The privity doctrine has been criticised as a source of injustice on the basis that it both frustrates the intentions of the contracting parties and disappoints the legitimate expectations of the third party (Kincaid). The Law Commission’s primary reason for proposing the reform of the privity rule was to give effect to the intentions of the contracting parties: If A and B had contracted to confer a benefit upon C then it would seem only just to allow C to enforce the contract in order to receive that benefit, and for the law to deny C that right would be to thwart the intentions of the contracting parties and thus undermine the ‘general justifying theory of contract’ (MacMillan). The other very strong concern behind the Law Commission’s recommendations was to overcome the injustice caused to the third party by the privity doctrine, since, where reasonable expectations have been created in C by a contract made to confer some benefit on him between A and B, it is considered unjust by many for the law to deny C any benefit, especially where C has relied on the contract to regulate his affairs.
‘The general approach of the Act reflects the underlying purpose of allowing the intention of the parties to determine the nature of the right provided to the third party. Once the Act is found to apply to a contractual term, a certain set of rules will automatically apply unless the parties vary these rules by contract…a default setting’. The third party does not become a party to the contract. The Act in general does not adopt the technique of transferring rights from B to C or treating C as having acquired rights by means of the fiction that he has become a party to the contract.(s7(4)). The Act does not abolish privity but simply acts as a ‘general and wide–ranging exception to’ the doctrine’.
The third party’s right to enforceability is found in s1(1) and s1(3) of the act. There are two tests: the first giving the third party the right to enforce a contractual term where the contract expressly so provides (s 1(1)), the second where there is no express provision but where the term purports to confer a benefit on the third party, who must be expressly identified by name, class or description, and unless on a proper construction of the contract the parties did not intend for the term to be enforceable by the third party (s1(3)). The initial interpretation and application of this second test is likely to give rise to difficulties, especially in answering the rather open question, ‘When does a term purport to confer a benefit on a third party and when does it not?’ Also, because s1 of the Act applies to ‘a term of the contract’, each term will need to purport to confer a benefit upon the third party. Thus each term must withstand scrutiny, since the presumption of an enforceable benefit could be rebutted by something else in the contract. There is also the question of whether there is scope to include an implied term within the second test. There is nothing in the Act which prohibits this possibility( but for an implied term to succeed, s 1(3) requires that the third party must be expressly identified).
Because of the resultant uncertainty, the inclusion of the second test as well as the first has been criticised, but can be justified on three grounds (Burrows). The first is that contractual rights are not merely a question of express rights but also of implied terms. It would be artificial to restrict the reform in this case to express terms. The second justification is that looking over past cases where privity of contract has caused injustice to third parties, a reform confining itself to the scope of the first test would not have improved the position of the third party e.g. cases concerning A contracting with B to pay money to C such as Beswick v Beswick and Woodar v Wimpey. The third justification is that, while third party rights could be conferred by the simple insertion of a magic formula conferring rights on the third party under the first test in well drafted contracts, not all contracts are well drafted or drafted by professionals thus not everybody will be in a position to take advantage of the first test.
In this way, the Act aims to give effect (1) to the intentions of the parties to confer a benefit on a third party and (2) also to protect the reasonable expectations of that third party, since these interests normally compliment each other. However, the interests of the parties to the contract and the third party beneficiary can conflict where the parties to the contract no longer intend the consequences or contents of their original agreement and decide they want to vary or rescind it. This situation would not have been an issue before the Act: the intentions of the parties were the only relevant concern, since third parties could not enforce a contract and thus their unprotected interests had no impact on the freedom of the parties to change the contract. The Act settles this issue by means of a compromise. The default position is that variation or rescission cannot be made so as to ‘extinguish or alter’ C’s entitlement (s 2(1)) without the consent of the third party where the third party has communicated his assent to the promisor, where the promisor is aware that the third party relied on that term or where the promisor ought to have foreseen that the third party would rely on that term and the party has so relied on it. However, the act provides that it is open to the contracting parties in their initial contract to insert an express term to state that A and B may by agreement rescind or vary the contract without the consent of C and this reaffirms the central importance of intention behind the reforms.
The rules of the common law on contractual relations and enforceability have evolved to apply only between parties. Thus it would obviously be necessary to iron out practical wrinkles that arise in giving an individual rights to enforce a contract to which he is not a party without using the fiction of making him a joint promise. The Act giving third parties rights must also seek to clarify the position of each of the parties and the third party under the contract.
In terms of the promisor’s position, the Act follows the Law Commission’s basic recommendation that those defences which would have been available to the promisor in an action brought by the promisee should be available where the action is brought by the third party, since to deny the promisor these defences would be to give the third party something more than would have been given to the actual promisee. The act stipulates that the defence or set off must arise from or be in connection with the contract and it must be relevant to the term on which the third party relies (s(3)(2)(a)). However, the application of the Act in this regard can be changed if the contracting parties so require. Section 3(4) of the Act allows a promisor to raise any defence, set – off or counter claim which would have been available to him had the third party actually been a party to the contract, which provision allows the promisor to raise a defence, set – off or counter claim which is specific to the third party and which would not be available had the promise brought the action.
In terms of the promisee’s position, the right of the third party to enforce a term of the contract does not affect the right of the promisee to enforce any term of the contract (s4). Although there is no legislative provision on this point, MacMillan contends that it is intended that once the promisor has performed his duty towards the third party, the promisor is to that extent discharged from further performance to the promisee. The promisor is not to have double liability to both the promisee and the third party.
This was an area that the common law struggled with before the enactment of the Act, and will still struggle with in cases which fall outside of the ambit of the act and the other exceptions to the privity doctrine. The difficulty is that it is the third party beneficiary who suffers loss if the contract to benefit him is breached, yet as a third party he clearly has no action for his loss against the promisor. Only the promisee has such an action, and yet in many cases he suffers no loss. This is less of an issue when the promisee can obtain a remedy for the third party such as specific performance (roughly the situation in Beswick v Beswick) but even in this case the promisee may not be wish to sue (due to the stress or cost of litigation) or may not be able to do so (where he is outside of the jurisdiction of the court, ill or even deceased).
Substantial damages have be recovered by the promisor in some cases, notably St Martin’s Property Corporation v Sir Robert McAlpine Ltd in which the House of Lords cited two possible grounds for this award. The broad ground was the basis of Lord Griffith’s judgement but not the basis preferred by the majority. This broad ground was based on the principle that if a promise engages a promisor to supply specific materials or do specific work and he fail to render this contractual service, the promisee suffers a loss of bargain (expectation interest), loss should be recoverable on the basis of what it would cost to put right the defects.
The narrow ground is that extracted by Lord Brown Wilkinson from old case of Dunlop v Lambert, as subsequently explained and modified by Lord Diplock in The Albazero. The rationale of the Albazero exception was that, in the carriage of goods cases in which it applies, the shipper and carrier must have contemplated the property in the goods might be transferred to third parties after the contract had been made and that therefore the shipper must be treated in law as having made the contract of carriage for the benefit of all persons who might after the time of contracting acquire an interest in the goods. The narrow ground required the construction contract, interpreted in the light of its surrounding circumstances, to foresee or contemplate the benefit or interest of the third party in the subject – matter of the contract so that the right to recover substantial damages ‘arises because the parties to the contract intended or contemplated that it should arise, their intention being ascertained from the terms of the contract and the circumstances in which it was made… when this situation arises, the plaintiff recovers damages in respect of financial loss which in fact has been bourne by another person, and he is liable to account to that person accordingly.’
Lord Diplock stressed in the Albazero that the rule could not be extended to contracts for the carriage of goods which contemplated that the carrier would in due course enter into separate contracts of carriage with the new owners. This is the reason the majority would not allow Panatown to recover substantial damages in McAlpine v Panatown, as the owner of the land Unex Investment Properties Ltd had a direct contractual relationship with McAlpine under a collateral duty of care warranty. The minority in that case sought to apply the broader ground on the basis that the contractual loss was Panatown’s own, their loss of bargain. This makes more conceptual sense in my opinion, except that since the loss is acknowledgd as being that of the promise, he would not be automatically accountable to the third party for the damages recovered. Thus the broad ground does not deal with the third party’s rights to damages at all, whereas the narrow ground only gives a limited basis for the promise to recover damages for the third party.
Under the Act, where a third party has the right to enforce a term of the contract by virtue of section 1, he can invoke the same kinds of judicial remedies as would be available to the promise if no third party was involved and can recover damages for loss of bargain even though the bargain was not made with him but with the promise. The promisee’s rights are unaffected, but where the promise has received a sum of money, the court can, by virtue of section 5, reduce any award to the third party to the extent it deems appropriate. It is left to the courts to determine when the promise is under a duty to account to the third party for the sum he recovers. Under the common law, it seems the narrow ground is the one which has been approved. The requirement of foreseeability of the third party interest seems to correspond with the requirement of intention to benefit a third party under the Act in terms of when a third party can receive damages. The difference is that under the Act, the third party can sue himself, rather that receiving the damages sued for by the promisee, and the Act applies to a wider range of contracts than the common law exception in its present state of development which seems restricted to contracts for the supply of work and materials.
The Act enables contracting parties a good deal of leeway to confer benefits of varying levels of generosity to the third party, since the promisor may provide expressly in the contract that he may avail himself of and all defences and set offs in any action brought by the third party (provided they could be relied upon in an action brought by the promise) and that it can be varied or rescinded simply by the agreement of the contracting parties. He can also limit or exclude any liability which might otherwise accrue to him for negligence where the negligence is a breach of his contractual obligation with respect to the third party (s7(2)), except liability for personal injury or death. In other words, the promisor can provide no benefit at all, or a defective benefit, and still have an adequate defence to any action brought by the third party.
The Act seems to achieve its objective of giving effect as far as possible to the extractable intentions of the contracting parties as regards the third party. However, perhaps the Act does not go far enough. The doctrine of privity has suffered much academic criticism. It was abolished in the USA, New Zealand and parts of Australia and its abolition has been recommended in this country by The Law Commission. Lords Denning and Reid have spoken out against it. In the whole European Union, only England and Eire do not permit third party enforceability. It has been severely criticised by Flanagan, who cannot find one theory of contract for which the privity doctrine is vital. Smith, Kincaid and Stevens all argue that the morality of promise keeping dictates that only the person to whom the promise is made has the right to enforce it but there are conflicting and equally plausible theories on the nature of promises under which every citizen has an interest in enforcement of another’s promise since we will all eventually become involved in the contracting process and thus each of us will be presently concerned in the process being made dependable. The Act is a good compromise, balancing competing interests to effectively purge English law of the doctrine of privity where the contracting parties intend this result. By the insertion of one magic phrase in the contract the doctrine can be bypassed. This shows the importance of the will theory of contract in the consciousness of the legislature – the Act is a prime example of the developing law doing its best to be sensitive to and to give effect to the intentions of the parties in the contract but no more, by bypassing the blunter and more inflexible rules originally put in place to regulate enforceable promises.
