The rule is that... Only those who are parties to the contract are bound by it and can benefit from it. Only them can sue and be sued.
The modern statement of the rule can be found in Dunlop Pneumatic Tyre Co Ltd V Selfridge & Co ltd.
From this case Lord Haldane stated that only a person who is a party to a contract can sue on it. In this case the contract was between Dew & co and Selfridge, as a consequence Dunlop was not a party to the contract, so their claim failed.
The rule which developed from Tweddle V Atkinson states that 'consideration must move from the promisee'.
This means a person cannot sue or be sued under a contract unless he has provided consideration.
This rule was ignored in the case of Jackson V Horizon Holidays Ltd in which a claim for compensation due to a disappointing holiday experience was not confined to Mr Jackson but was extended to his family, even though they were not strictly parties to the contract. Many argue that if the rule is to be ignored then what is the need of having the rule in the first place. Some may think that the courts should either stick to using the rule like in the case of Tweddle or not use it at all¸ like in the case of Jackson.
The courts and parliament have created exceptions when the rule of privity does not apply, they are:
· Agency – Where one party acts as an agent for another.
· Collateral contracts – When a second contract is used alongside the main agreement.
· Restrictive covenants – exists in land law when a purchaser of land makes a promise to the seller, for example not to build on it, the covenant (promise) then runs with the land.
Contract (rights of Third Parties) Act 1999
Under this act someone who is not a party to the contract (3rd party) may enforce the contract on either or both of the actual parties if:
1. The third party is expressly identified by name, or as a member of a class or as answering a particular description.
2. The contract expressly provides the third party may enforce the contract.
3. The contract term is an attempt to confer the benefit of the term on the third party.
The case of Nisshin Shipping Co Ltd V Cleaves & Co Ltd confirms that the test for what reasonable contracting parties would have thought the terms of the contract meant is an objective test.
The Act does not apply if the parties did not intend the term to benefit a third party. Most commercial contracts now include a term which excludes the third party from benefiting.