Someone recently bought our

students are currently browsing our notes.

X

Privity Notes

Law Notes > Contract Law Notes

This is an extract of our Privity document, which we sell as part of our Contract Law Notes collection written by the top tier of Oxford students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Contract Law Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

TABLE OF CONTENTS
I - Passing a Benefit to a Third Party................................................................................................. 4
A - The Third Party's Rights (The General Rule)............................................................................4
|*Tweddle v Atkinson (1861) 1 B&S 393.........................................................................4
|*Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 847..........................................4
|Smith & Snipes Hall Farm Ltd v River Douglas Catchment Bd [1949] 2 KB 500 (Lord
Denning only).................................................................................................................. 5
|*Scruttons Ltd v. Midland Silicones Ltd [1962] A.C. 446..............................................5
B - The Promisee's Remedies in a Contract for the Benefit of a Third Party..................................6 1/ Specific Performance.............................................................................................................. 7
|*Beswick v Beswick [1968] AC 58.................................................................................7 2/ Stay of Proceedings................................................................................................................. 8
|Gore v Van der Lann [1967] 2 QB 31.............................................................................9
|Snelling v Snelling [1973] QB 87...................................................................................9 3/ Damages.................................................................................................................................. 9 a/ Damages for the promisee's own loss (YES)........................................................................9 b/ Damages for the third party's loss.......................................................................................9i/ General rule = no recovery.....................................................................................9
|*Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518...........................9
|*Jackson v Horizon Holidays [1975] 1 WLR 1468........................................................10
|*Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR

277................................................................................................................................ 10ii/ Exceptions............................................................................................................ 11
I - Contracting out of the general rule (no?)....................................................................11
II - The Albazero Exception.............................................................................................11
|The Albazero [1977] A.C. 774 (esp Lord Diplock)........................................................11
|*Linden Gardens Trust Ltd v. Lenestra Sludge Disposals [1994] 1 A.C. 85................11
|NOTE Wallace (1994) 110 L.Q.R. 42...........................................................................12
|NOTE Cartwright, "Remedies in Respect of Defective Buildings after Linden
Gardens", (1993) 9 Con. L.J. 281..................................................................................13
|*Darlington Borough Council v. Wiltshier Northern Ltd [1995] 3 All E.R. 895...........15
|*McAlpine v. Panatown [2001] 1 AC 518.....................................................................15
|NOTE Burrows, "No Damages for a Third Party's Loss" (2001) Ox Univ
Commonwealth LJ 107.................................................................................................. 15
|NOTE Coote, "The Performance Interest, Panatown and the Problem of Loss" (2001)
117 LQR 81................................................................................................................... 16
C - Exceptions to Privity............................................................................................................... 16 1/ Collateral Contracts.............................................................................................................. 16
|Shanklin Pier v Detel (1951, KBD)...............................................................................16 2/ Agency................................................................................................................................... 16 3/ Assignment............................................................................................................................ 17 4/ Trust of the Promise.............................................................................................................. 17
|Les Affreteurs Societe Anonyme v Leopold Walford (London) Ltd [1919] AC 801......18
|Re Schebsman [1944] Ch. 83, 89-90, 100-104.............................................................18
|Trident General Insurance v. McNiece Bros. (1988) 80 A.L.R. 574 (minority)............18 5/ General statutory exceptions................................................................................................ 19 6/ Covenants concerning land................................................................................................... 19 7/ Tort of Negligence................................................................................................................. 19
|Junior Books v Veitchi (1983, HL)................................................................................19
|*White v Jones [1995] 2 AC 207...................................................................................19 8/ The Eurymedon Exception (Third Party ENforcement of Exclusion Clauses).......................19a/ Can a third party take the benefit of an exclusion clause in a contract to which he is not a party?..................................................................................................................... 19
|The Mahkutai [1996] 3 WLR 1 (PC).............................................................................19
|*The Eurymedon [1975] AC 154 (unilateral contract).................................................21
Page 1
CONTRACT: PRIVITY |The New York Star [1981] 1 WLR 138 (Barwick CJ's bilateral contract analysis).......21
|The Starsin [2003] 2 WLR 711, paras 93, 149-153, 196-197.......................................22
|London Drugs Ltd v Kuehne & Nagel International (1993) 97 DLR (4 th) 261 (Canadian
Supreme Court)............................................................................................................ 23
|Norwich CC v Harvey [1989] 1 All ER 1180................................................................23b/ Can a party to a contract rely on an exclusion clause against a third party who is not a party to the contract?................................................................................................. 24 9/ Negotiable Instruments......................................................................................................... 24
D - Reform leading to the 1999 Act.............................................................................................. 24 1/ Case for and against reform.................................................................................................. 24a/ The Law Commission's Report and Stevens' Response........................................24
|*Law Commission Report No 242................................................................................24
|R Stevens, "The Contracts (Rights of Third Parties) Act 1999" (2004) 120 LQR 292. 25b/ Main arguments that justice requires not giving third party right to sue............25 i/ The third party is not a promisee..................................................................................25
|S Smith, "Contracts for the Benefit of Third Parties: in Defence of the Third Party
Rule" (1997) 17 OJLS 643.............................................................................................25 ii/ The third party has not provided any consideration....................................................25
|Kincaid, "Third Parties: Rationalising a Right to Sue" (1989).....................................25 2/Contracts (Rights of Third Parties) Act 1999.........................................................................26
|*Contracts (Rights of Third Parties) Act 1999.............................................................26
|A Burrows, "Contracts (Rights of Third Parties) Act 1999 and its implications for
Commercial Contracts" [2000] LMCLQ 540.................................................................28 a/ Two cases where 1(1)(b) was satisfied.........................................................................29
|Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd's Rep 38........................29
|The Laemthong Glory (No 2) [2005] EWCA Civ 519, [2005] 1 Lloyd's Rep 688..........29 b/ One case where it failed.............................................................................................. 30
|Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening
[2009] EWHC 716 (Comm); [2009] 2 Lloyd's Rep 123.................................................30 3/ Nature of the third party's right under the Act.....................................................................30
II - The Imposition of Burdens on Third Parties..............................................................................30
A - Agency................................................................................................................................. 30
B - Restrictive Covenants Concerning Land..............................................................................31
C - Statutory Exceptions............................................................................................................ 31
D - Bailment on terms............................................................................................................... 31
|Morris v Martin [1965] 2 All ER 725...........................................................................31
|*The Pioneer Container [1994] 2 All ER 250...............................................................31
E - Tortious Interference with Contract....................................................................................31
F - Burden Running with Goods................................................................................................ 31
|*The Strathcona [1926] AC 108...................................................................................31
|*Port Line v Ben Line [1958] 2 QB 146........................................................................32
|NOTE Wade [1958] C.L.J. 169.....................................................................................32
|Swiss Bank Corp v Lloyds Bank [1979] 3 WLR 201, 221-227......................................32
|NOTE Tettenborn [1982] C.L.J. 58..............................................................................34
|Law Debenture Corp v Ural Caspian Oil [1995] Ch 152..............................................34
III - Commentary............................................................................................................................. 34
|B Coote, "Consideration and the Joint Promisee" [1978] CLJ 301...............................34
|R Flannigan, "Privity - The End of an Era (Error)" (1987) 103 LQR 564....................35
|C MacMillan, "A Birthday Present for Lord Denning: The Contracts (RTP) Act 1999"
(2000) 63 MLR 721....................................................................................................... 36
Beale "A Review of the Contracts (Rights of Third Parties) Act 1999" in Burrows and
Peel Contract Formation and Parties (OUP 2010)........................................................36
IV - Questions.................................................................................................................................. 36

Page 2
CONTRACT: PRIVITY I - PASSING A BENEFIT TO A THIRD PARTY
A - THE THIRD PARTY'S RIGHTS (THE GENERAL RULE)
The rule wasn't clearly established until 19C (Price v Easton, Tweddle v Atkinson):
|*Tweddle v Atkinson (1861) 1 B&S 393-

Facts: C married the promisor's daughter. Prior to the wedding the promisor entered into an agreement with C's father where they each promised to give C money, with a clause in the contract stipulating that C "has full power to sue the said parties in any Court of law or equity for the aforesaid sums". The promisor failed to pay and C sued.
Held (QBD): The claim failed -
o "it is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit" (Wightman J).
o "Consideration must move from the party entitled to sue upon the contract" because it would be "monstrous" to allow someone to sue for his own advantage but not for the purpose of being sued (Crompton J)
o Consideration must move from the promisee for an action to be maintained upon a promise; C argued that there was an exception - where consideration moves from a father for the benefit of his son, the natural love and affection between them gives the son the right to sue as if the consideration moved from himself. However, "natural love and affection are not a sufficient consideration" to found an action (Blackburn J)

1o Thus it seems that the reason the son couldn't sue is less (1) he was not a party to the contract and more (2) consideration didn't move from him:-

C accepted that there was a general rule that an action must be brought by the person from whom consideration moved (though he argued for an exception for father/son), and this concession has been criticized as unnecessary, leading to the loss of a general third party right of action (Flannigan).
Nobody mentioned the NY CoA case of Lawrence v Fox1, suggesting that the real basis of the decision was that C was a stranger to the consideration, not that he was a third party to the contract

So some argued that the privity rule is really no more than an application of the doctrine of consideration (Furmston), but the two doctrines were distinguished in Dunlop.
2o Thus, the rule that consideration must move from the promisee is closely linked with the privity rule, and discussion of the former often renders the latter obsolete. Only where the third party has provided consideration but is not party to the agreement that the need for a distinct privity rule arises (but can a third party provide "consideration" if no contract is made?).
3o One point of significance is that C's father might not have sued the promisor himself because he had not, himself, honored his promise and paid his son. Lord Denning explained in Beswick that
Tweddle "failed for the very good reason that the husband's father had not done his part". If he had done his part, then he would have been able to sue the promisor (but this is difficult because there is nothing in Tweddle to suggest that the father hadn't paid).
|*Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 8471

Facts: X agreed to buy tires from C, tire manufacturer. C agreed to give X certain discounts in return for a promise from X not to sell to anybody at less than the list price except where X
obtained from the buyer a similar promise to observe the list prices. D ordered tyres from X at a discount in return for such an agreement, and then breached the agreement. C sued D for breach of the undertaking.

Recognizing the existence of a third party right of action (1859)
Page 3
CONTRACT: PRIVITY -Held: trial judge held for C, reversed by CoA because C was not a party to the contract, upheld by HL.
Haldane VC:
o Three principles:
-Only a person who is a party to a contract can sue on it; a third party right of action can only be conferred by way of property (ex. Trust) and not contract in personam.
-Consideration must move from the person trying to enforce the promise.
-A third party can sue upon a promise if the promisee really contracted as his agent, but then again he must have given consideration either personally or through the agent.
o In this case the consideration (discount) was given by X, not as C's agents, but as principals acting on their own account. This conclusion renders it unnecessary to decide whether C can claim that the bargain was made by X as C's agent, but (obiter) two contracts (one made as principal and one as agent by the same person) can be comprised in the same paper, but they must be two contracts and not one single contract.
Lord Dunedin:
o This case is "apt to nip any budding affection which one might have had for the doctrine of consideration", for it essentially bars the person who has a legitimate interest to enforce a bargain, not in itself unfair, from enforcing it. However, "I cannot say that I
have any doubt that the judgment of the Court of Appeal was right".
o In this case X contracted as C's agent, but C still can't sue because consideration didn't move from C to D (in that X had full ownership of the tires and could confer ownership on anyone he liked, subject to an in personam right of C to sue X in breach of the collateral contract to the sale).

1o Viscount Haldane confirmed that privity and consideration must move from the promisee are two separate (though interrelated) rules (though the greater part of this case was again devoted to consideration).
2o In Smith and Snipes Lord Denning said that Dunlop should be confined to cases concerned with
"the maintenance of prices to the public disadvantage" (because it was a price fixing agreement aiming to fix a minimum price for sale to consumers, which might disadvantage the public), but there is nothing in the judgment to suggest that the Court was at all concerned by this fact.
3o Privity is not absolute - there are at least two exceptions:Trust of a promise (possible to confer a right of action upon a third party via trust)
Agency (a principal not named in the contract may sue upon it if the promisee really contracted as his agent - Viscount Haldane), but the consideration must crucially move either from the principal directly or from the agent in his capacity as agent so in reality from the principal

|Smith & Snipes Hall Farm Ltd v River Douglas Catchment Bd [1949] 2 KB 500 (Lord
Denning only)-

Lord Denning: Can deal with privity either by admitting the principle and saying that it does not apply to this case, or by disputing the principle itself. I make so bold as to dispute it. The principle is not nearly so fundamental as it is sometimes supposed to be. It did not become rooted in our law until the year 1861 (Tweddle v. Atkinson21 , and reached its full growth in 1915 (Dunlop v. Selfridge 22 ).
It has never been able entirely to supplant another principle whose roots go much deeper: the principle that a man who makes a deliberate promise intended to be binding must keep his promise; and the court will hold him to it, not only at the suit of the party who gave the consideration, but also at the suit of one who was not a party to the contract, provided that it was made for his benefit and that he has a sufficient interest to entitle him to enforce it,
subject to any defences.

Page 4
CONTRACT: PRIVITY -It is upon this principle, implicit if not expressed

(i.) that a covenant made with the owner of land for its benefit can be enforced against the covenantor, not only by the original party, but also by his successors in title.
o (iii.) that Lord Mansfield held that an undisclosed principal is entitled to sue on a contract made by his agent for his benefit, even though nothing was said about agency in the contract

(iv.) that Lord Hardwicke decided that a third person is entitled to sue if there can be spelt out of the contract an intention by one of the parties to contract as trustee for him,
even though nothing was said about any trust in the contract, and there was no trust fund to be administered. (See Tomlinson v. Gill 27 .)
The difficulty is what is sufficient interest to entitle the third person to recover.
o Sometimes been supposed that there must always be something in the nature of a
"trust" for his benefit. (See Vandepitte's case 28 .) But this does not explain all the cases.
The truth is that the principle is not so limited.
o It may be difficult to define what is a sufficient interest. Whilst it does not include the maintenance of prices to the public disadvantage, it does cover the protection of the legitimate property, rights and interests of the third person, although no agency or trust for him can be inferred.
o It covers, therefore, rights such as these which cannot justly be denied; the right of a seller to enforce a commercial credit issued in his favour by a bank, under contract with the buyer; the right of a widow to sue for a pension which her husband's employers promised to pay her under contract with him; (See Dutton v. Poole 30 and cf. In re
Schebsman 31 ); or the right of a man's servants and guests to claim on an insurance policy, taken out by him against loss by burglary which is expressed to cover them;
cf. Prudential Staff Union v. Hall 32 .
o In some cases the legislature itself has intervened , as, for instance, to give the driver of a motor car the right to sue on an insurance policy taken out by the owner which is expressed to cover the driver. But this does not mean that the common law would not have reached the same result by itself.

|*Scruttons Ltd v. Midland Silicones Ltd [1962] A.C. 446-

Held, (Lord Denning dissenting), that the stevedores were not entitled to rely on the limitation of liability contained in the bill of lading, since

(1) The word "carrier" in the Act did not include a stevedore, and there was thus nothing in the bill of lading which stated or even implied that the parties to it intended the limitation of liability to extend to stevedores.
o (2) The carrier did not contract as agent for the stevedores.
o (3) There was no implied contract to which the present parties were parties that the stevedores should have the benefit of the immunity.
o (5) It is a fundamental principle that only a person who is party to a contract can sue upon it, and a stranger to a contract cannot in question with either of the contracting parties, take advantage of provisions of the contract even where it is clear from the contract that some provision in it was intended to benefit him.
Simonds VC:
o Agents: no ground for thinking so - the relationship between the carriers and stevedores was one of independent contractors

Implied contract between the cargo owners, the respondents, and the stevedores that the latter should have the benefit of the immunity clause in the bill of lading: no -
already uncommon to imply a term into a contract to give "business efficacy", even more difficult to infer a contractual relationship where none exists. In this case, the stevedores knew nothing about the exclusion clause between the carriers and owners;
and were only concerned with the business the carriers told them to do. No reason to imply a contract.
o The stevedores can sue on the contract between the carriers and the owners : privity is a
"fundamental principle" of English law and reforming it is the task of Parliament.

Page 5
CONTRACT: PRIVITY oLord o

o

oLord o

o

o

o

Therefore, any support for introducing an ius quaesitum tertio principle by the courts
(Smith and Snipes etc.) must be rejected.
Cites Wilson v Darlington Island Stevedoring and Lighterage (HCA) with approval,
especially the passages by Fullagar J arguing that the exceptions to the rule in Tweddle v. Atkinson 152 are apparent rather than real and explains the so-called on-carrier cases,
and in which he protests against a tendency by some artifice to save negligent people from the normal consequence of their fault.
Reid:
Although I may regret it, I find it impossible to deny the existence of the general rule that a stranger to a contract cannot enforce, even where it is clear from the contract that it was intended to benefit him.
There are certain well-established exceptions to that rule - though I am not sure that they are really exceptions and do not arise from other principles. But none of these in any way touches the present case.
The rule applies equally where the stranger is using the contract as a shield or as a sword.
Denning:
The "fundamental principle" was a discovery of the nineteenth century, and in the nineteenth century it was carried to the most extravagant lengths: it was held that,
where a duty to use reasonable care arose out of a contract, no one could sue or be sued for a breach of that contract except a party to it (so this case would have failed entirely,
because the duty of the stevedores to use reasonable care arose out of their contract with the carrier and only he would be able to sue). The goods owner would only have had a remedy against the carrier (because negligence was not an independent tort).
It is ironic that this "fundamental principle" which was invoked 100 years ago for the purpose of holding that the agents of the carrier were "not liable at all" is now invoked for the purpose of holding that they are inescapably liable, without the benefit of any of the conditions of carriage. How has this come about?
Since the decision of Donoghue v. Stevenson222 in 1932 we have had negligence established as an independent tort in itself. But if you permit the owner of the goods to sue the sub-contractor in tort for what is in truth a breach of the contract of carriage,
then at least you should give him the protection of the contract. Were it otherwise there would be an easy way round the conditions of the contract of carriage.
If the owner can, by suing the stevedores in negligence, escape the exceptions in the contract of carriage and the limitations in the Hague Rules, it will expose a serious gap in our commercial law. It has great potentialities too. If you can sue the stevedore, why should you not sue the master and officers of the ship? No longer need you worry about the limitation. You can recover the value of the most precious package without disclosing its nature or value beforehand. No longer need you worry about bringing an action within one year. You can bring it within six years. Nor are the potentialities limited to carriage by sea...
EXAM POINT (MI)

Perhaps it is growth in the tort of negligence that is both (1) a response to the privity rule and its being taken to extremes in the nineteenth century, and (2) the biggest threat to the doctrine of privity today because it seems to give people (in this case cargo owners) the right to sue but not be sued.

B - THE PROMISEE'S REMEDIES IN A CONTRACT FOR THE BENEFIT OF A THIRD
PARTY
This is important because:The third party is a gratuitous beneficiary whereas the promisee provided consideration, so the law should put greater emphasis on protecting the promisee

Page 6
CONTRACT: PRIVITY

D might have defences against the promisee (like Lord Denning's interpretation of Tweddle)
and these should be applied to the third party beneficiary as well
Stopping D from breaking the contract with impunity should arguably focus on strengthening the promisee's rights and not the third party's
EXAM POINT (MI)

Clearly, if there is no trust, and the judges are so insistent on this fact, it is because then B can vary or discharge A from the contract and should be free to do so regardless of X's opinion. So what legitimate expectation can X have under the contract, since A and B can vary it at any point, and B
doesn't even have to enforce the contract in case of breach? The rightful beneficiary is clearly B and not X.
Primary remedies:-Specific remedies

Specific performance

Injunction (to enforce a negative promise not to sue the third party)
o Action for agreed sum (no reason in principle why it couldn't also be available to enforce the promise to pay a third party, though no clear authority on this point)
Damages

For promisee's own loss

For the third party's loss?
Restitutionary remedies

Recovery of money paid for total failure of consideration (but wouldn't work if there was part performance)

1/ SPECIFIC PERFORMANCE
|*Beswick v Beswick [1968] AC 58-

Held: Trial judge refused to accord specific performance, CoA allowed C to specific performance in her capacity as administratrix or s56(1) in her personal capacity, and HL
upheld the first point but rejected the second point.
Lord Denning:
o Under the common law:
-he third party should bring the action in the name of the contracting party, and D
cannot argue that the contracting party suffered no loss because "the common law has never allowed the defaulter to escape by such shifty means". The contracting party then holds the proceeds for the benefit of the third party (Re
Schebsman). However, now that joinder of parties is allowed the third party and contracting party should join as co-plaintiffs and the money will go at once to the third party.
o In Equity:
-Contracting parties can make the contract on trust for the third person (so from the very beginning the contractual right is vested in the contracting party as trustee for the third party beneficiary, who can sue in equity), but the disadvantage is that the contract cannot be varied without the consent of the third party beneficiary.
-But even without a trust Equity can order specific performance as long as the action is brought in the name of the contracting party.
o Under statute:
-S56(1) LPA 1925 applies to "property", which includes "things in action"
(s205(1)(xx)). The promise to pay is a thing in action (because it can be enforced in an action), so that the widow can take the benefit of that agreement under s56(1) although she is not named as a party. Thus, she must be able to sue for it.
o Conclusion:

Page 7
CONTRACT: PRIVITY

Buy the full version of these notes or essay plans and more in our Contract Law Notes.

More Contract Law Samples