DOCTRINE OF PRIVITY
Meaning: a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person
except the parties to it.
REASONS FOR DOCTRINE OF PRIVITY:
1) Contract is based on mutual agreement;
2) Third party would not have provided consideration to support the agreement;
3) Privity avoids allowing third parties to restrict the rights of contracting parties to amend or abandon their agreement.
Exceptions to doctrine under common law:
1) Exception of agency:
Agency contracts - those allowing agents to act on principal’s behalf. Contract entered by agent is binding
on principal.
2) Trusts:
- Trustee holds property on behalf of a beneficiary.
- Trustee holds legal title.
- Promisee regarded as trustee if intention was such at the time of entering into a contract.
- Whether a trust is in place will depend on true construction of terms & circumstances around the
contract.
- The intention to create a trust need not to be held by all parties.
3) Restrictive covenants;
4) Collateral contract;
5) If it is foreseeable that damage caused by breach of contract will cause a loss to a third party.
Valid assignment of the benefit of the contract:
- A party to contract can transfer benefit to another;
- Assignment must be in writing;
- The assignee’s rights cannot be better than assignor’s rights;
- Consent of all parties required.
Changes in law through Contracts (Rights of third parties) Act 1999:
Section 1:
Third party gains rights of enforcement if the contract expressly confers such right.
Third party must be identified clearly.
Third party need not be in existence at the time of contract.
Contractual intention - there must be an intention to enter into legal contract.
- Intention is rarely stated explicitly.
- Commercially based agreements have rebuttable intention.
- Domestic or social agreements are not intended to create legal relations.
- An agreement which is made “subject to contract” or a “letter of comfort” is generally unenforceable.
