The doctrine of privity of contract states that generally only those who are parties to a contract can have rights or liabilities under it. The doctrine is well established in English law but also has a number of exceptions to it. In particular, the Contracts (Rights of Third Parties) Act 1999 means that there are situations where the parties can choose to sidestep the doctrine. The order of treatment here is:
The origins of the doctrine. What are the reasons underlying the doctrine and how did it develop in English law?
The Contracts (Rights of Third Parties) Act 1999. This is a major exception to the doctrine. It allows, in particular circumstances, the parties to a contract to create benefits that are legally enforceable by a third party.
Common law devices to evade the doctrine. These include the following:
Damages on behalf of another. In some situations the courts will allow a party to a contract to recover damages for a loss suffered by a third party as a result of a breach of contract.
The trust of a promise. At times this device has been used to create third party rights although it has been used to a lesser extent in more recent times – and has probably been overtaken, in practical terms, by the 1999 Act.
Collateral contracts. In some situations the courts will find that there is in fact a ‘collateral contract’ with a third party, sitting alongside the main contract.
Tort of negligence. A third party to a contract has sometimes been allowed to use the tort of negligence to recover damages from a party in breach but recovery for pure economic loss has traditionally been very restricted.
Statutory exceptions. There are some specific contracts (for example, certain types of insurance contract) where statutes give rights to third parties.
Privity and exclusion clauses. Parties quite often purport to give the benefits of an exclusion clause to third parties and the courts have in some cases used agency concepts to enable these to be enforceable. The 1999 Act reduces the need for these devices to be used.
Restrictive covenants are used in land law to impose burdens on third party occupiers of land. Limited use of this approach has been made outside the land law context.
The tort of interference with contractual rights can be used to obtain an injunction to stop a third party encouraging a breach of contract.