Rights of Third Parties - Assignment Example

Assessment Questions and 2 damages prior to the Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 functions to circumvent the impact of party autonomy in respect of contractual obligations and liabilities. The 1999 Act contracting parties can by implication or otherwise confer certain enforceable rights on third parties. Although the Contracts (Rights of Third Parties) Act 1999 stifles the privity of contract rule, it does not abolish it.1 Prior to the coming into force of the 1999 Act, Sarah Jones Developments would have had a cause of action in contract against Archibald McPennine Construction Ltd. However, that right would have arisen by virtue of common law principles rather than statutory law as contained in the Contracts (Rights of Third Parties) Act 1999. Owen Fox explains that ‘for many years, the doctrine of privity of contract was a fundamental feature of English law, meaning that it was only the parties to a contract who could rely upon or enforce the terms of that contract. The consequence of this was that if a third party suffered a loss because the contracting parties failed to fulfil their obligations to each other, then the third party had no recourse under the contract.’2 This is the background against which Sarah Jones Development’s claim for damages against Archibald must be examined. There were and are exceptions to the privity of contract rule. One exception is to be found in circumstances where a collateral contract exists. For example when there is a contract between two parties one of the parties thereto may have a collateral contract with a third party in respect of the same matters contained in the primary contract. Shanklin Pier v Detal Products [1951] 854 provides a good example. In this case the plaintiff hired a contractor for the purpose of painting a pier. The painting contractor was instructed to purchase the paint from the defendants. The defendants informed the plaintiffs that the paint would last for seven years when in fact it only lasted for three months. As a result the plaintiff took the defendants to court despite the absence of a contract between them and defendants. 3 The court ruled that the plaintiffs could sue the defendants for damages on the basis of a collateral contract. The plaintiff had provided consideration in exchange for the defendants’ assurance of the quality of the paint by indorsing a contract with the painting contractor which specifically required that they purchase the defendants’ paint.4 The general tone of judicial findings was that there must be an intention to form a collateral contract. That intention can be determined by the conduct and circumstances of the affected parties. In Darlington BC v Wiltshier Northern Ireland [1995] 1 WLR 68, Steyn LJ explained the law relating to privity of contract and collateral contracts. He said, ‘ the case for recognising a contract for the benefit of a third party is simple and straightforward. The autonomy of the will of parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties. Principle certainly requires that a burden should not be imposed on a third party without his consent. But there is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties. Moreover, often the parties and particularly, third parties, organize their affairs on the faith of the contract. They rely on the contract. It is therefore unjust to deny effectiveness to such a contract...’5 The House of Lords formulated the doctrine of ‘transferred loss’ in the case of The Albazero [1977] AC 774. In this case Lord Diplock explained that in a commercial contract, ‘the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into’.6 In St. Martins Corporation Ltd v Sir Robert McAlpine [1994] 1 A.C. 85 Lord Griffiths was of the opinion that the party contracting a construction company could sue the latter for faulty work and the consequential loss to the ultimate owner of the building constructed.7 By this rationale and the doctrine of transferred loss, although the loss is not Lifestyles’, Lifestyles can sue Archibald for the loss incurred by Sarah Jones. The authorities consistently agreed however, that where a plaintiff sued for losses that were not per se his own, he was only entitled to recover nominal losses as opposed to substantial damages. This rule is founded on a general principle of English law enunciated by Lord Diplock in The Alberezo in which he said, ‘the general rule of English Law that apart from nominal damages a plaintiff can only recover in an action for breach of contract the actual loss he has himself sustained.’8 As a result of this principle of English law with regards to recovery of damages Lifestyles would only be in a position to pursue nominal damages on behalf of Sarah Jones Development Ltd. In East Ham Corporation v. Bernard Sunley & Sons Ltd. [1966] A.C. 406 Lord Cohen stated that damages were limited to the cost of reinstatement.9 In other words, Lifestyles may only recover damages equal to the cost of repairing the defective construction undertaken by Archibald. In Radford v. De Froberville [1977] 1 W.L.R. 1262 Oliver J explained as follows:- ‘If [the plaintiff] contracts for the supply of that which he thinks serves his interests - be they commercial, aesthetic or merely eccentric - then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.’10 It is clear that prior to the enactment of the Contracts (Rights of Third Parties) Act 1999 the rigid barriers safeguarding the principle of privity of contract were coming apart. Although merely permitting a claim for nominal damages, Sarah Jones could pursue a claim under the exceptions enunciated above on the basis that the company was an interested party in the contemplation of the parties to the construction contract. A second exception to the privity of contract rule permits Lifestyles to sue for the damages incurred by Sarah Jones in their position as a party to the contract although the loss is not their own. By virtue of the ruling in St. Martins Corporation Ltd v Sir Robert McAlpine Lifestyle would hold the damages awarded upon trust for Sarah Jones.11 Privity of contract has developed into a rather flexible principle, but like any common law principle it is fraught with uncertainties. Prior to the enactment of the 1999 Act departures from the principle were based primarily on equitable principles of fairness and justice. The House of Lords duly noted that ‘an action for damages for breach of contract is an action at common law, and in the eyes of the common law it is the trustee who sustains the loss.’ 12 Moreover, Treitel maintains that, ‘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.’13 Question 3 Following the Contracts (Rights of Third Parties) Act 1999 By virtue of the Contracts (Rights of Third Parties) Act 1999 Sarah Jones Development has a statutory right to pursue damages against Archibald as a third party to the construction contract. The relevant Section of the 1999 Act provides as follows:- ‘1-(2) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if- (a) the contract expressly provides that he may, or (b) subject to subsection (2), the term purports to confer a benefit on him (2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.’14 Assuming that the contract between Archibald and Lifestyles properly identified the complex to be constructed it follows that Sarah Jones was identified in the contract. Therefore Sarah Jones would be a third party to which Section 1of the Contracts (Rights of Third Parties) Act 1999 applies. Moreover, in Alfred McAlpine Construction Limited v Panatown Limited, the House of Lords ruled that intention can be either expressed or implied from the specific circumstances of the case. This decision was influenced by consideration of common law precedents rather than the application of Section 2(1)(b) of the Contracts (Rights of Third Parties) Act 1999 since that Act only impacts contracts made after May 11, 2000.15 Obviously, the ruling in Alfred McAlpine Construction Limited in relation to intention has only been fortified by the 1999 Act. The House of Lords maintained that the exception to privity of contract is founded upon a principle of law and therefore it was not necessary for the plaintiff to prove that he or she would have been in the contemplation of the contracting parties. Lord Clyde said ‘If the exception is founded primarily upon a principle of law, and not upon the particular knowledge of the parties to the contract, then it is not easy to see why the necessity for the contemplation of the parties that there will be potential losses by third parties is essential.’16 Although the previously discussed exceptions to the doctrine of privity of contract remain unchanged by the Contracts (Rights of Third Parties) Act 1999, Sarah Jones can by virtue of the 1999 Act bypass the privity of contract and take action against Archibald as if they were a party to the contract. Previously the right of a third party to take action for damages pursuant to a contract was only possible by virtue of agency and equitable principles discussed above. However, the new statutory right to sue for damages only possible if the criteria set out in Section 1 of the Contracts (Rights of Third Parties) Act 1999 are met. By virtue of Section 1 of the Contracts (Rights of Third Parties) Act 1999 Sarah Jones will have to demonstrate that they are named in the contract or that they are identified by a particular description within the actual contract for the construction of the complex.17 Moreover, by virtue of Section 1(1)(b) the contract must make provision for Sarah Jones to enforce the contract. 18 If the Section 1(1)(b) criteria is met Sarah Jones may enforce the contract as if the company itself is a party to the contract.19 The Contracts (Rights of Third Parties) Act 1999 was the result of the Law Commission’s Report Number 242 of 1996. The Law Commission stated that they did not wish to usurp the common law exceptions nor did they wish to alienate third party rights from those of the ‘full’ contractual parties. The Law Commission stated that ‘although we do not regard a third party under our proposed Act as having a ‘full’ contractual right his right under our proposal is clearly closely analogous to a contractual right and standard common law contractual principles should in general apply.’ 20 With this in mind, together with the provisions of Section 1 of the Contracts (Rights of Third Parties) Act 1999, Sarah Jones may pursue a claim for substantial damages against Archibald. That is, provided Sarah Jones is a party identified in the contract either by name or description and provided also that the ‘full’ contractual parties did not specifically state an intention in the contract to alienate the rights of Sarah Jones as a third party to the contract.21         . Works Cited Alfred McAlpine Construction Limited v Panatown Limited http://www.hrothgar.co.uk/WebCases/hol/reports/00/02.htm Viewed March 7 2007 Contracts (Rights of Third Parties) Act 1999 Darlington BC v Wiltshier Northern Ireland [1995] 1 WLR 68 East Ham Corporation v. Bernard Sunley & Sons Ltd. [1966] A.C. 406 Fox, Owen. The Contracts (Rights of Third Parties) Act revised. Contract Journal. August 9, 2006 Law Cmm No 242 CM 3329 Mulcahy, Linda and Tilloston, John. (2000) Contract Law in Perspective Taylor and Francis Ltd. Radford v. De Froberville [1977] 1 W.L.R. 1262 Shanklin Pier v Detal Products [1951] 854 St. Martins Corporation Ltd v Sir Robert McAlpine [1994] 1 A.C. 85 The Albazero [1977] AC 774 Treitel, G.H.(1999) The Law of Contract. Sweet and Maxwell Assessment 2 The doctrines of common mistake and frustration are principles formulated to address the difficulties that arise out of events of a very low probability. Generally, the parties are excused from the obligation to perform under a contract when low probability events occur with the result that the performance of the contract is either impossible or unduly expensive.22 The doctrine of common mistake is calculated to address circumstances in which both parties to a contract are influenced to act on incorrect presumptions of facts at the time of entering into the contract. This usually renders the performance of the contract unenforceable. On the other hand the doctrine of frustration addresses unforeseen situations that arise following the formation of the contract with the usual result that the contract is terminated at the time of frustration.23 The Court of Appeal considered both the doctrine of frustration and the doctrine of common mistake in Great Peace Shipping Limited v Tsavliris (International) Limited (2002). Lord Phillips MR referring to the formulation of the doctrine of frustration by Lord Simon in Bell v Lever Brothers Ltd [1932] AC 161 said that, ‘frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.’24 Lord Phillips goes on to say that this formulation of the doctrine of frustration must have some influence on the doctrine of common mistake. He adds that ‘where a fundamental assumption upon which an agreement is founded proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding. The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement.’25 Lord Phillips’ comparison of the doctrines of frustration and common mistake clearly subscribe to the argument that both doctrines are designed to allocate the risks of unforeseen risks. The relative similarities of the operation and application of these doctrines are evident in the judicial temperament in the courts’ approach to both doctrines. The case of Bell v Lever Brothers Ltd [1932] AC 161 is important to the doctrine of common mistake since it has endured for so long and as observed it was indorsed by the Court of Appeal in Great Peace Shipping Limited v Tsavliris (International) Limited (2002). In Bell v Lever Brothers Ltd the Niger Company endeavored to merge with Lever Brothers in March of 1929. In the course of doing so, Niger wanted to terminate the services of two employees, Bell and Snelling. In order to accomplish the termination of the relevant employment contracts, Lever Brothers made an agreement with Bell and Snelling to award them with attractive compensation packages should they resign their respective positions with the company. At the time of forging this agreement both parties mistakenly assumed that neither of the employees had conducted themselves in a manner which would justify termination of their employment contracts. In fact, ground did in fact exist for termination of Bell and Snellings’ employment contracts since they had previously made secret profits in abuse of their position with Lever Brothers. This fact came to light later on.26 The House of Lords ruled that this mistake would not render the contract void. The mistake had to be such a ‘fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreements.’27 The mistake must be such that if it had been known at the time of contracting both parties would have refused to agree to the terms of the contract. It is entirely doubtful that Bell and Snelling would have refused to indorse the contract offering them an attractive compensation settlement in exchange for their resignation. The doctrine of common mistake is founded on principles of res extincta and res sua. Res extincta refers to circumstances in which the subject matter of the contract is non-existent. An example of res extincta is demonstrated by the early case of Griffith v Brymer [1903] 19TLR 434. In this case the plaintiff entered into an oral agreement with the defendant for the letting of a room for the purpose of viewing the King’s coronation on June 26 1902. The agreement was made at 11 a.m. on June 24. However, unknown to both parties the coronation was postponed at 10 a.m. for medical reasons. Wright J held that the contract was void since there was an erroneous assumption of facts which were at the root of the matter agreed on.28 Res sua applies in circumstances where a person erroneously contracts to acquire that which already vests in him. The operation of res sua was demonstrated in the case of Cooper v Phibbs [1867] LR 2 HL 149. In this case an uncle erroneously but unintentionally told his nephew that he was the owner of a fishery. Upon the uncle’s death the nephew, acting on this information agreed to rent the fishery from his uncle’s surviving daughters when in fact, the fishery belonged to the nephew. The House of Lords ruled that the mistake operated to render the contract voidable. Westbury J explained that ‘If parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is that that agreement is liable to be set aside as having proceeded upon a common mistake.’29 A common mistake as to the quality of the subject matter will not render a contract voidable. Lord Atkins submitted in Bell v Lever Brothers Ltd [1932] AC 161 that ‘a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.’30 The manner in which the courts address the issue of remedies in relation to contracts rendered unenforceable by virtue of common mistake is demonstrative of the role the doctrine of common mistake plays in the allocation of risks in cases where unforeseen events arise. The remedies available are equitable in nature and are rescission, the imposition of terms between the parties so as to achieve justice and fairness and refusing to order specific performance.31 The doctrine of frustration, like the doctrine of common mistake evolved to weaken the rigid common law dictates that insist on the performance of a contract in circumstances where it would be unreasonable to do so. The doctrine of frustration will arise in the following circumstances:- 1. When it is apparent from the terms and conditions of the contract together with the relevant circumstances that the parties are bound themselves on the common understanding that something or someone will continue to be at their disposal or that a future event upon which the contract is based will in fact occur; and 2. After forming the contract some event arises which renders the performance of the contract impossible or performance can only be conducted in a manner not contemplated by the parties.32 Some of the earliest applications of the doctrine of frustration emerged in instances where there was physical destruction of the subject matter which was the basis of the contract. For example in Taylor v Caldwell [1863] 3 B&S 826 a contract was discharged for the hiring of a hall for performing concerts when the hall was accidently destroyed by fire. 33 An unforeseen delay will also operate to frustrate a contract as was demonstrated in the case of Metropolitan Water Board v Dick, Kerr & Co [1918] Ac 119. In this case the defendant agreed to construct a reservoir for the plaintiff within six years from the date of the contract. However, within two years of commencing the construction of the reservoir the Minister of Munitions required that the defendant cease his construction. The defendant argued that the contract made provision for time extensions, but the House of Lords ruled that should the construction resume following the interruption in the work it would be an entirely different contract, therefore the contract was frustrated.34 An unforeseen delay will not automatically frustrate a contract. The courts will look to see the length of the delay and temper the length of the delay with the general belief that it is unfair to require that business men wait around in anticipation of resuming their business obligations. Moreover, the court will look at the expenses involved in the delay as well as the inconvenience to both sides.35 When a contract is discharged as a result of frustration some terms of the contract might survive the contract and are still enforceable. This is mandated by Section 1 of the Law Reform (Frustrated Contracts) Act 1943 Section 1.36 Moreover, in the case of Codelfa Construction Pty Ltd v State Rail [1982]) CLR 337 the contractor was entitled to be paid for the work completed up to the time of frustration on the basis or quantum meruit or restitution. In this case Codelfa agreed to construct a railway for the defendant within 130 weeks on the basis that Codelfa would work on a continuous basis for six days a week with more flexibility allowed on Sundays. However, residents complained after work commenced and obtained an injunction to the effect that Codelfa could not work between the hours of 10 p.m. to 6 a.m. Codelfa could not continue under the original terms of the contract without incurring substantial costs and delays. The contract was therefore frustrated.37 The inherent similarities observed between both the doctrines of frustration and common mistake is that certain facts operate to change the actual spirit of the agreement. In both cases the ultimate conclusion is that neither party agreed to the performance of the contract in the circumstances arising or coming to light after the formation of the contract. Indeed the unforeseen circumstances exist at the formation of the contract in cases of common mistake. However, these circumstances commonly only come to light once the contract is formed. Moreover, the doctrine of common mistake assumes that had these circumstances and facts been known to the contracting parties there would not have been a contract at all. In cases invoking the doctrine of frustration, the circumstances are not known at or before the formation of a contract and are therefore unpredictable. Therefore the contract would have been entered into in any event. In both cases the allocation of risk is essential to meet the ends of justice since contracts are rendered impossible of further performance when unforeseen circumstance and facts arise that were not provided for in the contract itself. In the absence of both these doctrines parties would be bound to contracts the performance of which would be unfair and unduly detrimental financially. Bibliography Bishop, William.The Contract-Tort Boundary and the Economics of Insurance. Journal of Legal Studies 14 (1983) Chakki v United Yeast Co Ltd (1982) 2 All ER 446 Codelfa Construction Pty Ltd v State Rail [1982]) CLR 337 Cooper v Phibbs [1867] LR 2 HL 149 Great Peace Shipping Limited v Tsavliris (International) Limited (2002) http://www.ucc.ie/law/restitution/archive/englcases/great_peace_2.htm Viewed March 8, 2007 Griffith v Brymer [1903] 19TLR 434 Law Reform (Frustrated Contracts) Act 1943 Magee v Pennine Insurance [1969] 2 All ER 891 Metropolitan Water Board v Dick, Kerr & Co [1918] Ac 119 Taylor v Caldwell [1863] 3 B&S 826 Treitel, G.H.(1999) The Law of Contract. Sweet and Maxwell Read More