Contract - Privity

Front 1

Three main points of privity

Back 1

1. At common law, a third party cannot enforce a contract for their benefit

2. The Contracts (Rights of Third Parties) Act 1999 allows a third party to sue the promisor directly

3. The capacity of the promisee to obtain remedies comes under the common law

Front 2

Imposing obligations on third parties is undesirable

Back 2

Darlington Borough Council v Wiltshier, Steyn LJ

Front 3

Principles of privity (2)

Back 3

1. Only parties to contract can enjoy its benefits and burdens

2. A third party cannot receive rights or obligations

Front 4

Origins of privity

Back 4

Thirteenth century (whilst continental law went in the other direction)

Front 5

Four main arguments in favour of privity

Back 5

1. Third party not party to contract (circular)

2. No consideration

3. No promise made to the third party

4. Giving the third party rights will erode the freedom of the other two parties to vary the contract

Front 6

Academics on privity (5)

Back 6

1. Smith - contractual burdens are onerous and should not be lightly imposed

2. Collins - indeterminate liability weightiest argument in its favour

3. Kincaid: rights have corresponding obligations, there must be a personal link between right and duty

4. Kincaid: privity is a corollary of that, as much as a rule

5. Kincaid: must be consideration, since Eastwood v Kenyoon even the strongest intention to be bound has been actionable without it

Front 7

Traditional case on privity

Back 7

1. Tweddle v Atkinson

2. Promise by father and father-in-law to pay money to a son

3. Son could not sue when neither paid because he was not privy to the furnishing of consideration

Front 8

Subsequent case on privity (4)

Back 8

1. Dunlop Pneumatic Tyre v Selfridge

2. Viscount Haldane: 'fundamental' principle

3. Only a person party to a contract can sue

4. Two exceptions - trusts and agency

Front 9

Measured judicial criticism of privity (5)

Back 9

1. Lord Goff, Alfred McAlpine Construction v Panatown

2. Privity is rational in a doctrine based on consideration

3. But it is commercially unsound

4. Parties intend to confer benefits

5. Common law simply devised exceptions

Front 10

Ferocious judicial criticism of privity (4)

Back 10

1. Steyn LJ, Darlington Borough Councilv Wiltshier

2. 3rd party rights simple and straightforward, axiomatic

3. Expectations should be given effect

4. Rule was barely tolerable in Victorian England

Front 11

First exception to privity (8)

Back 11

1. Collateral contract between A and X

2. Oral contract (often unilateral) basis for written contract

3. Shanklin Pier v Detel Products

4. Claimants selected paint then employed contractors to paint pier

5. They sued paint company directly

6. Collateral contract found from paint company to claimants

7. This was an oral contract on which written contract was based

8. Consideration was claimants' hiring of contractors

Front 12

First exclusion clause case (5)

Back 12

1. Scruttons v Midland Silicones

2. Stevedores tried to rely on limitation clause in original charter-party

3. House of Lords: nothing expressly or impliedly extended limitation clause to them

4. Lord Denning, dissenting: law of bailment applied instead

5. Lord Reid reluctantly agreed but set up escape route

Front 13

Lord Reid's four-stage escape route in Scruttons v Midland Silicones (5)

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1. Clause clearly covered stevedores

2. Clause set out carrier was agent for stevedores

3. Carrier authorised by stevedores to act as agent

4. Stevedores provide consideration

5. This was applied in The Eurymedon

Front 14

Himalaya clause

Back 14

Clause for the benefit of a third party

Front 15

Successful application of Lord Reid's dictum (9)

Back 15

1. The Eurymedon

2. Himalaya clause limiting liability to a year

3. Stevedores damages the cargo

5. 3-2 - stevedores shielded by clause

6. Unilateral contract from shipper to stevedores, carrier was agent, performing the unloading was consideration

7. Note that in the Makutai it was seen as a bilateral contract

8. Lord Wilberforce: courts should be practical even if facts did not fit offer and acceptance

9: Viscount Dilhorne, dissenting, should not 'save negligent people from the consequences of their negligence'

Front 16

Second Himalaya case (4)

Back 16

1. The Makhutai

2. Third party merchant tried to rely on exclusive Indonesian jurisdiction clause against promisor ship-owner

3. Privy Council rejected this: Himalaya clause is purely beneficial, this is a two-way street with obligations for both

4. Lord Goff: pendulum of opinion had swung back and form, time for courts to develop a proper exception to privity

Front 17

Second exception to privity (7)

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1. Tort

2. Junior Books v Veitichi Corp

3. Two-stage Anns v Merton test

4. Lord Roskill rejected 'somewhat capricious judicial determination' between tort and contract

5. White v Jones

6. Lord Goff accepted contractual solution desirable, but impossible

7. 'practical justice' required tort fill the gap

Front 18

Third exception to privity

Back 18

Third party as co-promisee, extending consideration jointly

Front 19

Fourth exception to privity (2)

Back 19

1. Agency (technically not an exception)

2. Agent need not tell promisor that he is acting as agent ('undisclosed principal' doctrine)

Front 20

Fifth exception to privity (3)

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1. Trust of a promise

2. Promisee is also trustee of beneficiary third party

3. Following Re Schebsman they have to be explicitly created

Front 21

Sixth exception to privity (3)

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1. Assignment

2. Promisee may assign contractual rights to third party

3. Third party takes title subject to any defects and defences

Front 22

Damages principle in privity (4)

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1. Promisee can only sue for their own loss, not vicariously

2. Third party cannot sue for their loss

3. Promisee has right to sue but not lost

4. Lord Millett, Alfred McAlpine Construction v Panatown - 'only the person who has suffered the loss is entitled to have it made good by compensation'

Front 23

Damages exception (3)

Back 23

1. The Albazero

2. Lord Millett: only true exception

3. Unberath: many pockets of exceptions, including agency and bailment

Front 24

The Albazero (8)

Back 24

1. Ship sank containing oil

2. Title of the oil had already passed to the buyers

3. Buyers failed to sue ship-owners under bill of lading but ran out of time

4. Lord Diplock: promisee can sue if...

5. 1. Proprietary interests in goods transferred

6. 2. Both parties contemplate this

7.3. Both parties intend for promisee to be able to recover on behalf of X

8. Failed on third point - no intention due to bill of lading action

Front 25

Specific performance 3rd party case (7)

Back 25

1. Beswick v Beswick

2. Business transferred for regular payments

3. Promisee died, wife sued as administratrix and third party

4. Could not sue for specific performance as X, could as estate

5. Accident of being both promisee and X

6. Lord Denning MR in CoA: should sue as promisee and hold on trust as X

7: Lords disagreed, criticised privity, did not overrule

Front 26

Albazero into property (3)

Back 26

1. St Martins Property Corporation v SirRobert McAlpine

2. Lord Griffiths also added that promisee was recovering for their own loss - the loss of breach

3. So broad ground (own loss) and narrow ground (Albazero)

Front 27

Major Albazero property case (7)

Back 27

1. Alfred McAlpine Construction v Panatown

2. Pre-1999 Act

3. Deed between promisor and third party

4. Narrow ground Albazero approach taken - so no claim due to direct right of action through deed

5. Majority gave only nominal damages, no broad ground

6. Burrows: deed had inferior rights with duty of care, not strict liability, and should not have extinguished claim

7. Dissenting Lords Goff and Millett: broad ground, promisee should have recovered for breach of performance interest

Front 28

Criticism of broad ground approach (4)

Back 28

1. Unberath: distorts loss to mean breach of contract itself

2. Promisee pockets damages

3. Lord Millett in Panatown suggested these should be on trust

4. Lord B-W in Panatown: fear of double-compensation so no broad ground

Front 29

In favour of broad ground approach (2)

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1. McKendrick: it reflects not all contracts made for financial gain

2. Lord Goff in Panatown: philanthropist employing builder to fix village hall

Front 30

Family exception (2)

Back 30

1. Jackson v Horizon Holidays

2. Promisee could claim damages for the whole family

Front 31

Law Commission's criticisms (6)

Back 31

1. Thwarted intentions

2. Injustice to third parties

3. Already exceptions

4. Rule is complex, artificial, and uncertain

5. Clashes with EU

6. Causes commercial difficulties

Front 32

Stevens on the Act (5)

Back 32

1. Intentions change - intentions of promisor and promisee are frozen

2. Should not sympathise with someone who relies on an unenforceable contract with someone else

3. Should not blindly follow other legal systems

4. Act would have little effect - too many exceptions, yet that was why privity was abolished in the first place

5. Would rather promisee got more powers to enforce bargain

Front 33

Criticisms of 1999 Act (5)

Back 33

1. Mitchell: based on intentions of parties, yet 3rd party rights prevent variation of contract, contradiction

2. Smith: no sound theoretical basis, should have tackled distinct problems head on

3. Kincaid: pragmatism before conceptual clarity

4. Rights could be bestowed before, and this is why builders lobbied for exceptions

5. Stevens: why not create separate contracts

Front 34

Function of Act (3)

Back 34

1. Third party can enforce a term of the contract that expressly provides so, or if it purports to confer a benefit

2. Third party must be expressly identified

3. Any limitation clauses apply

Front 35

Main exceptions to Act (4)

Back 35

1. Carriage of goods by sea (6(5a))

2. Carriage of goods by land or air subject to international convention (6(5b))

3. Standard practice to be excluded from construction contrracts

4. Does not affect obligations on third parties

Front 36

First case on the Act (4)

Back 36

1. Nissan Shipping v Cleaves

2. Arbitration clauses came within 1(1b)

3. 1(2) only overrules 1(1)

4. Express identification under 1(2) is not a requirement for 1(1)

Front 37

Second case on the Act (3)

Back 37

1. Dolphin Maritime v Sveriges

2. Could pay either promisee or promisee's agent - did not matter if just promisee, as promisee has the choice

3. Only if expressly agree to pay promisee's agent must that occur

Front 38

Third case on the Act (3)

Back 38

1. White v Jones

2. Law Com: performance of legal services was for a benefit of client, so no 1(1b)

3. Unless defined for benefit of legatees, then 1(1b)

Front 39

Last-minute addition to the Act (2)

Back 39

1. Arbitration agreements (Lord Wilberforce intervention)

2. Section 8: third party will sue promisor through arbitration clause if there is one

Front 40

Three exceptions to no obligations on third parties (3)

Back 40

1. Tort to encourage another to breach a contract

2. Bailment on terms

3. Purchaser of land or goods

Front 41

Purchaser of land or goods (3)

Back 41

1. Wade: cannot extend far beyond real property

2. Well-established in land since Tulk v Moxhay

3. Port Line v Ben Line Steamers

Front 42

Port Line v Ben Line Steamers (5)

Back 42

1. Silver charters to C

2. D bought ship on condition to re-charter it to C

3. Original contract terminated on requisition, new contract did not

4. Court found that original term did not bind D and contract did not terminate

5. Case law to the contrary overruled - or only applied if they knew, which they did not