Privity Of Contract

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Purpose and functions of the Contracts Privity Act

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The purpose is to allow an intended beneficiary of contracts between others to enforce a benefit conferred by the contract, yet not interfere with autonomy of the parties. The 3rd-party benefit is called jus quaesitum tertio.

section 2 - Meaning of benefit: "advantage, immunity, limitation, or other qualification, obligation to which a person is subject" - may be without economic value (Coote) or a release from liability Allison v KPMG Peat Marwick.

section 4 - A beneficiary must be "designated by name, description, or reference to a class, who is not a party to the... contract... unless [specified unenforceable]. (Sebenza Investments v South Cant.)"

section 6 - A misrepresented contract cannot be sued upon, though Pragma Holdings says this is unfair for third parties.

section 14(1) - a) does not prevent any party from acquiring any right or remedy, (d) principles of agency can be applied, and (e) possible alternative remedies for third parties by way of trust are introduced.

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Burden of Proof for being a Beneficiary

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Nisshin Shipping - Burden lies on the party claiming benefit. One established they are "sufficiently designated", other party must argue otherwise. Inferred designation by implication are construed strictly.

Rattrays - Nominees come under s4, as their designation is always jointly by the contract and the party, and so should be allowed. Does not matter if not chosen at the time of contract. It accords the purpose of the Act.

Gartside v Sheffield - A person died before signing their will. Their son was not an implied nominee, and thus a beneficiary as the contract was not finished.

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Designated on Beneficiary

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Cross v Aurora Group - "designation is a strong, positive word... more than a mere contemplation or possibility." Being named is sufficient (Nightingale v Barfoot), but also needs evidence enforceability was contemplated. Field v Fitton described it as "sufficiently defined with particularity", a more liberal view in Rattrays was applied allowing for "X's Nominee".

Laidlaw v Parsonage - Held that did not matter whether nominee was described in the section of the contract describing benefits, and did not matter if nomination was revocable up till signing of contract.

Rivette v Attrax Group - The act of nomination not diminish contractual rights (Venning K).

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Beneficiaries not yet in existence

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Mckinlay Hendry Ltd v Tonkin & Taylor - Following Rattrays and Tipping J, a beneficiary need not be in existence yet. They only need to be clear in the intention of the parties. s4 applies when made FOR a third party, not ON BEHALF on them (Speedy v Nylex).

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Contracting Parties Cancelling a Contract

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section 5 provides that parties may be estopped from cancelling a contract of benefit where 1) the beneficiary's position has been "materially altered by reliance" on that promise, 2) they have obtained judgement on the promise. It may not "be varied or discharged without the consent" of beneficiary.

section 6 - parties may contract out of section five.

section 7 - parties may obtain discharge through the courts in "whatever circumstances they see fit" (Minister of Trade and Industry v NZ Steel). If beneficiary has been injuriously affected, compensation is necessary.

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Remedies for the Promisee and Third Parties

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Beswick v Beswick - Third parties may acquire specific performance (as in Rattrays). You cannot sue for the loss of a third party and recover as such. You have to show you were PERSONALLY affected. Damages are recoverable where promisor's failure to pay damages a third party.

Snelling v John G Snelling - Allows for remedy by court declaration of the contract.

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Exclusion Clauses and Third Parties

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Scruttons v Midland Silicones - Lord Reid ruled coming under an exclusion clause requires showing a CONTRACTUAL NEXUS with the plaintiff. However agency applies if 1) makes explicit reference, 2) party contracts as agent for those seeking, 3) they have the authority (or later ratification), and 4) consideration is overcome.

The Eurymedom - wider approach than Scruttons. A contract placing all "agents and servants" under an exemption clause may be viewed as a UNILATERAL offer to perform. Mahkutai is one example. However, Adler v Dickson held a servant is not under an exemption unless specified. This APPLIES where CPA DOES NOT - as technically they aren't a third party.

The New York Star - The Eurymedon principle only applies when the word being done was at request of the employer, and nothing more.

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Defenses to Actions in Tort

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Elder Dempster & Co Ltd v Paterson Zochonis - Vicarious immunity is where agents/servants under a contract containing an exemption clause cannot be sued as independent people, but claim protection of employers.

Sheehan v Watson - This is to do with various immunity where C, B's agent, substantially damages A. Agents are entitled to their employer's limitation clause, and considered the same reasoning for benefits under the CPA.

Osborne v London - This is assumption of risk (volenti non fit injuria) where a party voluntarily assumed liability. It must be proved they had full knowledge of risks and waived rights to damages. Then the third party can claim this defence.

Smith v Eric S Bush - This deals with non-contractual notice, such as a disclaimer for accuracy of mortgage report at top of an application form. Exemption for an agent of negligence. Rolls Royce affirmed this.

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Consumer Guarantees Act

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s6/s25(a) - Stephen Todd clarifies that buyers are limited to action against the seller for breach of a warranty of quality, and gives action against the manufacturer as well. Applies to consumer NOT COMMERCIAL cases.

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Imposition of Contractual Liabilities on Third Parties

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Formby v Baker - This case deals with restictive covenants, which can be enforced against third parties who later buy the property in order to retain a certain lifestyle for the land and city (as in the PLA 2007).

Morris v CW Martin & Sons - Normally and exclusion clause couldn't bind a third party. However, if they EXPRESS CONSENT by conduct then it may. For example a subcontractor is unlike to do a job unless subject to limitation.

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The Summary of all these Points

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Summary:

1. It used to be that if you are not privy to a contract, you couldn’t sue. This led to injustice. The Contracts Privity Act allows sufficiently designated third parties to sue.

2. Nominees are sufficiently designated, but it must be unequivocally provable.

3. A contract cannot be cancelled without permission of an affected third party, and they are entitled to damages in certain circumstances.

4. Third parties may sue builders for defects in certain circumstances - [see below].

5. Tort actions may be avoided by assumption of risk, non-contractual notice, and exclusion clauses they are entitled to.

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Exceptions to Privity (The Albazero, Linden Gardens, Alfred McAlpine, Darlington, Coulls v Bagot)

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The Albazero - the promisor of goods lost at sea could recover substantial damages from the carrier on behalf of the other party as it is to be treated as if the promisor entered into the contract for the benefit of the promisee. even though ownership of the goods had then passed to the promisee, who would have no action against the third party (except in tort).

Linden Gardens - you cannot sue the builder unless designated as a beneficiary, unless it's known it will be acquired by a third party - then B can sue for A's loss, even if B acted wrongly in transferring. They may also if the contract extends to subsequent purchasers.

Alfred McAlpine - The Albazero exception did not apply where the third party itself had acquired contractual rights against the carrier (either under the CPA or contract). The owner had an independent contractual right against the builder. There was no “black hole” where neither owner nor third party could sue.

Darlington - An assignee can never sue for more than assignor could have done.

Coulls v Bagot - It is also arguable that the promisee suffered a loss on the basis of expectation of benefit to the third party, owing a duty or love for the third party.