Privity of contract

Question 1

Privity of contract

Answer 1

A contract does not confer enforceable rights on a third party. It is a fundamental principle of the common law that no person can sue or be sued on a contract unless he is party to it (Dunlop Pneumatic Tyre v Selfridge)

Question 2

Problem with privity of contract

Answer 2

It has always been uncontroversial that a third party should not be subjected to a burden by a contract to which he is not party. What is more controversial is the rule that a third party should not be able to obtain a benefit from a contract to which he is not party. Various common law and statutory devices were used to circumvent the rules on privity.

Question 3

Contract (Rights of Third Parties) Act 1999

Answer 3

Allows a third party, who is neither a party to the contract, nor has provided consideration, to enforce a term in the contract in certain circumstances.

The Act only applies in certain circumstances, so the old common law and statutory devices may still be used and may give superior rights to the third party concerned.

Question 4

Agency

Answer 4

• An agency relationship occurs where one party, the agent, is authorised either expressly or by implication, by the principal, to contract on behalf of the principal.
• In practice, businesses sometimes appoint agents to find customers, negotiate sales and/or enter into contracts on their behalf.
• If an agent enters into a contract with Party A on his principal’s behalf, it is as if the contract were made between the principal and Party A

Question 5

Basic requirements necessary to establish an agency relationship

Answer 5

a) The principal should be named and it should be clear that the agent is contracting on the principal’s behalf
b) The agent should be authorised to act as agent. The principal is only bound by acts of the agent which are within the agent’s authority.
c) Consideration has moved from the principal.

Question 6

Scruttons Ltd v Midland Silicones

Answer 6

An attempt was made to rely on the principle of agency in order to allow a third party to rely on an exemption clause in a contract to which he was not party. It was held that they could not rely on the limitation clause because they were not a party to the contract. The argument that they were agents was considered but ultimately rejected. The case did leave open the possibility for the agency argument to succeed provided the exemption clause was suitably drafted. Lord Reid stipulated four conditions:

a) The contract of carriage makes it clear that the stevedore is intended to be protected;
b) the contract of carriage makes it clear that the carrier is contracting not only on his own behalf but as agent for the stevedore;
c) The carrier has authority from the stevedore to contract;
d) Consideration moves from the stevedore.

Question 7

New Zealand Shipping Co v A.M.Satterthwaite (The Eurymedon)

Answer 7

Similar facts but the exemption clause in the contract had been carefully drafted to fulfil Lord Reid’s criteria. Held that the exemption clause could be relied upon.

Question 8

Assignment

Answer 8

• A is under a contractual obligation to B
• B assigns his contractual rights to C
• It may be possible for C to sue A on his promise to B.
• Because B is simply passing his rights on to C, the extent of C’s rights can never exceed the rights of B.

Question 9

‘Non-assignment’ clause

Answer 9

If there is a prohibition against the assignment in the main contract, then any attempted assignment is likely to be unsuccessful (Linden Gardens Trust v Lenesta Sludge Disposals) This is called a ‘non-assignment’ clause, and is quite common.

Question 10

Actions in tort

Answer 10

Donoghue v Stevenson: held that the privity principle that restricted the range of claims for breach of contract did not also restrict the range of claims in tort.

Question 11

Judicial criticism of the doctrine

Answer 11

Woodar v Wimpey - it means that in some cases, A contracts with B to provide something of benefit to C. If B fails to do so, C has suffered loss, but can’t bring a claim. A is party to the contract, but has suffered no loss.

Question 12

The Albazero Principle

Answer 12

Court ruled that where a contract was entered into by A and B, both of whom knew that the end benefit of the contract was going to reside in a third party, C, then in that situation, either party breaching the contract could be sued by the other party on behalf of the third party.

McAlpine v Panatown: the Albazero principle will only be applied if the third party has no other means of recourse.

Question 13

Contracts (Rights of Third Parties) Act 1999

Answer 13

• Introduced the most fundamental exception to the doctrine of privity
• Allows a third party, in limited circumstances, to enforce a term of a contract to which he is not party, even if the third party has not provided any consideration.
• Doesn’t allow a contract to be enforced against a third party
• s 7(1) - existing common law (Albazero) and statutory exceptions are preserved.

Question 14

Circumstances in which a third party may enforce a term of a contract to which he is not party

Answer 14

s 1(1)

(a) the contract expressly provides that he may,
(b) subject to subsection (2), the term purports to confer a benefit on him.

Question 15

To satisfy s 1(1)(b), it needs to be established that…

Answer 15

(a) the agreement purported to confer a benefit on the third party;
(b) it was not the case that the contracting parties ‘did not intend the term to be enforceable by the third party.’

Question 16

Meaning of ‘purporting to confer a benefit’

Answer 16

One of the purposes of the bargain (not just an incidental effect) has to be to benefit the third party (Dolphin & Maritime v Sveriges)

Question 17

Identifying the third party

Answer 17

s 1(3): 'The 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 is entered into.' 
- so for example, can be an unborn child

Question 18

In what circumstances does s.1(1)(b) not apply?

Answer 18

• Once it is held that the contract purports to confer a benefit on a third party, there will be a rebuttable presumption in favour of the third party having the right to enforce the term + it will be difficult to rebut (The Laemthong Glory)
• the Act also allows third parties to rely on exemption or limitation clauses in the same way in which it allows third parties to enforce contractual terms (s 1(6))

Question 19

‘Exclusion of third party rights’ clause

Answer 19

e.g. ‘this Agreement does not and is not intended to give any rights, or any right to enforce any of its provisions, to any person who is not party to it.’

Question 20

Remedies available to the third party

Answer 20

Section 1(5): any remedy that would have been available to him in an action for breach of contract if he had been party to the contract.

Question 21

Can the parties change the contract to avoid this?

Answer 21

s 2(1): ‘where a third party has a right under s 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if:

a) the third party has communicated his assent to the term to the promisor,
b) the promisor is aware that the third party has relied on the term,
c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term’
- s 2(2)(a) - the third party may communicate his assent by ‘words or conduct’
- s 2(2)(b) - where the assent is sent by post, it will not be effective until received
- if the parties wish to allow variation/recission without the consent of the third party, they can do so by including an express term in the contract (s 2(3))
- the court can dispense with the third party’s consent where they don’t know where he is (s 2(4)(a)), he is mentally incapable of giving consent (s 2(4)(b)), his reliance on the term cannot be reasonably ascertained (s 2(5)). The court can still impose a requirement to pay compensation (s 2(6))

Question 22

Limit on remedies available to third party

Answer 22

Section 3(6) - a third party is not to be placed in a better position than if he had been a party to the contract himself. If as a party he would not be able to enforce the term, then he cannot enforce it under s 1 as a third party.

Question 23

Other exceptions of solutions to the rules on privity

Answer 23

• Guarantor’s right of subrogation
• Trusts
• Collateral contract
• Statutory exceptions

Question 24

Guarantor’s right of subrogation

Answer 24

Where a guarantor has paid a creditor, he is subrogated to the rights of the principal creditor against the debtor, so has the same rights as the principal creditor would have.

Question 25

Trusts

Answer 25

Possibility that the promisee under a contract might declare himself trustee of the benefit of the promise on behalf of a third party and thus avoid the privity doctrine.
- The rights of the third party are those of a beneficiary and are equitable rather than being the same rights as a party to the contract would have.

Question 26

Collateral contract

Answer 26

If the court can establish the existence of a separate collateral contract between the promisor and the third party, it can avoid the difficulties of privity. The key elements are that the promisor and third party had communicated with each other, and the court found consideration for the bargain between them.

Question 27

Statutory exceptions

Answer 27

Road Traffic Act 1988: permits an injured third party to make a claim directly against the insurance company even though he is not party to the contract

Third Parties (Rights against Insurers) Act 2010: where a person incurs a liability in relation to which he is insured, his rights against his insurer are transferred to the person liable (i.e. person who was suffered the loss).

Married Women’s Property Act 1882: a husband can take out a policy of insurance on his own life for the benefit of his wife and children. If the insurance policy fails to pay out, it can be directly enforced by the wife and children

CA 2006: company’s constitution is binding on the company and each of its shareholders

Carriage of Goods by Sea Act 1992: the holder of a bill of landing has all the rights and liabilities under the contract of carriage transferred to him

Law of Property Act 1925: ‘A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he may not be named as a party to the conveyance or other instrument.’