deceased). Therefore, the House of Lords held that her action succeeded because it was as if Peter was
suing and he was privy to the contract. The court ordered specific performance.
- Where he was seeking to rely on a term in the contract as a defence to a claim brought by the claimant
Scuttons Ltd v Midland Silicones Ltd
The claimants, who were the owners of a drum of chemicals, entered into a contract with a firm of
carriers for the transportation of the drum. Under the contract the carriers limited their liability to $500.
Stevedores, who were employed by the carriers to discharge the drum, negligently dropped it and the
claimants brought an action in tort against them. The stevedores sought to rely on the exclusion clause
contained in the contract between the claimants and the carriers. It was held that they could not do so
because they were not privy to the same contract.

Dunlop v Selfridge
Dunlop sold tires to Dew & Co (wholesalers). This company agreed that the manufactures could fix the lowest price at
which they could sell the tire and promised not to see the tires below that price. They also agreed to obtain the same
pricing terms from costumers to whom they resold tires. On these terms they sold tires to Selfridge who broke the
agreement and sold the tires at discount prices. Dunlop sought an injunction to prevent them from selling their tireas at
a discount. The court held that there was no contract between Dunlop and the third party and therefore they could not
impose their terms upon them.

Exceptions to the doctrine of privity:

1. Collateral contracts
It may be used to avoid the rule relating to privity (a new contract arises). The court can find a collateral contract
between the promisor and the third party and held that they are bound to the promise they made.
Shanklin Pier v Detel Products Ltd
The claimants entered into a contract with painting constructors to paint their pier, having been assured by the
defendants that their paint would last for at least 7 years without deterioration. In fact, the pain peeled within 3
months. The pier owner could not sue the painters since they had carried out the work professionally. The pier
 owners sued the paint manufacturers. They were successful because it was held that a collateral contract had
arisen from their promise as to the suitability of the paint.
2. Agency
The doctrine of agency gives a right to a businessman, who appointed an agent to contract on his behalf, to sue
upon the contract himself. An agency relationship arises where one party, the agent, is authorized by another
party, the principal, to negotiate and enter into contracts on behalf of the principal. There is NO contractual
relationship between the third party and the agent! The bounding contract is just between the third party and
the principal.
3. Trusts
A party has a contractual right to sue the other party for breach of contract on trust for the benefit of a third
party. This applies only if there is an expressed intention in the contract between A and B that the third party
should receive a benefit.
This principle was affirmed in Les Affreteurs Reunis v Walford
4. In limited circumstances a third party may be able to bring an action in the tort of negligence against a negligent
promisor.
5. Statutory exceptions to the doctrine of privity: s11, Married Women’s Property Act 1882 (allows a wife to claim
on her husband’s life assurance policy), Bills of Exchange Act 1882 (a third party may sue on a cheque or bill of
exchange) …
6. Assignment
A promisee may assign his right to sue the promisor to a third party if it was on the intention of the parties that
the third party would have rights under the assignment but would not acquire the third-party rights’ under the
Act.

The were four problems with this old law:

 It failed to give effect to the expressed intentions of the parties
 The law was complex
 It was commercially inconvenient (ex in cases with carriage of goods)
 It could sometimes lead to injustice

The contracts (Rights of Third Parties) Act 1999

It introduced a limited third party right of action to enforce a term of a contract.
1. A person who is not a party to the contract (third party) may in his own right enforce a term of the contract if:
a) The contract expressly provides that he may, or
b) The term purports to confer a benefit on him
2. Subsection 1(b) does NOT apply if it appears that the parties did not intend the term to be enforceable by the
third party.
3. The third party must be expressly identified in the contract by name, as a member of a class or as answering a
particular description but need not be in existence when the contract is entered into. (this could extend rights to
unborn children, a future spouse…)

In Nisshin Shipping Co Ltd v Cleaves & Co Ltd the interpretation of the Act was tested in court for the first time. It was
held that if the contract is neutral on the question of weather the term was intended to be enforceable by the third
party, then section 1(2) does not disapply section 1(1)(b).

N.B. the third party is not required to provide consideration to enforce a term of the contract!

Remedies available to the third party

There ‘shall be available to the third party any remedy that would have been available to him in an action for breach of
contract if he had been a party to the contract.’ s1(5)
The same rules apply. However, the law Commission did not intend the parties to be able to terminate the contract for
breach. Also, if the promisee has already recovered damages from the promisor in respect of losses suffered by the
third party, then section 5 will operate to reduce any award the third party to take account of damages already
recovered from the promisor. This provision operates to prevent promisor from double liability to both the promisee
and the third party.

Variation and cancellation of the contract

The right of the third party to enforce a term of the contract may not be removed or variated in the contract by the
contracting parties if:
a) The third party has communicated his assent to the term to the promisor
b) The promisor is aware that the third party has relied on the term
c) The promisor could reasonably be expected to have foreseen that the third party would rely, and the third party
has in fact so relied.

Defences available to the promisor

The right which the third party acquires is essentially the right to enforce the term of the contract subject to the
defences which would have been available to the promisor had been sued on the contract by the promisee.

Exception
The act will not apply to: bill of exchange, promissory notes; contracts of employment; contracts for the carriage of
goods by sea.

Rights of the promisee

Section 4 of the Act preserves the right of the promisee to enforce any term of the contract.

On breach of contract the promisee could ask for this remedies:

1. Damages for breach of contract
2. Seek to recover damages for the third party

Jackson v Horizon Holidays

Jackson had booked a holiday in his name. for a variety of reasons, the holiday was a disaster: the food,
accommodation, services, facilities. It was so unsatisfactory that the whole family suffered discomfort, distress and went
home disappointed. Jackson sued the holiday company on his behalf and his family’s. the company didn’t want to pay
damages to the family because they were not part of the contract. The Court of Appeal held that the disappointment
suffered by the family was a loss to Jackson himself and awarded damages in respect of the whole family on that basis.

This decision was criticized as being too wide in this case:

Woodar v Wimpey Construction
Purchasers of land agreed to pay £850,000 to the vendors and £150,000 to a third party on completion of the contract.
Wimpey unlawfully repudiated the contract after the market fell. The question here was whether the vendors could
recover also the £150,000 payable to the third party. The House of Lords held that there was no general principle
allowing a party to a contract to sue on behalf of a third party who had suffered a loss as a result of the breach of the
contract.

This rule that a contracting party cannot sue and recover damages in respect of a loss suffered by a third party was
affirmed in:
Alfred McAlpine Construction v Panatown Ltd
There was a contract between the parties for the design and build of a multi-storey car park. McAlpine had also entered
into a “duty of care” deed with a third party, which was the owner of the site. By the deed the third party acquired a
direct remedy against McAlpine in respect of any failure by the contractor to exercise reasonable skill, care and
attention under the contract. Serious defects were found in the building and Panatown sued. The House of Lords held
that the duty of care deed with the third party prevented Panatown from suing since this deed gave the third party a
specific remedy.
 3. He could seek an order of specific performance against the promisor (with the 1999 Act it may be harder
for the promisee to demonstrate that damages would not be an adequate remedy and specific
performance may not be ordered)
4. He can ask the court for a stay of proceedings

N.B. but the general rule is that A PROMISEE CANNOT RECOVER DAMAGES ON BEHALF OF A THIRD PARTY!