Privity

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Privity

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A contracts with B to do X. C who is not a party to the contract cannot take an action for breach of contract where A fails to perform X, even where X is for the benefit of C.

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Tweddle v Atkinson (1861)

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Atkinson was unable to enforce an agreement made between his father and his prospective father-in-law that money would be paid to the son on his getting married. In holding the son could not enforce the contract, great emphasis was placed on the fact that he did not provide consideration.

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Dunlop v Selfridge [1915]

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Case concerned two contracts. Contract A was between the plaintiff and a distributor. Distributor agreed that it would not sell Dunlop’s products at undervalue. Contract B - distributor - Selfridge. Contract contained a clause in which Selfridge agreed to pay penalty to Dunlop for tyres sold at undervalue. Selfridge sold undervalue but refused to pay the penalty. The Court held that Dunlop was unable to enforce contract B as it was only a party to Contract A.

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Rationale

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Doctrine of Consideration

Equity and Fairness

Freedom of contract

Floodgates

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Exceptions

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Three parties a principal (P) who appoints an agent (a) who enters into a contract with a third party (T). Applying the doctrine of privity only A and T but not P should be able to enforce the contract. However, when an agent is properly appointed in the eyes of the law it is as though P is contracting directly with T and A drops out of the picture altogether.

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Eurymeydon [1975]

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Owner of the drill (O), shipper of drill (S), and the stevedore (U). In a contract to which only the owner and shipper were a party there was exclusion clause exempting the shipper or any of its “employees, agents, servants or independent contractors” from liability. Claim was made by the owner. Stevedores damaged the drill while unloading it and they sought to rely on exemption clause. As it was not a party to the contract between O and S the doctrine of privity would prevent it from doing so. The stevedores sought to get around this by arguing that the shippers were stevedores agent.

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Rational for decision

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(1) Intention that third party benefit: Did the relevant clause make clear that the parties intended the stevedores to benefit from it? From the language used it was clear that the shippers were not contracting for their own benefit only. The stevedores qualified as independent contractors.

(2) One party contracting as agent for third party: Did the contract make clear that the shippers were contracting as agent for the stevedores? The Privy Council did not engage in much discussion on this point. While there was no express agency relationship the Court was willing to imply one on the grounds that the shipping company was a subsidiary of the stevedore company (so they had a close relationship) and the stevedores frequently unloaded goods for the shippers.

(3) Authority: Did the shippers have authority from the stevedore company be it express or implied to act as its agent or if it didn’t have this authority at the time the contract was made did the stevedores ratify / approve the contract that the stevedores made as their agents after the event? The Court concluded that this requirement was satisfied.

(4) Consideration:As we discussed in the earlier lectures on consideration a majority of thePrivy Council, taking what it described as a commercially sensible approach tothe concept of consideration, found that the performance of the unloadingservice for the benefit of O despite the fact that U was already bound to dothis under a contract with S was sufficient consideration.

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Hearn and Matchroom Boxingv Collins (1998)

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Eurymedon was cited with approval

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Statutory Exceptions

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The legislature has recognised that in certain situations theapplication of the doctrine of privity could lead to injustice and unfairnessand has intervened so as to allow persons who are not parties to certaincontracts to nevertheless enforce the terms of those contracts

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(a) MarriedWomen’s Status Act, 1957

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Section 7: Life assurance policy / endowment is expressly to benefit the insured’s wife and / or children (including non-marital and adopted children) the proceeds will be held on trust for those persons.

Section 8: Where a contract expressly confers a benefit on the spouse or children of a party then they too can enforce that contract.

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(b) Section 76(1) Road Traffic Act, 1961

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Provides limited recourse for a driver against the insurer of the other driver

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(c) Package Holidays Act, 1995

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Remedies for those who have had or were to have the benefit of a package holiday but were not the person or persons who actually booked the holiday.

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Assignment

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Assignment is a means by which one party to a contract transfers hisrights under it to another external party and that party can step into theshoes of the contracting party and enforce those rights.

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Issues with Assignment

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(1) Many commercial contracts contain a prohibition on assignment. If a party were to seek to transfer his rights under such a contract he would be in breach of it.

(2) Contracts in which the parties are dependent upon the skill and reputation of another are not assignable. In other words it is only those contracts where the identity of the person performing is irrelevant that can be assigned. EG: agreement by an author to write a book for a publisher is personal as between those parties and was not assignable without consent.

(3) While you can assign contractual rights without consent you cannot transfer contractual obligations without the consent of all the parties involved. This is called a novation.

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Tort

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From the perspective of the third party to the contract the rules of tort are not a complete solution to the problem of privity:

(1) The law of tort has developed special rules around the recovery of damage for economic loss.

(2) Claims for personal injury in negligence are subject to a shorter limitation period than is the case with claims for personal injury owing to a breach of contract.

(3) The“reasonable standard of care” in tort may be more generic than the detailed allocation of responsibility which can be provided for in a contract.

(4) Tort is a useful way of enforcing rights under the contract but it cannot serve as a defence. For example a contract may state that a party must act carefully but the contract also contains an exclusion clause. If the third party wanted to enforce the obligation to act carefully then tort is a good substitute to the contract. However, if the third party wants the benefit of the exclusion clause there is no substitute in the law of tort that he can draw on.

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Collateral Contracts

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One way around the privity doctrine is to create a separate contract which exists alongside the main contract but in which the party external to the main contract is included. Collateral warranties are one of the most common ways in which lawyers get around the doctrine of privity.

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Shanklin Pier v DetelProducts Limited [1951]

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Defendant promised the plaintiff that their brand of paint will last for seven years. Contract A- The plaintiff hired a contractor to paint a pier. Contract B- The contractor agreed with the defendant to purchase its brand of paint. It was a term of this contract that the paint would last for 7 years. The paint only lasted three months. As it was not a party to contract B the plaintiff could not enforce it. However, in light of the circumstances the Court found that there was a third contract, Contract C between plaintiff and defendant the consideration for which was the action of the plaintiff in instructing the contractor to deal with the plaintiff. It was also a term of this Contract C that the paint would last seven years. The collateral contract must have consideration or be under seal.

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Trusts

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Inthe early case law there was no requirement that the parties indicate or intendthat one of them was to hold contractual rights on trust for a thirdparty. The only question was whetherthere was a benefit under that contract to be conferred on the third party andwhether it necessary from the perspective of justice and fairness to imply atrust relationship in order to preserve that benefit.

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Cadbury Ireland Ltd. vKerry Co-Op and An Bord Bainne [1982]

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Two defendants were a creamery and a statutory body under the control of the Minister for Agriculture. The creamery acquired certain other creameries from the statutory body, on terms that their supply of milk to Cadburys would not be cut off. Cadburys was not a party to this contract. Years later, creamery sought to reduce the supply of milk to Cadburys. One of the issues presented was whether Cadburys could rely on the terms of the contract between the statutory body and the creamery. It was held by Barrington J. that they could not.

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Freehold Covenants

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A covenant is a promise to another to do or to refrain from doing something in relation to one’s own land. The issue arises as to whether this covenant will be enforceable by the party who was to benefit from it where the original promisor transfers the land.

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A Principled Approach

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Canada

Adopted an approach whereby the doctrine of privity will not be followed where “the intention of the parties,fairness, business and insurance” suggest otherwise.

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REFORM

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2008 the LRC in its Report on Privity of Contract and Third Party Rights recommended reform of the privity rule by way of statute. A number of difficulties with the rule were pointed to, in particular:

(1) Contrary to the general principles of contract law it works contrary to the intentions of the parties where they contract for the benefit of a third party.

(2) Works injustice on the third party.

(3) Rule is subject to the various common law exceptions discussed above making it difficult to state the law with a high degree of certainty.

(4) Legal costs are wasted in a commercial context in putting in place methods forgetting around the privity rule. Significant reform of the rule has already taken place in the UK. Some of the key features of the new legislation proposed by the Commission are as follows:(1) A third party will be able to enforce the terms of a contract and rely on any exclusion clause etc. contained therein where a contract is expressly stated to be for his benefit and he is referred to in the contract by name or by reference to a class. The parties to a contract can expressly state that it won’t be for the benefit of third parties;

(2) A third party can rely on any remedy which the parties to the contract would have at their disposal but a party to the contract may also rely on any defence that he would have under the contract in an action by the third party; and

(3) Where a third party has indicated his assent to a contract the parties cannot change it without the third party’s consent.