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1. THE DOCTRINE OF PRIVITY
"The doctrine of privity means that a contract cannot, as a general
rule, confer rights or impose obligations arising under it on any person except
the parties to it." (GH Treitel, The Law of Contract)
The common law reasoned that:
1. Only a promisee may enforce the promise meaning that if the third party is
not a promisee he is not privy to the contract. See:
Dunlop Tyre Co v Selfridge [1915] AC 847 - The plaintiffs sold tyres to Dew
& Co, wholesale distributors, on terms that Dew would obtain an undertaking
from retailers that they should not sell below the plaintiffs' list price. Dew
sold some of the tyres to the defendants, who retailed them below list price.
The plaintiffs sought an injunction and damages. The action failed because
although there was a contract between the defendants and Dew, the plaintiffs
were not a party to it and "only a person who is a party to a contract can
sue on it," (per Lord Haldane).
2. There is the principle that consideration must move from the promisee.
See:
Tweddle v Atkinson (1861) 1 B&S 393 - The fathers of a husband and wife
agreed in writing that both should pay money to the husband, adding that the
husband should have the power to sue them for the respective sums. The husband's
claim against his wife's fathers' estate was dismissed, the court justifying the
decision largely because no consideration moved from the husband.
The two principles of privity and consideration have become entwined but are
still distinct.
2. EXCEPTIONS
If the doctrine of privity was inflexibly applied it would cause considerable
injustice and inconvenience. Many exceptions to it have therefore been
developed.
A) COLLATERAL CONTRACTS
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. For
example:
Shanklin Pier v Detel Products [1951] 2 KB 854. The
plaintiffs had employed contractors to paint a pier. They told them to buy paint
made by the defendants. The defendants had told them that the paint would last
for seven years. It only lasted for three months. The court decided that the
plaintiffs could sue the defendants on a collateral contract. They had provided
consideration for the defendants' promise by entering into an agreement with the
contractors, which entailed the purchase of the defendants' paint.
There must, however, be an intention to create a collateral contract before
that contract can be formed
B) AGENCY
The concept of agency is an exception to the doctrine of privity in that an
agent may contract on behalf of his principal with a third party and form a
binding contract between the principal and third party.
For example, a third party may be able to take the benefit of an exclusion
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:
In Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, a bill of lading
limited the liability of a shipping company to $500 per package. The defendant
stevedores had contracted with the shipping company to unload the plaintiff's
goods on the basis that they were to be covered by the exclusion clause in the
bill of lading. The plaintiffs were ignorant of the contract between the
shipping company and the stevedores. Owing to the stevedores negligence, the
cargo was damaged and, when sued, they pleaded the limitation clause in the bill
of lading. The House of Lords held that the stevedores could not rely on the
clause as there was no privity of contract between the plaintiffs and
defendants.
Lord Reid suggested that the stevedores could be brought into a contractual
relationship with the owner of the goods through the agency of the carrier
provided certain conditions were met: (1) that the bill of lading makes it clear
that the stevedore is intended to be protected by the exclusion clauses therein.
(2) that the bill of lading makes it clear that the carrier is contracting as
agent for the stevedore. (3) the carrier must have authority from the stevedore
to act as agent, or perhaps, later ratification by the stevedore would suffice.
(4) consideration must move from the stevedore.
All of the above conditions were satisfied in New Zealand Shipping v
Satterthwaite (The Eurymedon) [1975] AC 154.
C) TRUSTS
Equity developed a general exception to the doctrine of privity by use of the
concept of trust. A trust is an equitable obligation to hold property on behalf
of another.
The device was approved by the House of Lords in Les Affreteurs Reunis v
Leopold Walford [1919] AC 801, where a broker (C) negotiated a charterparty by
which the shipowner (A) promised the charterer (B) to pay the broker a
commission. It was held that B was trustee of this promise for C, who could thus
enforce it against A.
However, the trust device has fallen into disuse because of the strict
requirements of constituting a trust and most particularly that there should be
a specific intention on the part of the person declaring the trust that it
should be a trust.
D) RESTRICTIVE COVENANTS
Restrictive covenants may, if certain conditions are satisfied, run with the
land and bind purchasers of it to observe the covenants for the benefit of
adjoining owners.
For example, in Tulk v Moxhay (1848) 2 Ph 774, the plaintiff who owned
several houses in Leicester Square sold the garden in the centre to Elms, who
covenanted that he would keep the gardens and railings in their present
condition and continue to allow individuals to use the gardens. The land was
sold to the defendants who knew of the restriction contained in the contract
between the plaintiff and Elms. The defendant announced that he was going to
build on the land, and the plaintiff, who still owned several adjacent houses,
sought an injunction to restrain him from doing so. It was held that the
covenant would be enforced in equity against all subsequent purchasers with
notice.
This device was carried over into the law of contract by the Privy Council in
Lord Strathcona SS Co v Dominion Coal Co [1926] AC 108, but Diplock J refused to
follow the decision in Port Line Ltd v Ben Line Steamers [1958] 2 QB 146. Most
recently, in Law Debenture Trust Corp v Ural Caspian Oil Corp [1993] 2 All ER
355, it was emphasised that the principle permitted no more than the grant of a
negative injunction to restrain the person acquiring the property from doing
acts which would be inconsistent with the performance of the contract by his
predecesser and had never been used to impose upon a purchaser a positive duty
to perform the covenants of his predecessor.
E) STATUTES
Certain exceptions to the doctrine of privity have been created by statute,
including price maintenance agreements; and certain contracts of insurance
enforceable in favour of third parties. For example, under s148(4) of the Road
Traffic Act 1972, an injured party may recover compensation from an insurance
company once he has obtained judgment against the insured person.
F) REMEDIES OF THE CONTRACTING PARTY
The question of the extent to which a contracting party may recover for loss
sustained by a third party who is intended to benefit from the contract was
raised in:
Jackson v Horizon Holidays [1975] 1 WLR 1468. The plaintiff
entered into a contract for himself and his family. The holiday provided failed
to comply with the description given by the defendants in a number of respects.
The plaintiff recovered damages and the defendants appealed against the amount.
Lord Denning MR thought the amount awarded was excessive compensation for the
plaintiff himself, but he upheld the award on the ground that the plaintiff had
made a contract for the benefit of himself and his family, and that he could
recover for their loss as well as for his own.
However, in Woodar Investment Development v Wimpey Construction [1980] 1 WLR
277, the House of Lords rejected the basis on which Lord Denning had arrived at
his decision, and reaffirmed the view that a contracting party cannot recover
damages for the loss sustained by the third party. Their Lordships did not
dissent from the actual decision in Jackson, which they felt could be supported
either because the damages were awarded for the plaintiff's own loss; or because
booking family holidays or ordering meals in restaurants calls for special
treatment.
3. ACADEMIC DEBATE ON THE DOCTRINE
GH Treitel, The Law of Contract, 9th ed, 1995, p588, states:
"The rule that no one except a party to a contract can be made liable
under it is generally regarded as just and sensible. But the rule that no one
except a party to a contract can enforce it may cause inconvenience where it
prevents the person most interested in enforcing the contract from doing so. The
many exceptions to the doctrine make it tolerable in practice, but they have
provoked the question whether it would not be better further to modify the
doctrine or to abolish it altogether."
4. REFORM
Proposals for legislative reform were made by the Law Revision Committee as
long ago as 1937 (Cmnd. 5449) and further proposals were put forward for
discussion by the Law Commission in 1991 (Paper No 121, 1991). In July 1996, the
Law Commission published proposals in "Privity of Contract; Contracts for
the Benefit of Third Parties" (Cmnd. 3329; Law Com No 242), which
recommended that the law expressly provide for third parties to be able to
enforce contracts (including taking advantage of exclusion/limitation clauses)
in certain circumstances. These proposals for reform were acted upon.
The Contracts (Rights of Third Parties) Act 1999 received Royal Assent on 11
November 1999. It reforms the common law rule of privity of contract. Section 1
provides that a third party may in his own right enforce a term of a contract
if:
(a) the contract expressly provides that he may, or
(b) the term purports to confer a benefit on him (except where on a proper
construction of the contract it appears that the parties did not intend the term
to be enforceable by the third party).
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: s1(5).
See further, LCD press release 11 November 1999 and Gazette 1 December 1999.
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