Privity of Contract & Agency

The Doctrine of Privity of Contract

The doctrine of privity of contract is a foundational principle of English contract law. Its core rule is that only parties to a contract can acquire rights and be subject to liabilities under it. This means that a third party — someone who is not party to the contract — cannot sue upon it, even if the contract was made for that person's benefit.

The foundational authority for this principle is Tweddle v Atkinson [1861], in which it was held that a third party could not enforce a contract made between two others, even though the contract had been concluded for his benefit. The doctrine, whilst logically coherent, was capable of producing unjust results in practice and was therefore subjected to legislative reform.

The Problem with the Rule and Its Legislative Reform

The strict operation of the privity doctrine could cause hardship where a contract was clearly intended to benefit a third party but that party had no mechanism to enforce it. In response to these concerns, Parliament enacted the Contracts (Rights of Third Parties) Act 1999, which introduced a significant legislative reform to this area of law.

The Contracts (Rights of Third Parties) Act 1999

The Contracts (Rights of Third Parties) Act 1999 allows a third party to enforce a term of a contract in certain circumstances. There are two alternative conditions under which the right of enforcement arises.

Two Conditions for Third-Party Enforcement

A third party may enforce a contractual term if either of the following conditions is satisfied:

1. The contract expressly provides that the third party may enforce it; or
2. The term purports to confer a benefit on the third party — unless, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party.

The second condition effectively creates a presumption in favour of third-party enforcement where a benefit is conferred, but this presumption may be rebutted if the parties' intentions indicate otherwise.

The Identification Requirement

In either case, the third party must be sufficiently identified in the contract. The Contracts (Rights of Third Parties) Act 1999 requires that the third party be identified:

• by name;
• as a member of a class (for example, "employees" or "sub-contractors"); or
• as answering to a particular description.

The third party need not be in existence at the time the contract is made — a provision can, for example, be made in favour of a company not yet incorporated.

Agency

Definition of Agency

Agency is the relationship which arises where one person (the agent) acts on behalf of another (the principal), and in doing so has the power to affect the principal's legal position with regard to a third party. Through agency, a principal may enter into contractual relations with third parties through the acts of the agent, thereby enlarging the principal's capacity to transact at a distance or through specialists.

Actual Authority

Agency normally arises by express appointment, whereby the principal expressly appoints someone to act as agent to perform specific tasks. The agent then has actual authority to do those specific things, but no more and no less. Where authority is granted expressly, its scope is defined by the terms of the appointment itself; the agent who acts within that scope binds the principal to the contract with the third party.

Ostensible or Apparent Authority

Ostensible authority (also referred to as apparent authority) arises where the principal has given a distinct but false impression to a third party that the agent has authority to enter into a contract on the principal's behalf. A typical example is where the agency relationship has been terminated, but the principal fails to notify third parties, and the former agent subsequently enters into a contract with one of them.

Three Conditions for Ostensible Authority

Where ostensible authority is alleged, the principal will be estopped from denying the agent's authority only if all three of the following conditions are satisfied:

1. The principal must have represented, by words or conduct, that the agent had authority to act;
2. The third party must have relied on this representation, believing the agent had authority; and
3. The third party must have altered his position as a result — for example, by entering into a contract on the strength of that belief.

If these three conditions are met, the principal cannot subsequently deny the existence of the agent's authority so as to avoid the legal consequences of the transaction.

Legal Consequences Depending on the Existence of Authority

Breach of Contract Where Authority Exists

Where the agent contracted on the principal's behalf with either actual or ostensible authority, and there is subsequently a breach of contract, the third party cannot sue the agent. The rights and obligations arising from the contract belong to and bind the principal and the third party exclusively; the agent, having acted within authority, drops out of the transaction entirely. The agent has no personal liability for breach of contract in such circumstances.

Consequences Where No Authority Exists

Where the agent purported to act on another's behalf but had no authority to do so, the legal position is as follows:

• The principal cannot sue the third party, nor can the third party sue the principal — the contract does not bind the principal because the agent had no authority to conclude it;
• The third party may sue the agent in deceit or fraud, where the agent falsely represented that authority existed; and
• The agent cannot sue or be sued for breach of contract, because the contract does not bind the agent personally — the agent was purporting to act on behalf of another and did not assume contractual liability in their own right.

The interplay between the doctrine of privity of contract and the law of agency is therefore of considerable practical importance: it determines who may enforce a contract, who may be sued for breach, and how third parties are affected by agreements made on their behalf or for their benefit.