Understanding Privity of Contract Principles
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Mikhail EremenkoUnderstanding Privity of Contract Principles
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Mikhail EremenkoPrivity of Contract
Generally in common law A person is not bound by a contract to which he is not a party ('burden' rule), nor may he enforce the contract, even if the contract is expressly made for his benefit ('benefit' rule). Promisee is not entitled to substantial damages if he suffers no loss from the breach. Only a promisee may enforce the promise (privity principle)
/ Dunlop v Selfridge Initial seller (to protect his position on the market) has put a clause into contract that the buyer cannot sell the goods below the initial price and that he ought to put the same clause when selling those goods. The 3rd party sold the goods below the initial price, claiming it was not bound by the clause since it was not a party to the contract.
Consideration must move from the promise (consideration principle)
/ Tweddle v Atkinson A couple was marrying. Fathers promised each other to give money to the groom. One of them died before giving the money. Groom sued. Held: Groom couldn't sue because he provided no consideration and also was not a party to a contract.
Exception: Common Law1
AGENCY
Third party may be able to take the benefit of an exclusion clause (The Himalaya clause) by proving that the party imposing the clause was acting as the agent of the third party, thereby bringing the third party into a direct contractual relationship with the plaintiff. / Scruttons v Midland Silicones Initial buyer put a clause that his liability is limited to certain amount of money. A third party, contracting with a buyer has damaged the goods and was sued by the initial seller (and the owner of goods) for damages in tort. The third party tried to rely on the limitation clause, claiming it was a party to a contract via the initial buyer as an agent. HELD: It could only work if the limitation clause included the limitation on this 3rd party liability, where in fact it only covered the buyer. The requirements for a clause to be applicable to a third party from the agency relationships (Scruttons v Midland Silicones): the principal was intended to be protected by a clause in the contract the agent was acting as agent for the principal when entering into the contract
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Legal constructions to circumvent the privity rule
the agent has authority from the principal to act as his agent the principal has provided consideration to the other contracting party / The Eurymedon The facts are the same as in Scrutton, except that the clause in the initial contract exempted from liability not only the initial contract but also other parties including stevedores. Also: there could be implied a 3rd direct made between the shipper and the stevedores (via the carrier as an agent) in which the shipper made a unilateral offer with the consideration of exempting of stevedores from liability and stevedores accepted the offer by performance.
GUARANTORS RIGHT OF SUBROGATION
Where a guarantor has paid the principal creditor, he is subrogated to the rights of the principle creditor against the debtor and has the same rights that the principal creditor would have had against the debtor.
TRUSTS
The concept of privity does not extend to trusts (In Re Schebsman), in the sense that if the contractual rights become held on trust, the beneficiary will not be able to enforce the contract. However the benefit under the contract can be a subject of trust.
COLLATERAL CONTRACT
A contract between two parties may be accompanied by a collateral contract between one of them and a third person relating to the same subject-matter. There must, however, be an intention to create a collateral contract before that contract can be formed. / Shanklin Pier v Detel Products The claimants had employed contractors to paint a pier. They told them to buy paint made by the defendants. The defendants had claimants that the paint would last for seven years. It only lasted for three months. HELD: There was a collateral contract. The claimants provided consideration for the defendants' promise by entering into an agreement with the contractors, which entailed the purchase of the defendants' paint.
COLLATERAL CONTRACT
Actions for damages in tort are often brought when contractual claim is impossible, e.g. Donoghue v Stevenson.
CAN A PROMISEE SUE FOR A BENEFIT OF 3RD PARTY?
Where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself. / Jackson v Horizon Holidays The family has got a disastrous holiday. The father, who booked the holiday, sue for the damages to his family members as well as for himself. / Woodar v Wimpey Overruled Jackson, with a retreat to former position.
ASSIGNMENT
The contractual right under a contract can be assigned to a 3rd party. The 3rd party takes the place of the assigner, and his rights cannot exceed the rights of the assigner. / Linden Gardens v Lenesta Sludge The employer has leased a property to a 3rd party. The 3rd party found the property defected. The employer then assigned the right to sue the contractor to a lessee. However, the lessee couldnt sue, because there was a clear clause in the main contract, prohibiting assigning2 the employers right under a contract to 3rd parties.
The Albazero principle
If where a contract was entered into by A and B, both of whom knew that the end benefit of the contract (proprietary interest in goods or property) 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 contemplated third party. The employer to the contract must join as a party to the legal action, brought by the 3rd party. / St. Martins v McAlpine The facts were similar to Linden Gardens, but here claimants brought into the Albazero principle. / Darlington BC v Wiltshier Northern Ltd extended The Albazero principle to when the employer has no proprietary rights in the property. The Albazero principle, however, cannot override another existing ways to sue and should be used as last resort. / McAlpine v Panatown The contractor to the original contract granted duty of care via a deed to a third party and, consequently, was sued in tort.
Exception: Statutes
S56(1) Law of Property Act 1925
any person can benefit from the agreement over the land, even if he is not named as a party. This was however held to be inapplicable in contracts. / Beswick v Beswick A person sold the land with under provision that the buyer will pay monthly charges to him during live, and then a smaller amount to the sellers wife. He died and the buyer stopped payments. Wife sued both as an administratrix and in her own capacity on the grounds of s.56(1) LPA 1925. HELD: She could sue only as an administratrix, since she was not a party to the contract, although she benefited from it.
See S1(2) of Contract (Rights of Third Parties) Act 1999 below
Contract (Rights of Third Parties) Act 1999
Allows a 3rd party to enforce a term of the contract in certain circumstances, even if it provided no consideration (changed benefit of a 3rd party). But a 3rd party still cannot be sued on a contract to which he is not a party (cant impose a burden on him). The Act does not limit the common law rules on the privity of contract. Requirements: S1(1): a) The contract must expressly provide that the 3rd party can enforce; OR b) The terms of the contract purport to confer a benefit on that 3rd party. It creates a rebuttable presumption that the 3rd party will be able to enforce. S1(2): S1(1) does not apply if it appears that parties did not intend the term to be enforceable by a third party. It rebuts the presumption of s1(1)(b). S1(3): 3rd party need not be in existence when the contract is entered into. 3rd party must be identified in the contract by: Name; OR As a member of a class; OR As answering a description / Avraamides v Colwill The contractor has transferred his rights to a 3rd party. The employer sued the 3rd party. HELD: The right to sue a 3rd party was not expressly conferred from the contractor to the employer. S1(5): 3rd party has the same rights as if a party to a contract S1(6): 3rd party can rely on exemption or limitation clauses. S2(1): The parties cannot rescind the contract and extinguish the 3rd party rights if: 3rd party communicated his assent to the term, (communication can be made by conduct, if by post then will come in force upon receiving, not when sent) The promisor is aware that the 3rd party has relied on the term; OR The promisor can reasonably be expected to have foreseen that the 3rd party would rely on the term.
S2(3): Parties can include an express term that they can vary the contract without the consent of the 3rd party. S2(4): The court can dispense with 3rd partys consent if (a) his whereabouts are uncertain, (b) he is mentally incapable and (S2(5)) if reliance cannot be reasonably ascertained. S4: S1 does not affect the right of the promisee to enforce the contract. S5: The promisor is protected against double liability. How to tackle 3rd party interest under contracts: 1. Identify relevant contracts. 2. Identify potentially relevant third parties. 3. Consider whether third parties should be given enforceable rights.
4. If enforceable rights are given to third parties, should there be any restrictions on their ability to enforce such rights (should the Act be excluded).