Privity of contract

From The Jolly Contrarian
Jump to navigation Jump to search
The Jolly Contrarian’s Glossary

The snippy guide to financial services lingo.™


Index — Click the ᐅ to expand:

Get in touch
Comments? Questions? Suggestions? Requests? Sign up for our newsletter? Questions? We’d love to hear from you.
BREAKING: Get the new weekly newsletter here Old editions here

The vexed question of who may sue a delinquent contractual obligor for losses sustained due to its mis-performance of a contract.

Until 1999, the common law was clear: only the parties to the contract themselves had an action under the contract: Even if the contract appeared to confer a benefit on someone else, that someone else could not take action to enforce the contract itself, and would have to rely instead on one of the parties doing do on its behalf.

For example, let’s say I arrange to hire an apartment overlooking Fleet Street so that my son can watch the Lord Mayor’s parade. He likes that kind of thing. The contract is specific: I pay the lease for the day, and the landlord grants a specific licence to my son — not me — to occupy the house. On the appointed day, in breach of contract, the landlord refuses my son entry to the property.

My son was not party to the contract and provided no consideration — therefore has no privity of contract. My son cannot sue under the contract. On the other hand, I do have privity, and I can sue for contractual damages — but only for my own loss. I didn’t suffer any loss: I wasn’t entitled to enter the property. Nor can my son take action against me — Lord Mayor’s parade was his birthday present[1]. So I have no damages to sue for, and the losses accruing to a third party (in this case, my son) — even one on whom you wanted the benefit to fall — do not count.

To be sure, there are always equitable remedies: specific performance of the contract — devised by the courts of chancery precisely to cover a situation where damages would be inadequate sanction for breach of contract. But still, an aggrieved third party beneficiary of a contractual right would still have to rely on a contractual counterparty taking this action on its behalf (and being organised enough to obtain an injunction before the parade!)

My son might try to make out a non-contractual duty of care and sue the landlord in negligence, but the rules about concurrent liability in contract and tort would likely scotch that.

Nevertheless, this state of affairs was adjudged by the legal fraternity to be a fine thing, until 1999 when legislators in England and Wales decided otherwise, and in a moment of millennial madness, enacted the Contracts (Rights of Third Parties) Act 1999, which provided a third party direct rights to claim where the contract explicitly contemplated it.

Sniffily, the industry’s response was some boilerplate language explicitly purporting not to confer such a benefit, therefore rendering the CRTPA a dead letter even on its launch date. To this contrarian, that seems to be a pity, and a missed opportunity. But there you go; hey ho.

See also

  1. Look, we’re an unusual family okay?