Week 4- Privity of contract Flashcards
What are the two strands of the privity doctrine?
Which of the two has said to been reformed by the Contract (rights of third parties) act 1999?
1) A third party cannot be subjected to a burden by a contract to which he is not party; what this means is that a third party cannot be under a contractual obligation made by two other contracting parties, as this would be wholly unreasonable considering the third party would be completely unaware of their expected involvement.
2) The second rule, which is said to have been reformed by THE ACT, was that a person who was not party to a contract could not sue upon the contract in order to obtain the promised performance, even in the case where the contract was entered into with the very object of benefiting him.
Facts and significance of Beswick v Beswick 1968 regarding the old doctrine of privity?
What criticism did this raise of the old doctrine, notwithstanding the outcome of the case?
Where a claimant seeks to assert a positive right under the contract eg to be paid a sum of money:
Facts- PB sold his coal round and the goodwill of his business to his nephew JB in return for the promise to pay PB £6 10s a week for the rest of his life, and his wife £5 once he died. (annuity) JB ceased paying PB’s widow after his death, so she brought an action to compel payment for the rest of her life, as agreed.
Significance- She failed to sue under contract for the payment, on the technicality of the privity of contract doctrine, rule no 2. Rather, as the widower, she became the administratrix to her husband and acquired his rights, and therefore she was still paid through this avenue. There was no need to create a new rule for her to continue to be paid, but if she had been a different family member who had not taken control of her husband’s estate, she would not have had a remedy. In fact, it was specific performance, as opposed to restitutionary damages, which allowed Mrs Beswick to recover the sums payable, as there was no actual loss accruing with her husband’s estate, even though it was the deceased husband and thereby his estate who had made the contract with the nephew.
-There was also a court order for specific performance of the payment, but following the act, it is more likely that the third party would bring their own action in respect of obtaining damages; therefore, the promisee who was privy to the contract may be unable to seek a specific performance because of C’s decision to claim damages, which illustrates that damages rather than specific performance would be an appropriate remedy.
-The first criticism of the old doctrine therefore was one of injustice and hardship.
Facts and significance of Tweddle v Atkinson 1861, and Dunlop v Selfridge 1915?
How do the doctrines of privity and consideration work in conjunction?
Tweddle v Atkinson: Facts- JT and WG entered into an agreement under which each promised to pay a sum of money to WT when he married WGs daughter. Within the agreement, it explicitly gave the power to WT to sue the parties for the sums of money. Upon JT’s death, WT attempted to sue for the money.
Significance- WT could not sue under the contract, as he had given no consideration for the promise to pay the money; it was his father who had given the consideration.
-All judges gave their judgements based on the fact that a stranger to the consideration cannot enforce the promise where he was not privy to the contract.
Dunlop v Selfridge: Facts- claimants attempted to operate a price-fixing ring. They extracted a promise from Dew and Co (dealers), who were to create their own contract with third parties to whom they sold Dunlop products to, so that they were not to sell Dunlop products below the price set by Dunlop. Selfridge bought Dunlop products from Dew and Co, undertook the agreement not to sell below the price, but went on to sell at less than half the price.
Significance- Dunlop brought action for injunction and damages against Selfridge, which clearly failed as the agreement did not concern Dunlop, and they provided no consideration in return for the agreement between Selfridge and Dew to sell at the listed price.
These two cases indicative of the relationship between consideration and privity of contract; without consideration, there is no contract, and so without consideration on the third parties’ behalf, they should never be able to sue for breach of contract, even where the benefit would accrue with them. Privity is ‘swallowed up’ by the doctrine of consideration.
-The following example however maintains their distinction; “The following example is often used to illustrate the point. X makes a promise to Y and Z to pay £100 to Z in exchange for consideration provided by Y. In such a case Z is privy to the contract but cannot maintain an action against X unless he has provided consideration for X’s promise. Privity and consideration constitute two hurdles for Z to surmount, not one.”
How might the third party who does not himself provide consideration be justified in having a claim, when, on the face of it, it seems he is nothing more than a gratuitous beneficiary/ volunteer?
“The relationship between privity and consideration does, however, throw up a deeper issue and that relates to the justification for giving the third party a right of action in the first place (see Stevens, 2004). The difficulty is that the third party is, in most of the cases, a gratuitous beneficiary; he or she has given nothing in return for the promise. If the law does not generally allow a gratuitous beneficiary to bring a contractual claim (and the doctrine of consideration prevents him from doing so) why should we give a claim to a third party gratuitous beneficiary? The answer to that question is that in the third-party case the consideration has been provided by the other contracting party and all that is happening is that the third party is, in effect, being allowed to take advantage of the consideration provided by that contracting party. So, the case is distinguishable from a gratuitous promise where no one has provided consideration for the promise in respect of which the claim is being brought.”
How did Lord Denning attack the privity of contract doctrine in Smith and Snipes hall v River Douglas 1949?
Lord Denning: The privity rule only entered the law in Tweddle and before this it did not exist: the actual rule was that “one who was not a party to the contract, provided that it was made for his benefit and that he has a sufficient interest to entitle him to enforce it [can enforce it]”.
- “A man who makes a deliberate promise which is intended to be binding, that is to say, under seal, or for good consideration, must keep his promise; and the court will hold him to it, not only at the suit of the party who gave the consideration but also at the suit of one who was not a party to the contract, provided that it was made for his benefit and that he has a sufficient interest to entitle him to enforce it, subject always, of course, to any defences that may be open on the merits.”
What two situations is it said that the third parties act benefits third parties, specifically in relation to simplicity and the identification of third party beneficiaries?
1) Where a contract explicitly provides that the third party can sue to enforce a positive obligation, eg payment, or the possibility that an exclusion clause is vicariously enforced by the third party, again where this is expressly provided. S1(1)(a) and s1(6) respectively. A benefit of the change therefore is the removal of the complexity of showing an intention to allow a third party to be covered by an exclusion clause (see The Eurymedon), because it can be expressly provided in fewer and more simpler words. With this ‘intention test’, the parties can expressly intend not to allow the third parties to claim.
2) Where there is no express intention by the parties to allow the third party to have limited rights, but rather, the contract term ‘purports to confer a benefit on’ the third party (s1(1)(b)). There is no purporting to confer a benefit merely because the terms are such that a third party would benefit from the contract’s performance. One of the purposes of the parties’ bargain must be to have benefited a third party. The right of action for a third party is not triggered where the full construction of the contract does not appear that the parties intended the term to be enforceable by a third party, which is Section 1(2) of the act. It seems as though the courts will err on the side of the third party unless it simply cannot be construed in this way or there is an express rebuttable of the assumption of the limited rights of enforceability by the third party.
What do s1 (1)-(5) of the Contract (Rights of third parties) act 1999 provide for third parties?
Right of third party to enforce contractual term.
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if—
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
(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.
(4) This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract.
(5) For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly).
Facts and significance of Nishin Shipping v Cleaves and Co 2004 regarding the treatment and application of the 1999 act?
Facts- Nishin failed to pay commission to Cleaves and Co, who had negotiated deals for Nishin (a shipowner) and various other charterers. Was questioned whether the contracted purported to confer a benefit onto Nishin and therefore whether the third party could enforce the term of contract from which they would benefit.
Significance- the clause which called for a 2% commission to be paid and then divided to Cleaves and another sub-company purported to confer a benefit on cleaves. S1(2) of the act holds that s1(1)(b) is disapplied where it can be shown that the contract as a whole did not intend to allow the third party to enforce the terms. This burden fell on Nishin because they were the ones who said that the third parties could not enforce payment. The contract was neutral with respect to s1(1(b)) and so s1(2) did not disapply s1(1)(b), so the third party could be successful in claiming for breach of contract.
Facts and significance of the The Laemthong glory NO 2 (2005) regarding the rebuttable presumptions under s(1)(b) of 1999 act?
Facts- A allowed B to charter his boat, and B chartered it to C. C wrote letter of indemnity, which said that they would indemnify B for all expenses if the boat was to be arrested. A sought to rely on the contract terms under the indemnity letter, to recover the costs when the boat was arrested.
Significance- S1(1)(b) applied because the terms of the contract purported to confer a benefit on the ship owner (by paying for all related arrest expenses- they would be directly affected by arrest of the ship, as they let it out, and it was subsequently sub-let to C) and there was nothing to rebut the assumption under s1(2). Clearly as the owner of the boat the indemnity would benefit party A.
Facts and significance of Chudley v Clydesdale bank 2019 regarding s1(3) of the 1999 act?
Chudley v Clydesdale bank 2019:
Facts- The case concerned funds provided by the Appellants (the “Claimants”) to Yorkshire Bank (“the Bank”) towards the development of Cape Verde resorts, in particular one known as Paradise Beach. Arck LLP (“Arck”), the development company, obtained the investments via its existing account with the defendant Bank. A Letter of Instruction (“LOI”) was issued from Arck to the Bank which contained statements about how the investors’ deposits would be held. The LOI specifically envisaged that the deposits would be held in a segregated account on certain terms, including that a solicitor’s undertaking would be required for the release of funds. Upon discovering that certain of Arck’s schemes were fraudulent, and that funds had been released by the Bank without the solicitor’s undertaking, the Claimants issued proceedings against the Bank for breach of the LOI
Significance- The CA held in favour of Chudley, the investors, for breach of the LOI. “The Court addressed the level of identification required in order for a third party to establish that a contract conferred a benefit upon them which they could then enforce under the Act. The relevant section of the Act is s. 1(3), which requires third parties to be “expressly identified in the contract by name, as a member of a class or as answering a particular description”. The correct approach was to construe the contract as a whole in accordance with the principles in “The Laemthong Glory “ (No. 2) [2005] 1 Lloyd’s Rep 688. In that regard, it was not necessary for the LOI to mention a third party investor by name, as reference to “a client account” in the LOI together with the name of the investment scheme would be express identification of the class, namely clients of the Bank’s customer who were investing in the scheme in question.”
what does s4 of the 1999 act provide for and what options/ remedies does this provide the promisee with in comparison to the third party?
S4 of the act expressly preserves the right of the promisee to enforce any term of the contract eg where A promises B that they will pay C money for B to do something. B is the promisee, what should B be able to do if A fails to pay C?
1) B could bring actions for breach of contract and get damages; B himself has not suffered the loss, as the benefit would accrue with C. However, B would be under no obligation to pay this to C because C is not the promisee. Likely to just be nominal damages.
2) B could recover damages on C’s behalf. The act itself means that this no longer seems necessary, but where C may not have a right of action, B may still wish to recover on Cs behalf. A party may attempt to recover on the third parties’ behalf, but the case law seems to decline this possibility in most cases.
Facts and significance of Jackson v Horizon holidays 1975?
What criticism of the privity doctrine does this represent and what opinions towards the doctrine are driven, especially by Lord Denning?
Facts- Claimant entered into contract with D under which D promised to provide the claimant and his family with a holiday to a certain standard. Holiday was shit, and D admitted breach of contract.
Significance- C sought to recover damages of £1,100, including £500 for mental distress (as this was before the act and therefore the family members could not sue on their behalf). It seems as though the £500 represented some compensation for the other family members but passed off as Cs own disappointment and distress of seeing his family members disappointed, rather than being expressed as money awarded to the third party (other family members).
-Lord Denning was more radical and suggested that £1100 would be too much only if this solely represented compensation for the single claimant. Instead he alluded to the change which the act made, because he suggested that the claimant could gain compensation and hold it on trust for the rest of the family, especially following Lloyds v Harper (although a trusts case)
What are the two exceptions to the privity of contracts rule of agency and trust?
1) Agency: Where one party negotiates and enters into a contract on behalf of a principal. It is accepted that this process in fact creates a contract between a principal and a third party (eg football player and football club). The agent then ‘drops out of the picture’ so this isn’t strictly in contrast to privity.
However, it can also occur that a principal may sue on a contract with a third party, even though the third party is unaware that the agent acted on behalf of the principal. The 1999 act will not confer rights on the principal in either case because he has not been expressly identified to both parties, so both cases governed by common law.
2) Trust: It is said that where A promises B that he will pay C £50, B holds the right of action against A on trust for C (trust of the promise). This enables the beneficiary ( c) to enforce the trust in his own name despite not being privy to the original agreement. This was adopted in Les Affreteurs v Walford 1919, but since this, English law has decline to allow this flexibility, instead requiring strict proof of intention to create a trust of promise, nothing less will suffice. Must show promisee intended third party to benefit. In comparison, the 1999 act allows the right to be conferred with more flexibility, allowing it to be varied or rescinded, although the third party would prefer to be a beneficiary because their rights are irrevocable and will not be subject to defences.
Facts and significance of The Eurymedon 1975 regarding the enforcement of exclusionary clauses by third parties prior to the act?
What positive impact does the act have on cases such as these?
Facts- The carrier company was a subsidiary of the company who unloaded the drill, which was to be shipped from NZ to Liverpool; the bill of lading between the carrier and the drill owner said that it extended its limited liability to other agents or independent contractors, ie the stevedores who had unloaded the drill and negligently damaged it. It was contended whether the third party could rely on the exclusion clause in the contract between the carriers and the drill-owners, despite not being privy to the contract.
Significance- The “Lord Reid test” stipulated in Scruttons sought to extend exclusion clauses to a third party, subject to certain criteria.
Lord Reid test: “I can see a possibility of success of the agency argument if (first) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability, (secondly) the bill of lading makes it clear that the carrier, in addition to contracting for these provisions on his own behalf, is also contracting as agent for the stevedore that these provisions should apply to the stevedore, (thirdly) the carrier has authority from the stevedore to do that, or perhaps later ratification by the stevedore would suffice, and (fourthly) that any difficulties about consideration moving from the stevedore were overcome. And then to affect the consignee it would be necessary to show that the provisions of the Bills of Lading Act 1855 apply.”
With regards to the act, the parties have enhanced freedom to extend such clauses and make them enforceable as a defence merely by reference to a clause, a notable benefit of the act.
What is a Himalaya Clause following the Starsin 2004?
A Himalaya clause in a contract of carriage is designed to create contractual relations between the shipper and any third parties whom the carrier may employ to discharge his obligations. It does so without *759 infringing the English doctrines of privity of contract and consideration, which, until the Contracts (Rights of Third Parties) Act 1999, prevented third parties from claiming benefits under contracts. The way it works is this. The shipper makes an agreement through the agency of the carrier with the third party servant or contractor. Such third parties may have authorised the carrier in advance to contract on their behalf or they may afterwards ratify the agreement. The terms of the agreement are that if such a third party renders any services for the benefit of the cargo owner in the course of his employment by the carrier, he will be entitled to the exemptions and immunities set out in the clause. At that stage, the agreement is not a contract. The third party makes no promise to the shipper to render any services and, until he has actually rendered them, no contract has come into effect. It is the act of rendering the services which provides the consideration and brings into existence a binding contract under which the third party is entitled to the exemptions and immunities. The efficaciousness of the clause to achieve these results has been affirmed by the decision of the Privy Council in New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 . The theory of the agreement which becomes enforceable conditionally upon the act providing consideration was developed by Sir Garfield Barwick CJ in his dissenting judgment in the High Court of Australia in Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (The New York Star) (1978) 139 CLR 231 and adopted by the Privy Council when it affirmed his judgment on appeal: see The New York Star [1981] 1 WLR 138 .
