Privity of Contract - Essay Example

Privity of Contract According to the Doctrine of Privity of Contract under common law, no rights or obligations can be imposed upon third parties who are not signatories to the original contract. The rationale behind this principle was established in the case of Dunlop Type Co v Selfridge1where it was held that only a promisee can enforce a promise contained in a contract; i.e, only a person who is a party to a contract can sue under it. While the rule that allows only a contractual party to be liable is regarded as just, allowing only a contractual party recoveries may be a source of inconvenience and hardship. The Law reform Commission, in its Consultation Paper titled “Privity of Contract: Third Party Rights” launched on 14 November 2006, has recommended that the rules of privity be amended such that where the parties to a contract clearly intend a third party to benefit, then that party be allowed to sue if terms are not carried out.2 Moreover, the existing exceptions to the Rule of Privity are also to be preserved. However, in view of the numerous exceptions and exclusions that exist to the Doctrine of Privity of Contract, the question that arises is whether these reforms are really necessary? As stated by Trietel, “the many exceptions to the Doctrine [of Privity] 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.”3 For example, one of the exceptions that exist is the provision for collateral contracts, where one of the parties to the original contract may have a collateral contract with a third party that relates to the same subject matter of the original contract. In the case of Shanklin Pier v Detel Products4 the Plaintiffs had a contract with some contractors. However these contractors recommended that the plaintiffs purchase paint from the defendants, which was guaranteed to last seven years. When it lasted for only three months, the plaintiffs sued and the Court held that despite the existing contract with the Contractors, plaintiffs could sue defendants under the collateral contract arrangement which existed, thereby allowing for action against a third party. Collateral contracts also provided the means for a third party to circumvent the doctrine of Privity in the case of Andrews v Hopkinson.5In this case the Plaintiff bought a car from a defendant who assured him that it was in good condition. The Plaintiff bought the car on a hire purchase arrangement and had it financed through a finance Company and signed a note on delivery of the car stating that he was satisfied that it was in good condition. He later found the car to be defective, but he could not sue the finance company with whom he had a direct contract because he had signed the note accepting the car and stating it was in good condition. As a result, he sued the Defendant Hopkinson, who was a third party to the contract, but was held by the Courts to have a collateral contract with the plaintiff since he had promised that the car was in good condition and helped the plaintiff to make an agreement with the finance company on a hire purchase basis. Another exception to the Privity of Contract has been through the execution of agency agreements, where an agent contracts on behalf of a third party – the principal, as a result of which the principal also has a direct contractual relationship with the other party. The validity of third party rights in such agency agreements has been upheld by the Court in the case of New Zealand Shipping v Satterthwaite.6 A third exception to the Privity of Contract has been developed in equity through the concept of trusts of contractual rights. A trust is an equitable obligation whereby property may be held on behalf of a third party. Alternatively, trusts may also operate through restrictive covenants, especially on land for example, where a contractual arrangement on use of land between two parties will also be binding upon future third party users. This may also apply in the case of chattel, where an original agreement between two parties that lays out guidelines for use of property may also be enforceable against subsequent users and any violation of the original terms would render future users who are third parties, liable, despite the fact that they are not parties to the original contract. For example, in the case of Tulk v Moxhay7 the plaintiff contracted with a buyer of his property to keep his gardens in their present condition. Later when the property was sold to another buyer who wanted to build on the land despite knowledge of the restriction about the gardens, plaintiff successfully filed suit against him despite the successive buyer not being a party to the original contract between Plaintiff and the first buyer, thereby circumventing the Doctrine of Privity of Contract. Remedies of the contractual party offer another means to circumvent the doctrine, allowing a contracting party to recover losses on behalf of a third party who is intended to benefit from the terms of contract. For example, in the case of Jackson v Horizon Holidays8 the plaintiff entered into a contract with the defendants, but when the defendants failed to comply with contractual terms, plaintiff was able to recover damages not only for himself but for his family members who are third parties to the contract. There may also be exceptions to the Doctrine of Privity that are created through statutes. One example is the Road Traffic Act of 1972, which under Section 148(4), allows an injured third party to recover compensation amounts from insurance companies, even if the original contract is between the insured person and the Company. Another example is the Data Protection Acts of 1988 and 2003, which under section 11(6) state that a data subject (a third party) can enforce the terms of data export contracts originally executed between data exporters and importers. Under the Sales of Goods and Supply of Services Act of 1980, section 14 allows the purchaser of a defective car to sue either the dealer or the finance company that has financed the sale, despite the fact that the original contract of sale/financing arrangement may exist between the dealer and the finance Company. Exemption clauses in contracts executed between two parties have also helped third parties to enforce action on the contracts, despite the existence of the Doctrine of Privity of Contract. For example, in the case of Adler v Dickinson9, a contract between a passenger and a P&O ship contained an exclusion clause that clearly stated that the employees would be exempt from any liability for damages resulting out of their negligence. However, the Plaintiff fell off the gangplank due to the negligence of the employees. Rather than suing the employees, he sued the Captain of the ship. The Court of Appeal held that plaintiff could legitimately sue for damages, because the Captain was a third party to the contract between the plaintiff and the employees and was therefore not bound by the terms of the original contract, which restricted the liability of employees arising out of negligence. A similar situation also arose in the case of Scruttons Ltd v Midland Silicones.10 In this instance, the Plaintiffs had a contract with a shipping Company to ship a drum of chemicals that belonged to the Plaintiffs. As per the terms of the contract between the Plaintiffs and the shipping Company, the liability of the carrier for any damage resulting out of damage was restricted to 179 pounds per package. A group of stevedores were engaged by the carrier company to unload the goods from the ship and due to their negligence, the drum of chemicals was damaged. The plaintiffs sued the stevedores Company for damages. When this company tried to reply on the terms of the original contract which restricted the amount of their liability, the Court held that it would not apply because the stevedores were a third party and therefore could not avail of the limitations specified under the exclusion clause. Lastly the principled approach exception has also been used in some cases to circumvent the Doctrine of Privity of Contract, where a principled approach to ensure fairness would require that the Doctrine be applied. This was the case in Snelling v Snelling.11 The Plaintiff was the Director of a Company and had entered into an agreement with other directors of the Company that in the event that any of them resigned, they would then forfeit the loan amount that they had each made to the Company. However, the Plaintiff resigned and sued to recover the loan from the Company. Since the Company was not a party to the agreement but it was a third party, therefore the restriction would not have applied and the Plaintiff should have recovered his loan. However in this case, the application of a principled approach required that despite the Doctrine of Privity restricting the involvement of the Company because it was a third party, nevertheless sin the interest of justice, it would be justified for the Company to enforce the agreement between the Directors. As was stated by Ormond J, “In my judgment therefore, the second and third defendants have made out an unambiguous case and have shown that the interests of justice required that the plaintiff be not permitted to recover against the defendant Company. It follows that this is a proper case in which to grant a stay of all further proceedings in the plaintiff’s action against the Company.”12 As a result, the outcome in this case showed that an agreement existing between the Directors resulting in plaintiff losing the loan amount, was enforced in his action against the Company, despite the fact that the Company was not a party to the original agreement. From the above case law, it may be noted that there have been many exceptions developed to the Doctrine of Privity, especially in instances where equity requires justice has to be done to third parties who may not be original parties to the contract. The reforms also seek to retain most of these exceptions and bring justice to third parties, which is already being accomplished. According to the reforms, in assessing the application of the Doctrine of Privity, the courts would be required to examine whether a contract is intended to benefit a third party and similarly, whether a third party is to be able to enforce the terms of the contract. However from the case law above, it may be noted that the Courts have already been applying equity and the law in granting justice to third parties by making a determination whether third parties are intended to benefit by the terms of contract. The application of the principled approach exception has also meant that Courts have not hesitated to reject the restrictions of the Doctrine in those instances where an application of it would have produced an inequitable or unjust result. Therefore, in view of this, it appears that the Courts are already functioning along the lines of the principles that form the basis of the reforms that have been proposed by the Law Commission. Hence, there was no need to even suggest such reforms which are already being executed through the numerous exceptions to the Doctrine that are already available. On this basis, it may be concluded that the reforms are unnecessary. Bibliography * “LRC recommends change in Privity of Contract Rules” [online] Accessed August 24, 2007 from: http://www.mhc.ie/news-+-events/legal-articles/214/ * Trietel, G.H., 1955. “The Law of Contract” (9th edn) Cavendish Publishing Cases cited: * Adler v Dickinson (1954) 3 All ER 396 * Andrews v Hopkinson (1957) 1 QB 229 * Dunlop Tyre Co v Selfridge (1915) AC 847 * Jackson v Horizon Holidays (1975) 1 WLR 1468 * New Zealand Shipping v Satterthwaite (The Eurymedon) (1975) AC 154 * Scruttons Ltd v Midland Silicones (1962) AC 446 * Shanklin Pier v Detel Products (1951) 2 KB 854 * Snelling v Snelling (1973) 1 QB 87 * Tulk v Moxhay (1848) 2 Ph 774 Read More