7. Privity of Contract

cases

tweddle v atkinson

murphy v bower

gandy v gandy

drimmie v davies

cadbury ireland v kerry co-op creamery

midlands silicones ltd v scruttons

smith v eric s bush

shanklin pier ltd v detel products ltd

Privity of Contract

McDermott defines the doctrine of privity as a “common law rule which prevents a contract from being enforceable in favour of, or against, someone who is not party to the contract

as a general rule, a person who is not a party to a contract cannot enforce the terms of that contract, nor can those terms be enforced against him

it is closely related to the doctrine of consideration as a person who is not party to a contract cannot be said to have provided any consideration for that contract, and cannot therefore enforce that contract

tweddle v atkinson

doctrine of privity was established in the English case

son was unable to enforce an agreement between his father and his father-in-law that money would be paid to the son on his getting married

aspects to the doctrine of privity identified by McDermott

a. A person cannot enforce rights under a contract to which they are not a party to

b. A person who is not a party to a contract cannot have contractual liabilities imposed on them

c. A party to a contract cannot have his position under the agreement altered to his detriment by means of a further agreement to which he was not a party and pursuant to which they could assert no rights

d. Contractual remedies are designed to compensate parties to a contract, not third parties

murphy v bower

Railway contractors had a contract with a railway company. Bower was the engineer employed by the railway company and was responsible for certifying that the contractors' work had been completed. Bower refused to issue the certificates, so the contractors tried to sue him.

Held

The contractors could not sue Bower in contract because Bower was not a party to their contract with the railway company.

exceptions to the doctrine of privity

1. trusts of contractual rights

   • requires quite strong and specific evidence of intention to create a trust before the doctrine of privity can be evaded in this way

2. agency

3. exemption clauses

4. assignment

   • in certain circumstances, contracts of non-personal nature may be assigned to by third parties

5. tort of negligence

6. collateral contracts

7. covenants relating to land

8. statutory exceptions

9. the “principled approach” exception

trusts of contractual rights

rights under a contract can be the subject of a trust - example;

contract between A and B in which B agrees to confer benefit on C, initially C cannot compel B to honour his obligations under that contract.

if A agrees to become a trustee of these rights, and B a beneficiary then C has 2 ways of securing rights under the contract

1. since A is a trustee, he owes certain duties to C as a beneficiary, which C can enforce if necessary

   • this will be inadequate as issues of privity often occur in circumstances where A is unable or unwilling to enforce the contract

   • this is a long process as it involves 2 sets of proceedings (C suing A, and then A being compelled to sue B

2. For the reason above, equity permits a beneficiary under a contract to directly enforce that contract and this has been explained in the following terms

gandy v gandy

Cotton LJ stated the general rule that a third party who is not a party to the contract cannot enforce it. However, he said an exception arises where the contract, although formally made between A and B, is intended to benefit C, so that C has a beneficial interest as a cestui que trust. In that situation, C may enforce the contract in equity.

drimmie v davies

A father agreed with his son that the son would take over his dental practice. As part of the agreement, the son promised to pay annuities to his mother and other family members if the father died before them. The family members were not parties to the agreement.

Held - The court allowed the claim because the agreement was treated as creating a trust in favour of the family members. Therefore, they could enforce the promise despite not being parties to the contract

cadbury ireland v kerry co-op creamery

Cadbury had an arrangement with the Dairy Disposal Company that it would receive priority in milk supplies. The Dairy Disposal Company later sold its creameries to Kerry Co-op. The sale agreement contained a provision intended to protect Cadbury's milk supply.

Cadbury tried to enforce that provision even though Cadbury was not a party to the contract between Kerry Co-op and Dairy Disposal.

Held - Barrington J rejected Cadbury's claim. He was unwilling to treat the provision as creating a trust in favour of Cadbury, because there was no sufficient intention by the contracting parties to create such a trust.

agency

there are a number of ways circumventing the doctrine of privity, the first is by way of the law of agency

an agent is a person with authority to enter into certain transactions on behalf of another person (principal) and that where an agent acting within his authority enters into a contract on behalf of his principal then the principal becomes a party to the contract, and can sue and be sued on that contract

this exception has been particularly useful in the context of exclusion clauses

the response of the courts has been to hold that in such situations, sub contractors may be able to invoke the law of agency so as to become parties to the contract and thus to rely on the limitation of liability contained in it

midlands silicones ltd v scruttons

Lord Reid set out four conditions under which a third party could potentially obtain the benefit of such a clause through agency

• The contract clearly intends the third party to benefit.

• The contracting party is contracting as agent for the third party.

• The contracting party has authority from the third party to do so.

• The third party provides consideration.

exemption clauses - smith v eric s bush

a party may use a non-contractual notice to limit or exclude tortious liability

held that an exclusion notice was effective at common law, thereby giving the valuer a defence when sued by the purchaser for negligence

tort of negligence

a person may be liable to another in tort notwithstanding the absence of any contractual relationship between them: this can be seen from the limitation clause cases cited above under agency

it is possible to side-step the requirement of privity if an alternative cause of action in tort can be found instead

collateral contracts

in certain instances the courts deal with a privity issue by recognising two separate contracts i.e. the contract between the original parties and a second contract between one of the parties and the beneficiary

McDermott notes the use of collateral contracts “suggests that privity can be overlooked by giving effect to the commercial reality of the transaction”

shanklin pier ltd v detel products ltd

Shanklin Pier hired contractors to repaint the pier. Detel, the paint manufacturer, assured Shanklin that its paint was suitable and would last at least 7 years. Relying on this assurance, Shanklin instructed the contractors to use Detel's paint. The paint failed after about 3 months.

Problem: The contract to buy the paint was actually between the contractors and Detel, so Shanklin wasn't a party to it and normally couldn't sue Detel.

Held: Shanklin could sue because Detel's promise created a collateral contract with Shanklin. Shanklin's consideration was its instruction to the contractors to buy Detel's paint.

covenants relating to land

section 70 of the Land and Conveyancing Law Reform Act 2009

a. where a deed is expressed to confer an estate of interest in land, or the benefit of a covenant or right relating to land, on a person, that person may enforce the deed whether or not named a party to it

b. nothing in this section otherwise affects the doctrine of privity of contract

the benefit of covenants runs at law if four criteria can be met (concerning land of successor, etc )

a. annexed to the land

b. assigned to the successor

c. the covenant was imposed as part of a scheme or development

statutory exceptions

a number of statutes provide for enforceability by third parties in specified e.g.

• package holidays act 1995 - confers rights on persons apart from the person who actually booked the holiday

• s.8 of the married women’s status act 1957 - where a contract is made for the benefit of a spouse or child and they are specifically named in that contract

• sale of goods and supply of services act 1980 - implies a condition into every sale of a motor vehicle by a dealer, that the vehicle be free from any defect which would danger it to the public at the time of delivery

• road traffic act - provides that a party injured in a road accident will have a cause of action against the insurance company of the vehicle involved