privity of contract

Question 1

basic principle

Answer 1

third parties may not enforce the terms of a contract to which they are not a partyt

Question 2

the general rule

Answer 2

only parties to a contract can acquire rights and liabilities under that contract
-> if you are not a party to a contract, then you cannot sue upon it or be sued under it

Question 3

Dunlop v Selfridge 1915

Answer 3

• dunlop sold Tyers to Dew & Co; who were wholesalers
• dew and co undertook (expressly in the contract) that the manufacturers could fix the lowest price at which they could also sell the tyre and promised not to sell the tyres below that price e
• also agreed to obtain the same pricing terms from customers to whom they resold tyres
• sold tyres to Selfridge om these terms
• Selfridge broke the pricing agreement and sold the tires at discounted prices
• dunlop sued Selfridge and sought an injunction to prevent them from selling their tyres at a discount

Question 4

Dunlop v Selfridge 1915: Legal Principle

Answer 4

• dunlop failed
• although there was a contract between them and Dew&Co , Selfridge were not a party to that contract and Dunlop, therefore could not impose their terms upon them

Question 5

common law rule criticism ->

Answer 5

• leading to harsh and unfair outcomes, especially in cases where the contract purports to confer a benefit on a third party who remains unable to sue if that benefit is not forthcoming due to a breach by one of the parties to a contract

Question 6

exceptions to the basic rule

Answer 6

• by statute
• collateral contracts
• agency
• convenants in land law
• trusts

Question 7

exceptions provided by statute

Answer 7

• s.14 road traffic act 1988
• s.11 married womans property act 1882
• s.29 bills of exchange act 1882
• s.136 law of property act 1925
• s.56 law of property act 1925
• competition act 1998

Question 8

using statute as a creative loophole to avoid the privity doctrine has failed ->

Answer 8

Beswick v Berwick
-> used law of property act 1925 in relation to personal property > land interest/land

Question 9

s.14 road traffic act 1988

Answer 9

requires drivers to have 3rd party insurance, which can be relied on by 3rd parties who suffer loss/damage even though they are not a party to that contract

Question 10

s.11 married womans property act 1882

Answer 10

allows a wife to claim on her husbands life insurance policy

Question 11

s.29 bills of exchange act 1882

Answer 11

a third party may sue on a cheque or bill of exchange

Question 12

• s.136 law of property act 1925

Answer 12

allows rights arising under a contract to be signed by a 3rd party

Question 13

• s.56 law of property act 1925

Answer 13

allows a person to acquire an interest in land/other property or the benefit of a covenant relating to land or other property even if that person is not expressely named in another document

Question 14

competition act 1998

Answer 14

prohibits price fixing arrangements

Question 15

collateral contract

Answer 15

a collateral contract may be used to avoid the rule relating to privity
-> a contract between 2 parties may be accompanied by a collateral contract between one of those parties and a third party relating to the same subject matter

Question 16

Shanklin Pier v Detel Products Ltd 195: FACTS

Answer 16

claimants entered into a contract with painting contractors to paint their pier, having been assured by the defendants that their paint would last for at least 7 years without deterioration
- the defendants then sold the paint to the contractors
-» however, the paint peeled within 3 months
- the pier owners could not sue the painters since they had carried out the work professionally and thus had completed their side of the contract
- the pier owners sued the paint manufacturers

Question 17

Shanklin Pier v Detel Products Ltd 1951: Legal Principle

Answer 17

pier owners were successful
- although were not a party to the contract between the paint manufacturers and the painting contracts [hence, no privity of contract]
- it was held that a collateral contract had risen from their promise as to the suitability of the paint
-> the use of collateral contract is not an exception to the doctrine of privity, since a new contract arises
-» however, it is an effective means of evading the doctrine of privity

Question 18

what are collateral contracts for>

Answer 18

• seen as a way to identify a contract between the party making a promise and the other party

Question 19

agency

Answer 19

the contract of agency is a common law exception to the doctrine of privity, the parties in an agency arrangement are -»

Question 20

parties in an agency agreement

Answer 20

• principal
• agent
• third party

Question 21

principal

Answer 21

• the party on whose behalf the contract is made and who receives the benefit arising under the contract

Question 22

agent

Answer 22

• the agent is a party to the contract with the third party, the agent has a direct contractual relationship with the 3rd party, but is making the contract on behalf of the principal, and not on his own behalf

Question 23

third party

Answer 23

• the third party enters into the contract with the agent
  -> however, the rules of agency provide that there is no contractual relationship with the agent, instead the principal is bound by the contractual relationship with the 3rd party; which has been entered into by the agent on his behalf

Question 24

convenants in land law

Answer 24

a covenant is an agreement between two or more parties made in the form of a deed
-> therefore similar to a contract, with the exception that contracts made by deed do not have to be supported by consideration

Question 25

restrictive covenants

Answer 25

(promises to refrain from doing something) will bind successive purchasers of the land even though there is no privity between them and the original seller

Question 26

Tulk v Moxhay

Answer 26

• to show how restrictive covenants can bind successive purchasers of land in equity w/o privity between them and the original seller
• court considered would be unconscionable for Moxhay to buy with knowledge of the restriction and yet to build on the land
  -> an injunction was therefore granted to enforce the original agreement between Tulk and the first purchaser of the land, even though Moxhay had not been a party to that agreement
  -> principle v narrowly used and generally only applies to land

Question 27

two conditions to which Tulk v Moxhay principle

Answer 27

• the third party must have had notice of the restrictive covenant at the time of purchase and
• the original seller must have retained land that was capable of benefiting from the restriction

Question 28

Tulk v Moxhay: failed principle

Answer 28

• failed in relation to price fixing arrangement

Question 29

trusts

Answer 29

the doctrine of privity may also be avoided in the situation where one of the parties to contract that confers a benefit of a third party holds their contractual rights in trust for that third party

Question 30

the right to claim damages

Answer 30

1. General Rule: Normally, if you’re not directly part of a contract (a third party), you can’t enforce it. That’s called the doctrine of privity.
2. Exceptions: There are some exceptions to this rule, but if none apply, the third party has no way to enforce the contract unless one of the people who is part of the contract takes action.
3. The Problem: If the contract is meant to benefit the third party, the person suing (one of the actual parties to the contract) might not have suffered any personal loss because they weren’t the one meant to benefit.
4. Damages: In such cases, the court can award damages (compensation), but since the person suing didn’t suffer any real loss, they’d only get a small, symbolic amount called “nominal damages.”

Question 31

common law rule:

Answer 31

allows a remedy to be awarded to a party event w/o privity of contract where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who caused it

Question 32

Alfred McAlpine Constructions Ltd v Panatown Ltd

Answer 32

House of Lords held that the duty of care deed with the 3rd party prevented panatown from suing, since this deed gave the 3rd party a specific remedy
-> lords split 3-2 on the issue, which shows that the decision was very finely balanced

Question 33

the common law position was amended by..

Answer 33

statute in the form of the Contracts (Right of Third parties act 1999)