Law of Contract Privity of Contract/Third Party Rights.

Law of Law of ContractContract

Privity of Privity of Contract/Third Party Contract/Third Party

RightsRights

Third party rightsThird party rights

Doctrine of Privity of Doctrine of Privity of ContractContract

1) Only a party to a 1) Only a party to a contract can contract can be sued on be sued on a contracta contract

2) Only a party to a 2) Only a party to a contract can contract can sue on a sue on a contractcontract

Third party rightsThird party rights

1)1) Common law rules & Common law rules & exceptionsexceptions

2)2) Common law Common law amended byamended by

Contracts (rights of third Contracts (rights of third parties) parties) Act 1999Act 1999

Third party rightsThird party rightsTwo general common law Two general common law

rules of rules of doctrinedoctrine

1) 1) A 3rd party cannot be A 3rd party cannot be subjected to a subjected to a burdenburden by by

a a contractcontract

2)2) A person who was not A person who was not party party to a contract could to a contract could not sue upon not sue upon the contract, the contract, in order to obtain in order to obtain the the performance, andperformance, and benefit benefit from it. from it.

(even if it was intended to (even if it was intended to benefit him)benefit him)

No privity to be suedNo privity to be suedDunlop v Selfridge (1915)Dunlop v Selfridge (1915)

Facts : Dunlop contracted Facts : Dunlop contracted with Dew & with Dew & Co and at their Co and at their request Dew & Co, had request Dew & Co, had placed a placed a minimum sale price in their minimum sale price in their

contract with Selfridge.contract with Selfridge.

Selfridge sold some tyres Selfridge sold some tyres below the below the minimum price.minimum price.

Held : Dunlop cannot sue Held : Dunlop cannot sue selfridge as selfridge as they were not they were not party to the contract party to the contract between Dunlop and Dew.between Dunlop and Dew.

No privity to sueNo privity to sueTweedle v Atkinson (1861)Tweedle v Atkinson (1861)

Facts : The fathers of married Facts : The fathers of married couple couple agreed in writing that agreed in writing that both should pay both should pay money to the money to the husband, adding also that husband, adding also that the the husband should have the power husband should have the power to to sue them for the respective sue them for the respective sums.sums.

Held : The husbands suit was Held : The husbands suit was dismissed as he had dismissed as he had

no privity to sue in no privity to sue in the contract.the contract.

No privity to sueNo privity to sueBeswick v Beswick (1968)Beswick v Beswick (1968)Facts : Peter Beswick sold his Facts : Peter Beswick sold his

coal coal business to his business to his nephew John Beswick, in nephew John Beswick, in return return for a promise to pay £6 10s a week to for a promise to pay £6 10s a week to

Peter Beswick for the rest of his Peter Beswick for the rest of his life and life and thereafter thereafter ££ 5 a week to 5 a week to Peter Bewick’s wife Peter Bewick’s wife for the rest of for the rest of his his life. John stopped paying life. John stopped paying his his Uncle’s wife upon his uncle’s death.Uncle’s wife upon his uncle’s death.

Held : Mrs Beswick cannot sue in Held : Mrs Beswick cannot sue in her her personal capacity as she had personal capacity as she had no privity to the no privity to the contract.contract.

Privity-Statutory Privity-Statutory exceptionexception

The rule of the doctrine that The rule of the doctrine that prohibits the conferring of benefits prohibits the conferring of benefits to a third party via a contract that to a third party via a contract that he has no privity to has been he has no privity to has been amended by statute:amended by statute:

Contracts (Rights of 3rd Contracts (Rights of 3rd parties Act 1999)parties Act 1999)

Harsh rule-common law Harsh rule-common law exceptionsexceptions

If Privity was inflexibily applied it If Privity was inflexibily applied it would cause considerable injustice would cause considerable injustice and inconvenience :and inconvenience :

Common law exceptions :Common law exceptions :

1)1) Collateral ContractsCollateral Contracts

2) 2) AgencyAgency

3)3) TrustsTrusts

4)4) Restrictive CovenantsRestrictive Covenants

5)5) StatutesStatutes

Collateral ContractsCollateral ContractsA contract between two parties A contract between two parties may be may be

accompanied by a collateral accompanied by a collateral contract between contract between

one of them(either the promisor or one of them(either the promisor or the the

promisee) and a third personpromisee) and a third person relating to the relating to the

same subject matter.same subject matter.

Collateral ContractsCollateral Contracts

Shanklin Pier v Detel Products Shanklin Pier v Detel Products [1951][1951]Facts : The Plaintiff’s had Facts : The Plaintiff’s had employed contractors to paint a employed contractors to paint a pier. They told them to buy paint pier. They told them to buy paint made by the defendants. The made by the defendants. The defendants had told them that the defendants had told them that the paint would last for seven years. It paint would last for seven years. It only lasted three months.only lasted three months.

Held : The court decided that the Held : The court decided that the plaintiffs could sue the defendants plaintiffs could sue the defendants on the collateral contract.on the collateral contract.

AgencyAgencyScruttons Ltd v Midland Silicones Scruttons Ltd v Midland Silicones Ltd [1962]Ltd [1962]Facts Facts : The claimants who were the owners : The claimants who were the owners of a drum of chemicals entered into a of a drum of chemicals entered into a contract with a firm of shippers for the contract with a firm of shippers for the transportation of the drum. Under the transportation of the drum. Under the contract the shippers limited their liability to contract the shippers limited their liability to the claimants to £500 per package.the claimants to £500 per package.

Stevedores who were employed by the Stevedores who were employed by the carriers to offload the drums negligently carriers to offload the drums negligently dropped it.dropped it.

The claimants brought an action in tort The claimants brought an action in tort against the stevedores.against the stevedores.

The stevedores sought to rely on the The stevedores sought to rely on the exemption clause.exemption clause.

AgencyAgencyScruttons Ltd v Midland Silicones Scruttons Ltd v Midland Silicones Ltd [1962]Ltd [1962]

Held : as per Lord ReidHeld : as per Lord Reid

1) There was no doctrine of vicarious 1) There was no doctrine of vicarious immunity in the English law.immunity in the English law.

2) The limitation clause only referred 2) The limitation clause only referred to the carrier shipping company, and to the carrier shipping company, and thus in capable of protecting the thus in capable of protecting the stevedores.stevedores.This lead to immense commercial This lead to immense commercial inconvenience, because it became inconvenience, because it became difficult for employers to give his difficult for employers to give his employees and agents the benefit of an employees and agents the benefit of an exclusion clause negotiated by the exclusion clause negotiated by the employer.employer.

AgencyAgencyScruttons Ltd v Midland Silicones Scruttons Ltd v Midland Silicones Ltd [1962]Ltd [1962]As per Lord Reid’s obiter :As per Lord Reid’s obiter :

The stevedores could have claimed if :The stevedores could have claimed if :

1)1) The bill of ladingThe bill of lading makes it clear makes it clear that that the stevedore is the stevedore is intended to be protectedintended to be protected by the provisions.by the provisions.

2) The carrier in addition to contracting 2) The carrier in addition to contracting for these provisions on his own behalf is for these provisions on his own behalf is also contracting as agent for the also contracting as agent for the stevedore.stevedore.

3) The carrier has authority from the 3) The carrier has authority from the stevedores to do that. stevedores to do that.

4) consideration must move from the 4) consideration must move from the stevedorestevedore

AgencyAgencyNew Zealand Shipping Co. v A M New Zealand Shipping Co. v A M Satterthwaite (Satterthwaite (The EurymedonThe Eurymedon) ) [1975][1975] Privy Council : Privy Council :

Facts : Similar to the Scruttons case Facts : Similar to the Scruttons case Held :Held :

1) When the consignor signed the bill 1) When the consignor signed the bill of lading they made an offer to all the of lading they made an offer to all the world that anyone who unloaded their world that anyone who unloaded their goods would be entitled to the benefit goods would be entitled to the benefit of the exclusion clause.of the exclusion clause.

2) This offer was accepted once 2) This offer was accepted once stevedores started handling the goods.stevedores started handling the goods.

3) The consideration supplied was the 3) The consideration supplied was the performance of the contractual duty performance of the contractual duty owed to the shipperowed to the shipper..

Trusts Trusts A trust is an equitable obligation to A trust is an equitable obligation to hold property on behalf of another. hold property on behalf of another.

Les Affreteurs Reunis v Walford Les Affreteurs Reunis v Walford [1919] [1919] HLHL

Facts : Terms of charterparty between a Facts : Terms of charterparty between a shipowner and a charterer stated that shipowner and a charterer stated that the shipowner would pay a commission the shipowner would pay a commission to the broker who had negotiated the to the broker who had negotiated the contract but was not party to the contract but was not party to the contract.contract.

Held : It was held that the broker was a Held : It was held that the broker was a “beneficiary” of the trust, : the subject “beneficiary” of the trust, : the subject matter of the trust being the contractual matter of the trust being the contractual right of action created by the promise of right of action created by the promise of the shipownerthe shipowner

Tort / Restrictive covenantsTort / Restrictive covenants Tulk V Moxhay (1848)Tulk V Moxhay (1848) Facts : P owned several houses in Facts : P owned several houses in Leicester Square, and he sold the garden Leicester Square, and he sold the garden in the cenre to Elms, who covenated that in the cenre to Elms, who covenated that he would keep the gardens and railings he would keep the gardens and railings in their present condition.in their present condition.

The land was sold to the defendants who The land was sold to the defendants who knew of the restriction contained in the knew of the restriction contained in the contract. The defendant wanted to build contract. The defendant wanted to build on the land and the claimant sought to on the land and the claimant sought to get an injunction to stop the defendant.get an injunction to stop the defendant.

Held : The covenant could be enforced in Held : The covenant could be enforced in equity in land law, against all equity in land law, against all subsequent purchasers who had notice subsequent purchasers who had notice of the covenant.of the covenant.

Statutory exceptionsStatutory exceptions Price maintenance agreementsPrice maintenance agreements

Various insurance contractsVarious insurance contracts

Married Woman’s Property Act Married Woman’s Property Act 18821882

S148(4) Road Traffic Act 1927 : S148(4) Road Traffic Act 1927 : allows injured party to recover allows injured party to recover compensation from insurance compensation from insurance company.company.

Damages for 3rd partyDamages for 3rd party The question of the extent to which a The question of the extent to which a contracting party may recover for loss contracting party may recover for loss sustained by a third party who is sustained by a third party who is intended to benefit from the contract intended to benefit from the contract was raised in :was raised in :

Jackson v Horizon Holidays [1975] : Lord Jackson v Horizon Holidays [1975] : Lord DenningDenning

Facts : Plaintiff recovered £500 for Facts : Plaintiff recovered £500 for “mental stress” due to disastrous “mental stress” due to disastrous holiday. holiday.

CA thought that the amount was CA thought that the amount was reasonable because he was also claiming reasonable because he was also claiming for the distress that the family suffered.for the distress that the family suffered.

But see But see Woodar Investment Woodar Investment Development v Wimpey Construction Development v Wimpey Construction (1980)(1980) where the HL decided that a where the HL decided that a contracting party cannot claim for loss contracting party cannot claim for loss of 3rd party.of 3rd party.

Criticisms of Doctrine of Criticisms of Doctrine of PrivityPrivity

General criticisms against the doctrineGeneral criticisms against the doctrine : :

1) that it failed to give effect to the 1) that it failed to give effect to the expressed intentions of the parties e.g. expressed intentions of the parties e.g. Tweddle v AtkinsonTweddle v Atkinson

2) Law was unduly complex, as 2) Law was unduly complex, as exceptions lie in trust, tort & “artificial” exceptions lie in trust, tort & “artificial” exceptions like collateral contractsexceptions like collateral contracts

3) It was commercially inconvenient. e.g. 3) It was commercially inconvenient. e.g. The Eurymedon, Scruttons v MidlandsThe Eurymedon, Scruttons v Midlands

4) Would lead to results that were 4) Would lead to results that were fundamentally unjust. e.g. Tweddle v fundamentally unjust. e.g. Tweddle v Atkinson, Beswick v BeswickAtkinson, Beswick v Beswick

Contracts (Rights of third parties) Contracts (Rights of third parties) Act 1999Act 1999

Upon the recommendations of the Law Upon the recommendations of the Law commission report (1996), the 1999 Act commission report (1996), the 1999 Act was passed.was passed.

S1(1)a & b of the act providesS1(1)a & b of the act provides : Right of : Right of 3rd party to enforce contractual terms3rd party to enforce contractual terms

S1 (1):S1 (1): subject to the provisions of this subject to the provisions of this act, a person who is not a party to a act, a person who is not a party to a contract may in his own right enforce a contract may in his own right enforce a term of the contract if -term of the contract if -

a)a) the contract the contract expressly provides that expressly provides that he mayhe may, or, or

b)b) subject to subsection (2), subject to subsection (2), the term the term purports to confer a benefit on him.purports to confer a benefit on him.

Contracts (Rights of third parties) Contracts (Rights of third parties) Act 1999Act 1999

S (3)S (3) The third party must be expressly The third party must be expressly identified in the contract by name, as a identified in the contract by name, as a member of a class or as answering a member of a class or as answering a particular description but need not be in particular description but need not be in existence when the contract is entered existence when the contract is entered into.into.

S(5)S(5) …there shall be available to the …there shall be available to the third party any remedy that would have third party any remedy that would have been available to him in an action for been available to him in an action for breach of contract, if he had been a breach of contract, if he had been a party…party…

S(6) S(6) Where a term of contract excludes Where a term of contract excludes or limits liability in relationor limits liability in relation