PastPaperHero | Existence and formation of a contract - Privity of contract and rights of third parties

Learning Outcomes

This article outlines the common law doctrine of privity of contract and the significant modifications introduced by the Contracts (Rights of Third Parties) Act 1999, including:

The distinction between the privity rule and the requirement that consideration must move from the promisee
The two alternative tests in s 1(1)(a) and s 1(1)(b), and the contrary intention proviso in s 1(2)
Identification of the third party under s 1(3), including classes and descriptions and the fact the third party need not exist at the time of contracting
Rights-only conferral under the Act and subjection of third parties to the contract’s terms (including jurisdiction or arbitration clauses)
The defences and set‑off framework in s 3, and the double‑recovery safeguard in s 5
Excluded categories under s 6 (e.g., negotiable instruments and certain carriage of goods by sea contexts) and the continued availability of common law routes where the Act does not apply
Variation and rescission under s 2, including crystallisation of third‑party rights and consent mechanisms
Exclusion of the operation of the Act by a clear "no third-party rights" clause

Key Term: Privity of Contract
The common law doctrine stating that only the parties to a contract are bound by it and can enforce its terms. It prevents third parties from suing or being sued under the contract.

Key Term: Third Party
A person or entity who is not one of the original contracting parties to an agreement.

Key Term: Contracts (Rights of Third Parties) Act 1999
An Act of Parliament that allows a third party to enforce a term of a contract in certain specified circumstances, creating a major exception to the doctrine of privity.

Key Term: Purported benefit
A contractual term that, on its proper construction, appears intended to benefit a third party (used in s 1(1)(b) CRTPA 1999).

Key Term: Crystallisation
The point at which a third party’s rights under s 2 CRTPA 1999 become protected against variation or rescission without the third party’s consent (after assent or reliance meeting s 2(1) criteria).

Key Term: No Third Party Rights clause
An express contractual term excluding the operation of CRTPA 1999, typically stating that no third party may enforce any term of the contract.

Key Term: Set-off
A defence allowing a promisor to reduce (or extinguish) a claim by netting it against a countervailing claim, subject to the constraints of s 3 CRTPA 1999 when the claim is brought by a third party.

SQE1 Syllabus

For SQE1, you are required to understand privity of contract and the statutory framework of third-party rights under the Contracts (Rights of Third Parties) Act 1999, with a focus on the following syllabus points:

the basic principle of privity of contract
the circumstances under which a third party can enforce a contract term under the Contracts (Rights of Third Parties) Act 1999
the requirements for identifying the third party within the contract
the test regarding the contracting parties' intention for the term to be enforceable by the third party
the rules concerning variation or rescission of a contract where a third party has rights
the availability of defences and set-offs against a third-party claim under s 3 and avoiding double recovery under s 5
exclusions under s 6 and the continued relevance of common law mechanisms (e.g., trust, collateral contract, agency, assignment).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Under the traditional doctrine of privity of contract, who can sue on a contract?
1. Only the parties to the contract.
2. Any party who benefits from the contract.
3. Only the party who made the promise.
4. Anyone identified by name in the contract.
Which section of the Contracts (Rights of Third Parties) Act 1999 allows a third party to enforce a term if the contract expressly states they may?
1. Section 1(1)(a)
2. Section 1(1)(b)
3. Section 1(3)
4. Section 2(1)
For a third party to enforce a term under s 1(1)(b) of the 1999 Act (purporting to confer a benefit), what additional condition must usually be met?
1. The third party must provide consideration.
2. The third party must be expressly named in the contract.
3. It must not appear on a proper construction of the contract that the parties did not intend the term to be enforceable by the third party.
4. The contract must be in writing.
How must a third party be identified in the contract to enforce a term under the 1999 Act?
1. Only by their full legal name.
2. By name, as a member of a class, or answering a particular description.
3. Only as a member of a clearly defined class.
4. They do not need to be identified if the benefit is obvious.

Introduction

A fundamental principle of English contract law concerns who is entitled to enforce the promises made in a contract. Generally, only the individuals or entities who are parties to the agreement can sue or be sued under it. This concept is known as privity of contract. However, this traditional rule can sometimes lead to outcomes perceived as unjust, particularly where a contract is clearly intended to benefit someone who is not a party to it. The Contracts (Rights of Third Parties) Act 1999 introduced significant exceptions to the basic rule.

The Traditional Rule: Privity of Contract

The core principle of privity is that a contract cannot confer rights or impose obligations on any person except the parties to the contract. This means that a person who is not a party (a third party) cannot sue to enforce a promise contained in the contract, even if that promise was intended to benefit them. Equally, the contract cannot impose liabilities on a third party. The classic authority often cited for this rule is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. Another foundational case is Tweddle v Atkinson (1861) 1 B & S 393, where a third party beneficiary failed to enforce a promise because he was not a contracting party and had not provided consideration.

It is important to distinguish privity from consideration. Although the doctrines often lead to the same practical result—denying enforcement by a third party—privity is a separate rule from the requirement that consideration must move from the promisee. A promise cannot generally be enforced by someone who furnished no consideration; but even where consideration can be found elsewhere, privity may still bar the non-party’s claim.

This rule provides certainty but was criticised for potentially defeating the clear intentions of the contracting parties and causing unfairness where contracts were made for the benefit of a third party. While some complex common law exceptions developed (such as trusts of a promise, collateral contracts, agency, assignment, and limited recovery by promisees for losses suffered by third parties), they were often difficult to apply. The main reform came through legislation.

The Contracts (Rights of Third Parties) Act 1999

The Contracts (Rights of Third Parties) Act 1999 (C(RTP)A 1999) created a major statutory exception to the doctrine of privity. It allows third parties to enforce contractual terms in specific circumstances, without needing to rely on the old common law exceptions (though these still exist). The Act does not abolish the doctrine of privity; it operates alongside it. The original parties can still enforce all terms of the contract. The third party is granted rights but cannot be saddled with burdens merely by virtue of the Act.

The Act’s operation is shaped by safeguards and exclusions. It preserves parties’ freedom to exclude third-party rights entirely, and it limits application in certain contexts (e.g., negotiable instruments and specified carriage of goods by sea situations). Where the Act confers a right, it also subjects the third party to the contract’s terms, such as limitation, jurisdiction, and arbitration provisions.

When Can a Third Party Enforce a Term?

Section 1 of the C(RTP)A 1999 sets out two alternative circumstances (or 'tests') where a third party can enforce a term of the contract:

The Express Test (s 1(1)(a)): The contract expressly provides that the third party may enforce the term. This is the clearest way to grant rights: the parties explicitly state their intention for the third party to have enforcement rights. Where a contract is neutral or silent as to enforceability, courts look to the statutory presumptions and the overall language of the contract.
The Purported Benefit Test (s 1(1)(b)): The term purports to confer a benefit on the third party. This test is subject to s 1(2). If the provision looks to confer a benefit, there is a presumption of enforceability by the third party unless, on a proper construction, it appears that the contracting parties did not intend the term to be enforceable by the third party (s 1(2)). Case law indicates that where the contract is neutral about enforceability, s 1(2) will not disapply s 1(1)(b) (Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004]). Conversely, a benefit that is merely incidental, rather than a purpose of the bargain, will not suffice (Dolphin & Maritime & Aviation Services Ltd v The Swedish Club [2009]).

The third party’s enforcement right is subject to the terms of the contract: any relevant limitations, conditions precedent, and dispute resolution provisions govern the right as if the third party were a party to the contract (see s 1(4), s 1(6)).

Identifying the Third Party

For a third party to enforce a term under either s 1(1)(a) or s 1(1)(b), they must be expressly identified in the contract (s 1(3)). This identification can be:

by name (e.g., 'John Smith');
as a member of a class (e.g., 'subsequent tenants of the property'); or
as answering a particular description (e.g., 'the architect employed for the project').

Importantly, the third party does not need to exist when the contract is made (e.g., an unborn child or a company yet to be incorporated).

Identification can be concise but must be sufficiently clear to enable a court to determine whether the person seeking to enforce falls within the name/class/description at the relevant time. For example, “any future assignee” is adequate; so is “the warehouse operator engaged by the buyer for the consignment.”

Worked Example 1.1

Developer Ltd contracts with Builder plc to construct an office building. The contract includes a clause stating: "Future tenants of the building shall be entitled to enforce the warranty regarding the quality of the heating system provided in Clause 15." Aria Ltd later becomes a tenant and discovers the heating system is faulty. Can Aria Ltd enforce Clause 15?

Answer:
Yes. This falls under s 1(1)(a) C(RTP)A 1999. The contract expressly provides that future tenants (a class) may enforce the specific term (Clause 15). Aria Ltd, as a member of that class, can enforce the warranty directly against Builder plc, provided Aria Ltd meets the description of 'future tenant'.

Worked Example 1.2

Parent A contracts with Coach B for swimming lessons for their child, C. The contract states, "Coach B will ensure the pool environment is safe for Child C." Child C suffers an injury due to unsafe conditions. Can Child C sue Coach B under the contract?

Answer:
Possibly, under s 1(1)(b) C(RTP)A 1999. The term purports to confer a benefit (safety) on Child C, who is expressly identified by description ('Child C'). Enforcement is possible unless, on proper construction, it appears Parent A and Coach B did not intend Child C to have the right to enforce the term (s 1(2)). Without evidence to rebut the presumption, Child C likely can enforce the term.

Worked Example 1.3

Supplier and Buyer include a term: “No person other than Buyer and Supplier shall have any right to enforce any term of this contract.” Buyer’s customer, RetailCo, later claims to enforce a delivery warranty as a third party. Is RetailCo entitled to enforce?

Answer:
No. Parties may exclude the Act. An express “No Third Party Rights” clause is effective to prevent third-party enforcement under CRTPA 1999. RetailCo cannot rely on the Act and must look to other routes (e.g., an assignment, collateral contract, or promisee enforcement), if available.

Worked Example 1.4

A logistics contract between PrincipalCo and Carrier includes a clause: “Any consignee may rely on the limitation of liability in clause 12.” The consignee sues Carrier for damaged goods. Can the consignee also rely on clause 12?

Answer:
Yes. Under s 1(6), a third party can rely on limitations or exclusions as if a party. If the consignee is identified (by class/description), and either s 1(1)(a) or s 1(1)(b) is satisfied, the consignee can invoke clause 12 as a defence to the Carrier’s liability, provided the clause would be valid between the contracting parties.

Worked Example 1.5

Owner and Contractor agree a variation reducing performance standards after the building contract provides: “Occupiers may enforce the façade performance warranties.” After taking occupation, an occupier complains. Owner and Contractor argue the warranty was varied away. The occupier had previously written to Contractor expressly assenting to enforce the warranty. Can the variation bind the occupier?

Answer:
Unlikely. Under s 2(1), once the third party’s right has crystallised (e.g., by communicating assent to the promisor, or reliance where the promisor was aware or reasonably expected reliance), the contract cannot be varied or rescinded so as to remove the third party’s right without the third party’s consent, unless the contract provides otherwise or the court so orders. The occupier’s prior assent protects the right.

Worked Example 1.6

Event Organiser promises Venue to pay “£5,000 to the Artist’s agent on the Artist’s behalf,” and states “the Artist may enforce the payment clause.” The Artist sues for £5,000. Venue argues it has a £1,000 set-off against Organiser for unrelated services. Can Venue set-off against the Artist’s claim?

Answer:
It depends on s 3. Under s 3(2), the promisor may raise any defence or set-off that would have been available in proceedings brought by the promisee, provided it arises from or in connection with, and is relevant to, the term. Under s 3(4), defences and set-offs available against the third party as if they were a party may also be raised. If the £1,000 set-off arises independently between Venue and Organiser and the contract does not extend such set-off to third-party claims (and is not relevant to the term sued on), Venue may not be able to set it off against the Artist’s claim. Contract wording can broaden or restrict set-offs: many contracts expressly include or exclude set-offs in third-party enforcement.

Remedies for the Third Party

If a third party has the right to enforce a term under the C(RTP)A 1999, they have the same remedies available as if they had been a party to the contract (s 1(5)). This includes damages, injunctions, and specific performance, subject to the usual rules governing those remedies. Where the third party invokes the contract’s terms, they are also bound by limitations or dispute resolution provisions applicable to enforcement. For instance, an arbitration clause or exclusive jurisdiction clause in the contract can govern the third party’s claim (s 1(4)).

A significant safeguard against double recovery is s 5. If the promisee has already recovered sums in respect of the third party’s loss, a court must reduce the third party’s award to the extent appropriate to account for the sum recovered, avoiding over-compensation. Conversely, if the third party recovers first, the promisee’s damages may be nominal, since the promisee has suffered no loss.

Variation and Rescission of the Contract

Once a third party’s right under the Act has 'crystallised', the original contracting parties' ability to vary or rescind the contract to remove or alter that right is restricted (s 2). Crystallisation typically occurs when:

the third party communicates their assent to the term to the promisor (s 2(1)(a)); or
the promisor is aware that the third party has relied on the term (s 2(1)(b)); or
the promisor can reasonably be expected to have foreseen that the third party would rely on the term, and the third party has in fact relied on it (s 2(1)(c)).

After crystallisation, the contract cannot be varied or rescinded in a way that affects the third party's rights without their consent, unless the contract expressly provides a permitted variation mechanism or the court authorises a departure. Parties commonly include a clause specifying how third-party consent will be obtained (e.g., notice and deemed consent mechanisms), and the court may dispense with consent in limited circumstances (e.g., if the third party cannot be found after reasonable steps).

Defences and Set‑Offs Against Third-Party Claims

Section 3 regulates what defences and set‑offs a promisor can raise against a third party:

s 3(2) allows the promisor to raise any defence or set‑off that would have been available against the promisee if the promisee had sued, provided it arises from or in connection with the contract and is relevant to the term being enforced.
s 3(3) permits parties to expand or restrict the promisor’s ability to raise such matters by express term.
s 3(4) preserves defences and counterclaims available against the third party as if they had been a party (e.g., limitation against the third party’s own claim).
s 3(6) confirms that when a third party seeks to rely on an exclusion or limitation clause, they may do so only to the extent the clause would be valid if the third party had been a party.

Contract drafting often clarifies whether set‑offs arising under separate dealings with the promisee can be asserted against a third-party claim. Where the contract is silent, courts apply s 3 cautiously to avoid undermining third-party rights through unrelated set‑offs.

Exclusions and Preserved Rights

The Act does not apply in certain categories (s 6), including:

contracts on a bill of exchange, promissory note, or other negotiable instrument (s 6(1));
contracts constituting a company’s constitution (now under Companies Act 2006; s 6(2));
various carriage of goods by sea contexts, although a third party may still avail themselves of an exclusion or limitation of liability in such contracts (s 6(5)–(8)).

Parties can expressly exclude the Act’s operation by a clear clause (“No Third Party Rights”). Even where the Act does not apply, the third party may still have recourse under common law mechanisms, which the Act preserves (s 7), such as:

Trusts of a promise: a promisee declares a trust of contractual rights for the third party beneficiary, enabling the beneficiary (or trustee) to enforce.
Collateral contracts: a separate contract arises between the promisor and the third party (e.g., a manufacturer’s representation to a client inducing the client to instruct a contractor).
Agency: an agent contracts on behalf of a principal, creating a direct contract with the principal.
Assignment: the promisee assigns its contractual rights to the third party (subject to statutory and contractual limits).
Promisee recovery for third-party loss: in certain commercial contexts, the promisee may recover substantial damages for the third party’s loss (e.g., Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994]; Darlington BC v Wiltshier Northern Ltd [1995]), often called “transferred loss” cases.

These routes remain important where the Act is excluded or does not apply on its terms.

Exam Warning

Be careful to distinguish between the two limbs of s 1(1). Section 1(1)(a) requires express permission for the third party to enforce. Section 1(1)(b) requires a term purporting to confer a benefit, coupled with no contrary intention shown under s 1(2). Also, always check that the third party is expressly identified as required by s 1(3). Consider whether the contract contains a “No Third Party Rights” clause. If so, the Act will be excluded unless the clause preserves specified third-party rights. Remember s 1(4) and s 1(6): a third party enforcing a term is bound by, and may rely upon, the contract’s dispute resolution and limitation scheme as if a party. When advising on variation or rescission, analyse crystallisation under s 2(1). If rights have crystallised, consent is required unless the contract provides otherwise or the court orders. Defences and set‑offs can reduce or defeat third-party claims, but only within the structure of s 3. Check whether the set‑off arises “from or in connection with” the contract and whether the contract modifies s 3(2).

Key Point Checklist

This article has covered the following key knowledge points:

The traditional doctrine of privity states only parties to a contract can sue or be sued on it.
Privity is distinct from consideration; both may bar a non-party’s claim.
The Contracts (Rights of Third Parties) Act 1999 provides statutory exceptions to privity.
A third party can enforce a term if the contract expressly allows it (s 1(1)(a)).
A third party can enforce a term if it purports to confer a benefit on them, unless the parties did not intend enforceability (s 1(1)(b) and s 1(2)).
The third party must be expressly identified by name, class, or description (s 1(3)); they need not exist at the time of contracting.
A third party enforcing a term has standard contractual remedies available (s 1(5)), but enforcement is subject to contract terms (s 1(4)) and they may rely on exclusions/limitations (s 1(6)).
The original parties’ right to vary or rescind a contract affecting the third party’s right is restricted once the right has crystallised (s 2).
Promisors may raise defences and set‑offs against third-party claims within the framework of s 3; double recovery is prevented by s 5.
The Act contains significant exclusions (s 6); common law exceptions (trusts, collateral contracts, agency, assignment, and promisee recovery for third-party loss) continue alongside the Act (s 7).
Parties can exclude the Act by a “No Third Party Rights” clause; careful drafting can also manage set‑offs and variation mechanisms affecting third-party rights.

Key Terms and Concepts

Privity of Contract
Third Party
Contracts (Rights of Third Parties) Act 1999
Purported benefit
Crystallisation
No Third Party Rights clause
Set-off

Existence and formation of a contract - Privity of contract ...