Privity is a doctrine in English contract law that covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a "third party". Historically, third parties could enforce the terms of a contract, as evidenced in Provender v Wood, but the law changed in a series of cases in the 19th and early 20th centuries, the most well known of which are Tweddle v Atkinson in 1861 and Dunlop Pneumatic Tyre v Selfridge and Co Ltd in 1915.
The doctrine was widely seen as unfair, for various reasons – it made no exception for cases where the parties to a contract obviously intended for it to be enforced by a third party, and it was so inconsistently applied that it provided no solid rule and was therefore "bad" law. The doctrine attracted criticism from figures such as Lord Scarman, Lord Denning, Lord Reid and Arthur Linton Corbin, and as early as 1937 the Law Revision Committee recommended that it should be significantly altered. With the passing of the Contracts (Rights of Third Parties) Act 1999 on 11 November 1999 the doctrine was significantly altered, and it now allows a third party to enforce the terms of a contract if the third party is specifically authorised to do so by the contract or if the contractual terms "purport to confer a benefit" on such third party.
Original doctrine
The original doctrine of privity consisted of two rules: first, that a third party may not have obligations imposed by the terms of a contract, and second, that a third party may not benefit from the terms of a contract.McKendrick (2007) p.137 The first rule is not something that is contested, while the second was described as "one of the most universally disliked and criticised blots on the legal landscape".Dean (2000) p.1 The second rule was not originally held to be valid, and in the 17th century third parties were allowed to enforce terms of a contract that benefited them, as shown in Provender v Wood Hetley 30, where the judgment stated that "the party to whom the benefit of a promise accrews, may bring his action".Flannigan (1987) p. 564 The first reversal of this was in Bourne v Mason (1669) 1 Vent., where the Court of King's Bench found that a third party had no rights to enforce a contract that benefited him. This case was quickly reversed, and decisions immediately after Bourne v Mason took the view that third parties could enforce contracts that benefited them.
Over the next 200 years, judicial decisions differed as to whether or not a third party could enforce a contract that benefited them. The issue was settled in 1861 by Tweddle v Atkinson (1861) 121 ER 762, that confirmed that a third party could not enforce a contract that benefited him.Flannigan (1987) p.565 This decision was affirmed by the House of Lords in Dunlop Pneumatic Tyre v Selfridge and Co Ltd AC 847 in 1915, where Lord Haldane stated that only a person who was party to a contract could sue on it.Mulcahy (2008) p.94 This version of the doctrine is commonly known as the original or basic doctrine.Turner (2007) p.viiMcKendrick (2007) p.vii
Views of the original doctrine
Supporters of the original doctrine of privity say that it is reasonable not to allow third parties to enforce contracts, arguing that to allow them to do so would hamper the rights of the original parties in relation to amending or terminating contracts.Flannigan (1987) p.570 Another argument put forward is that the doctrine was deliberately retained by judges to protect consumers from exclusion clauses designed to protect third party manufacturers from liability. The general view of academics, however, is that no legal argument has yet been advanced as to why the original doctrine should be good law.Flannigan (1987) p.571Atiyah (1979) p.413 Patrick Atiyah argues that the doctrine came from a time of rising trade through middlemen, and was designed to simplify commercial transactions and encourage enterprise liability.
The second rule of privity, that a third party cannot claim benefits from a contract, was widely criticised by academics, members of the judiciary and legal professionals. One problem was that the rule made no exceptions for cases where it was obviously intended for the third party to claim a benefit, such as in Beswick v Beswick, where an uncle gave his nephew a business, on the condition that the nephew would pay the uncle a certain amount per week, and in the event of the uncle's death, give a similar amount to his widow.Mulcahy (2008) p.95
A second argument used to undermine the doctrine of privity is the large number of exceptions to the rule created by acts of Parliament, which seemed to indicate that Parliament itself had an issue with the doctrine.Flannigan (1987) p.572 Critics also argued that with the large number of inconsistencies and exceptions with the doctrine of privity, it was "bad" law, as it provided no reliable rule; the way that the law works in theory is hugely different from the way it was enforced by the courts.Jacobs (1986) p.466 The doctrine is also not found in many other legal systems, such as that of the United States.Flannigan (1987) p.569
The doctrine came under criticism from many academics and judges, including Lord Scarman, Lord Denning, Lord Reid and Arthur Linton Corbin. As early as 1937 the Law Revision Committee recommended that the doctrine be completely abolished by an act of Parliament. Lord Diplock called the doctrine "an anachronistic shortcoming that has for many years been regarded as a reproach to English private law",Johnson (1992) p.154 and Stephen Guest wrote that "[I]t is said that it serves only to defeat the legitimate expectations of the third party, that it undermines the social interest of the community in the security of bargains and it is commercially inconvenient".Treitel (1983) p.458
Loopholes
With the unpopularity of the doctrine, the judiciary developed several ways around it. These were at times both complex and extremely artificial, and used the law relating to trusts and agencies, along with other areas and ideas such as collateral contracts. These exceptions, however, were extremely limited in how they could be used.
Trusts
Trusts have been used as a way around the original doctrine of privity. A trust is an arrangement where the owner of property gives it to a second party (a trustee) to manage on behalf of a third party (a beneficiary). In this situation the House of Lords decided (in Les Affréteurs v Walford AC 801) that the trustee's ability to sue the owner of the property is to be exercised on behalf of the beneficiary, a third party. This is known as a "trust of the promise", and, while artificial, it bypassed the doctrine of privity.McKendrick (2007) p.165 The trust exception has been heavily undermined by the decision in Re Schebsman Ch 83, which requires a court to find evidence of an intent to create a trust of the promise rather than simply using the requirement as an intention as a fiction to allow the courts to enact the trust exception.
Estates
In Beswick v Beswick an uncle gifted his nephew a business, on the condition that the nephew would pay the uncle (Mr Beswick) a certain amount per week, and in the event of the uncle's death, give a similar amount to his widow (Mrs Beswick). When the uncle died the nephew refused to pay the widow the money required, arguing that as she was not party to the original agreement she could not benefit from it. The Court of Appeal under Lord Denning tried to use this as an opportunity to claim that the doctrine of privity was invalid, something the House of Lords rejected. However, the Lords did agree that Mrs Beswick could sue, not as a third party to the contract but as the executrix of her husband's estate. As executrix she would be acting as a representative of Mr Beswick, and the doctrine of privity would not apply.Turner (2007) p.354
Claiming on behalf of another
A second exception was created in Jackson v Horizon Holidays Ltd 1 WLR 1468. Jackson had booked a family holiday in his own name from Horizon Holidays. The holiday did not match the specifications given in the contract, and Jackson sued Horizon Holidays. The company accepted liability, but claimed that they should not have to pay damages to the family as the doctrine of privity meant they were not allowed to sue on the contract. The Court of Appeal said that the loss of enjoyment suffered by the family was a loss to Jackson himself. He had paid for a family holiday but not received it, and so damages were awarded.Turner (2007) p.362
This created fairly limited circumstances in which a party could sue on behalf of another, if the other party would have benefited from the contract.
Collateral contracts
A collateral contract is a contract where the consideration is the entry into another subordinate contract, which co-exists side by side with the main contract. Because this normally involves parties who are not part of the main contract, it has been used as a way around the doctrine of privity.Turner (2007) p.366 The habit of the courts finding collateral contracts to allow an injured third party to sue has been criticised, however, as "exceedingly artificial", and in light of the Contracts (Rights of Third Parties) Act 1999 the use of this has been predicted to decrease.McKendrick (2007) p.162
In Shanklin Pier Ltd v Detel Products Ltd 2 KB 854, Shanklin Pier Ltd were having their pier refurbished. Shanklin Pier contacted a painting company and asked them to repaint the pier with paint produced by Detel Products, based on assurances from Detel that the paint would last for at least seven years. The painters bought the paint from Detel and used it to repaint the pier. Within three months the paint had almost completely flaked off. Shanklin Pier had no contractual relationship with Detel Products, but the Court of Appeal found like there was a collateral contract they could use to sue.Turner (2007) p.367
As a loophole the use of collateral contracts is limited, because the courts must first find evidence to imply some kind of collateral contract, as well as consideration.Treitel (2003) p. 584 Attempts by the courts to do this have added to the perception of this as an artificial device; the decision in Charnock v Liverpool Corporation 1 WLR 1498, which used collateral contracts, has been described by Guenter Treitel as "invented" consideration, and by Patrick Atiyah as "fictitious". In certain commercial contracts, such as goods sold to consumers by a dealer, there is automatically a collateral contract between the consumer and the manufacturer of the goods.Treitel (2003) p.582
Insurance contracts
Parliament is not bound by the common law, and as a result several acts of Parliament unwittingly create valid exceptions to the doctrine of privity. Under the Road Traffic Act 1988, motorists are obliged to take out third party liability insurance. This means that victims of car accidents can claim money from the insurer of the driver at fault, even though they are not part of the original contract.Turner (2007) p.353 Under the Married Women's Property Act 1882 a husband can take out insurance in his own name, but make it enforceable by his wife and children despite the doctrine of privity.
Exceptions
There are several ways around the original doctrine which were not loopholes created by case law but situations which by their very nature must involve three parties. Broadly speaking these are agency, assignment, and negotiable instruments.
Agency