Key Issue: Determining who is a party to the contract.
Rule: "…a person not a party to a contract may not himself sue upon it as to directly enforce its obligations."
Coulls v Bagot’s Estate (1967) 119 CLR 460 at 478 per Barwick CJ.
Overlap with Consideration:
Privity is closely related to the elements of consideration.
Coulls v Bagot's Executor & Trustee Co Ltd: Barwick CJ stated, "Questions of consideration and of privity are not always kept distinct." (at 478).
Multiparty contracts: Contracts that specify parties with a distribution of duties/roles for each of the parties involved.
Part A: Notion of Privity
Doctrine of Privity: Along with consideration, it's a 19th-century pillar of contract law, emphasizing bargain and exchange (quid pro quo).
Traditional Rule: A contract confers rights and imposes liabilities only on actual and immediate parties.
Only these parties are entitled to enforce the contract and receive benefits.
Viscount Haldane LC in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915):
Held that only a person who has given consideration may enforce a contract not under seal.
Stressed that only a party to a contract can sue on it.
Law doesn't recognize a jus quaesitum tertio (third party right) arising from a contract.
Such a right may be conferred by property (e.g., under a trust) but not on a stranger to a contract (at 853).
Note: jus quaesitum tertio refers to third-party rights.
Application of Privity Rule
Scenario:
Dunlop wants to enforce a contract against Selfridge.
Dew (Agent? HL UK - No) is involved in the transaction.
Can Dunlop enforce the contract against Selfridge?
Held: No
Due to issues of consideration, privity, or agency.
Dunlop Tyres v Selfridge [1915]
Key Question in Privity: Can a third party, not a party to the contract, enforce the contract (jus quaesitum tertio)?
Generally, the answer is no.
Part B: Benefits (Coulls, Trident)
Coulls v Bagot's Executor & Trustee Co Ltd
Facts: Mr. Coulls granted a company the right to quarry and remove stone for £5 and royalties.
Authority was given to pay Mr. Coulls and his wife "as joint tenants" and "going to the living partner" - both signed.
After Mr. Coull's death, Bagot's Executor & Trustee Co Ltd (BE&T) sought advice on whether they were required to pay the estate or Mrs. Coulls.
Held: The High Court of Australia (HCA) majority construed the contract as between Mr. Coulls and the company.
Mrs. Coulls was not a party to the contract, so she could not enforce it under the privity rule (nor because of consideration).
The authority to receive royalties was not a contractual right/duty.
Dissenting Opinion: Barwick CJ dissented, stating that it's possible for a person to obtain the benefit of a promise made with another for his benefit through steps other than enforcement in his own right (at 478).
On construction, O’Neil promised for consideration to pay both and enforceable by joining the other (at 479, but C died).
Privity Rule Illustration: Coulls v Bagot's Executor & Trustee Co Ltd
Contract: Coulls enters a contract with O'Neil Construction Ltd for £5 and royalties.
Authority: Coulls authorizes his wife to receive royalties as joint tenants, with the clause "passing to living partner."
Question: Should payments go to Mrs. Coulls or Bagot's as Executor?
Benefits: Trident v Mc Niece
Note: This case on the "insurance exception" has been superseded by legislation.
Facts: Workman Hammond (H) is injured while working on a crane for Mc Niece (McN).
McN seeks indemnity from Trident General Insurance (TGI) under an insurance policy with Blue Circle.
TGI argues that McN is not a party to the contract.
Contract: The indemnity clause in the contract states:
"The Insurance…indemnifies the Assured against all sums which the Assured shall become legally liable to pay in respect of…death of or bodily injury to or illness of any person not being a person who at the time of the occurrence is engaged in and upon the service of the Assured [i.e., Mc Niece] under a contract of service or apprenticeship…"
"Assured" is defined to include the company, all subsidiary, associated and related companies, all contractors [i.e., Mc Niece], subcontractors, and suppliers.
Distinction: Indemnity vs. Guarantee
Indemnity = collateral contract to make good a loss caused by another.
Guarantee = assurance to answer for the default of another.
Trident: Party Relationships
Parties Involved:
Trident General Insurance
Blue Circle Southern Cement Ltd
Mc Niece Bros Pty Ltd (Principal contractor)
Hammond (Crane Worker) - claim for injury damages.
Contract: A contract of insurance exists between Trident General Insurance and Blue Circle Southern Cement Ltd.
Trident Rulings
First Instance (NSWSC): Held that Blue Circle was an agent of Mc Niece and Mc Niece was covered.
Appeal to NSWCA: Found no agency but recognized an insurance exception to the privity rule.
HCA Decision: UphUheld the NSWCA decision (5-2).
Mason CJ and Wilson J: Highlighted the injustice of applying the privity doctrine to insurance policies.
It fails to give effect to the expressed intention of the person taking out the insurance.
It goes against the common intention of the parties.
Others, aware of the policy, will order their affairs accordingly.
Subcontractors will assume that such an insurance is an effective indemnity and may not make their own insurance arrangements accordingly (at 123-4).
Insurance Exception: The "old rules" of privity do not apply to insurance contracts.
Even though a party is not a party to the insurance contract and there's no consideration or ratification, they can assume the insurance policy covers them.
Insurance as 'Exception' to Privity
Toohey J (with Mason CJ and Wilson J): viewed insurance as an 'exception' to the privity rule.
Gaudron J: based her judgment on unjust enrichment (but this was doubted in subsequent cases).
Dissents of Brennan and Dawson JJ: Highlighted the difficulty in distinguishing an exception for liability insurance policies from the general rule of privity.
Brennan J argued that if privity is overthrown for liability insurance, there's no logical reason to retain it for other contracts (at 127).
Key Practical Point: Which party insures in many contracts?
Note: There were obiter remarks regarding estoppel as a remedy in this case (Mason CJ & Wilson J at 140 and Deane J at 145).
Statutory Modification of the Privity Doctrine
The Insurance Contracts Act 1984 (Cth) s 48(1) now addresses the insurance exception:
"Where a person who is not a party to a contract of general insurance is specified or referred to in the contract…as a person whom the insurance cover provided by the contract extends, that person has a right to recover the amount of his loss from the insurer in accordance with the contract notwithstanding that he is not a party to the contract."
Note that this legislation was passed after the events of Trident v Mc Niece.
Other Legislation:
Property Law Act 1974 (Qld) S 55: A promise to do something for the benefit of a beneficiary is enforceable where the third party “accepts.”
Property Law Act 1969 (WA) S 11: An intention to benefit a third person may be expressed in the contract, and they may take an interest, even if not named as a party to the conveyance.
Benefits v Burdens
Privity: Prevents burdens and duties from being imposed on third parties not in the contract.
Second part of the rule: Benefits and burdens cannot be extended to non-parties.
Exception: Contracts relating to land.
Some restrictive covenants may "run with the land."
Restrictive covenant example: The sale of land by A to B can be enforced by A against later purchasers where they have notice of it (Tulk v Moxhay).
Leases: If a lessor (A) leases to lessee B, who then assigns the lease to C with A’s consent, A is liable to lessee C (the assignee) concerning covenants in the A/B lease affecting the land.
Part C: Two Exceptions to the Application of the Privity Rule
Agency:
A legal person (e.g., a company) (A) appoints an agent (B) to do their work.
B is a ‘third party’ but acts/works for the principal, A, so can bind that principal in a contract with ‘C.’
B signs, but the contract is really between A and C.
Assignment:
Where a third party is, in effect, a party to the contract.
You (A) assign your rights against B to another party C, and allow them to take up your debt, legal right, etc. (e.g., selling a debt to a collection agency).
Agency Details
Principal: Expressly or impliedly authorizes the agent to contract on their behalf.
Agent: Generally discloses that they sign as an agent.
If disclosed, the agent is not personally liable, nor can the agent sue on the contract.
Agency for an “undisclosed principal” is possible if:
The agent has actual authority.
The contract does not contradict the agency.
The party does not intend to contract personally with the “agent."
Exception to privity: The principal can enforce even though not a party to the contract.
(Note: Trident General Insurance v Mc Niece Bros arguments on agency and policy that, in effect, Blue Circle was the agent of Mc Niece).
Agency - And Non-Application of Privity Rule
Agent enters a contract with a third party.
If the agency is disclosed (actual authority) or undisclosed (if not contradicted), the contract is with the principal.
Agency – Bill of Lading
Parties Involved:
A (Consignor/Freight Forwarder)
B (Carrier)
C (Consignee)
The bill of lading outlines the contract.
See Scruttons v Midland Silicones for a 4-stage test.
Agency: Port Jackson Case
HCA - Port Jackson Stevedoring Pty Ltd v Salmon & Spraggon (Australia) Pty Ltd (The New York Star) (1978)
A bill of lading was issued to the Consignor (Schick) for a consignment of razor blades from Canada to Sydney by the carrier/shipper, Blue Star, and sent to the Consignee (Respondents).
The Appellant Stevedore company was 49% owned by Blue Star.
33 of 37 cartons were stolen, leading to an action in tort.
The issue was whether the Himalaya clause applies (clause 2 and clause 17 - action within one year).
The case followed Eurymedon [1975] AC 154.
Agency: Himalaya Clauses
Himalaya Clause: "It is hereby expressly agreed that no servant or agent of the Carrier…shall in any circumstances whatsoever be under any liability whatsoever to the Shipper, Consignee or Owner of the goods…for any loss or damage or delay of whatsoever kind arising or resulting directly or indirectly from any act neglect or default on his part while acting in the course of or in connection with his employment and…every exception, limitation, condition and liberty herein contained and every right, exemption from liability, defence and immunity of whatsoever nature applicable to the Carrier…shall also be available and extend to protect every such servant or agent of the carrier acting as aforesaid….."
Question: Does this protect not only the carrier shipping company but also any independent contractors who are not party to the bill of lading?
HCA Held: The clause covered the stevedores, and the Privy Council upheld the stevedores’ case.
Note: Considerations of policy arguments by Stephen and Murphy JJ in the case (Textbook [11.35]) and the view of Tedeschi that risk should be on the owner who knows the goods, their value, and can insure.
Key Questions: Who insures? And when should this be decided?
Agency: Background, Eurymedon
Note: The New York Star followed the Eurymedon case.
New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154 (Eurymedon)
Respondents (S) were consignees under a bill of lading and sued for damages to cargo discharged due to the negligence of NZS’s (Defendants & Appellants) stevedores.
The bill of lading stated that any carrier, servant, agent, or independent contractor would not be sued by the holder of the bill for negligence.
There were no arrangements for unloading the ship, so upon arrival, NZS was engaged as independent contractors.
Machinery was damaged - did the clause apply?
Privy Council: Found that the clause applied and the consideration to support the promise exempting them from liability for any damage caused by negligence was the unloading of the ship.
Thus, there was no privity problem.
Exception 2: Assignment
Assignment (and Novation) - Non-Application of Privity
Assignment: Is a form of transfer.
One party (assignor) to a contract may transfer rights (as opposed to liabilities) to another who is not an original party (assignee).
Statutory Requirements:
If statutory requirements are complied with (particularly notice and writing), the assignee may sue alone.
If statutory requirements are not fulfilled, there can be an equitable assignment if notice is given.
Novation: Where parties agree to transfer duties (debts).
Assignment (& Novation) Exception
In assignment, a contract exists between A and B (Assignor).
B assigns their rights or obligations to C (Assignee).
The contract is now effectively between A and C.
Part D: Final Points - Other Exceptions to Circumvent the Privity Rule
Beyond agency and assignment, what other ways are there to circumvent the privity rule?
Trust: This will be covered in the next slide.
Equivalents of charitable trusts in Civil law Foundation and Islamic Waqf.
Misleading and deceptive conduct: As per S18 of the Australian Consumer Law (ACL) or tort law.
Trust: Circumventing the Privity Rule
A transfers property to B (the Trustee).
B holds the property in trust for C (the Beneficiary).
This allows C to benefit from the property even though they are not a party to the original transfer between A and B.
Criticisms - Abolition or Retention of the Privity Doctrine?
Criticism of Privity: The privity doctrine has been widely criticized [Textbook: 11.05].
Both privity and consideration rules “..have been under siege throughout the common law world.” - Per Mason CJ and Wilson J in Trident General Insurance v Mc Niece Bros at 116.
Historical Context: The Law Committee (UK) in their 1937 6th Interim Report suggested abolishing both privity and consideration altogether.
Law Commission UK Report: The Law Commission UK published a report titled Privity of Contracts (Report 242, 1996).
Also, see Burrows [1996] Lloyd’s Maritime and Commercial LQ 467.
Privity Thwarts Intent: Privity can thwart the intention of parties.
Example: Coulls v Bagot Executors & Trustee Co (Query how to benefit Mrs. Coulls).
Criticisms Summarized:
Injustice to third parties.
Circumventing the rule "suggests the rule is unjust."
Exceptions to the rule "makes the law complex, artificial, and uncertain."
Counter Arguments: Note Brennan J in Trident and articles by Kincaid.
Textbook at [para 11.90] arguing that contract is a bargain, not a matter of public interest.