PRIVITY

  • Created by: archeey98
  • Created on: 23-04-19 12:08

What is privity?

The doctrine of privity states that only those who are parties to a contract can have rights or liabilities under it. 

There are 2 rules (3 elements):

1) a contract can only be enforced against someone who is a party to it.

2) a contract can only be enforced by a person who is a party of the contract.

The 3 elements are:

1) that only a party to a contract can have an obligation or burden

2) under it only a party to a contract can benefit from the contract

3) even if both parties in the contract agree there will be a benefit for the 3rd party.

There are exceptions to this; collateral contracts, trust if a contractual right, assignemtn and agency, bills of exchange and other negotiable instruments and statutory exceptions; Contract (Rights of Third Parties) Act 1999.

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Tweddle v Atkinson

Fathers of the newly wedded couple agreed to pay the couple money but both passed away without paying. The son in law sued the will maker, however the courts held the groom is not a party to the agreement and didn't provide any consideration.

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Dunlop Pneumatic Type Company Ltd v Selfridge

Dunlop had a contract with Dew & Co, wholesalers in motor accessories, under which, in exchange for a discount, Dew agreed that in selling the tyres to retailers it would not give a discount, unless the retailer agreed to sell at Dunlop's list price. Dunlop's objective was to prevent the tyres from being solf to the public at a discount. Selfridge & Co entered into such agreement with Dew & Co. Dunlop subsequently sought an injuction and damages against Selfridge in relation to alleged breaches of this agreement. 

Held: The House of Lords held that they could not succeed.

Dunlop was not a party to the agreement between Dew and Selfridge, and provided no consideration for Selfridge's promise not to sell below the list price.

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Why do we have the doctrine of Privity?

1) it follows the rules of consideration

2) it would be unfair if a party could sue to enforce a benefit under a contract, but could not be sued himself

3) contract law should not provide free rides - it is against basic prinicples that someone should get a benefit under a contract without doing anything at all. an example of this is Beswick v Beswick in which the nephew getting the factory cheap and then not paying his widow.

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Critiscm of the Privity Rule

The inconvenience and injustice of the doctrine of privity was recognised in Dunlop Pneumatic Tyre Company Ltd v Selfridge.

Lord Dunedin: "...the effect of the doctrine in the present case is to make it possible for a person to snap his fingers at a bargain deliberately made, a bargain not in itself unfair and which the person seeking to enforce is has a legitimate interest to enfore..."

Lord Denning put a strong attack against the doctrine in the 1960's and 1970's. The House of Lords who were also not keen on the doctrine refused to follow Lord Denning's encouragement to abolish the doctrine in the case Beswick v Beswick. This case illustraed the attitude of the House of Lords, they spoke of the doctrine critically but did not attempt to abrogate it.

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Beswick v Beswick

A nephew had brought his uncle's coal merchant business, and had promised as part of the deal to pay his uncle £6.50 a week and then, when his uncle died, to pay his aunt £5 a week. After the uncle's death, the nephew refused to make the payments to his aunt and she sued. 

The traditional doctrine of privity applied and Mrs Beswick was therefore prevented from suing in her personal capacity. However, as an administrator of the estate, she could take husband's place as a party to the contract with the nephew.

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Doctrine of Privity - Problems

Dunlop v Selfridge: Selfridge got away with doing exactly what they wanted, selling Dunlop's tyres cheaply, despite Dunlop's wishes to the contrary. Also, commercially problematic.

Beswick v Beswick: the rule goes against the freedom to contract about anything.

Les Affreteurs Reunis v Walford: it is undair that a party can get away with making a promise to pay, getting a benefit, and then not paying.

These problems have been so prevelant that they have caused the courts to be put into a position whereby to achieve a fair result, they must find ways to avoid or get around the effects of the doctrine.

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Exceptions to the Privity Rule

  • The Trust of a Promise (contractual right)
  • Collateral Contracts
  • Assignment and Agency
  • Bills of Exchange and other negotiable instruments
  • The Contracts (Rights of Third Parties) Act 1999
  • Road Traffic Act 1988
  • Marine Insurance Act 1906
  • Married Womens Property Act 1882
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The Trust of a Promise - (Contractual Right)

A trust is an arrangement where the trustee holds property for the benefit of one or more beneficaries.

Case: Les Affreteurs Reunis v Walford

A contract for the hire of a ship (a time charterparty) included a clause promising a commision to the broker (Walford) who had arranged the contract. Walford was not a party to the contract, but it was held by the House of Lords to be able to sue to recover the commission, on the basis that the charterers, to whom the promise had been made, were trustrees of this promise.

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Collateral Contracts

A collateral contract generally takes the form of a unilateral contract under which one party says "if you enter into contract X, I will promise you Y." The consideration for the promise is the entering into contract X. It is possbile for such an agreemenr to be made between the two parties to contract X. In the three-party situation, however, the construction of a collateral contract can be a means of evading the doctrine of privity.

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Shanklin Pier v Detel Products

The plaintiffs, who were owners of a pier, were promised by the defendants, who were paint manufacturers, that the defendants paint, if used to re-paint the pier, would last for seven years. As a result, the plaintiffs instructed the firm of painters who had undertaken the re-painting to pruchase and use the defendants paint. This they did, but the paint only lasted three months. The plaintiffs sued the defendant in relationto the fact has no lasted as promosed. The defendanths resisted on the basis that they had no contractual relationship with the plaintiffs. The plaintiffs had provided no consideration for the promise given by the defendants. The only contract the defendants had made was to sell paint to the painters, and the plaintiffs were not a party to that agreement. It was held that there was a collateral contract between the plaintiffs and defendants, under which the defendants guaranteed the durability of the paint in return for the plaintiffs' promise to specify the defendants paint to be used on the contract. The plaintiffs could recover for the breach of this guarantee. 

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Assignment and Agency

Law of Assignment: Assignment is the legal device which allows transfer of benefit of a promise. For example, if A contracts with B, then transfers the benefit of A's promise to C, who can use A if A fails to perform the contract.

Law of Agency: Agency is the legal device which allows one party to contract to make contract on behalf of another by "stepping into his shoes". For example, agent A contracts on behalf of footballer B with club C Utd.

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Bills of Exchange and other negotiable instruments

Bills of Exchange are financial devices which enable the payee to transfer a benefit to a third party by signing it and handing it over.

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Damages on Behalf of Another

Where there is a contract made by one person for the benefit of another, the contracting party should, in event of breach, be able to recover damages to compensate the potential beneficiary's loss. 

Case: Jackson v Horizon Holidays

Mr Jackson had booked a holiday for himself and his family, which turned out to be a disaster. The hotel for which the booking was made was not completed when the Jacksons arrived, and the alternative offered was of a very poor standard. The facilities did not match what had been promised, and the family found the food distasteful. There was no doubt that the defendants were in breach of the contract.

The host should not only be able to recover lost expenses, but: "he should be able to recover for the discomfort, vexation and upset which the whole party have suffered by reason of breach of contract, recompensing them accordingly out of what he recovers."

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The Contracts (Rights of Third Parties) 1999

S1 The Contracts (Right of Third Parties) 1999

(1) ...a person who is not a party to the contract (a third party) may in his own right enforce a term of the contract if:

(a) the contract expressly provides that he may: or

(b) subject to sub-s(2), the term purports to confer a benefit to him.

(2) sub-section 1(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

Sub-sections (1)(b) and (2) therefore operate to create a rebuttable presumption that if a contract appears to confer a benefit on a third party, such a benefit is intended to be legally enforceable by that third party.

If the parties do not want a third party to be able to enforce any benefits under the contract, they will be well advised to say so in specific terms.

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Multiparty Contracts

Where a group of  people each join a club or enter a competition, they may be deemed to be entering into a contract with all the other members or entrants to abide by the rules of the club or competition.

Case: Clarke v Dunraven

The case concerned the participants in a race organised by a yacht club. There was a collision during the race, as a result the plaintiffs yacht sank. The plaintiff sued the defendant, claiming damages based on the provisions in the club rules. The defendant denied that there was any contractual relationship between him and the plaintiff. The House of Lords held that there was. The committee of the club had, in effect, made an offer to prospective entrants to the race to the effect that, if they wanted to take part in the race, they would have to abide by the conditions that the committee had laid down. 

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Summary

  • The essence of the doctrine of privity is that only those who are parties to a contract can have rights or liabilities under it. It has links to the principle that consideration must move from the promisee.
  • The Contracts (Right of Third Parties) Act 1999 enables the parties to a contract to create a benefit enforceable by a third party. This may be done specifically or implied from the wording of the contract.
  • The common law has developed various exceptions to, or means of avoiding the doctrine - these include: damages recoverable on behalf of another, trust of a promise and collateral contracts.
  • There are also some specific exceptions - e.g. insurance.
  • Exclusion clauses may benefit a third party by virtue of the 1999 Act, by using the principle of agency in the Eurymedon, or as a result of the modification of a negligence duty owed by the third party.
  • There are a few exceptions to the ban on the imposition of burdens on third parties, but this may be possible: in land law, and in shipping contracts.
  • The tort of intentionally inducing a breach of contract may be used to restrict the actions of a person who is not a party to the contract.
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Summary of Exceptions

PRIVITY OF A CONTRACT: only a party to a contract can sue under it. 

Tweddle v Atkinson: Dunlop v Selfridge

But there are some exceptions:

EXCEPTIONS 1 - The Contracts (Rights of Third Parties) Act 1999

EXCEPTIONS 2 - Avoiding the Doctrine; trust of a promise - now rarely used, collateral contracts - Shanklin Pier v Detel Products

EXCEPTIONS 3 - Multiparty Contracts - Clarke v Dunraven

EXCEPTIONS 4 - Statutory Exceptions: e.g. Married Women's Property Act 1882, Road Traffic Act 1988.

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