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Privity Pq Notes Notes

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PRIVITY

PQ Approach in summary 1) Does C have a right under s.1 1999 Act?
2) If not, does C have a right under the common law?
a) Most likely to be applicable - the Albazero exception b) Potentially specific performance 3) If yes, does C have a better right under the common law?
a) Potentially in the case of collateral contracts, as not subject to the same limitations as the 1999 Act b) Trusts of promise (there the right is basically as good as B's)

1 Statute: Contracts (Rights of Third Parties) Act 1999
When does T have a direct contractual claim?
Two alternative ways T has a direct contractual claim:
(i) s.1(1)(a) + s.1(3), or
(ii) s.1(1)(b) + s.1(2) + s.1(3)

Section 1(1) and 1(2) of the Contracts (Rights of Third Parties) Act 1999
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if a. The contract expressly provides that he may, or b. Subject to subsection (2), the term purports to confer a benefit on him
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party
Note that s. 1(1) may also be used to confer on T the benefit of an exclusion clause, per s.
1(6).
If (ii), apply the statute as understood in Nisshin Shipping v Cleaves: (i)
(ii)

Stage 1 of analysis: if A and B purports to confer on T a benefit, T has prima facie a direct right of action against A;
Stage 2 of analysis: to rebut this presumption,
a. A and B must show that on the proper construction of the contract they did not intend terms to be enforceable by T, or b. if it was inconsistent with the contract, or c. if there is a chain of contracts under which T has the right to sue someone else for the breach of the promisor's obligation

Section 1(1)(b) does not apply to incidental beneficiaries - only direct beneficiaries: Dolphin
Maritime v Sveriges Angfartygs Assurans Forening (2009). Facts: A was obligated to pay money to B through T, who was acting as B's agent. T sought to enforce payment from A so that it could pass the money to B after deducting its commission. Verdict: Unsuccessful. T
was solely acting as a conduit through which money would be transferred from A to B. There was no intent that T should be directly benefitted under the contract. Further, at stage 2 of the limb 2 test, it was not shown that A and B had truly intended that T should have a direct right of action against A.
Exam scenario
In the White and Jones scenario, the benefit accrued to the daughter (the inheritance) is merely incidental to the benefit accrued to the father under the contract (the service by the solicitor).

Section 1(3) of the Contracts (Rights of Third Parties) Act 1999
The third party must be expressly identified in the contract (i) by name, (ii) as a member of a class or (iii) as answering a particular description but need not be in existence when the contract is entered into.
This is to be applied strictly, T has to fit at least one of the three categories: Avraamides v
Colwill (2006)
There is no requirement in the 1999 Act that a third party who is entitled to the benefit of a contract is aware of the contract at the time it is made or at any particular time after that. This was confirmed in Chudley v Clydesdale Bank Plc (2019), where the third party, who succeeded under the 1999 Act, did not know about the contract when it was made. What can T claim for?

Section 1(5) of the Contracts (Rights of Third Parties) Act 1999
For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly).

i. Specific performance

The Act creates an exception to the general maxim of Equity that specific performance can only be awarded in favour of someone who has provided consideration. The Act states that T
can obtain specific performance. However, B must have furnished consideration and debts and damages must be insufficient to protect T.

ii. Damages

T can claim not just for "reliance-loss" but also "expectation interest" (financial or material gain that would have been achieved if the promisor had not breached his contract)
Variation or rescission of the contract by A and B
A and B jointly own the contract as they are the contracting parties. It is therefore in their interests to identify the point at which they last enjoyed freedom of contract to extinguish or enforce it. It is T's interests to rapidly obtain an irrevocable right. The question here is when
T would be held to obtain such a right.
Section 2(1) of the Contracts (Rights of Third Parties) Act 1999
Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if -
(a) The third party has communicated his assent to the term to the promisor (see s.2(2)
below)
(b) The promisor is aware that the third party has relied on the term (Law Commission:
reliance need not be detrimental), or
(c) The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it
(Note the "master clause" exception in s.2(3) below.)
Section 2(2) of the Contracts (Rights of Third Parties) Act 1999
The assent referred to in subsection (1)(a) - (a) may be by words or conduct, and (b) if sent to the promisor by post or other means, shall not be regarded as communicated to the promisor until received by him
Section 2(3) provides a master clause
Subsection (1) is subject to any express term of the contract under which - (a) the parties to the contract may by agreement rescind or vary the contract without the consent of the third party, or (b) the consent of the third party is required in circumstances specified in the contract instead of those set out in subsection (1)(a) to (c).
Therefore, there are two 'cut-off' points at which the parties will have lost the capacity to vary or extinguish T's rights (ie. T's right has become irrevocable).
(i)

T has communicated assent to the term to A.
Elaborated on in s. 2(2): By words/conduct, or if it is sent to A by post or other means, it is not regarded as communicated to A until received by him

(ii)

T has relied on A's promise and A either knew that it had occurred or it was reasonably foreseeable by A.

However, T will not have the benefit of either cut-off point if
(i)
(ii)
(iii)
(iv)

A decides to terminate the contract following B's breach
A rescinds the contract following B's misrepresentation, undue influence, nondisclosure
The contract is terminated by a frustrating event
The contract or a part of it, ceases to operate, or is suspended, in accordance with the force majeure clause

Right of defence or set-off
If A is sued by T, A can raise against T any 'defence or set-off' or 'counter-claim' pertaining as between A and T directly. For example, if the contract provides that A should pay T £1m, but in a separate transaction T had incurred a debt to A of £100,000, satisfaction of T's claim against A under the Act will be reduced to take this into account (by way of set-off). This right connects A and T.
Section 3(4)
The promisor shall also have available to him - (a) by way of defence or set-off any matter, and (b) by way of counter-claim any matter not arising from the contract, that would have been available to him by way of defence or set-off or, as the case may be, by way of counter-claim against the third party if the third party had been a party to the contract
T's right of action is subject to the same rights of defence or set-off that A would enjoy if A
had instead been sued by B under the same contract (unless the contract provides otherwise).
This right connects A and B.
Section 3(2)
The promisor shall have available to him by way of defence or set-off any matter that - (a)
arises from or in connection with the contract and is relevant to the term, and (b) would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee
PQ Scenarios:
 If B makes a misrepresentation which entitles A to rescind the contract, and T sues A
under the Act, A can raise against T the defence of rescission - Section 3(2)
 If A promised to pay £1000 to T if B first pays £5000 to T, B has defaulted, and T
then sues A under the Act, A can raise the defence that B's performance is a condition precedent to A's duty to pay - Section 3(2)
 If A promised B to pay £2m to T, but B had incurred a debt to A under the same contract, A can set-off the £1m owed by B to A when T asks A to pay T the £2m -
Section 3(2)
Note: Per s. 3(3), A and B can expressly stipulate that A can enjoy any defence against T's action, that A would have vis-à-vis B, meaning that the scope of set-off available to A is expanded so as to cover all sums owed by B to A, even if the relevant liability arose outside and independently of the A/B/T transaction.

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