Privity of Contract and Third-Party Rights for SQE1

Contract Law > Privity of Contract and Third-Party Rights

The doctrine of privity means that only parties to a contract can enforce it or be bound by it. However, the Contracts (Rights of Third Parties) Act 1999 introduced a major statutory exception. SQE1 tests both the basic rule and the circumstances in which a third party can enforce a contractual term. Understanding this area requires knowing both the traditional doctrine and the modern statutory overlay. Privity sits within the broader Contract Law framework and connects closely to remedies for breach.

What Is Privity of Contract?

Candidates often lose marks on SQE1 by assuming the Contracts (Rights of Third Parties) Act 1999 always gives third parties rights, forgetting that the s.1(1)(b) presumption can be rebutted. This mistake costs points because it requires careful analysis of the parties' intent.

Privity of contract is the principle that a contract creates rights and obligations only between the parties to it. A third party — someone who is not a party to the contract — cannot generally sue on it or be sued under it, even if the contract was made for their benefit (Tweddle v Atkinson 1861; Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd 1915).

Example: If A contracts with B to build a house for A's daughter C, the daughter C cannot sue B for breach, even though the contract benefits her. Only A can sue B.

The harshness of the privity rule led to the enactment of the Contracts (Rights of Third Parties) Act 1999, which allows third parties to enforce contractual terms in defined circumstances.

Key Principles for SQE1

The Privity Rule

• Only parties to a contract can enforce rights or be bound by obligations under it.: A third party has no right of action.

Contracts (Rights of Third Parties) Act 1999 — Section 1(1)

A third party may enforce a contractual term if:

• (a) The contract expressly provides that they may: , OR

• (b) The term purports to confer a benefit on them: unless on a proper construction of the contract it appears the parties did not intend the term to be enforceable by the third party.

• Section 1(1)(a) — Express Provision:: The contract must explicitly state that the third party can enforce the term. This is straightforward.

• Section 1(1)(b) — Benefit Rule:: A term that appears to confer a benefit on a third party is presumed to be enforceable by them, unless the contract construction shows the parties did not intend this. This is a rebuttable presumption — the parties can show by the contract's language or context that they did not intend the third party to enforce.

Identification (Section 1(3))

The third party need not be named — they must be identifiable, whether by:

• Name (specifically identified)
• Class (e.g., "any purchaser of a flat")
• Description (e.g., "the manager of the department")

The third party must exist or be ascertainable at the time the contract is made, but they need not know about the contract.

Quick Exam Reference

| Route to Enforcement | Requirements | Example | |---|---|---| | s.1(1)(a) — Express | Contract explicitly states third party may enforce | "The buyer shall have direct rights against the contractor" | | s.1(1)(b) — Benefit | Term purports to confer benefit; no evidence parties rejected enforcement | "The catering company agrees to provide food for Sarah's party" | | Common law — Agency | Third party acts as agent for a party | Person authorised to contract on another's behalf | | Common law — Assignment | Party transfers rights to a third party | "A assigns to B all rights against C" |

Defences (Section 3)

The promisor may raise against the third party any defence or set-off that would have been available against the promisee (the party who contracted with the promisor).

• Example:: If the defences would have reduced the promisee's claim by 50%, they reduce the third party's claim by 50%.

Variation and Rescission (Section 2)

The parties to the contract cannot vary or rescind the contract so as to extinguish or alter the third party's rights without the third party's consent if:

• The third party has communicated assent to the term, OR
• The third party has relied on the term, OR
• The promisor knows or could reasonably foresee the third party would rely on it

This protects third parties from having their contractual rights removed after they have relied on them.

Exclusion of the Act

The contracting parties can expressly exclude the application of the 1999 Act by including a clause stating it does not apply. This is frequently done in commercial contracts.

Common-Law Exceptions to Privity (Still Relevant)

Even where the 1999 Act does not apply, third parties may enforce rights through:

• Agency — a party contracts as agent for the third party
• Assignment — the promisee assigns their rights to the third party
• Collateral contracts — a separate contract exists between the third party and the promisor
• Trusts of contractual promises — the promisee holds contractual rights on trust for the third party
• Jackson v Horizon Holidays Rule — damages for third-party loss in certain holiday/family contexts

Privity of Burden

• Critical limitation:: The 1999 Act confers rights on third parties but does not impose obligations. A third party cannot be made liable under a contract to which they are not a party. This is privity of burden — a third party cannot be burdened by contractual obligations.

Exam tip

Remember the asymmetry: the 1999 Act gives third parties rights but never imposes burdens on them. If a question asks whether a third party can be forced to perform obligations under a contract, the answer is always no (unless they are actually a party to the contract or liable in tort).

How This Appears in SQE1 Questions

SQE1 questions present a contract that benefits a third party and ask whether that person can enforce the term. This is a classic SQE1 trap. Common traps include:

• Assuming the third party can always enforce a beneficial term — the s.1(1)(b) presumption can be rebutted
• Forgetting that the 1999 Act can be excluded — the parties can include an express exclusion clause
• Applying the Act to impose obligations (burdens) on a third party — it only confers rights
• Missing identification requirements — the third party must be identifiable by name, class or description
• Overlooking section 2 restrictions on variation — once a third party has communicated assent or relied on the term, it cannot be varied without their consent

Common Mistakes Students Make

• Assuming the 1999 Act always gives third parties enforceable rights — the s.1(1)(b) presumption can be rebutted, and the Act can be expressly excluded
• Forgetting that the third party must be identifiable — they need not be named, but must be ascertainable by class or description
• Attempting to use the 1999 Act to impose obligations on a third party — the Act only confers rights, not burdens
• Overlooking the common-law exceptions to privity — agency, assignment and collateral contracts remain relevant alongside the statute
• Forgetting section 2 protection — once a third party has communicated assent or relied on a term, it cannot be varied without their consent

Want to test your understanding of privity and third-party rights? Try a few SQE1-style questions below before moving on.

Quick Summary

• The privity rule: Only parties to a contract can enforce it; third parties have no rights.
• Section 1(1)(a): A third party can enforce if the contract expressly provides they may.
• Section 1(1)(b): A third party can enforce if the term purports to benefit them, unless the contract shows the parties did not intend this (rebuttable presumption).
• Identification: Third party must be identifiable by name, class or description; need not be named.
• Defences: Promisor can raise against third party any defence available against the promisee.
• Variation: Parties cannot vary/rescind without third party's consent once they have communicated assent or relied on the term.
• Exclusion: The 1999 Act can be expressly excluded by the contracting parties.
• Privity of burden: Third parties can never be made liable under a contract; the Act only confers rights, never imposes burdens.
• Common-law exceptions: Agency, assignment, collateral contracts, trusts and Jackson v Horizon Holidays remain relevant.

Want to test this now? Try a few SQE1-style questions below before moving on.

Test Yourself

Related Topics

• SQE1 Contract Law: Complete Guide
• Formation of a Contract for SQE1
• Terms of a Contract for SQE1
• Remedies for Breach of Contract for SQE1

Practise Privity Of Contract And Third Party Rights Questions for SQE1

Want to solidify your knowledge? ActusPrep provides realistic SQE1 questions tailored to this topic.

👉 Try our free demo: https://actusprep.com/demo 👉 View plans and pricing: https://actusprep.com/pricing