Importance and Effects of Privity of Contract - Case Study Example

Q Importance and Effects of Privity of Contract. The doctrine of privity of contract according to the rules of common law does not allow a third party, no matter how many benefits the contract may confer on him, to sue on it principally for two reasons. The first relates to the requirement that only the promisee is entitled to enforce the contract, thus, barring a third party from enforcing it himself (Dunlop Tyre Co v Selfridge [1915])1. The second pertains to the requirement of consideration that is an essential ingredient in the formation of a contract. Consideration moves from the promisee, not the third party and thus the third party cannot sue upon the contract (Tweddle v Atkinson [1861]2. As imagined, this was done in the interest of certainty in law but it did have the potential of leading to unfairness for a party to whom the benefit was provided, such as that witnessed in Dunlop and Shanklin Pier v Detel Products3. This is where the Law Commission came in with its reforms in 1996. The resulting Contract (Rights of Third Parties) Act 1999 brought into force that report of the Law Commission (1996) which allows third parties to enforce the contract and be able to sue for breaches subject to a few conditions. Needless to say, this brought forth a welcome wave of statutory protection for third parties which previously were entitled to benefits under that contract but still could not enforce it due to lack of consideration. Section 1 of the Contract (Rights of Third Parties) Act 1999 provides that a third party may be able to enforce the terms of the contract if “the contract expressly provides that he may” (s.1(1)(a)) and “the term purports to confer a benefit on him” (s. 1(1)(b)) (except where on proper construction  of the contract it appears that the parties did not intend the term to be enforceable by the third party (s.1(2)). Thus if A agrees to pay C $100 on the performance of an obligation by B, C can enforce that payment if A fails to pay in breach. This was not the case earlier, as seen in Beswick v Beswick4 where the nephew made a contract with his uncle which involved payment of weekly maintenance to the aunt. The House of Lords held that Mrs. Beswick could not enforce the contract since she was not privy to it. In light of the Contract (Rights of Third Parties) Act 1999 today, it is clear that the case would have been decided differently. The third party may also rely on exclusion clauses in order to protect its interest. However, simply conferring a benefit to the third party may not be enough to grant him a right to sue. Where there is doubt as to whether the parties designed the agreement to avoid conferring a right to sue on the third party, s.1(2) applies and the courts will, on a proper construction of the contract, seek to determine the actual intention of the parties. This presents certain problems if the contract does not expressly state the intention of the parties. In Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003]5, the burden of proof to counter a right granted to a third party to sue under s.1(2) was placed on the party that alleges that such a right has been wrongfully applied (as per Colman J). Thus, in a neutral contract, where there is no language barring the third party to sue, it would usually follow that the statute often grants a right to sue to the third party. This safeguards the third party a little too broadly, and it has been applied differently where the chain of sub-contracts is long. In cases where the contract consist of sub-contracts that purport to confer a benefit to a third party, it is more likely for courts to construe that parties privy to a sub-contract lower down the chain did not intend to enable the third party benefitting under that contract to sue up the hierarchy the original contractor (see Junior Book v. Veitchi & Co Ltd [1983]6. Of course, it must be noted that the Act does not allow the right to a third party in all cases and the parties may explicitly bar him to sue on it. In addition, there must be some identification given as to the party’s existence, either by name, as a member of a class, etc but the party need not be in existence at a time (s.1(3)), which includes subsequent owners of a property, for example. The Act eliminates the operation of the doctrine of consideration as well, and the third party need not have provided any to the promisor, so long as the promisee provided the same. The remedies available to the third party are the same as that available to the parties privy to the contract. Thus, any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (s.1(5)) is applied. This includes, damages, specific performance, injunctions, etc, subject to the tests of remoteness of damage, causation and mitigation. Moreover, s.2 also protects the third party when it comes to variation of the contract. Thus, the importance of the Contract (Rights of Third Parties) Act 1999 cannot be undermined as to its broad implications towards the benefits it accrues to the third party. It can rightly be said that it does away with the unjust mechanisms of the old doctrine of privity (Beswick v Beswick; Dunlop Tyre Co. v Selfridge] whereas protecting the promisor from any excessive liabilities (as he can incorporate terms to disallow a third party to sue) without upsetting established applications of Privity of contract (Carriage of goods by sea ss.6(5)(6)(7) respectively7). S.7(1) even leaves unperturbed existing third party rights that may arise apart from the Act itself. Thus, the pre-existing exceptions arising out of Collateral Contracts and Agency agreements remain undisturbed, giving third parties a much greater say than before. Q. 2 Since John was the agent of CBS, any representation that he made to Michael would be deemed to be a representation made by CBS according to the principles of agency, and thus would render CBS personally liable to Michael. It follows that John made a few representations to Michael prior to the purchase of the property which turned out to be false. This may be a breach of an express term, implied term or a misrepresentation under the Misrepresentation Act 1967. For the purposes of this question, each statement John made will be discussed individually and considered for the best course of action. “The builders are amongst the finest and most reliable builders in Europe” These claims by John turned out to be false. The question then arises whether it is to be considered as an express term, which has been breached. If it was an express term, much will depend upon whether the courts, taking the parties intentions in mind, regard it as a condition or a warranty in order to signify the appropriate course of remedy. If it was a condition that was broken, Michael would be able to reject the purchase and recover the price paid as well, whereas if it was considered a warranty, Michael would only be able to recover damages. John’s statement may also be considered a misrepresentation, if it was a misstatement of material fact or law that induced Michael into signing the contract (Smith v Land and House Properties [1884]8; Dimmock v Hallett [1866]9). It must not be a ‘mere puff’ (see Dimmock) nor a statement of opinion (Bisset v Wilkinson10). In John’s case, since he was in a better position to know the reputation of CBS, his statement is likely to be considered one of fact (Esso Petroleum ltd. v Mardon [1976]11. However, the statement must also have induced Michael into signing the contract12. This inducement does not have to be reasonable, but then, the burden of proof is on the representee to show that he was induced (see Museprime). The facts state that Michael was impressed with the statements made by John but expected him to say things like that. On top of that, he made his own observations as well through the neighbor he encountered in the absence of John. However, the law states that the statement may not be the ONLY inducement to the contract (Edgington v Fitzmaurice13). On balance, it seems that Michael did not rely on John’s statement. “They only use the finest materials in all their houses” This statement should also satisfy the prerequisite of being a statement of existing fact rather than being a mere puff (see Dimmock) which seems unlikely. In Dimmock, the statement that the land was ‘futile and improveable’ was considered a mere puff. Even if here, it alludes to a statement of fact, this statement seems unimportant to Michael, as he later made his own investigations through the neighbor who purported that John gave them a written statement verifying the quality of materials, and therefore could not have induced him (see Museprime; Smith v Chadwick [1884]14). Thus, this misrepresentation may not be actionable. “I just sold a house for 75000 pounds” Footballer expected to Move in next door These two claims turned out to be false. It appears that Michael did not rely on either of these statements, since he expected John in his position as a salesman to exaggerate. The courts may not regard a statement as to the moving in of a footballer sufficient to induce a reasonable person, and thus, the onus would be on Michael to prove that the statements on price and footballer induced him (County Natwest v Barton [2002]15). The statement on price would be easier to prove in such a case and thus, CBS would be liable for fraudulent misrepresentation provided they cannot show that their belief was reasonably held. If John did, in fact, sell a house nearby for 75000 pounds, there is no misrepresentation. “The house is excellent value for money” This statement amounts to a mere puff as it merely represents a statement of opinion rather than one of fact (see Bisset and Dimmock). “Situation of the house … queue of people waiting to buy” This statement was of concern to Michael, which means that he relied upon it, and was induced to contract. This inducement is also valid where Michael could himself make efforts to find out if the statement made was true, but did not (see Redgrave v Hurd [1881]16. As a result, John would be liable for misrepresentation, provided that he cannot show that he had reasonable grounds to believe and did believe up to the time the contract was made “that the facts represented were true” (s.2(1) Misrepresentation Act 1967). On the facts, it would be difficult for John to prove otherwise given his position as agent who possesses special skill (Mutual Life and Citizens Assurance Co v. Evatt17) and thus, he would be liable for fraudulently misrepresenting to Micheal. The remedies would be discussed below in the remedies section. Garden, Swimming Pool, and Dispute with farmer This proved to be a false statement of fact as well. However, given the fact that Michael had already started financing procedures, it is arguable that the answers to the questions would have induced him. However, even if the requirement of inducement (see Museprime) is not satisfied, it is difficult to see how CBS did not have knowledge of legal disputes that existed prior to the contract nor did they have the knowledge of the construction of the pool and the garden. This belief does not apply to John but to CBS directly (The Skopas [1983]18) and the burden of proof is on them to prove that their belief was reasonably held19. Thus, on balance, it is submitted that CBS would be liable for misrepresentation for the statements made by John. Remedies Michael may be able to set the contract for the purchase of the house aside or claim damages, either in place of rescission (which is at the discretion of the judge under s.2(2) or as an independent claim for damages under s.2(1) of the Misrepresentation Act 1967. CBS has in these cases the defense of reasonable belief that the statements made were true at the time of contract under s.2(1). However, it would be difficult for them to justify the claims of faulty workmanship, queue of people, construction of the garden and the pool and most importantly, the dispute with the former. With regards to the latter, the misrepresentation was fraudulent, and thus allows Michael to set aside the contract, which is the ideal course of action because of the impending suit expected to be filed by the farmer. Read More