H418/04 - Privity and third-party rights

Parties and third parties

Privity means that, at common law, contractual rights and obligations generally belong to the parties who made the contract.

A third party is someone outside that contract. Promisor identifies the party making the particular promise; promisee identifies the party receiving it. Suppose A pays B to deliver flowers to C. A and B are parties; C benefits but did not necessarily become a party. Identify the particular contract before using the labels: a person may be a third party to one agreement and a party to another.

In Tweddle v Atkinson (1861), the fathers of a marrying couple agreed to pay money to the son. Even express provision for his benefit did not let him enforce the common-law bargain: he was not a party and had supplied no consideration. In Dunlop v Selfridge (1915), a manufacturer sought to enforce a retailer's resale-price undertaking made to an intermediary. The House of Lords applied privity and consideration barriers; the manufacturer could not simply sue on that separate promise as though it had contracted with the retailer.

These cases illustrate the baseline rule, not the whole present law. The 1999 Act can now give a specified third party a direct right despite not supplying consideration personally. Ordinary contract formation between the contracting parties still requires its applicable elements.

The burden side also matters: A and B cannot normally impose a contractual obligation on C merely by agreeing that C must pay. The 1999 Act confers rights under its conditions; it does not generally let contracting parties force new duties onto an outsider. Separately, a tort duty may protect a non-contracting person, but that is a distinct basis of liability rather than automatic membership of the contract.

Common-law routes to rights

Several common-law mechanisms can protect an intended beneficiary, but each needs its own legal basis rather than a general claim of unfairness.

With agency, an authorised agent makes a contract on behalf of a principal. The principal can have contractual rights because the agent acts for them; the legal agency relationship, authority and relevant contract must be established. Merely calling a buyer someone's “agent” after a dispute does not create the relationship.

An assignment transfers an existing contractual right to another person, subject to the rules and restrictions governing that transfer. It does not normally transfer a contractual burden without the necessary agreement. A beneficiary needs an actual valid transfer, not just an expectation of receiving performance. Assignment supplies a recognised route to the right rather than abolishing privity for everyone affected.

A trust of a contractual right can give a beneficiary an equitable means of enforcing the right through the trust mechanism. A trust requires the relevant intention and legal conditions; an intention to benefit someone is not automatically an intention to create a trust. This distinguishes a specific equitable route from a broad third-party contract claim.

A collateral contract is a separate contract supporting the main transaction. In Shanklin Pier v Detel Products (1951), paint suppliers assured pier owners about their paint's durability. Relying on that assurance, the owners instructed their contractors to use it; the contractors bought the paint. The paint failed prematurely. The High Court recognised a collateral warranty between suppliers and owners: the owners' instruction to purchase supplied consideration for the assurance. They were not trying to enforce the contractors' purchase contract as strangers; they had their own bargain.

Original application: a manufacturer makes a definite durability promise to an owner in return for the owner specifying its product to a contractor. A separate promise and requested purchasing instruction support the collateral route. If the owner merely reads vague promotional praise and never enters a reciprocal arrangement with the manufacturer, the route is much weaker. Prove formation, rather than assume every representation is a collateral contract.

Promisee enforcement and remedies

An intended third-party benefit can sometimes be protected through a claim by the promisee, but the claimant's identity and appropriate remedy remain crucial.

In Beswick v Beswick (1968), an uncle transferred his business to his nephew in return for payments, including an annuity to the uncle's widow after his death. The nephew failed to pay her. She could not enforce as a third-party beneficiary in her personal capacity under the common-law rule. As administratrix, the representative of her husband's estate, she could enforce his contractual right. The House of Lords granted specific performance to secure the promised payments. This is not proof that a spouse automatically becomes a contracting party, or that damages for every third-party loss are freely recoverable.

The distinction matters because a promisee may personally suffer little financial loss when a beneficiary loses performance. A purely nominal damages award could fail to protect the promise's purpose. Specific performance may address that problem where its requirements are met, but remains discretionary.

In Jackson v Horizon Holidays (1975), a father booked a disappointing family holiday. The Court of Appeal allowed damages reflecting the family's disappointment. Later, Woodar v Wimpey (1980) rejected a broad generalisation that a promisee can always recover any outsider's loss, while recognising the possibility of special contracts such as family holidays. Do not treat Jackson as a universal permission to sue for all losses of friends or relatives, or as a right for those relatives themselves to sue at common law.

Original example: a parent books a family holiday and claims for the promised family's enjoyment. That is a much stronger analogy to Jackson than a business contract which incidentally disappoints a supplier's neighbour. Identify the contract's purpose and why the claimant's remedy can legitimately protect it. The 1999 Act provides a separate direct-right question which should also be considered.

Direct rights under the 1999 Act

The Contracts (Rights of Third Parties) Act 1999 creates a direct enforcement route for qualifying third parties without making every person who benefits a contracting party.

Under section 1(1)(a), a third party can enforce a term if the contract expressly provides that they may. Alternatively, under section 1(1)(b), they can enforce if the term purports to confer a benefit on them. That second route is subject to section 1(2): on proper construction, it must not appear that the parties did not intend third-party enforcement. Read the agreement as a whole. A clear exclusion can prevent an assumed right under the benefit route; incidental advantage from someone else's bargain is insufficient.