Chapter 4 Key facts checklists

Chapter 4 Key facts checklists

Privity and third party rights

●  The doctrine of privity of contract, which provides the general rule in England, states that a person who is not a party to a contract (called a ‘third party’), generally cannot enforce the provisions of that contract or rely on its protections even if the provisions were intended to benefit that third party. In addition, consideration must move from the promisee—and a third party may not have provided consideration.

●  At common law there are complex, and sometimes artificial, ways to avoid this conclusion such as the use of agency to allow a third party to rely on an exemption clause seemingly in a contract to which the third party is not a party.

●  More significant nowadays is the attempt to reform this principle by legislation in the Contracts (Rights of Third Parties) Act 1999, allowing those third party beneficiaries who satisfy the s. 1 test of enforceability to enforce the provisions of contracts. Where the s. 1 test is satisfied, it will not matter that the third party may not have provided consideration for the promise it is seeking to enforce, as long as the promise is supported by consideration supplied by another.

●  If the third party has not been given an enforceable right under the 1999 Act, it may still be possible for the promisee to enforce the promise for the third party’s benefit. However, there is a need to avoid the usual principle preventing the recovery of substantial damages if the promisee’s loss is nominal (e.g. as it is the third party who was due to benefit under the contract). The courts have devised methods to avoid the ‘black hole’ problem (the party who suffers loss cannot sue due to privity and the contracting party is unable to recover more than nominal loss) since this would permit the party in breach to avoid having to pay substantial damages for that breach.

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