Privity - Contract Law

COMMON LAW DOCTRINE OF PRIVITY

At common law, A and B cannot confer on T, a third party, a direct right of action against A. Nor could parties A and B give T the benefit an exclusion clause.

Cases establishing that a third party cannot acquire rights under a contract -> Absence of consideration supplied by 3^rd party bars 3^rd party from suing – Tweddle v Atkinson (1861) where A and B made contract that A will pay C 200 quid. Held C could not sue A for the 200 quid as consideration did not flow from C ie C was not a party to the contract so could not enforce it

• Followed in Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] where C could not sue as not part of contract. Judges here said C cannot sue as “consideration must flow from promisor” while in Tweddle v Atkinson judges said “consideration must move from the claimant”. Though these 2 are usually taken to mean the same thing

• Emphasis that B was that B was not a non-party

• Now we have 2 reasons why a third party cannot sue

1. Tweddle v Atkinson because of consideration did not flow from promise

2. Dunlop Pneumatic Tyre Co Ltd v Selfridge because B was not a party to the contract

• Privity of contract reaffirmed by HL in Scruttons v Midland Silicones [1962], (which was an exemption clause case) which extends this to exemption clauses

• In this case, the HL applied the Dunlop Pneumatic Tyre Co Ltd v Selfridge reasoning the stevedores were not parties to the contract

Freedom of contract demands that A and B cannot impose a burden on T without his consent. And so T cannot be subjected to a duty to pay money to A or B, nor can A and B impose on T the burden of an exclusion clause, preventing T from being able to sue A or B, or restricting his capacity to obtain compensation.

In Re Schebsman [1944] (only an express trust of a promise will be recognised. Here, 3^rd party cannot sue as there was no express trust created) the court held that the third party could not sue for breach of promise because:

• In the past, there will be an equitable remedy that there was an implied trust between B and T with B as the trustee and T as the beneficiary

• Therefore B must sue on T’s behalf

• But after Re Schebsman there must be (i) express language and (ii) A and B must intend to give T the right

1. He had not provided consideration for the promise.

   1. However, we can argue that it should not matter that only B has provided consideration. The function of consideration is to render the contract binding between A and B. It is an unconvincing extension of the role of consideration to require a third party to have earned or bought the right to sue given him by the contracting parties.

   2. Further, immediately after the contract’s formation, B can assign the benefit of the contract to T. The fact that T has not given anything to earn this right does not preclude him from acquiring a right to assignment. Upon assignment, T will acquire a direct right against A.

2. He was not an addressee of the promise made by A to B. A was committing himself only to an obligation towards B but not to an obligation towards the third party.

   1. However, it is arguable that A intends to commit himself to an obligation towards the third party

3. If T was granted a direct right of action, such a right would be ‘irrevocable’. It could not be altered or extinguished by A unilaterally, nor even consensually, by A and B. As the third party’s right arises gratuitously, he should not have initial ‘sovereignty’ over A and B’s agreement, although the position might change once he has acted on it, or assented to it.

For this reason, under s2 the Contracts (Rights of Third Parties), A and B can vary or extinguish their contract until:

• T notifies A that he accepts the contract or

• T has relied on the contract

PROBLEMS RESULTING FROM THE COMMON LAW RULE

Firstly, it thwarts the intention of A and B where they both intend to give T a right to enforce the contract.

Secondly, it is arguable that in situations where the contract suggests that the intention of A and B is to give T rights under the contract, T has a reasonable expectation of having a legal right to enforce the contract. These expectations are ignored by the rule. However, Smith (1997) queries why T’s expectation of gaining rights under the contract is reasonable, as T has not provided any consideration.

Thirdly, it creates a lacuna in the law, because where a contract intended to benefit T is breached by A, it is often T rather than B who suffers the loss, though T has no right to sue on the contract. The consequence is that A is not held to account for his breach of contract, as even if B sues A, B would most likely be awarded a token sum as B has not suffered any significant loss.

Fourth, the rule causes practical difficulties in commercial life. A life insurance policy taken out for the benefit of a cohabitee will not be enforceable by the cohabitee

JUDGE MADE EXCEPTIONS TO COMMON LAW RULE

The express trust of a promise – Re Schebsman (1944)

Creation of a collateral contract ie A-C contracts – eg Wells (Merstham) Ltd v Buckland Sand (1965) where it was held in return for A’s promise to pay C, C caused B to enter into a contract with A. Therefore there was an A-C contract so C could sue A

• Used in The Eurymedon (1975) where PC analysed A-C contract as A making a unilateral offer to C and C accepted the offer (and thus covered by exemption clause) by conduct in unloading the goods. Though it was later suggested in The Mahkutai (1996) that the offer was a bilateral one

`TRUSTS OF PROMISES’: DIRECT RIGHT OF ACTIONS IF TRUSTEE DEFAULTS BY FAILING TO SUE PROMISOR

The benefit of A’s promise to pay money to T, or to transfer property to T (‘choses in action’), can be held by B on trust for T, B thereupon becoming obliged in equity to sue A for T’s benefit. This is based on the notion that the promise to pay money or to transfer property is itself a valuable asset, an intangible chose in action (right to sue somebody). This equitable concept...