Contract - Privity

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Linden Gardens Trust v Lenesta Sludge Disposals [1994]

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The House of Lords developed a more expansive approach to the issue. In that case, Company A entered into a contract with the defendant regarding work to be carried out on property.

The later owner of the same property (Company B) suffered damage as the work carried out by the defendant for Company A was defective. Notwithstanding the fact that Company B was not
party to the contract between Company A and the defendant the court held that Company A could recover on behalf of Company B because:

It could be foreseen that damage caused by a breach would cause loss to a later owner and not merely the original contracting party . .. it seems to me proper .. . to treat the parties as having entered into the contract on the footing that (Company A) would be entitled to enforce the contractual rights for the benefit of those who suffered from the defective performance.
Critically, in this case the House of Lords stated that this decision did not compel the original party (Company A) to sue on the third party's (Company B) behalf.

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Privity of Contract - Introduction

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The doctrine of privity of contract is a common law rule that " ... prevents a contract from being enforceable in favour of, or against, someone who is not a party to the contract".

As Friel explains, " ... it denies the right to a person who is not a party to a contract, and who therefore cannot be said to have supplied consideration, from enforcing the contract, despite the fact that the parties intended that person to be a beneficiary of the contract. " Indeed, it is closely aligned with the well-established rule that consideration must move from the promisee before he/she may enforce that promise.

There are three main aspects to the doctrine:

(1) a person cannot enforce contractual rights unless he/she is a party to that contract;

(2) a person cannot be contractually liable for breach of a contract to which he/she is not a party and;

(3) contractual remedies are available to the parties of a contract only and not to third parties.

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Tweddle v Atkinson [1861] 1 B & S 393,

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The plaintiff was engaged to be married to G's daughter. In recognition of the marriage, G entered into an agreement with the plaintiff's father whereby both of them would pay the plaintiff a sum of money upon the marriage. However, the plaintiff was not a party to this agreement. G died after the marriage took place and the executors of G's estate refused to pay the relevant sum of money to the plaintiff. The plaintiff sued for the sum of money, but it was held that since the plaintiff was not a party to the original contract, he could not sue.

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McCoubray v Thompson (1868) 2 IRCL 226

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In this case a landowner wished to transfer his property in equal shares to the plaintiff and the defendant. However, the defendant wanted the entire property. The plaintiff agreed to this, provided he was given the monetary value of his share of the land. In order to keep things simple, the landowner agreed with the defendant that he would transfer the property to him as long as he paid a certain sum of money to the plaintiff.

Following the transfer of the property, the landowner died and the defendant did not pay the plaintiff the agreed sum in lieu of his share of the property. The plaintiff sued the defendant for the money.

The court rejected his application, however, on the basis that he was not a party to the agreement and had failed to provide any consideration. Thus, the agreement was unenforceable.

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Dunlop v Selfridge [1915] AC 847

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The plaintiff company had sold tyres to a wholesaler. The contract for sale contained a term that stated that the tyres would not be resold to third parties at undervalue.

However, the House of Lords rejected a claim by the plaintiff to enforce this term against the defendants as there was a lack of consideration and due to the privity rule.

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Clitheroe v Simpson (1879) 4 LR (Ir.) 59

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A father agreed with his son that he would transfer property to his son on the condition that the son would pay his sister a sum of money. The sister's estate was unable to sue for this sum on the basis that she was not a party to the original agreement and had provided no consideration.

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Murphy v Bower [1868] IR 2 CL 506

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In this case the plaintiffs made an agreement with a railway company to carry out construction work on the railway. The railway company (not the plaintiff) then employed the defendant to supervise the work.

The construction contract provided that the defendant would issue certificates as the work was completed and that upon presentation of these certificates, the plaintiffs would be paid for the work. However, the defendant refused to certify the work and the plaintiff sued, but was unsuccessful.

This was on the basis that there was no contract between the plaintiff and the defendant.

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Mackey v Jones [1958] 93 ILTR

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The uncle of a 14-year-old boy promised his mother that if the boy worked the farm for him, he would leave the farm to the boy in his will. He left the farm to a third party, and the boy sued.

The Court held that since the boy was not a party to the agreement between the uncle and his mother, he could not sue.

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Exceptions to the Doctrine

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1. Trusts of Contractual Rights
2. Agency
3. Restrictions on the use of Land and Chattels
4. Collateral Contracts
5. Statutory Rights - Insurance for the Benefit of Spouse or Children, Section 7 of the Road Traffic Act 1961, Section 13 of the Sale of Goods and Supply of Services Act 1980 - motor vehicles

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Trusts of Contractual Rights

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The equitable trust is another means by which persons who are not party to a contract. This occurs where a person transfers property or money to another person (Trustee) to hold on trust for a third party (Beneficiary). Thus, the beneficiary has not been a party to the original contract, but is still entitled to benefit from the agreement.

According to Clark:

While the primacy of the Drimmie v. Davies line of authority has not been directly challenged in the Irish courts the practice of the trust as a means of avoiding the privity doctrine has fallen into disfavour.

Indeed, it appears that there may need to be some evidence of an intention to create a trust in favour of a third party in order to fully rely on this exception.

However, in the case of O'Leary -v- Irish National Insurance Co. Limited [1958], this question was left open. But in the more recent case of Cadbury Ireland -v- Kerry Co-Op Creameries Ltd. [1982], Barrington J held that such an intention must be evident.

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Tomlinson -v- Gill (1756)

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The Defendant promised a widow that if she appointed him administrator of her deceased husband's estate, he would personally settle any debts the estate could not meet. When he failed to honour this aggreement, one of the creditors brought an action based on this promise. The court found that while the creditor was not a party to the original agreement, he was one of the benificiaries of the agreement and the widow could be regarded as a trustee. It is noteworthy that the plaintiff succeeded in this case despite the fact that there was no express intention to create a trust.

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Drimmie. v Davies [1899] 1 IR 176

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A father agreed to establish a dental practice with his son. As part of the agreement, the son agreed to maintain his mother and family and to pay them certain annuities should his father predecease him. The executor of the deceased fathers' estate, as well as the beneficiaries, sought to enforce the promise. The court held that the contract effectively created a trust in favour of the deceased husband's wife and the other beneficiaries.

According to Clark:

While the primacy of the Drimmie v. Davies line of authority has not been directly challenged in the Irish courts the practice of the trust as a means of avoiding the privity doctrine has fallen into disfavour.

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Agency

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An agent is a person who is authorised to act on behalf of another person, who is called a principal. In contractual negotiations, the actions of the agent bind the principal.

Indeed, the principal is entitled to benefit from the contract as if he/she concluded it on his/her own behalf. The agent or the principal may sue on foot of the contract. The agency relationship may be disclosed where it is known that the agent is acting for a principal) or undisclosed (where it is not known that the agent is acting for a principal.

In order for the acts of an agent to bind the principal, there must normally be an intention to create the relationship of agent and principal: Shepherd -v- Murphy (1867). The operation of this exception was explored in the early case of Aldler -v- Dickson (1955)

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Shepherd -v- Murphy (1867)

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In order for the acts of an agent to bind the principal, there must normally be an intention to create the relationship of agent and principal

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Aldler -v- Dickson (1955)

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Here, an exemption clause in a contract of carriage between the plaintiff and a shipping company excluded the shipping company from liability for personal injury caused by the negligence of its employees. The plaintiff was injured when mounting a gangway on a ship called the Himalaya and sued the employees of the company. The court held that the exemption clause was not available to the employees because they were not parties to the original contract.

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Scruttons Ltd v Midland Silicones [1962] AC 446

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The court was asked to determine whether or not a firm of stevedores (people contracted to unload a ship's cargo) could rely on a limitation clause in a contract between the client and the carrier.

The House of Lord set down a four-stage test that had to be satisfied under the circumstances:

(I) The contract must make it clear that the stevedore is intended to be protected.
(2) The contract clearly provides that the carrier has the status of agent for the purpose of obtaining the benefit of the contract for the principal.
(3) The carrier has the authority to act for the principal.
(4) Consideration was present on the part of the principal.

Under the circumstances of the case, this test was not satisfied as there was no explicit intention to benefit the firm of stevedores.

Front 17

New Zealand Shipping v A.M Satterthwaite and Co Ltd
(The Eurymedon) [1975] AC 154

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In this case a drilling machine was to be transported from England to New Zealand. The consignors, who were based in England, made an agreement with the carrier that included an exclusion clause limiting the liability of the carriers, their
employees, agents and independent contractors. The carriers employed the defendant stevedores to unload the machine, which was damaged as a result of negligence on the part of the stevedores. Relying on the relevant principles enunciated in Scrutton, the majority of the Privy Council agreed that the stevedores were entitled to rely on the limitation clause, despite the fact that the clause was contained in a contract to which they were not party
(between the consignors and the carriers).

This was copper-fastened by the fact that the exemption clause was properly worded; the third party had provided consideration under a
separate contract and due performance was intended by the contracting parties to entitle the third party to avail of the clause. The Privy Council held:

a bargain initially unilateral but capable of becoming mutual, between the shipper and the [stevedores], made through the carrier as agent. This became a full contract when the stevedores performed services by discharging the goods. The performance of these
services for the benefit of the shipper was the consideration for the agreement by the shipper that the [stevedores] should have the benefit of the exemptions and limitations
contained in the [contract]. That is, a second contract was entered into by the carrier acting as trustee for the stevedores, for which the consideration was the work carried out by the stevedores, and the terms of the limitation clause were imported into this contract from the parent contract. Despite extensive
criticism of this holding it has been consistently followed by the Privy Council, in The New York Star [1980] 3 All ER 257, and most recently in The Mahkutai [1996]

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The Mahkutai [1996] 3 All ER 502,

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It was again accepted that such a clause was effective to protect a sub-contractor against claims in tort by a consignee or cargo owner. It is significant that both of these cases
recognise that such an exemption from the principle of privity of contract is commercially desirable.

Front 19

Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70.

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The minority in this case expressed misgivings about using a legal fiction to avoid the privity doctrine.

Front 20

Hearn and Matchroom Boxing v Collins (1998)

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Agency was successfully used to circumvent the doctrine of
privity. In this case, Matchroom Boxing entered into a contract with the defendant. Hearn, who was not a party to this contract, sought to rely on its terms. He successfully argued that
Matchroom Boxing acted as Hearn's agent when they entered into the contract. The second plaintiff clearly acted with the authority and for the benefit of the first plaintiff, and
consideration was found to be present.

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Restrictions on the use of Land and Chattels

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Clark acknowledges that " ... covenants that "touch and concern" real property may be enforced against, and indeed be enforced by, persons who are not parties to the original transaction."

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Tulk v Moxhay (1848) 2 Ph. 774

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It was asserted that such a covenant runs with the land.

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De Mattos v Gibson (1859) 4 De & 1 276

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Reasserts a general equitable principle in respect of land, which is that any person with notice of a right or interest who acquires property, whether movable or immovable, will be prevented from ignoring the rights of that third party if that party has given valuable consideration for that interest.

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Collateral Contracts

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In some cases the courts may prefer to deal with a privity issue by recognising two separate contracts, i.e. the contract between the original parties and a second contract
between one of the parties and the beneficiary.

This approach was adopted in the case of Shanklin Pier Ltd v Detel Products Ltd [1951].

Front 25

Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854.

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In this case, the plaintiffs sued contractors to repair and repaint their pier. The plaintiff's recommended that the contractors purchase the paint from the defendants. Thus, the contractors had contracted with the defendants for the supply of paint. The defendants assured the contractors that the paint in question would last seven years.

However, the paint turned out to be of poor quality and began to fade within a few months. The plaintiffs sued the defendants. The court held that a collateral contract existed between the plamtlffs and the defendants. The
defendants had promised that their paint would last for several years and based on that promise (consideration) the plaintiffs compelled the contractors to purchase the paint from the defendants.

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Insurance for the Benefit of Spouse or Children

s 2 of the Married Women's Property Act 1882, s 7 and s 8 of the Married Women's Status Act 1957

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In accordance with s 2 of the Married Women's Property Act 1882 and s.7 of the Married Women's Status Act 1957, the privity rule does not apply to contracts of life insurance and endowment policies. So, for example, if a policy is expressed to be for the benefit of another, this may be subsequently relied upon by that other.

Under s 8 of the Married Women's Status Act 1957, where a contract is made for the benefit of a spouse or child and they are specifically named in that contract, they may rely on the terms of that contract despite not being parties to that contract.

Front 27

Jackson v Horizon Holidays [1975] 1 WLR 1468

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The plaintiff booked a holiday for himself and his family. The accommodation proved wholly unsatisfactory and the plaintiff successfully sued for the loss sustained not only for himself but on behalf of his family.

Front 28

Section 7 of the Road Traffic Act 1961

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Section 7 of the Road Traffic Act 1961 provides that a third party who is injured in a road accident may claim from the insurance of the wrongdoer. Inevitably, this person will not have been a party to the insurance policy.

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Section 13 of the Sale of Goods and Supply of Services Act 1980

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Section 13 of the Sale of Goods and Supply of Services Act 1980 provides that a third party may sue in respect of the unroadworthiness of a vehicle. For example, this could include a passenger who has suffered an injury due to a fault in the car. This person may sue the manufacturer of the car for the injuries sustained.

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Woodar v Wimpey [1980] 1 AllER 571

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The House of Lords rejected the approach taken by Lord Denning in Jackson regarding the rights of a third party to a contract to claim damages under that contract.

In Woodar, vendors had agreed to sell land to the purchasers. A purchaseprice of £850,000 was payable and on completion a further £150,000 was payable to third parties who had no legal relationship with the vendors. The vendors alleged that the purchasers had repudiated the contract and sought damages. The purchasers argued that they were not liable and if they were, should not be liable for any damages to any third parties.

Limiting the decision in Jackson to its own facts (damages awarded to compensate for discomfort of entire family) the House of Lords held that the third parties were not entitled to any damages under the contract.

Front 31

Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85

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The House of Lords developed a more expansive approach to the issue. In that case, Company A entered into a contract with the defendant regarding work to be carried out on property. The later owner of the same property (Company B) suffered damage as the work carried out by the defendant for Company A was defective.

Notwithstanding the fact that Company B was not party to the contract between Company A and the defendant the court held that Company A
could recover on behalf of Company B because:

It could be foreseen that damage caused by a breach would cause loss to a later owner and not merely the original contracting party . .. it seems to me proper .. . to treat the parties as having entered into the contract on the footing that (Company A) would be entitled to enforce the contractual rights for the benefit of those who suffered from the defective performance.

Critically, in this case the House of Lords stated that this decision did not compel the original party (Company A) to sue on the third party's (Company B) behalf.

Front 32

McAlpine v Panatown Ltd [2000] 4 All ER 97

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M contracted with P to build offices. P was a subsidiary company of U and was not the legal owner of the offices in question. P was only involved for VAT reasons. In the contract between M and P, M agreed a "duty of care Deed" for the benefit of U which entitled U to recover (against M) for cost of defects in M's work. It transpired that there were some major flaws in the work.

Could p recover under the contract with M on behalf of U?

M argued that as P had no title to the property they did not suffer any loss and could not sue. There were two arguments put forward by p as to why it should be allowed to recover on behalf of U under the contract with M:

(1) Where two parties enter into a contract where it is in the contemplation of the parties that the proprietary interest in the goods may be transferred after the contract entered into but before the breach - then - if it is the intention of both parties - the original party to the contract will be held to have entered into it for the benefit of all the parties - narrow view. In this scenario P would be obliged to account to U for all the losses.

(2) Because P did not get what it contracted for then P should be entitled to sue for the losses - broad view. Criticism of this approach - no obligation to pass on compensation to party who actually suffered the loss i.e. U.

Ultimately, the cause of action by P failed because U had a remedy (the duty of care deed). Consequently, there was no need for the court to interfere. Lord Browne-Wilkinson concluded:

In my judgment the direct cause of action which [the third party] has under the [contract] is fatal to any claim to substantial damages made by Panatown against McAlpine . .. The principle [of recovery by a third party] ... is based on the fact that it provides a remedy to the third party "where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated person who has caused it" . .. If the contractual arrangements between the parties in fact provide the third party with a direct remedy against the wrongdoer the whole rationale of the rule disappears."

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O'Keeffe v Ryanair [2003]

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(full facts referred to in chapter on Consideration);

Where the court held that the plaintff was entitled to recover losses on behalf of herself and her husband even though the prize of free flights applied to "a companion" and she was not married at the time she won the prize.

This was done on the basis of the Status of Married Women's Act 1957.

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Reform

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The Law Reform Commission published a Report on Privity of Contract and Third Party Rights, (LRC 88 - 2008), which has made a number of proposals for legislative reform in this area. In particular, the LRC recommended that the privity rule be reforme? to allow third parties to enforce rights under contracts made for their benefit. In particular, the LRC outlined the following reasons for reform of the rule:

(1) The intentions of the parties - the privity rule does not give effect to the intentions of the parties to the contract who wish to benefit third parties.

(2) The third party who suffers a loss cannot sue, while the contracting party who can sue has not suffered a loss - the rule leads to this bizarre situation.

(3) Injustice to the third party - a third party may not be able to sue under the contract causing injustice as a result.

(4) The effect of the exceptions to the privity rule -- increasing_ reliance_ will be placed on the exceptions which have been developed in a piecemeal fashion causing further confusion.

(5) Commercial inconvenience and expense - in order to circumvent the pnvity rule practitioners are drafting even more complex documentation leading to greater inconvenience and expense.

(6) Commercial warranties - the artificial creation of such warranties is an example of the inconvenience that is caused.

(7) Software licences - if third party rights were recognised it would mean that the producers of such software could rely on the contract entered into between the retailer and the consumer.

(8) Insurance contracts for the benefit of third parties - while there is statutory recognition of certain types of insurance contracts this is not true of all.

(9) Recovery in tort for pure economic loss - because of the rigidity of contract law in refusing to recognise such rights, tort law has expanded into this area when it is probably not appropriate for it to do so.

(10) Risk allocation and exemption clauses - recognition of third party rights would make risk allocation less complex.

(11) Comparative analysis- most other jurisdictions already recognise such rights.

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McEvoy v Belfast Banking [1935] AC 24

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However, the House of Lords held that the payment was made on behalf of the father and another (i.e. the son) and therefore the contract is entitled to be enforced by both.