consideration: privity of a contract - enforceability

Question 1

Define privity:

Answer 1

A contract cannot as a general rule confer rights or impose obligations arising from under it on any persons except the parties to it

Part 1:
A person may not sue unless they are privy to the contract

Part 2:
A person may not be sued unless they are privy to the contract

Question 2

Dunlop Pneumatic Tyre Co. Ltd v Selfridge (1915)

Answer 2

Dunlop was a tire manufacturer who agreed with their dealer to not sell the tires below a recommended retail price (RRP). As part of the agreement, Dunlop also required their dealers to gain the same agreement with their retailers, who in this instance was Selfridge. The agreement held that if tires were sold below the RRP, they would be required to pay £5 per tire in damages to Dunlop. This was agreed between the dealer and Selfridges, which effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge sold the tires below the agreed price and Dunlop sued for damages and an injunction to prevent them from continuing this activity. At the initial trial, the decision was given to Dunlop. This was appealed by Selfridge and the decision was reversed. Dunlop appealed.

Issue
Selfridge argued that Dunlop could not enforce the contract as Dunlop was not part of the agreement between the dealer and Selfridges. On this basis, the question for the court was whether Dunlop had the right to access damages without a contractual relationship.

Decision/Outcome
The court held in a unanimous decision that Dunlop could not claim for damages in the circumstances. The court found that firstly, only a party to a contract can claim upon it. Secondly, Dunlop had not given any consideration to Selfridge and therefore there could be no binding contract between the parties. Lastly, Dunlop was not listed as an agent within the contract and could therefore not be included as a valid third-party who had rights to claim on the contract.

Question 3

relationship between privity and consideration

Answer 3

privy is based on the rule that consideration must move from the promisee

Question 4

Jackson v Horizon Holidays Ltd (1975) - injustice

Answer 4

if it is seen to be an injustice, the courts have found ways to avoid the rule.
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)

Question 5

1. Exceptions - Agency

Answer 5

An agent is authorised to make a contract on behalf of another person, the principal. The principal is then bound by the terms of the contract even though they did not physically make the contract themselves.
The agent and principal are treated as the same thing therefore the principal is party to the contract.
Employee - agent
Company - principal

Question 6

2. Exceptions - Collateral Contracts

Answer 6

this is when a contract is found alongside the main agreement, as seen in Shanklin Pier

Question 7

Shanklin Pier Ltd v Detel Products (1951)

Answer 7

The Plaintiffs were owners of a pier in Shanklin on the Isle of Wight. They entered into a contract with contractors to have the pier repaired and painted. Under the contract the plaintiff had the express right to alter the contract. The Defendant company director approached the Plaintiffs with a new painting product for the pier. After much persuasion, the Plaintiffs amended their contract with the Contractors to allow for the paint in the renovation. After several months, the paint flaked off and did not last. The Plaintiffs brought a claim for damages.

Issues
Whether the Plaintiff was entitled to bring a claim against the Defendant company, who was not party to the contract to undertake renovations.

Decision / Outcome:
The Defendant was found to be liable given he had provided an express warranty over the paint to the Plaintiffs, who in consideration of the warranty caused the contractor to buy the paint from the Defendant also and suffer the same damage, by reason of a breach of warranty. It was held that if the contract for the direct sale and purchase had been made between the Plaintiff and the Defendant (with no involvement of a contractor), then the same warranty for the paint would be intended to exist and be implied. The Judge saw no reason as to why the same warranty should not be enforceable and extend between the Plaintiff and the Defendant. The Plaintiff was entitled to recover damages.

Question 8

3. Exceptions - statutory exception - Contracts (Rights of third parties0 Act 1999

Answer 8

Under S1 of this act, a third party may enforce the contract against either or both the actual parties if:
1) the third party is expressly identified by a name or as a member of a class, or as answering particular description and,
2) the contract expressly provides that the third party may enforce the contract, OR
3) the contract term is an attempt to confer the benefit of the term on the third party (is it made to benefit them?)

Step 2: is the section 1 established?
1. C must establish that A and B intended him to be able to enforce the contract
a) the contract expressly provides that C can enforce the terms of the contract (s1(1)(a))
b) the term purports to confer a benefit on C (s1(1)(b))

Question 9

Step 2: is the section 1 established?

Answer 9

Step 2: is the section 1 established?
1. C must establish that A and B intended him to be able to enforce the contract
a) the contract expressly provides that C can enforce the terms of the contract (s1(1)(a))
b) the term purports to confer a benefit on C (s1(1)(b))

Question 10

Intention to create legal relations:

Answer 10

Once you have formed the agreement with offer and acceptance, there must also be an assumption to create legal relations, the parties to a contract expressly or impliedly agree that the contracts legally binding and enforceable in court

Question 11

General presumptions for legal relations:

Answer 11

Two general presumptions:
1) For social or domestic agreements, there is a presumption that there is no intention to create legal relations
2) for commercial agreements, there is a presumption that there is a legal relation
(these can be rebutted)

Question 12

Comercial Business agreements

Answer 12

general presumptions is that these are seen as having a legal intention, i.e. a gentlemen’s agreement states that the contract is binding in honour only.

Question 13

Jones v Vernons Pool:

Answer 13

Mr Jones claimed that he had a winning football pool coupon, the coupon which he signed stated that the agreement was binding in ‘honour only’, as the agreement was based on the honour of the parties and not legally binding, there was no intent to create legal relations and no legal contract.

Question 14

Burden of proof

Answer 14

If you do wish to rebut the presumption in a commercial setting that there is an intention to create legal relations then the following applies,
‘ In a commercial context, the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it and it is a heavy one’ Atkins

Question 15

Edwards v Skyways Ltd:

Answer 15

example of rebutting:
The plaintiff was a pilot who had been made redundant, he was offered and accepted a payment which stated to be ‘ex gratia’, the company then found the terms that had been offered would be more expensive than realized, they denied that there was any legal obligation to make the payment, the argument failed because it was a business agreement and they failed to rebut.

Question 16

Free gift:

Answer 16

the offer of a free gift cab create problems as if it is to promote a business it can be legally binding.
Esso

Question 17

Esso Petroleum Co. Ltd Commissioners of Customs and Excise (1976)

Answer 17

Esso gave a world cup coin with every four gallons of petrol purchased. Should this free gift act tax?
If the free gift is to promote a business, this is legally binding and Esso had to pay tax

Question 18

Competition prizes

Answer 18

this is another area of problem, this is the same as the free gift if the prize for the competition is meant to promote the company, McGowan v Radio Buxton

Question 19

McGowan v Radio Buxton (2001)

Answer 19

The claimant entered a radio competition, the prize was stated to be a Renault Clio car. The winner was given a four inch scale model of a Renault Clio, Radio Buxton argued that there was no intention to create legal obligations, the court decided that there was legal intention

Question 20

Letter of comfort

Answer 20

a written assurance usually provided by a parent company in respect of its subsidiary’s financial obligations to a bank. Usually where the parent company wishes to give some assurance to the lender is respect of the subsidiary’s ability to repay the loan but has no obligation to pay on its self.
It was found to be a moral obligation not a legal obligation.
The court of appeal also stated that the letter had only represented to a fact that it was their present intention to ensure that Metals Ltd would be able to meet its liabilities, as a result intention to create legal relations was irrelevant.

Question 21

Kleinwort Benson Ltd v Malaysian Mining Corporation (1989)

Answer 21

Malaysia Mining Corporation Metals Ltd (MMC Metals) was a wholly owned subsidiary of the defendant, MMC BHD. MMC Metals approached the claimant KB Bank for a loan. MMC Metals was a relatively newly formed company lacking in the size and resources of MMC BHD. The bank approached MMC BHD asking if they would act as guarantor for the loan. MMC refused to act as guarantor but stated they it was their company policy to ensure that their subsidiaries are always in a position to meet their debts. In reliance of this letter of comfort the bank advanced money to MMC Metals. MMC Metals subsequently went into administration having not paid the loan. KB brought an action against MMC BHD to recover their loss based on the assurance given in the comfort letter.

Held:

The comfort letter had no legal effect. The fact that MMC BHD had refused to act as guarantor demonstrated they did not intend to be legally bound. The comfort letter referred to company policy at that time. There was nothing to stop the company changing its policy.

Question 22

Business or Domestic?

Answer 22

Some cases may fall in between social and business agreement.
Sadler v Reynolds

Question 23

Sadler v Reynolds (2005)

Answer 23

Contract between journalist and business men who were also friends. It was held that their agreement fell ‘somewhere between an obviously commercial transaction and a social exchange’
The burden was on the journalist to prove that there was an intention to create legal relations, that it was a business agreement not a social one
So the presumption was that there was no legal intention unless he proved otherwise.

Question 24

Social and domestic arrangements:

Answer 24

Presumed not to be legally binding, the presumption can be rebutted as seen in Merritt v Merrit and Balfour v Balfour.

Question 25

Balfour v Balfour:

Answer 25

A husband worked abroad, his wife stayed in England he promised her an income of £30 per month, When they divorced she tried to claim her £30. As the agreement had been made at an amicable point in their relationship, it was purely a domestic agreement and therefore not legally enforceable.

Question 26

Merritt v Merritt

Answer 26

Mr Merritt had left his wife, an agreement to pay the wife an income if she paid the outstanding mortgage was held to be intended to create legally binding and was enforced by the courts.

Question 27

Blurred lines:

Answer 27

Some famillies may make arrangements that appear to be business arrangements due to the nature of it.
The court must then examine the real purpose of the arrangement as seen in Jones v Padavatton.

Question 28

Jones v Padavatton (1969)

Answer 28

A mother promised to pay her daughter $200 per month if she gave up her job in the US and went to London to study for the bar. The daughter was reluctant to do so at first as she had a well paid job with the Indian embassy in Washington and was quite happy and settled, however, the mother persuaded her that it would be in her interest to do so. The mother’s idea was that the daughter could then join her in Trinidad as a lawyer. This initial agreement wasn’t working out as the daughter believed the $200 was US dollars whereas the mother meant Trinidad dollars which was about less than half what she was expecting. This meant the daughter could only afford to rent one room for her and her son to live in. The Mother then agreed to purchase a house for the daughter to live in. She purchased a large house so that the daughter could rent out other rooms and use the income as her maintenance. The daughter then married and did not complete her studies. The mother sought possession of the house. The question for the court was whether there existed a legally binding agreement between the mother and daughter or whether the agreement was merely a family agreement not intended to be binding.

Held:

The agreement was purely a domestic agreement which raises a presumption that the parties do not intend to be legally bound by the agreement. There was no evidence to rebut this presumption.

Question 29

Money involved:

Answer 29

If there is money involved, then even if the agreement is made socially, it will likely be a business agreement and legally binding.

Question 30

Simpkins v Pays:

Answer 30

A Grandmother, granddaughter and a lodger entered into a weekly competition run by the Sunday Empire News. The coupon was sent in the Grandmothers name each week and all three made forecasts and they took it in turns to pay. They had agreed that if any of them won they would share the winnings between them. The grandmother received £250 in prize money and refused to share it with the other two. The lodger brought the action to claim one third of the prize money.

Held:

There was a binding contract despite the family connection as the lodger was also party to the contract. This rebutted the presumption of no intention to create legal relations.