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(b) Privity of contract
The doctrine of privity in contract law provides that a contract can only impose rights or obligations on persons who are parties to it. Its operation may be seen in Dunlop v Selfridge (1915). Dunlop sold tyres to a distributor, Dew and Co, on terms that the distributor would not sell them at less than the manufacturers list price, and that they would extract a similar undertaking from anyone they supplied with tyres. Dew and Co resold the tyres to Selfridge who agreed to abide by the restrictions and to pay Dunlop £5 for each tyre they sold in breach of them. When Selfridge sold tyres at below Dunlop’s list price, Dunlop sought to recover the promised £5 per tyre sold. It was held that Dunlop could not recover damages on the basis of the contract between Dew and Selfridge to which they were not a party.
There are a number of ways in which consequences of the application of strict rule of privity may be avoided to allow a third party to enforce a contract. These occur at both common law and under statute.
(i) Common law:
– The benefi ciary sues in some other capacity.
A person who was not originally a party to a particular contract may, nonetheless, acquire the power to enforce the contract where they are legally appointed to administer the affairs of one of the original parties. An example of this can be seen in Beswick v Beswick (1967) where a coal merchant sold his business to his nephew in return for a consultancy fee of £6·10 shillings (in pre-decimal currency) during his lifetime, and thereafter an annuity of £5 per week payable to his widow. After the uncle died, the nephew stopped paying the widow. When she became administratrix of her husband’s estate, she sued the nephew for specifi c performance of the agreement in that capacity as well as in her personal capacity. It was held that, although she was not a party to the contract and therefore could not be granted specifi c performance in her personal capacity, such an order could be awarded to her as the administratrix of the deceased person’s estate.
– The situation involves a collateral contract.
A collateral contract arises where one party promises something to another party if that other party enters into a contract with a third party, for example, A promises to give B something if B enters into a contract with C. In such a situation, the second party can enforce the original promise, that is, B can insist on A complying with the original promise. In Shanklin Pier v Detel Products Ltd (1951), the plaintiffs contracted to have their pier repainted. On the basis of promises as to its quality, the defendants persuaded the pier company to insist that a particular paint produced by Detel be used. The painters used the paint but it proved unsatisfactory. The plaintiffs sued for breach of the original promise as to the suitability of the paint. The defendants countered that the only contract they had entered into was between them and the painters to whom they had sold the paint, and that as the pier company were not a party to that contract they had no right of action against Detel. The pier company were successful. It was held that, in addition to the contract for the sale of paint, there was a second collateral contract between the plaintiffs and the defendants by which the latter guaranteed the suitability of the paint in return for the pier company specifying that the painters used it.
– There is a valid assignment of the benefi t of the contract.
A party to a contract can transfer the benefi t of that contract to a third party through the formal process of assignment. The assignment must be in writing, and the assignee receives no better rights under the contract than the assignor possessed. The burden of a contract cannot be assigned without the consent of the other party to the contract.
– Where it is foreseeable that damage caused by any breach of contract will cause a loss to a third party.
In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994), the original parties had entered into a contract for work to be carried out on property with the likelihood that it would subsequently be transferred to a third party. The defendant’s poor work, amounting to a breach of contract, only became apparent after the property had been transferred. There had been no assignment of the original contract and, normally, under the doctrine of privity, the new owners would have no contractual rights against the defendants and the original owners of the property would have suffered only a nominal breach as they had sold it at no loss to themselves. Nonetheless, the House of Lords held that, under such circumstances, and within a commercial context, the original promisee should be able to claim
full damages on behalf of the third party for the breach of contract.
– One of the parties has entered the contract as a trustee for a third party.
There exists the possibility that a party to a contract can create a contract specifi cally for the benefi t of a third party.
In such limited circumstances, the promisee is considered as a trustee of the contractual promise for the benefi t of the third party. In order to enforce the contract, the third party must act through the promisee by making them a party to any action. For a consideration of this possibility, see Les Affreteurs Reunis SA v Leopold Walford (London) Ltd (1919).
The other main exception to the privity rule at common law is agency, where the agent brings about contractual relations between two other parties even where the existence of the agency has not been disclosed.
(ii) Statute
The fi rst area in which statute has intervened in relation to the doctrine of privity is in relation to motor insurance where third parties claim directly against the insurers of the party against whom they have a claim.
The most signifi cant alteration of the operation of the doctrine of privity however, has been made by the Contracts (Rights of Third Parties) Act 1999 which sets out the circumstances in which third parties can enforce terms of contracts. In order for the third party to gain rights of enforcement, the contract in question must, either, expressly confer such a right on them or, alternatively, it must have been clearly made for their benefi t (s.1). The contractual agreement must actually
identify the third party, either by name, or as a member of a class of persons, or answering a particular description. The third person need not be in existence when the contract was made, so it is possible for parties to make contracts for the benefi t of as yet unborn children. This provision should also reduce the diffi culties relating to pre-incorporation contracts in relation to registered companies. The third party may exercise the right to any remedy which would have been available
had they been a party to the contract. Such rights are, however, subject to the terms and conditions contained in the contract and they can get no better right than the original promisee.
Section 2 of the Act provides that, where a third party has rights by virtue of the Act, the original parties to the contract cannot agree to rescind it or vary its terms without the consent of the third party; unless the original contract contained an express term to that effect.
Section 3 allows the promisor to make use of any defences or rights of set-off they might have against the promisee in any action by the third party. Additionally, the promisor can also rely on any such rights against the third party.
Section 5 removes the possibility of the promisor suffering from double liability in relation to the promisor and the third party. It provides, therefore, that any damages awarded to a third party for a breach of the contract be reduced by the amount recovered by the original promisee in any previous action relating to the contract. The Act does not alter the existing law relating to negotiable instruments, contracts of employment, or contracts for the carriage of goods or the statutory contracts constituted by to companies’ constitutional documents.