Privity

Front 1

Tweddle v. Atkinson (1861)

Statement and critique of doctrine

Back 1

A couple were getting married. The father of the bride entered an agreement with the father of the groom that they would each pay the couple a sum of money. The father of the bride died without having paid. The father of the son also died so was unable to sue on the agreement. The groom made a claim against the executor of the will.
Held: The claim failed: The groom was not party to the agreement and the consideration did not move from him. Therefore he was not entitled to enforce the contract. His suit was not successful as it was held no stranger to the consideration can take advantage of a contract, although made for his benefit. It was left unanswered if the groom's father could have successfully sued the estate instead.

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Dunlop v Selfridge (1915)

Statement and critique of doctrine

Back 2

Established that an agreement for resale price maintenance was unenforceable as a matter of privity of contract

Dunlop, a tyre manufacturing company, made a contract with Dew, a trade purchaser, for tyres at a discounted price on condition that they would not resell the tyres at less than the listed price and that any reseller who wanted to buy them from Dew had to agree not to sell at the lower price either. Dew sold the tyres to Selfridge at the listed price and made Selfridge agree not to sell at a lower price either and that they would pay £5 in damages if they violated this agreement. Selfridge proceeded to sell the tires below the price he promised to sell them for. Dunlop brought action and was successful at trial but this was overturned by the Court of Appeal.

The Lords agree fundamentally with the decision of the Court of Appeal; there was no contract between Dunlop and Selfridge and therefore Dunlop cannot sue. There are a few fundamental principles of law underpinning this decision: a) the doctrine of privity, which states that only a party to a contract can sue in breach of the contract; b) the doctrine of consideration would require the promisee (Dunlop) to give consideration to Selfridge for the contract to be completed, and this did not occur as Dunlop did not give anything to Selfridge here (Selfridge made a promise to Dunlop to only sell at a certain price but it was gratuitous because Dunlop gave no consideration in return); c) the only way that a principal not named in a contract can be sued is if he acted as an agent on behalf of one of the parties privy to the contract. Selfridge was not an agent of Dew, therefore this does not apply in this case.

• Only parties to a contract can sue for a breach of the contract.
• The only exception to this rule is if a party named in the contract was acting as an agent of an unnamed party; in this case, the unnamed party can be sued.

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Trident General Insurance Co. Ltd. v. McNiece Bros. Proprietary Ltd. (1988)

Statement and critique of doctrine

Back 3

A company took out public liability insurance for construction work being carried out at the plant. The "assured" was stated to be contractors and sub-contractors. McN became a principal contractor for construction work being carried out at the plant. A worker injured at the site obtained judgement against McNiece who sought an indemnity under the policy. Trident denied liability. It is important to note that the decision in Trident had no clear ratio, and did not create a general exemption to the doctrine of privity in Australia.

Trident says there are 2 important principles:

• Only a party to a contract can sue under it
• Consideration must move from the promisee.

At least in relation to insurance policies, and almost certainly in relation to contract of indemnity generally, where the evidence is that third parties were in the contemplation of the principal, then those third parties can enforce the contract. That was the case here - Trident was liable.

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The Mahkutai (1996)

Statement and critique of doctrine

Back 4

The owners of the vessel M appealed against a decision setting aside an order granting a stay of proceedings issued in reliance upon an exclusive jurisdiction clause contained in a bill of lading between the ship's charterers and the cargo owners, who had issued a writ in respect of damage to the cargo. Although not party to the bill of lading, the shipowners sought to rely on a Himalaya clause in it stating that all "exceptions, limitations, provisions, conditions and liberties herein benefiting the carrier" expressly accrued to the benefit of agents and sub-contractors, or alternatively to rely on their status as bailees under bailment on terms principles. The extension contended for by the shipowners was in accordance with the exceptions to the doctrine of privity of contract recognised in some cases of carriage by sea, which granted the benefit of contractual terms to shipowners and stevedore.

It traced the development of Himalaya clauses as a device to accommodate various situations arising in the context of carriage of goods by sea where there was a commercial expectation that the benefit of certain terms of the contract of carriage should be made available to parties involved in the adventure who were not parties to the contract - primarily stevedores, but in some cases also shipowners relying on terms in charterers' bills of lading to exempt them from possible liability to cargo owners and consignees.It was not apparent that a jurisdiction clause should be included within the list of clauses from which a subcontractor should be allowed to benefit. 'Such a clause can be distinguished from terms such as exceptions and limitations in that it does not benefit only one party, but embodies a mutual agreement under which both parties agree with each other as to the relevant jurisdiction for the resolution of disputes. It is therefore a clause which creates mutual rights and obligations.' While the Himalaya clause in the contract in question referred to subcontractors enjoying the benefit of a 'provision' for the benefit of the carrier, this term must be interpreted eadem generis with exceptions and limitations. The function of a Himalaya clause was 'to prevent cargo owners from avoiding the effect of contractual defences available to the carrier by suing in tort persons who perform the contractual services on the carrier's behalf. To make available to such a person the benefit of an exclusive jurisdiction clause in the bill of lading contract does not contribute to the solution of that problem.' In addition, the purpose of a jurisdiction clause is usually to confer jurisdiction on a court in the place where the carrier carries on business. It is purely fortuitous if that court is also a convenient place for a subcontractor to litigate. Both the terms of the Himalaya clause and the policy it pursued therefore indicated that it was not intended to include the jurisdiction clause.

Front 5

Contracts (Rights of Third Parties) Act 1999

Back 5

The 1999 Act does not abolish the doctrine of privity of contract, but creates a very wide general exception to it by providing that a third party can sue upon a contract if the contract purports to confer a benefit on him. Cases such as Tweddle v. Atkinson would now therefore be decided differently and other cases, such as Beswick v. Beswick, would be decided in the same way but for different reasons. There are very few reported cases so far on the interpretation of the 1999 Act. This is in part the consequence of s. 1(2), which provides that the parties to a contract can indicate that it is not intended to benefit a third party. Clauses to this effect are commonly inserted into commercial contracts. (For an example, see The Parsons Corporation v. CV Scheepvaartonderneming Happy Ranger [2002] 1 All ER (Comm) 176, 181d).

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Nisshin Shipping Co. Ltd. v. Cleaves & Co. Ltd. [2003]

The Contracts (Rights of Third Parties) Act 1999

Back 6

Cleaves & Co Limited was a firm of chartering brokers. It acted as middleman for the deal between Nisshin Shipping Co Limited, the shipowner, and various charterers. Cleaves was not a party to any of contract. Nisshin expressly agreed to pay a commission to Cleaves. In each charterparty was an agreement between Nisshin and the charterer to arbitrate disputes. Nisshin subsequently declined to pay the commissions to Cleaves.
The court of Appeal held that Cleaves are entitled under s.1 of the CRTPA 1999 to the unpaid commissions.

(1) Was the respondent within section 1 of the 1999 Act?

(2) Could the broker enforce its rights at arbitration, under the charterparty clauses?

Front 7

R. Stevens, The Contracts (Rights of Third Parties) Act 1999, (2004) 120 L.Q.R. 292

Back 7

To Be Read

Front 8

Beswick v. Beswick [1966]

Action by the promisee

Back 8

Peter Beswick was a coal merchant. He agreed to sell his business to his nephew, the respondent, if he paid him a certain sum of money for as long as he lived, and then to pay his wife (the appellant) £5 per week for the rest of her life after he died. He died, and the nephew only paid his aunt once before stating that no contract existed between them. She was also the administratrix of her husband's will. Mrs. Beswick was unsuccessful at trial and successful at appeal, which John Joseph Beswick appealed.

The House of Lords decide that the aunt has no right to sue her nephew in her own capacity as she was not a party to the contract. This overturns Denning's findings in the lower court allowing third parties to sue for benefits that were guaranteed to them under a contract. However, in her capacity as the administratrix she is able to sue him for the specific performance of his promise that was made in the contract.

• Third parties cannot sue for breach of contract when they were not a party to the contract, even if they were named as a benefactor of the contract.
• Executors of wills can sue for specific performance of promises made in contracts with the deceased.

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Lloyd's v. Harper (1880)

Action by the promisee

Back 9

In May, 1863, a father, on the occasion of the admission of his son as an underwriting member of Lloyd's , addressed to the managing committee of that body a letter, by which he held himself responsible for all his son's engagements in that capacity. Lloyd's was then a voluntary association, governed by certain by-laws, under which a person once admitted a member could not be excluded from membership except in the event of his bankruptcy or insolvency. The association consisted of underwriting members, non-underwriting members, and subscribers. The practice of the underwriting members was to underwrite policies of marine insurance fur the benefit of various owners of property, both members of the association and outsiders, but the policies with outsiders could only be effected through the agency of insurance brokers who were either members of or subscribers to the association. The association as such incurred no liability on the policies underwritten by its members. In 1871 the society was incorporated by Act of Parliament, all the rights of the committee on behalf of the members being vested by the Act in the corporation. In 1876 the father died, and notice of his death was shortly afterwards given to Lloyd's . In 1878 the son became bankrupt, and thereupon ceased to be a member of Lloyd's.

Held, by the Court of Appeal, affirming the decision of Fry , J.:—

(1.) That the guarantee was not determined by the death of the father or by the notice of it, but that his estate was liable in respect of engagements contracted by the son after his death:

(2.) That the guarantee extended to all engagements contracted by the son as an underwriting member of Lloyd's , whether with members or withoutsiders:

(3.) That the committee of Lloyd's , and the corporation of Lloyd's as their successors, were trustees of the benefit of the guarantee for all the persons, whether members or outsiders, with whom the son had contracted engagements as an underwriting member, and that the corporation could maintain an action to enforce the guarantee against the father's estate for the benefit of all those persons; on the ground, as to the outsiders, that the brokers, through whom the son's engagements with them were contracted, were trustees for their principals of the right which they themselves *291 had to call on their own agents, Lloyd's , to enforce the guarantee for their benefit.

A guarantee the consideration for which is given once for all cannot be determined by the guarantor, and does not cease on his death.

Whether a guarantee for future advances, which the party guaranteed is not bound to make, is not determinable by the guarantor, and whether it does not cease on notice of his death, quære .

THIS was an action to enforce a guarantee against the executors of the guarantor.

Front 10

Jackson v. Horizon Holidays (1975)

Action by the promisee

Back 10

Mr Jackson booked a 28 day holiday in Ceylon for himself and his family through Horizon Holidays. The hotel turned out to be unsatisfactory for various reasons relating to cleanliness and provision of services. The trial judge made an award for the disappointment suffered by Mr Jackson, but stated he could not take into account the disappointment suffered by his wife and children since they were not party to the contract. Mr Jackson appealed.

Held: Mr Jackson was able to recover for the disappointment suffered by his wife and children. This amounts to an exception to the rule of privity of contract based on the decision in Beswick v Beswick (1968) AC 88. Lord Denning MR held that Mr Jackson could recover damages of £600 for defective performance and £500 for disappointment or ‘mental distress’ for himself and his family. Lord Denning MR also held that the family might even, if desired, be joined as plaintiffs, that the initial award of £1100 was ‘about right’, and opined that other instances where a good claim may exist include a vicar contracting for a coach trip for the choir and a host booking a restaurant dinner for himself and his friends.

Front 11

Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd. AND JOINT WITH St. Martins Property Corp. Ltd. v. Sir Robert McAlpine & Sons Ltd. [1993]

Action by the promisee

Back 11

Stock Conversions Ltd, the lessee of a building, used a JCT standard form contract to hire Lenesta to remove asbestos. Clause 17(1) said "The employer shall not without written consent of the contractor assign this contract." Lenesta subcontracted another firm to do the job. More asbestos was soon found, and a third business was contracted. Then Stock Conversions Ltd assigned the building lease to Linden Gardens. Linden Gardens sued the contractors for negligence and breach of contract. The lessee assigned its right of action to Linden Gardens, and more asbestos was found, without Lenesta ever having consented. The Court of Appeal found the assignment was effective. Lenesta appealed.

In a second joined case, St Martin's Property Corp Ltd had been granted a 150 year lease on a site from a council where they began a shop development, and in 1974 used the JCT standard contract with the same clause 17 to hire Sir Robert McAlpine as a builder. They assigned their interest and the benefits of the contracts to another company, without Sir Robert McAlpine Ltd's consent. Then in 1981 it was found that the building work was defective, and remedial work would cost £800,000. The Court of Appeal by a majority held the assignment was invalid but that St Martin's Property Corp Ltd was entitled to damages.

The House of Lords held that a true construction of clause 17(1) prohibited assignment without consent and that since a party to such a contract might have a genuine commercial interest in ensuring that contractual relations with the party he selected were preserved, there was no reason for holding the contractual prohibition on assignment as being contrary to public policy.

In the second case because the development was, to the knowledge of the parties, likely to be occupied or purchased by third parties, damage to a subsequent owner was foreseeable. Because of the specific contractual provision that rights of action were not assignable without the defendants' consent, the parties could properly be treated as having entered into the contract on the basis that the first plaintiffs would be entitled to enforce against the defendants contractual rights on behalf of those third parties who would suffer from defective performance of the contract but were unable to acquire rights under it. Accordingly, the first plaintiffs were entitled to substantial damages for any breaches of the contract by the defendants.

Lord Browne-Wilkinson adapted the concept of Lord Diplock in The Albazero whereby goods expected to be passed through several hands might give a right to the third parties to sue the original seller for defects.

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Darlington BC v. Wiltshier Northern Ltd. [1995]

Action by the promisee

Back 12

In order lawfully to avoid the financial constraints of the Local Government Act 1972, G acted as financier to P council in connection with the construction of a recreational centre. G entered into building contracts with W, a construction company, for the benefit of P. Pursuant to a collateral agreement entered into with P, G assigned to P all rights and causes of action against W to which G was entitled under the contracts. In an action brought by P against W for breaches of the contracts, the judge held on a preliminary issue that P as assignee was not entitled to claim damages other than nominal damages. P appealed against the judge's decision.

Held, allowing the appeal, that (1) since both parties were aware that the building contracts were entered into for the benefit of P and it was foreseeable that damage caused by a breach of the contracts would cause loss to P, P, as assignee, could claim substantial damages for loss caused by W's breaches of the contracts, and the damages should be assessed on the normal basis as if P had been the employer under the contracts (Dunlop v Lambert 7 E.R. 824, Linden Gardens Trust v Lenesta Sludge Disposals [1994] A.C. 85 applied).