Privity and rights of third parties

  • Created by: Nikki
  • Created on: 15-04-16 12:47

General rule

Party seeking to enforce a contractual promise must
(i) be the promisee; and
(ii) have provided consideration for that promise

Therefore a third party (C) cannot sue to enforce the terms of a contract for her benefit made between two other parties (A and B)

A TP cannot rely on the contract by way of defence --> Scruttons v Midland Silicones

Parties to a contract (A and B) cannot impose burdens on fa third party (C) or restrict C's legal rights

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Justifications for privity rule

  • exclusivity
    • if contractual liability derives from voluntary undertaking, it follows that only a person to whom the undertaking is addressed (promisee) can enforce them --> contractual rights and duties are personal to those who create them
    • Smith --> promisor's only oblgiation is to proisee to whom promise is made 
  • priority of buyers
    • English law prioritises bargains
    • A promisee who has provided consideration is more deserving than a TP who has not
  • Floodgates
    • without privity rule anyone could potentially enforce any contract

Objections to privity rule
- inadequcy of contractual remedies to promisee
- inadequate protection of TP reliance
- unjust enrichment of contract-breaker

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Contracts (Rights of Third Parties) Act 1999 (1)

Reasons for Act

  • lays down exceptions to privity rule
  • LC report --> criticisms of privity rule
    • (1) defeats intention of contracting parties by preventing TPp from suing when contract parties intend them to be able to sue
    • (2) unjust to TP because it defeats their (a) expectation interest; (b) reliance interest
    • (3) creates difficulties in commercial life
    • (4) creates legal 'black hole' --> into which contractual rights and liabilities disappear because
      • (a) a promisee can sue but can obtain no effective remedy for breach since he suffers not loss (factual benefit directed to TP)
      • (b) TP who suffers loss cannot sue
      • additional problem fo unjust enrichment if promisor has already received promisee's performance
    • (5) the 'exceptions' to the privity rule are piecemeal, complex and uncertain
    • (6) the 'rule has been abrogated throughout much of the common law world --> legal systems of most MS of EU recognise and enforce rights of TP beneficiaries under contracts
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Contracts (Rights of Third Parties) Act 1999 (2)

Nature of reform 

  • beenfits, not burdens: reforming teh benefit side of privity doctrine only
  • general application --> prima facie applicable to all contracts, subjec tto specified exclusions
  • facilitative --> new device for ocntract parties to confer enforcement rights on TP
  • an additional facility --> not replacing or limiting the development of common law devices

Test of enforceability by a TP

s1(1)(a) --> allows TP to enforce a contractual term where teh contract 'expressly provides that he may'

s1(1)(b) --> allows TP to enforce a contractual term where the contract purports to confer a benefit on him 

s1(2) --> subsection (1)(b) doesn't apply if on proper construction of the contract it appears that the party did not intend the term to be enforceable by TP

s1(3) --> to satisfy either (1)(a) or (1)(b) the TP must be expressly identified by name, class or description

Argument that (1)(b) goes too far in permitting tp enforcement where contract merely 'purports to confer a benefit on him' --> uncertain; over-inclusive; wrong situation?; creating potential for double liability 

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Contracts (Rights of Third Parties) Act 1999 (3)

Variation and rescission by contract parties

  • s2 attempts to reconcile potential conflict between contract parties' ability to modify their contract and TP's reliance on or expectation from the original contract
  • by circumscribing when teh contract parties are barred from extinguishing or altering right of TP qualifying under s1 without his consent 
  • s2(1), parties barred from doing so where:
    • (a) TP has communicated his assent to the promisor
    • (b) promisor knows of TP's actual reliance on the term
    • (c) promisor can reasoanbly foresee TP's actual reliance
  • unless the contract parties expressly state (s2(3))
    • (a) that they can rescind or vary contract wihtout TP's consent
    • (b) the sepcific circ in which TP's consent is required 
  • s2(6) --> courts have limited residual discretion to authorise variation or discharge where:
    • parties cannot contact TP to get his consent (s2(4)(a))
    • TP is metnally incapable of consenting (s2(4)(b))
    • parties are uncertain whether TP has relied and so whether his consent is required (s2(5))
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Contracts (Rights of Third Parties) Act 1999 (4)

TP's claim

  • can enforce contractual term and claim 'any remedy t that would have been available to him in an action for breach of contract if he had been a party to the contract'
  • since TP's rights are derivative from promisee's, starting point is that his claim replicates promisee's
  • suject to express agreement to the contrary, s3(2) allows promisor to rely on any defences or set-offs that would have been available against promisee
  • promisor may incur greater liabiliyt to TP than to promisee in 3 respects
    • (1) promisor can only rely on oehrwise effective defence or set-off where it arises 'from or in connection with the contract and is relevant to the term' sought to be enforced (s3(2)(a))
    • (2) promisor cannot bring any counterclaim against promisee into the equation 
    • (3) promisor may be exposed to double liability since s5 does not reduce a TP's claim if promisee recovers in repsec tof his own loss under common law ground
  • promisor's poition against TP is stronger than against promisee in 4 respects
    • (1) promisor can rely on any defences, set-offs, or counterclaims (not arising from contract) that would have been available had TP been party to contract
    • (2) TP is not protected by s2(2) UCTA 
    • (3) tP is not treated as a contract party 'for the purposes of any other Act' (s7(4)) 
    • (4) certain types of contract are excluded form scope of 1999 Act, barring TP from suing on them
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Consideration, privity and 1999 Act

Impact of 1999 Act on doctrine of consdieration depends on how we see the relationship between privity rule and doctrine of consideration 

Traditional analysis --> consideration answers 2 questions --> party can only enforce promise if he has given consideration for it and is the promisee --> on this view privity rule is flipside of consdieration doctrine and cannot be reformed without reforming consideration doctrine --> 1999 Act does not expressly dispense with either element but by allowing a party to sue who conforms with neither, it implicitly recognises an exception to each requirement 

Alternative view --> consideration doctrine only addresses 1 question --> party can only enforce promise if he has given consideration for it --> on this view while 1999 Act clearl contradicts (2) it does not contradict (1) since consideration is still provided by promisee --> Act merely adds to cateogries of persons who can sue 

1999 Act undermines importance of consideration requirement --> LC suggests doctrine of consdieration may be 'suitable topic for a future separate review' 

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Enforcement by promisee (1)

Specific performance

  • Court can cmpel promisor to perform his promise --> interests of promisee and TP satsified simultaneously 
    • Beswick v Beswick 
  • SP as ideal remedy --> if systematically awarded in such cases there would be no legal 'black hole'
  • if relevant promise to refrain from suing TP, promisee can ask court to exercise its discretion to stay the proceedings against TP, where promisee has sufficient interest in doing so
    • Snelling v Snelling
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Enforcement by promisee (2)

Damages for loss of TP

  • HL in Panatown affirmed orthodox position that promisee cannot sue for TP loss --> only person who has suffered a loss can recover for that loss
  • numbr of avenues exist for prmisee to sue on behalf of TP, handing damages to TP
  • (1) promisee who is a bailee in respect of subject matter of promise can recover for damage to bailor's goods even though he is not liable to bailor for damage
  • (2) a promisee who is a trustee in respect of subject amtter of promise can recover damages for beneficiary's loss flowing from breach 
  • (3) promisee who is also an agent in respect of subject matter of promise can recover damages for loss suffered by his principal
  • (4) quasi-agency in domestic and social situations (?)
    • Jackson v Horizon Holidays 
    • disapproved in Woodar Investment Development Ltd v Wimpey Construction UK Ltd 
  • (5) most important exception for our purposes is the Albazero exception 
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Enforcement by promisee (3)

Albazero exception

  • allows promisee to recover daamges for TP loss held on trust for TP
  • originally calim applied to loss or damage to goods in contracts of carriage by sea where parties contemplated that promisee would trasnfer ownership of the goods, carried by promisor, to TP after contract's formation but before its performance
  • scope has been broadened -->
    • original requirement of damage to or loss of property in carriage by sea contract was extended to allow claims for incomplete or defective performance in building ocntracts (Linden Gardens)
    • original requirement of a contemplated transfer of ownership from promisee to TP was abolished to allow recovery without such transfer 
  • but continues to be necessary to show that TP
    • is identifiable at time of contract formation as likely to suffer damage on breach
    • has no claim of its own against promisor

St Martins v McAlpine

  • L B-W narrow view --> 
  • L Griffiths broad view -->
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Enforcement by promisee (4)

Damages fro promisee's own loss 

  • traditional approach to deny any compensable loss on promisee's part in contracts to benefit TP
  • 3 exceptions are arguable
    • (1) promisee can claim if he suffers direct pecuniary loss, as where the breach results in his own oblgiation to TP not being discharged, or brings him under a legal/factual oblgiation to TP
    • (2) promisee may have a claim for substantial damages under the 'broad ground' in Panatown
      • promisee calim damages in its own right for not receiving promised perfomrance --> claim failed on facts but controversy surround ratio of the case 
    • (3) promisee's claim may be for his own loss of amenity --> loss of satisfaction from promisor's failure to confer benefit on TP
      • 1st requirement --> promisee's non-pecuniary purpose should be distinct, important and communicated to promisor --> relatively easy to meet where contract for TP benefit
      • 2nd requirement --> damages should take account of reasonableness
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TP common law enforcement: contractual devices (1)

(i) Agency 

  • where C makes a contract with A, who acts on behalf of P, P is not really a TP but is a contract party in his own right --> can sue on contrat without contravening privity rule
  • difficulty where P is undisclosed P --> both C and A can sue P and be sued by P and C can appeal to any defences he may have against A in an action with P
  • seems anomalous that an undisclosed P can sue while a TP who is expressly intended by parties to be able to sue is barred

(ii) Collateral contract 

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TP common law enforcement: contractual devices (2)

(iii) Exemption of TP from liability

  • s1(6) 1999 allows qualifying TP to rely on any exclusion or limitation clauses
  • prior to this, courts combined agency adn collateral contract devices to do same job
  • tehmplate (Himalaya clause) set out by Reid LJ in Midland Silicones v Scruttons
    • contract (a 'bill of lading' in carriage of goods by sea) must stipulate that:
      • CC acts as S's agent
      • when concluding a collateral contract with CO
      • in which CO exempts SO from liability in exchange for S's consdieration of (a) performing (on a unilateral basis) or (b) agreeing to perform (on a bilateral basis) services in relation to cargo which S alread owes under a contract with CC
  • but this colalteral contract may still fall short 
  • common law could have avoided these contortions and achieved same result as s1(6) via doctrine of vicarious immunity
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TP common law enforcement: tort of negligence

  • Whether A's breach of his contractual duty owed to B amount also to a breach of A's duty of care owed to C, entitling C to sue A in negligence
    • physical injury or property damage --> C's claim straightforward
    • more difficulties where loss is purely economic
      • controversial decision on TP and econ loss in Junior Books v Veitchi Co
      • White v Jones
      • general approach --> part only assumes contractual liability to his immediate contractual partner and is not liable in tort to more remote parties furhter removed in contract chain
    • where TP can sue in neg this is distinctive from any contractual action
      • TP must be owed duty of care in respect of
        • conduct representing contractual performance
        • nature of loss incurred
      • promisor must breach this duty
      • measure of damage is different in principle
  • Can A's contract with  B negate C's tortious liability to A?
    • yes, whether loss is physical or purely economic
    • where A agrees with B to exempt B's subcontractor C from tortious liability this may negate any duty of care C would otherwise owe A
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TP common law enforcement: trust of contractual ri

TP has direct ation against promisor if court ocnstrues promisee as holding his contractual right to sue prmisor on trust for TP

Courts insistence on robust evdience of parties' intention to create a trust restricts utility of this device in circumventing privity rule

CA refused to adopt liberal appraoch in Re Schebsman

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TP common law enforcement: assignment

Promisee can assign his contractual rights to TP

TP takes benefit subject to equities --> vulnerable to all promisor's defences against promisee/assignor

One party can assign his rights without other party's consent unless:
- contract forbids such assignment
- assignee has no genuine or commercial interest in taking the assignment
- relationship between contract parties is personal

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TP common law enforcement

Negotiable instruments

  • e.g. cheque
  • writer of cheque (drawer) instructs bank (drawee) to pay a specified sum to a named tP (payee)
  • TP better off than assignee because take free from any defects of title of prior parties --> secure right to demand payment

Statutory exceptions

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Imposing burdens on TP (1)

1999 Act doesn't change rule that contract parties cannot impose burden on TP via their contract

Rule prevents contract parties from
- imposing positive burdens on TP
- depriving TP of some right or restricting their freedom of action

- inducing breach of contract
- sub-bailment contracts
- restrictions on property acquired

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Imposing burdens on TP (2)

Inducing breach of contract

  • tor tlaw imposes oblgiation on TP not to intentionall or recklessly indcue one party to breach its contract
  • TP can be liable if he acquires property with knowledge of a contract affecting it and his acquisition or use of the property is inconsistent with that contract

Sub-bailment contracts
- where C (bailor) entrusts property to A (bailee) for A to hold for or at the direction of C, and A then entrusts the property to B (sub-bailee), C is bound by the terms of the sub-bailment between A and B to which he has consented, whether expressly or impliedly

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Imposing burdens on TP (3)

Restrictions on property acquired

  • where A makes contract (1) with B regarding the use of B's property, and B then transfers the property to C via transaction (2), is C bound by the terms of (1)?
  • policy arguments --> free trade; security of certain rights acquired
  • respect for propiretary rights 
    • where A has acqiured a prop interest from contract (1) with B, A's propr rights attach to the prop and can prejudice the rights of TP C who later acquires the prop from B --> C can only take the prop from B subject to A's prop interest
  • a wider principle?
    • is there a braoder principle which operates in absence of recognised prop interests, simpl on basis of TP knowledge of vendor's contractual oblgiations towards C in resepct of property acquired? --> no, but not always -->Tulk v Moxhay 
    • De Mattos principle --> equity will protect the original promisee's contractual right in respect of the proprety transferred by imposing restrictions on TP who has acquired the property with knowledge of these rights
    • DM principle qualified in Swiss Bank Corp v Lloyd's Bank -->
      • A can obtain an injunction to prevent C from dealing with property in such a way as to cause B to breach his contract with A if:
        • C had actual knowledge of the contract between A and B when he acquired the property
        • it is still possible for B to perform the contract (if not, it is B's condcut (not C's) which undermines A's right)
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