As a general rule only the parties to a contract may enjoy its benefits, or be subject to its burdens. So, if Y contracts to buy a bicycle from X for £100 on terms that he will give it to Z, X and Y are the parties to the contract and Y is a third party, or beneficiary of that contract. But under the common law, Z may not enforce the contract in the event that Y keeps the bicycle for himself. Under the doctrine of privity of contract only X and Y can enforce the contract. The legal justification for the rule is that to sue for breach of a promise the promisee must have given consideration for it. In this example, Z gave no consideration for Y’s promise.
There are exceptions to the privity of contract rule and ways around it.
Contracts (Rights of Third Parties) Act 1999
Under this Act, a third party can enforce a contractual term if:
• limb a: the contract expressly provides that he may (s1(1)(a)), or
• limb b: the term purports to confer a benefit on him (s1(1)(b)), unless the contract establishes on its true construction that the parties did not intend the term to be enforceable by the third party (s1(2)).
In either case the ‘third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description’ (s1(3)). Accordingly, if Y buys a jumper in a shop and says it is for Mrs Smith (a name), or a relative (a class), or his mother (a description) then the intended beneficiary of the jumper can enforce any rights that Y holds, even though the intended beneficiary does not have privity of contract.
However, privity of contract will still apply if the conditions set out in the 1999 Act are not satisfied. For example, X employed Y (a business) to refurbish Z’s bathroom. The refurbishment was defective such as to give Z a remedy against Y under the Act. However, before enforcement of the contract, Y sold its business to W on terms that W assumed Y’s liabilities ‘to pay in the normal course of time any liabilities properly incurred by Y as at 31 March 2003’. Z sought to enforce against W, with whom he did not have privity of contract. He sought to overcome the problem by relying on the 1999 Act and the contract of sale between Y and W. He could not do so, as he was not expressly identified in that contract as is required by s1(3). (1)
Agency does not obviate the privity of contract rule, but it may operate to establish privity where it was not thought to exist. In the bike sale example above, if Y (the buyer) was acting as an agent for Z (the beneficiary) then the actual contract for sale would have been between X (the seller) and Z. Agency, is common. For example, if you book a holiday through a travel agent the resulting contract is between the you and the tour operator, not the agent. The common feature of agency is that the agent is authorised to enter into a contract but the agent does not become a party to that contract. The agent makes the contract for and on behalf of the principal.
Agency is itself created by a contract between a principal and the agent, whereby the principal authorises the agent to act on his behalf. A question that may arise under this contract is over the nature and extent of the agent’s authority to create contracts that bind the principal. The agent’s authority is either actual or apparent.
The agent’s actual authority is established by looking at what the parties have said and done, and any relevant surrounding circumstances.
• typically, the authority is established by a written agency contract (express authority),
• but it can also be implied, such as by custom and practice.
A contract entered into by an agent acting with actual authority (express of implied) will be binding on the principal.
Apparent (ostensible) authority
An agent that exceeds its actual authority may nevertheless create a contract that binds its principal. This will happen if three conditions are satisfied:
• the principal has represented (by words or conduct) that the agent has authority,
• the third party relies on that representation, i.e. believes that the agent has the relevant authority, and
• the third party alters their position such as by entering into a contract.
Where an agent exceeds its actual authority the principal is (subject to the above three conditions being satisfied) bound by the contract entered into. The principal’s remedy is against the agent for breach of the agency agreement.
(1) Avraamides v Colwill  EWCA Civ 1533.