Although privity of contract has been regarded as a
fundamental principle of English law, there is a large
number of exceptions to the rule. Where an exception
applies, a person who is not a party to a contract may be
able to take legal action.
1 Assignment of contractual rights. It is possible for
a party to a contract to transfer the benefit of a contract
to another person. For example, A may agree to sell B his
CD collection for £2,000. A may transfer his right to
payment under the contract to a third party, C. This
process is known as assignment. Provided the assign-
ment is absolute, in writing and notice is given to the
debtor, it will take effect as a statutory assignment under
s 136 of the Law of Property Act 1925. This means that
the assignee (C in the example above) can sue the debtor
(B) in his own name. The assignee gets the same rights
as the assignor (A) had. The burden of a contract cannot
be assigned unless the other party consents.
2 Agency. An agent is a person who is employed by
a principal to make contracts on his behalf with third
parties. A principal will be bound by contracts made by
the agent with the third party even if the existence of the
agency is not revealed. This is known as the doctrine of
the undisclosed principal.
3 Land law. There are many situations in land law
where the doctrine of privity of contract does not apply.
For example, a lease of property often contains a num-
ber of covenants by the landlord and the tenant. If the
tenant assigns the lease to a third party, either party,
landlord or new tenant may enforce a covenant in the
original lease against each other.
4 Trusts. The doctrine of privity does not apply to the
law of trusts. If X and Y by contract create a trust for the
benefit of B, B can enforce his rights under the trust even
though he was not a party to the contract.
5 Collateral contract.A collateral contract may arise
where one party makes a promise to another, the con-
sideration for which is that the promisee will enter into
a contract with a third party. The device of a collateral
contract was often used to enforce a promise made by
car dealers before a purchaser entered into a hire-
purchase agreement with a finance company.Part 3Business transactions
222
Linden Garden Trust Ltdv Lenesta
Sludge Disposals Ltd(1993)
The owner of land entered into a building contract with a
contractor to develop a site for shops, offices and flats.
The parties envisaged that the site would subsequently
be transferred to a third party. It was alleged that the
third party had suffered financial loss as a result of the
contractor’s poor workmanship which amounted to a
breach of contract. The owner of the site brought an
action for breach of contract but was met by the defence
that as the site had been transferred to a third party he
had only suffered nominal loss. The House of Lords
rejected this argument and upheld the right of the owner
to recover full damages on behalf of the third party. Andrewsv Hopkinson(1956)The defendant car dealer recommended a car to the
claimant saying: ‘It’s a good little bus. I would stake my
life on it.’ The claimant entered into a hire-purchase
agreement with a finance company and when the car
was delivered he was asked to sign a delivery note which
said that he was satisfied with its condition. This was the
first opportunity the claimant had to examine the vehicle.
The claimant was seriously injured when a week later
the car suddenly swerved into a lorry. The car was com-
pletely wrecked. A subsequent examination revealed
that the steering mechanism was faulty at the time of
delivery. As the law then stood, the delivery note may
have barred the claimant from suing the finance com-
pany. The claimant successfully sued the defendant for
breach of the promise made before he entered into the
hire-purchase agreement. The defendant was also liable
in the tort of negligence.6 Other causes of action.The doctrine of privity of con-
tract means that a person who is not a party to a contract
cannot bring an action in contract. He may have some
other cause of action on which to base a claim. If a hus-
band enters into a contract with a garage to have his
wife’s car serviced, she will not be able to sue the garage
in contract if the service is carried out badly. However,
if she is injured in an accident caused by a defective ser-
vice to the car’s brakes, she may be able to sue the garage
in the tort of negligence (see Chapter 11 ).Beswickv Beswick(1967)Peter Beswick was a coal merchant. He agreed to sell
the business to his nephew, John, provided that John
paid him £6.50 per week for the rest of his life and if his