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Privity Of Contract Notes

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Privity Of Contract

1. Passing a Benefit to a Third Party (i) The Privity Doctrine

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Tweddle v Atkinson (1861) 1 B&S 393: Before the wedding took place, Father of the bride made an agreement with the father of the groom that they would pay the husband sums of money after marriage. Further agreed that the husband should have right to enforce the agreement against them in the event of default.

o

No stranger to the consideration can take advantage of the contract; husband cannot enforce.

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Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 847: Contract for D to sell P's tyres at no less than the list price. However, did stipulate that could sell for less to a third party trade customer if they undertook to sell the tyres at no less than the agreed list price. Issue as to whether P could enforce agreement of the third party.

o o

Fundamental principle that only a party to a contract can sue on it.

If a person with whom a contract has been made is able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor's request, o A principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him to sue he must have given consideration, either personally or via the agent. o Although some of the judges were entitled to treat the intermediary as the agent there was still no consideration.

o

Note that privity and consideration treated as separate requirements (as compared to the above case), although it is clear that they are closely interlinked.

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Smith & Snipes Hall Farm Ltd v River Douglas Catchment Bd [1949] 2 KB 500: Agreement that if homeowners contributed towards the cost then would put in place flood defences. Land was conveyed with the benefit of the covenant to S who later tried to sue upon it.

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Language of the deed satisfies the test of 'touching and concerning the land' and being a benefit which was intended to attach to the land and pass thereupon. o If such a covenant runs with the land it is binding on the covenantor notwithstanding that a stranger benefits.

o o

Operation of s78 Law of Property Act means that S can sue.

Lord Denning tries to suggest that Dunlop confined to its facts relating to maintenance of prices at public disadvantage although this was not followed by the rest of the court and seems to have been ignored further since.

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Scruttons v Midland Silicones [1962] AC 446: Bill of lading had a clause which limited liability. Stevedores were negligent and later sought to rely on the clause in the contract to limit their liability to the lesser sum.

o

There was nothing in the bill of lading which stated or even implied that the parties intended the exemption to cover the stevedores as they used the word 'carrier' only which they are strictly speaking, not. o Did not think that contracted as agents.

o o o

Not an appropriate case to imply a term as there was no need to do so to give business efficacy to the agreement. Affirmed the fundamental principle.

Could be that a stranger could be protected in a roundabout way as follows: A gives X enforceable indemnity, and contracts with B that B will not sue X, informing B of the indemnity, and then B does sue X in breach it may be that A can recover from B as damages the sum which he has o pay X under the indemnity. o Lord Denning dissented saying that fundamental principle hadn't been around that long and was only designed to deal with the problem that there was no separate tort of negligence; had been used to extend liability rather than restrict it and hence the irony in its application in recent years. Disapproves of the doctrine but in any even thought that it was right to analyse the case as one of agency.

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Beswick v Beswick [1968] AC 58: B agreed to sell property and business to nephew subject to agreement that N would pay B's wife certain sums each week after his death. W brought action in personal capacity (s56(1) Law of Property Act claim) and as administratrix when N refused to pay. Issue as to whether could have SP because no loss caused to estate of B.

o

Appreciated that the Law Commission and Lord Denning have expressed concern with the privity rule but thought that not appropriate to overrule it. Lord Reid indicated that if things remained as they were the House might be forced to intervene in future cases. o If there were a trust 3P would have an equitable right against A who would have the legal right against B for the sum.

o

Order for specific performance was made, although their Lordships disagreed with proposition that only nominal damages would be payable to A in a case like this because that result would be grossly unjust; substantial damages would therefore be available.

(ii) The Promisee's Remedies in Contract for the Benefit of a Third Party

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Gore v Van der Lann [1967] 2 QB 31: Bus passes were distributed on the understanding that passengers would not have a claim for any injuries, however caused, against the employee's of the company. P suffered personal injury and brought a claim against the conductor alleging negligence. Company tired to prevent her bringing an action.

o

In order to obtain a stay of proceedings the promisee must demonstrate that the promisor had promised not to sue the third party and that the promisee has as sufficient interest in the enforcement of the promise to justify the grant of stay. o Not entitled to stay in this case because:?

On construction of the clause P had not promised not to sue the conductor;

Corporation did not have a sufficient interest in the enforcement of the promise as it was not obliged to indemnify its employee against liability to the plaintiff in negligence. o Clause was also invalid by operation of s151 Road Traffic Act 1960.

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Snelling v Snelling [1973] QB 87: Application for stay of action. Differences arose between brothers in business; they agreed that of one of them resigned he should forfeit all monies due from the company. P resigned and brought an action for sums due. o Whilst the company was not entitled to rely on the terms of the contract the brothers were so entitled.

o

Judge thought that brothers had made out that justice of this case required the order. Would have been one in which if the obligation had been positively worded an order for specific performance would have been made. o Note that order made notwithstanding the absence of obligation to indemnify; different from Gore (above).

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Beswick v Beswick (above)

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Jackson v Horizon Holidays [1975] 1 WLR 1468: A booked a holiday for him and his family, setting our precise requirements for that holiday with the travel agents. The holiday was a disaster. A tried to claim damages on behalf of the whole family for the distress caused.

o

Denning expresses the opinion that in a case like this damage can be recovered on behalf of others; can recover on behalf of B all that B could have recovered had he been a party to the contract himself. Thinks that this is the only way on which a just result can be achieved given the rule that B cannot sue in his own right. o Gives hypothetical example of guests who have spent money on getting to a restaurant at which they had a meal booked only to be turned away angry; and, where vicar makes contract for coach trip with the choir; claim would be allowed. o James LJ instead makes a broad decision which approves the measure of damages although not clear on what basis.

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Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277: Contract for sale of land said that purchase price was X and Y should be paid over to 3P. Upon action for breach of contract C tried to claim for the sum which was also due to the third party under the agreement. o Lord Wilberforce approves of decision in Jackson but prefers the reasoning of James LJ, outcome based appreciation of the fact that the type of contract was a special one which needed to be treated with flexibility. Expressly disapproves of Lord Denning's approach. Reserves opinion on whether damages are recoverable on behalf of third parties. o Lord Keith also disapproves of Denning approach; thinks may be exceptional cases but does not lay down general rule.

o o

Lord Scarman thinks may be open for a person to prove that should be able to recover the sums for a third party. A was only entitled to recover nominal damages in respect of the claim on behalf of the third party.

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Linden Gardens BC v Lenesta Sludge Disposals [1994] 1 AC 85: The rule that in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interest may be transferred in them after the contract has been entered into but before the breach, an original party to the contract, if such be the intention of them both, is to be treated as having entered into for the benefit of the persons who may acquire such an interest and is entitled to recover by way of damages the loss sustained by them, was extended to building contracts.

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Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68: A change of ownership is not a necessary ingredient for the application of the above rule.

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Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518: B entered into contract with E for construction of an office block. In addition to the contract B entered into a duty of care deed with O, which gave him a direct remedy for failure to exercise reasonable skill. The deed was expressly assignable. Issue as to whether E could sue for damages for defective work where O had direct right.

oLord Clyde:

There is no reason to question the general principle that P may only recover damages for a loss which he himself has suffered. But there are exceptions e.g. where a trustee.

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The express provision of a direct remedy to a third party is fatal to the application of the exception in the above cases. Panatown cannot be treated as having contracted for the benefit of the owners.The Albazero (above) exception has been one of recognizing that an entitlement to sue by the innocent party to a contract which has been breached, where the innocent party is treated assuming on behalf of or for the benefit of some other person or persons, not parties to the contact, who have sustained loss for the breach. In such a case the innocent party will be required to account to he whom in fact suffered the loss.Considers a broader formulation of above which would entitle the innocent party to treat the losses of the 3P as being suffered by him even where he did not incur the loss in making the obligation right himself. Objects:

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*If the loss is simply the disappointment then it seems difficult to measure it by the cost of repair; Loss constituted by the disappointment may well not include all the loss which the breach caused. There is no obligation to account to the person who actually suffered the loss. The loss here has usually been recognised as calling for an award of nominal damages only.

Whilst might be better to bypass the privity doctrine so as to allow direct and simple remedy it is a step which needs to be taken by Parliament.Practical solution is to permit the innocent party to recover damages on behalf of the 3P and make him accountable, rather than to attribute the loss suffered to him.o

Each case should be considered in light of its own circumstances; should not be allowed in this case. Lord Goff (dissent): Thinks that cause of action in these cases should not depend on having to incurred financial cost to remedy the case. Law should recognise that here P has an actual interest in the performance of the obligation. o Lord Jauncey:?
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Thinks that right to recover will depend upon the intention to remedy the defect. Also agrees that the express provision in this case prevents the claim (as does Lord Browne-Wilkinson) Further dissent by Lord Millet.

(iii) Contracts (Rights of Third Parties) Act 1999

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Law Commission Report No 242: Concluded that reform is needed for the following reasons:

o o o o o

Third party rule prevents effect being given to the intention of the contracting parties; failure to give effect to intention undermines the justifying theory of contract; Creates injustice where the agreement has created a reasonable expectation of a legal right in the third party, particularly where they have relied on that right to regulate their own affairs. Where the injustice to the third party is sufficiently string that should be enough to trump the intention of the parties where the original intention has changed; The person who has suffered loss cannot sue whereas the person who has suffered no loss can. Causes problems where cannot get an order for specific performance as they did in Beswick v Beswick; Even if a satisfactory remedy can be obtained the contracting party may decide that he does not wish to bring an action; The existence of exceptions to the rule provide a strong case for reform;?

o o o

The existence of them demonstrate the basic injustice of the rule;

The fact that the exceptions continue to evolve and be the subject of extensive litigation demonstrates that the existing exceptions have not solved all of the problems. Reform would enable artificiality and some of the complexity to be avoided. Extent of criticism here and elsewhere of the rule is a strong indication that the privity doctrine is flawed; most member states of the EU allow third parties to enforce contracts. The rule causes difficulties in commercial life.

Contracts (Rights of Third Parties) Act 1999

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Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd's Rep 38: Issue as to whether arbitration clause was wide enough to confer advantage of it upon a third party; referred to disputes as between owners and charterers and between parties to the charterparty.

o

S1(2) of the Act did not provide that s1(b) was disapplied unless on a proper construction of the contract it appeared that the parties intended the benefit to be enforceable by a third party. Rather it provided that it should be disapplied if it appears that they did not intend third party enforcement. o What intention the contract did express in this regard is a matter of construction having regard to all the circumstances. In this case it was neutral as did not express anything either way.

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The Laemthong Glory (No 2) [2005] EWCA Civ 519, [2005] 1 Lloyd's Rep 688: Clause of a charter provided for owners to appoint, employ and be solely responsible for agents at ports. After ship was arrested, owners who were not parties pleaded in aid the agreement to protect them from liability.

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