Contract Law - Privity of Contract (CH4)

Question 1

What is privity of contract?

Answer 1

General rule: No party can sue or be sued on a contract unless they are a party to it.

A third party cannot:
1) Acquire rights under
2) Be liable for
3) Enforce
…A contract to which they are not a party.

Question 2

Who can sue on a contract?

Answer 2

In the Law of England certain principles are fundamental. One is that only a person who is a party (and has provided consideration) to a contract can sue on it.

Question 3

What is a collateral contract? Give an example?

Answer 3

A collateral contract is a subsidiary contract which relates upon another contract for its existence.

Example (Shanklin Pier v DP): X employed contractors (Nisa) to paint a pier, it instructed the contractors to buy paint from Dulux store, which they did. X replied on a statement provided by Nisa that it would last 7 years. The paint only lasted 3 months..

HELD: that there was a collateral contract between X and Nisa that the paint would last 7 years.

Question 4

What are the 5 common law exceptions to privity?

Answer 4

1) Agency
2) Assignment
3) Collateral Contracts
4) Actions in tort
5) Other judicial attempts to avoid the doctrine

Question 5

What does a collateral contract do in terms of enforcing third party rights?

Answer 5

A collateral contract avoids the doctrine of privity of contract by giving the person that is the 3rd party under the contract direct contractual rights against the promisor under a separate contract.

Question 6

What are examples of collateral contracts?

Answer 6

1) When a producer (Dulux) makes an advertisement about the quality of the product, client (X) instructs the contractor (Nisa) to buy that product. When the contractor (Nisa) buys the product to use it for the client - this results in a separate contract with the producer (Dulux).

This separate contract is seem as the client accepting the producer’s offer of a quality product by instructing the contractor to buy the product and gives the client direct recourse against the producer, under a separate collateral contract.

Question 7

What are multiple party contracts?

Answer 7

Clarke v Earl of Dunraven

Facts: there was a collision during a race which was organised by a yacht club, Clarkes yacht sank.

Dunraven had a contract with the yacht club but not with the owners of the other boats.

HELD: Dunraven had effectively entered into an obligation with the owners of all the other yachts competing in the race, holding each liable to the other for any damage caused by a breach of club rules.

Question 8

What is the consideration component in Privity of contract and the case of Dunlop v Selfridge?

Answer 8

A promisee, i.e. a claimant can only sue on a contract, if a claimant has provided consideration.

Dunlop v Selfridge.

Dunlop sold tyres to a distributor on the terms that they would not resell at a price lower than Dunlop’s price list and would obtain undertakings from any trade customers not to do so. The distributor sold the tyres to Selfridge who sold them for less than the agreed price in breach of their undertaking to the distributor.
Dunlop sued selfridge.

Held: Dunlop could not sue on the contract between Selfridge and the distributor, as Dunlop was not a party to the contract and had provided no consideration.

Why can they not sue them?
1) they were not a party to the contract and they have not provided consideration.
2) Principle of mutuality - it would be unfair to allow a person to sue on a contract to which they were not a party ‘it would be a monstrous proposition to say that the person was a party to the contract for the purpose of suing upon it for his own advantage, and not a party of being sued’

3) It is undesirable for third-party rights to be created by contract, since that would restrict the freedom of the parties to amend or rescind their agreement.

Question 9

What does actual authority mean for Agents?

Answer 9

Agents can have Actual authority and this is assessed by:

By looking at what the parties have said and done and the relevant surrounding circumstances.

Express actual authority
- they have express authority given to them to sell certain things

Implied actual authority
- They usually carry out these things, e.g. sellers of goods and advertising them to others to receive payment for them (this is all agreed between the principal and the agent and most agents have a contract or some sort with their principle)

Question 10

What are the requirements for an agency to be effective?

Answer 10

Requirements for agency to be effective:

oPrincipal should be named (usually by the agent), and it should be clear that the agent is acting on the principal’s behalf.

oAgent should be authorised to act as an agent-authority will be limited by the principal to certain activities.

oConsideration has moved from the principal.

Question 11

What is the agency relationship?

Answer 11

In agency relationship, the agent contracts with a third party on behalf of the principal. It is the principal who can enforce the contract and be sued upon it.

The agent merely negotiates on behalf of the principal.

Example: Where an agreement is made between Party A and Party B, but Party A is acting as Party C’s agent, the legal position is that Party A has made an agreement between Party C and Party B-Party C is a direct party to the agreement (not a third party) and is entitled to the rights and remedies under that agreement.
E.g. travel agent, shop keeper on behalf of Tesco, insurance brokers, auctioneers, company directors.

Estate agents are not ‘agents’ its just the name they do not contract to sell the property on behalf of the client, they just help with advertising it.

Question 12

What if the agent has no authority, can there still be a binding contract?

Answer 12

Yes if there is apparent/ostensible authority.

The agent doesn’t need to have actual authority from the principal. Agent could still be able to form a binding contract.

The appearance of the authority must be created by the principal and this representation must have been intended to be and in fact was acted upon by another party.

This apparent authority arises in the following circumstances:

1) At some stage the principal must have represented (by words or conduct) that the agent had authority
2) the third party must rely on this representation, believing that the agent has authority, and the third party must alter their position, e.g. by entering into the contract.

Question 13

What is assignment?

Answer 13

A party may assign their contractual rights to a third party. In such a case the third party is able to sue under the contract, despite not being a party to the original agreement.

Where A is under a contractual obligation to B and B assigns their contractual rights to C, it may be possible for C to sue A on their promise to B.

Because B is simply passing their rights to C, the extent of C’s rights can never exceed the rights of B.

Whilst B has assigned its rights, it cannot assign its obligations, so A still has rights against B.

If there is a prohibition against the assignment in the main contract, any attempted assignment is likely to be unsuccessful.

Note: this is subject to strict equitable rules.

Question 14

Is it possible to assign the burden of a contract?

Answer 14

No.

Question 15

Does the doctrine of privity apply to Trusts?

Answer 15

A party to a contract can give rights to a third party by declaring himself to be a trustee for the third party beneficiary.

It will only be effective if the contract has
1) A declaration of trust
2) Promisor must be aware of the trust relationship

When third party rights are created through a declaration of trust, allows the promisee (who is a party to the contract) to enforce third party rights, or the third party BENEFICIARY can enforce the relevant rights agains the promisor directly.

Any rights created for a third party under a trust arrangement are in addition to any rights created under CRTPA 1999.

Example:
A broking company arranges a transaction pursuant to which the owner of a ship agrees to allow a charterer to use its ship.

The contract states that ShipCo will pay BrokerCo a commission for arranging the agreement between ShipCo and CharterCo, and that CharterCo is the trustee of BrokerCo’s right to recover the commission.

ShipCo refuses to pay the commission to BrokerCo.

The contract between ShipCo and CharterCo contains a clear declaration of trust in favour of BrokerCo-CharterCo can enforce this right on behalf of BrokerCo in its capacity as trustee for BrokerCo.

Question 16

What are the statutory avoidance of the privity rule?

Answer 16

1) s.11 Married Women’s Property Act 1882 = enables wives to claim under their husbands life assurance policies

2) s.136 Law of Property Act 1925 = allows contractual rights to be assigned to a third party

3) s.148 Road Traffic Act = Requires road users to have third party insurance, which third parties can se if they suffer loss as a result of the driver’s negligence

4) Contracts (Rights of Third Parties) Act 1999 = MAIN ONE

Question 17

What is the Contract (Rights of Third Parties) Act 1999?

Answer 17

Allows a third party, in limited circumstances, to enforce a term of a contract to which they were not a party, even if the third party has not provided any consideration.

Example: during christmas shops will often ask if you want a gift receipt for the goods you are buying. If you are buying goods for a friend or family you thereby confer direct contractual rights on the recipient so if something happens to be wrong with the goods the recipient (rather than you) can take them back to the shop and seek remedy.

Question 18

Why is the CRTPA 1999 limited?

Answer 18

1) It does not allow the enforcement of burdens imposed on third parties

2) it deals with the enforcement of the benefits by third parties (entered into after May 2000)

3) Even where the Act does not apply, it is not every third party who can enforce a contractual provision - the test of enforceability under s.1 must be satisfied.

Question 19

Can you add an exemption/limitation clause regarding the CRTPA 1999 Act?

Answer 19

Yes.

Act allows third parties to rely on exemption or limitation clauses in contracts to which they are not a party in the same way in which it allows third parties to enforce contractual terms.

Question 20

Can you vary or rescind a contract under the CRTPA?

Answer 20

Where a third party has a right under s1 to enforce a term of the contract, the parties may not be agreement, vary or rescind the contract in such a way as to alter or extinguish his entitlement under that right, without his consent if:

1) the third party has communicated their assent (agreement) to the term of the promisor

2) The promisor is aware that the third party has relied on the term

3) The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Question 21

What is the ONE only way that the parties can allow for variation or recission without consent of the third party?

Answer 21

1) If there is an express term in the contract.

The court can dispense with the third party’s consent where:

oTheir whereabouts cannot reasonably be ascertained.

oThey are mentally incapable of giving consent.

oTheir reliance on the term cannot be reasonably ascertained.

Where the court or tribunal sees fit to dispense with such consent, it may impose such conditions, for example a requirement to pay compensation, as may be thought fit.

Question 22

How can a third party communicate assent (agreement)?

Answer 22

*The third party may communicate assent by words or conduct.

*If the assent is sent by post, such communications will not be effective until received by the promisor.

Question 23

What are the defences available under the CRTPA 1999 act?

Answer 23

S3- the promisor’s defences against the third party are both the same as they would be against the promisee and anything specific that they may be able to claim against the third party.

S3(6)
*A third party is not, by virtue of s1, to be placed in a better position than if the third party had been a party to the contract themselves.

*If, as such a party, they would not for whatever reason have been able to enforce the term, then they may not enforce it under s1.

*E.g., where the benefit would be illegal under the contract or where the third party lacks contractual capacity.

S5
*As a breach of the relevant term could expose the promisor to actions by both the promisee and the third party-s5 protects the promisor from double liability.

*Any award to the third party may be reduced by the court or tribunal to such extent as thought appropriate if the promisee has already recovered a sum in respect of the third party’s loss or expense incurred by the promisee in making good to the third party the default of the promisor.

Question 24

What is the enforceability test under Contracts (Rights of Third Parties) Act 1999?

Answer 24

A third party may enforce a term of a contract to which they were not a party in the following circumstances:

S1(1)(a)-the contract expressly provides that he may.
The contract must specifically provide that the third party can enforce a term of the contract.
E.g., ‘X has the right to enforce this contract’ or ‘X has a right to sue on this contract.’

S1(1)(b) subject to subsection 2, the term purports to confer a benefit on him.
o
The agreement purported to confer a benefit on the third party, and
oIt was not the case that the contracting parties did not intend the term to be enforceable by the third party.

When does s1(1)(b) not apply?
Where a term purports to confer a benefit on a third party, a rebuttable presumption is created that the third party will be able to enforce the term.

This presumption will be rebutted if ‘on a proper construction of the contract, it appears the parties did not intend the term to be enforceable by the third party’

Question 25

What does ‘identification of a third party’ mean in C(RTP)A?

Answer 25

Identification of the third party (s1(3))

*Third party must be expressly identified in the contract by name, as a member of a class, or as answering a particular description but need not be in existence when the contract was entered into.

*A right can be conferred on, for example, an unborn child, being expressly identified as a member of an identified class or answering a particular description.

Question 26

What are the 4 requirements for there to be effective assignment?

Answer 26

To be effective, an assignment must be:

1) Permitted under the terms of the relevant agreement.
2) Absolute (final).
3) In writing.
4) Notice of the assignment must be given to the person against whom the third party acquires rights as a result of the assignment.

Question 27

When does an agent not have authority?

Answer 27

Generally:
1) If the agent is not acting as told
2) Because they are unsure to the extent of their authority
3) They may have previously had authority but it has become revoked in some way, e.g. principal has become ill or died.