Common Law and the Doctrine of Privity - Essay Example

? Common Law and the Doctrine of Privity Department: The common law, also known as ‘the general rule’,states that only a party to a contract can enforce or execute its standings. Any other person such as a third party is deemed to be an alien to the contract and as such, cannot enforce it. However, with implementation of the Contracts (Rights of Third Parties) Act 1999 (hereafter “the Act”) many transformations have been witnessed, consequently enabling third parties to enforce terms in contracts. In essence, the common law is built on a number of key principles that stipulate that the third party cannot have rights or bear the liability upon a contract he is not a partisan. In order to understand the privity doctrine, it is essential to first relate it to the law of contract. A contract is defined as a promise of exchange that is legally enforceable. Additionally, a contract can only exist if there is an offer - a promise of exchange is made by an offeror to the offeree, acceptance - where the offeree delivers whatever has been promised, and consideration - the bargain for exchange or simply price for exchange. In addition, it is important to ensure that there exists enforcement and reliance (Koffman & Macdonald, 2007)1. The common law is in most cases deemed as being unfair. A good example, person A enters into a bidding contract with person B, and one of the agreement is that person B will continue paying considerations to person A’s wife upon his death. However, B refuses to honor the promise upon A’s death. Under the common law A’s wife cannot sue B because she is not a party to the agreement. In this light, is the common law fair or unfair? The privity doctrine exists in the premises of contract law which states that only a party to a contract can impose it. It further, states that an agreement cannot inflict enforceable commitments on individuals who are not parties to a contract. This is very practical and ideal in many circumstances; however, it can give rise to some unsatisfactory and discriminatory results in practice. An example of the unsatisfactory eventuality is if a contract is entered into by an agent for another first, or on behalf of the contracting persons. Therefore, numerous exceptions have been settled to the doctrine. The precise exceptions to the privity doctrine industrialized from case law and precise legislative provisions. As such, the Privity Act 1982 relates to all contracts. As a result, then Act allows a third party beneficiary to a contract, who was projected to benefit from the contract, to enjoy enforcing rights. Nevertheless, the third party has to institute two key elements, namely, the contract must clearly indicate an intention to confer a benefit on the third party legatee, and that the third party must be clearly identified in the contract (designation). Consequently, the Act is void if the promise is not projected to bring forth an obligation that is enforceable by a non-contracting party. Therefore, the privity Act was aimed at empowering third parties to enforce a contract and be compensated for damages where appropriate. In this light, this paper is going to explore whether the common law position prior to the act was justifiable and whether third parties have now been given 'a ticket to ride’. Moving on the same, the Act addresses the concerns of variations of contracts advancing a benefit on a non-contracting party. Therefore, the parties to a contract that comprises an enforceable benefit to a third party legatee may revise or end the contract at any stage with the approval of that third party legatee. Consequently, the contract may also be revised or ended minus the approval of that third party beneficiary, up to when the position of the third party beneficiary has been substantially changed by his own or another's dependence on the undertaking, the third party beneficiary has attained judgment upon the undertaking, or the third party beneficiary has attained the grant of an mediator after a compliance with regards to the promise (Neyers, 2007)2. Further, if a third party beneficiary has operated focusing on a promise enclosed in a contract, and it is only possible to abide by the contract without varying the contract under the discussed terms - then the court can be consulted so that a variation can be enforced. In such instances, the Court is at liberty to command the promisor to compensate the third party any sum as it deems just. Subsequently, even if the Act has expressively restricted the submissions of the doctrine of privity, whereby it creates a general right for a non-contracting party to execute a contract when the elements are recognized, the doctrine still applies where other exceptions to the doctrine do not apply or when those elements are not recognized. Accordingly, when contracts are envisioned to be enforceable by third parties, the easiest and best way to do this is to define clear and unambiguous requirements affirming that the contract converses a benefit on the third party and that the benefit can be executed by that third party. More so, in the amendments of the common law there emerged situations that called for the incorporation of the promissory estoppel. Promissory estoppel crops up when injustice can be escaped only through enforcing a promise that would not have qualified as being enforceable because of the lack of consideration. In most cases, it rescues a party to as contract who had relied on another party’s promise. However, the party’s nonbinding promise has to be enforced because retracting from such a promise will cause great loss to the relying party. The Contract (Right of Third Parties) Act 1999 was used to save third parties to this unfair rule. Hence, the Act recognizes the third party and consequently confers a benefit on them. This rule has changed the norm in contract law where the third party has the power to enforce or denounce the contract partially or in total. The third party has been recognized as to have equal powers just like the offeror and the offeree (Riordan, 2004)3. Consequently it is important to scrutinize those situations under which the Contract (Right of Third Parties) Act 1999 may apply. In general, it applies in most contracts; however, in section 6 of the Act there are some exceptions. These exceptions include contracts for the carriage of goods and the employment contract. Moreover, those contracts that have not been mentioned under section six, then any person who is not a party to a contract may enforce am term of the contract in his own light under section 1 of the Act. However, this is only if the contract recognizes his right or power to do so, the terms give an indication that the party may confer benefits not unless there are indications that the party was intended to have the right of enforce the term(s). To avoid getting trapped in this, a contract should clearly spell out that third parties have no rights to enforce the contracts terms. In fact, under section 1(3), the third party does not have to be clearly declared in the contract provided that they are identified by means of description4 (UK-government, 1999). Indeed, the privity doctrine goes further to spell out the rights of a third party in a contract. Under section1 (5), the third part has the right to take advantage of all legal remedies as a result of any breach of a contract. As such, third parties have the right to claim and receive monetary compensation for the losses they suffered because of the breach. Further, the third party has been empowered to have a right to secure an injunction or even a specific performance compelling the breaching party to fulfill their obligations in the contract. More so, under section 2 (1) the third party has been safeguarded from the contracting parties: the contract cannot be altered in such a manner that it make it difficult to retract such a contract or vary it with an aim of extinguishing or altering the third party's rights. The section requires that the contract can only vary or retract on three grounds and with the consent of the third party, namely, on the ground that the third party has given his acceptance to the party which contracted to deliver the benefit, the contracting party affording the benefit recognizes the third party to have relied on the applicable term, and the third party adversely relied on the applicable term and the contracting parties to afford the benefit can judiciously be projected to have predicted that they would do so (Taylor & Myers, 2011)5 Likewise, the privity doctrine spells out restrictions to liability to third parties. Under section 3, the contracting parties are able to exploit existing defense to a claim for contract breach. In this regard, they can argue that the third party failed to minimize their losses or that he is a partisan in contributing negligence. As an aftermath, section 5 is in place to ensure that there is no double recovery. It stops either contracting parties or the third party from both recovering the full amount for the same loss. However, whenever an individual is thinking of engaging himself in a contract, it is prudent to reflect if the contract means to advance benefits on any third parties, either, named or identified by description in the contract. In such a case, one should deliberate whether they have the powers or right to enforce the terms (UK-government, 1999)4. Having discussed both the privity doctrine and the Contract (Right of Third Parties) Act 1999, it is prudent that the paper evaluates its relevance to the thesis question which was: For almost a century and a half each time a contractual third party attempted to board the train the common law guards would close the carriage doors smartly in his face. But now the contracts (Rights of Third parties) Act of 1999(hereafter "the act ") gives a third party a ticket to ride, assess whether the common law position prior to the act was justifiable and whether third parties have now been given 'a ticket to ride in adequate circumstances. The Contract (Right of Third Parties) Act of 1999 can be termed as the “savior”. This is because it greatly eliminated injustice that third parties faced under the common law on contracts where they had no right or power to enforce a contract term. As it has been noted earlier, the contract law under the common laws only recognized the offeror and the offeree as the legitimate persons in a contract. However, “the act” recognized the third party and awarded them rights to confer benefits in a contract. These rights to enforce contractual terms are clearly outlined in section 1, consequently, under sections 3 the third party has the right to defense and therefore can sue or be sued for damages (lawoflaw, 2010)6. On the contrary, the common law did not have any provisions for the third party in simply terms “the common law guards would close the carriage doors smartly in his face.” The third party could not claim any damages or sue the contracting parties because he was not recognized. As such, third parties were exploited and denied justice by this law. Therefore, the English law of contract only circled around the premises of ‘bargain’ and only between the contracting parties. Based on this ground, the doctrine of privity was enacted where only the parties to a contract had the right to enforce it, the primary reason being that they had negotiated for the necessary consideration. This was so even if the contracting parties had unambiguously stipulated within the contract that a benefit would be conferred on a third party (Lawoflaw, 2010). More so, why would a law that survived for over one hundred and fifty years need amendments? The first appropriate answer is that since a contract is founded on mutual agreement, it would be unfair to impose obligations on an innocent party who may have not given his consent. Secondly, with the third party having not provided consideration (must exist for a valid contract) to support the contract, he denounces his right to enforce the terms in that contract. As such, the foundation of ‘benefit’ denies the right to claim benefits on ‘free ride’ premise. In addition, the law safeguarded the contracting parties from the interference of third parties on the free ride. Consequently, third parties have no right of action, and this is governed by two vital rules. It was meant to cushion the third party from the consequences of an agreement they were no party to. The first rule is conditions that an enforceable contract exists if it can only be enforced on its parties. Therefore, third parties cannot enforce a contract they are not party to. In the second rule, the conditions are that a person who is not a party to a contract cannot ripe or claim its benefits. This includes even if the parties had agreed that the third party should be able to enforce it as in the example of parties A, B and A’s wife earlier discussed. As time passed, there emerged circumstances that required that a third party should be considered as a party to a contract. Such circumstances included the collateral contracts. Under the collateral contracts, a person is prompted to enter into a main contract. Hence, the existence of a third party becomes necessary, and they are presumed a contractual relationship with one or both contracting parties. Equally, the existence of an assignment or an agent defies the ideas of privity. Under the rules of agency, a third party principal may enforce a contract which was concluded on its behalf by a duly authorized agent. Lastly, bills of exchange and other negotiable instruments had to be recognized. The law allows the payee to assign the right to recuperate sums due to a third party. This can be done through simply transferring of the instrument or by validating it (signing and handing it over) (Koffman & Macdonald, 2007, p. 487). In conclusion, the Contract (Right of Third Parties) Act 1999 did not just recognize third parties in a contract, but it also made some other kinds of contracts easier to work with. More so, it did not make the privity law obsolete, but it was its supplement. In addition, even if it gave the third party a free ride, he had to fulfill certain conditions so that he can qualify for the free ride. The general law is still practicable, and this has been demonstrated through its dominance all the away till 1999. In fact, the basics of a valid contract still hold up to date. Bibliography Koffman, L. & Macdonald, E. 2007, The Law of Contract. Oxford University Press Oxford.(Print) Lawoflaw, 2010, Nov 13. lecture 6 - privity of contract. Retrieved March 7, 2013, from Quizlet: http://quizlet.com/3417583/lecture-6-privity-of-contract-flash-cards/ (Document from web) Neyers, J. 2007. Explaining the Principled Exception to Privity of Contract. McGill L.J Vol52 , 757. (Journal) Riordan, J. 2004, Privity: Jaani Riordian, London.(Print) Taylor, A. & Myers, A. 2011, June 02. The Contracts (Rights of Third Parties) Act 1999: an introduction. Retrieved March 08, 2013, from SEQ Legal LLP: http://www.seqlegal.com/blog/contracts-rights-third-parties-act-1999-introduction (Document form web) 4UK-government. 1999. Contracts (Rights of Third Parties) Act 1999. Retrieved March 07, 2013, from The National Archive: http://www.legislation.gov.uk/ukpga/1999/31/section/3 (website) Read More