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Privity Notes

GDL Law Notes > GDL Contract Law Notes

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Contract Law: Privity of Contract Doctrine of Privity of contract
? Contract at common law only creates rights & obligations between the parties to it. Does not give rights, or impose obligations, on a 3rd party.
? (1) burden cannot be imposed on a 3rd party
? (2) 3rd party to a contract cannot take a benefit from it.
? You cannot claim for somebody else's loss. Privity and Consideration-closely linked
? The rules on consideration and privity are distinct legal principles, but they are analogous, and the effect of both rules is: no person can sue on a contract unless (a) he is a party and (b) he has provided consideration.
? Tweddle v Atkinson (1861): o Tweddle Sr and Atkinson agree; Tweddle JR is unable to sue, not only because he didn't provide consideration. But because, even though the contract was for his benefit---
the doctrine of privity said no, Tweddle JR had provided no consideration, was not privy to the contract. o No consideration, no contract, no privity. o Clam failed on grounds of consideration; but could also have failed on privity grounds: contract was between father and father of bridge, not the groom.
? Consideration and privity often go hand in hand: no consideration, often no privity.
? Dunlop v Selfridge (1915)---made clear the two principles are distinct, Viscount Haldane LC: o Dunlop sells tyres to Dew. o Part of agreement between them includes an undertaking by Dew not to sell on Dunlop's tyres, for Dunlop's price or less than that price. i.e. Dew will only sell on Dunlop's tyres more expensively than Dunlop. o Dew sells to Selfridge. o As part of Dew's contract with Dunlop, Dew had to seek the same undertaking with anybody they sell to (i.e. they must not agree to sell below Dunlop's list price). o In this case, Dew sold to Selfridge, who then sold under Dunlop's list price. o Dunlop wants to sue Selfridge. o Problem 1: no consideration from Dunlop to Selfridge. o Problem 2: Dunlop is a 3rd party, Dunlop cannot sue Selfridge. o Dunlop tried to argue they had entered into a contract with Selfridge, through the agency of Dew.

1 o HELD, HL: privity---. The agreement was between Selfridge and Dew only---Dunlop not a party to that contract; and, furthermore, no consideration had moved from Dunlop to Selfridge. o [Lord Dunedin, making clear that privity and consideration are distinction: thought that the agreement was made by Dew as agent for Dunlop; Dunlop, as undisclosed principal, could theoretically sue; but, there would have to be consideration from Dunlop to Selfridge]. o And why couldn't Dew sue Selfridge instead? Because Dew hadn't suffered any loss. o Judge: 'nip any budding effect of consideration'. The problem is consideration.So--Dunlop v Selfridge, made clear that consideration and privity are distinct, they were treated separately. Viscont Haldane found there was neither privity nor consideration; Lord Dunedin found that Dunlop was privy (through agency), but to sue would have to show that consideration moved from Dunlop to Selfridge.Part of doctrine: it must be your loss which you sue for in court, cannot sue for another's loss.

The Law Commission jumps in---Law Revision Committee 1937---
eventually enacted in Contract (Rights of Third Parties) Act 1999---
came into force 11 Nov 1999, see below.
? 1937 report: 'where a contract by its express terms purports to confer a benefit on a third party it shall be enforceable by the third party in his own name subject to any defences...'
? So they're saying we're fed up with privity.
? Another Report in 1996
? Note Law Commission recommendations---they expect a legislative reaction usually. The courts can't go against precedent.
? 1999 Act---doesn't effect rule that a 3rd party should not be subjected to a burden by a contract; but allows a 3rd party, who has not provided consideration, to enforce a term of the contain in certain circumstances (s1).
? The Act does not change the position on imposition of obligations to a 3rd party---i.e. a 3rd party cannot be sued on a contract to which he is not a party; what it changes, is ability of a 3rd party to obtain a benefit.
? The Act does not affect the existing common law rules---rather, the Act provides a statutory exception to the common law Doctrine of Privity
? And the Act does not effect any right/remedy for a 3rd party that exists or is available apart from this Act (s7). Exceptions-Ways of Circumventing the Privity Requirement

2 ? ?? ? Guarantor's right of subrogation: o Crucial to insurance law. o Eg you want to take a loan out from a bank, but you have no capital. Someone agrees to be your guarantor: you say to bank, my guarantor will guarantee the loan. They give you the money. Then the bank goes under, and is trying to get money back, so calls in the loan from you. You have no money. So the bank sues the guarantor. The guarantor pays up. But then the guarantor steps into shoes of the bank---the bank's rights are subrogated to the guarantor, and, as the bank, the guarantor can now sue you for the money. o So when guarantor agrees to underpin a loan; if guarantor is called upon to pay the money to the principal creditor, he is subrogated to the rights of the principal creditor against the debtor. i.e. the guarantor 'stands in the principal creditor's shoes'. They then take on the original rights against the debtor.
? ?? ? Trusts, -not a real exception o Possibility that a right under a contract is a chose in action (a right to enforce an obligation), which can be the subject of a trust. o Possibility that the promisee, under a contract, might declare himself trustee of the benefit of the promise in question on behalf of a 3rd party and by that means avoid doctrine of privity. o Where a trust of a contractual right is found to have been created, the principal effect = to permit the 3rd party to enforce the benefit. o This is only an apparent exception to doctrine of privity
---because the rights of the 3rd party are those of the beneficiary, and thus equitable. o "it is not legitimate to import into the contract the idea of a trust when the parties have given no indication that such was their intention"--per Lord Greene MR , In Re Schebsman [1944]
o You can't enter into a plain contract, and then argue someone was a beneficiary. Tort-one massive exception to privity
??? ?Where a contracting party owes a duty of care to the other contracting party, a breach of contract may also constitute a breach of duty of care in tort---in English law, Claimants can choose between pursuing a remedy in either contract or tort (Henderson v Merrett).
??? ?Can a person, A, who is not party to the contract (between B and C), be owed a duty of care---so that a breach on the part of one contracting party will constitute a breach of duty of care, giving a third party (A) the right to sue that contracting party for damages in tort? YES---Donoghue.

3 ??? ?Donoghue v Stevenson. If Donoghue had had a contractual right to the guy who sold her the ginger beer, then no tort. In fact, in Donoghue, the plaintiff (A) was not only a 3rd party in relation to contract of sale between manufacturer and retailer, but was also a 3rd party in relation to contract of sale between retailer and purchaser of the bottle. HELD: the plaintiff, as ultimate consumer of the goods, could bring a tortious claim directly against the manufacturer---in effect, this held that the privity principle that restricted the range of claims for breach of contract, did not restrict the range of claims in tort.
??? ?But tort is an exception to privity---no contractual right, but manufacturer has a duty of care. So privity principle doesn't apply to tortious claims.
? ?? ? Junior Brooks v Veitchi (1983), majority HL held it was open, in principle, to A to plead tort of negligence to recover pure economic loss caused by breach of contract between B and C, even though such an action was not sustainable (because of privity of contract).
??? ?i.e. Junior Books licenced 3rd party claimants to invoke the law of negligence as a means of by-passing the restrictions imposed by privity on claims for breach of contract.
? ?? ? This could not be tolerated: so two things happened: o (1) Junior Books was treated as a one-off case having no general value as precedent; o (2) and there was a subsequent relaxation in restrictions that privity imposed on 3rd party claims for breach of contract. o So now it is a little easier for 3rd parties who have an interest in the performance of a contract to bring an action for breach; and more difficult for such 3rd parties to recover their financial loss by relying on tort of negligence [[but, compared White v Jones (1995), where 3rd party claimants did succeed in negligence]].
? ?? ? In all legal systems, contract & tort play complementary roles, but also tensions: need to lay down clear rules at the points where the laws intersect: Tai Hing Cotton v Lui Chong Hing. Other exceptions
? Agency
? Collateral Contracts
? Assignment
? Judicial Exceptions (or activism)
? Statute Exception---Agency
? Agency relationship: where one party, the agent, is authorised either expressly or by implication, by the principal, to contract on his behalf.

4 ?

Where a person acts as an agent for the principal, The principal will be bound by any contract made with another party (X) that falls within the scope of that authority. o Has been argued this is not a true 'exception' to doctrine of privity: because it is the principal, rather than the agent, who is a party to the contract with X---the principal can then sue and be sued on the contract. The agent is not a party to the contract, and once the contract is concluded, the agent's existence is no longer relevant.
? However, when the agent contracts with X on behalf of an undisclosed principal, situation is different: o Where X is not informed of the principal's existence. o Generally, both the agent and the undisclosed principal can sue/be sued on the contract. o This is clearly an exception to D of Privity, since X didn't know of the principal's existence at time of contracting.
?????And, another exception to privity: when agent contracts without authority on behalf of a named principal: the person named as principal may ratify the contract so that it becomes binding as between himself and X.
? Scruttons v Midland Silicones (1962): o A shipper, Midland Silicones (MS). Wants to ship barrels of chemicals. They contract with carrier to ship the chemicals. o In the contract between MS and the carrier is a limitation clause (not an exemption clause)---it limits the carrier's liability to $500. So carrier will only be liable to pay $500. o The carrier then hires Stevedores (Scruttons) to unload ships. The Stevedores drop a large barrel of chemicals---damage worth $1,500. o Can the shippers sue the Stevedores in contract? No. o Can the shippers sue the Stevedores in tort? Yes. o So the Stevedores are in court. And they find out about the limitation clause between shipper and carrier. They want a piece of that. o Stevedores try to argue: through the agency of the carrier, the Stevedores had in fact contracted with the shipper, and thus the limitation clause was intended to benefit them as well. The agent contracted with the shipper on our behalf. o HL HELD: NO. There is no consideration; and also the limitation clause does not mention the Stevedores at all---the shipper had no idea they were entering into a contract with the Stevedores. Can't argue the shipper and the Stevedores entered into a contract through agency of Carrier.
?????But the case left open the possibility for agency argument to succeed: Lord Reid criteria for agency. An agency contract will exist IF the contract/clause makes clear:

5 ?o (a) that the principal (the third party) is intended to be protected by a clause in the contract. o (b) clear that the agent is acting as a agent for the principal, when entering the contract. This would automatically follow from (a). o (c) that the agency has authority from the principal to act as his agent. Must be clear agreement between the agent and the principal. o (d) the principal has provided consideration to the other contracting party---any contract needs consideration. So, by giving guidance, the HL in Scuttons were giving judicial recognition that such clauses are commercially effective in allocating the risks & burdens of insurance in contracts of carriage. The Eurymedon (1975)---AGENCY found o Follows same facts and principals as Scruttons---but this time the exemption clause fulfilled Lord Reid's criteria. o Shipper is shipping goods with carrier; carrier has contracted Stevedores to unload the goods. Same contractual matrix as above. o The Stevedores are in fact the owners of the carrier. o So we have a contract between shipper and carrier; we have a contract between carrier (a subsidiary of the Stevedores) with the Stevedores to unload. o Exemption clause between shipper and carrier: even better than limitation clause. It said: 'The carrier, its servants, agents and employees' are exemption. CF Scruttons, where the limitation clause only mentioned the carrier. o Stevedores dropped the goods; shipper sued the Stevedores in tort; Stevedores want to use the exemption clause, so want to argue they, as the principals, through the agency of the carrier, can take the benefit of the contractual exemption clause. Arguing: the carrier was our agent, and when shipper entered into contract with carrier, they knew about us---
because the clause expressly stated the benefit was for someone else ('its servants, agent and employees). o The Stevedors fulfilled Lord Reid's criteria: (1) clear that principal was intended to be protected; (2) yes; (3) Stevedores had given authority to carrier to act as its agent, because it owned the carrier; o What about the fourth requirement--(4) consideration---
what consideration had Stevedores given the shipper?
? Court said: the consideration given from the Shipper to Stevedores was the exemption clause---the ability of being able to benefit from it.
? But what consideration from Stevedores to the shipper?
They've unloaded the ship---but they already had to

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