The common law exceptions under which a third party can have rights under a contract are as follows;
Agency
An agent in this context is the intermediary of the principal, rather than a true party to the contract. In practice, one party to a contract made by agency is usually a corporation of some kind, such as a company or local authority, and the agent is their employee. There are three circumstances in which a party will be treated as being the principal’s agent:
- Where there is express authority,
- Where there is implied authority, and
- Where there is apparent authority.
Express authority is the most straightforward and means that the agent has been specifically asked to make the contract in question.
Implied authority arises where the agent is asked to do something which by implication requires the contract to be made.
Apparent authority can cause more problems. It arises where the principal’s past behavior gives the other party to the contract reason to believe that the agent has authority to contract on the principal’s behalf.
a. Undisclosed principals
In some cases, an agent may act for a principal without disclosing the principal’s identity, or even the fact that there is a principal. While the principal remains undisclosed, the agent is personally liable on the contract; once the principal is disclosed, if a claim arises, the other party to the contract can choose whether to sue the principal or the agent.
b. Warranty of authority
If an individual purports to make a contract on behalf of someone else, but in fact has no authority to do so, where does that leave the party contracted with? It was held by the court in the case of Collen v Wright (1857) that it may be possible to hold that the purported agent has contracted that he or she does have authority. So the supposed principal will not be liable but the purported agent would be.
Assignment
It is possible to assign the benefit of a contract without the permission of the other party. A common example is where small businesses, having cash flow problems, sell the debts owed to them by others to what are called factoring houses. The factoring house buys the debt at less than its value, and so makes a profit when it collects from the creditor; the small business may lose a little of what it was owed, but gets its money quicker, and with less effort. Once the debt is assigned, the creditor owes the money to the party to which it was assigned, and not to the party originally contracted with.
Negotiability
Certain types of contractual benefit can be assigned merely by being put into a written document and given to another party; the original owner of the benefit need not be notified. The written documentis called a negotiable instrument, and the most common examples are banknotes and cheques.
Novation
Assignments only transfers the benefits, and not the burdens of a contract. To transfer both burdens and benefits, a novation is required. The effect of novation is that the old contract is destroyed and a new one created. It requires the agreement of both the original parties to the contract, and the third party who is to take on the liability, and consideration must be given for the new contract.
Damages on behalf of another
One obvious problem with the doctrine of privity occurs when a contracting party buys something on behalf of others, not in the sense of an agent.
The majority’s approach was that for example where many shops, offices and flats are being built it was foreseeable that the site owner does not intend to keep and occupy them all, but intends to sell or rent them at a profit to others on completion. As such where it is foreseeable that property will be transferred, the person (usually the builder) contracting to carry out services (usually construction work) on that property would be treated in law as having contracted for the benefit of all persons who might, after the time of contracting, acquire interests in the property. Thus the original owner of that property will be able to sue for breach of contract for loss suffered by the future owner. The loss is treated as having been suffered by the third party rather than by the original site owner, but the original owner can nevertheless receive substantial damages for that loss. This was a decision upheld by the court in the case of Darlington BC v Wiltshier Northern Ltd (1995).
Collateral contracts
Where one party makes contracts with two others, the courts will sometimes use the device of finding a collateral contract between the two others to evade the privity rule. An example can be found in the case of Shanklin Pier Ltd v Detel Products Ltd (1951).