Describe the rule of privity of contract. Illustrate your answer with cases.

In contract law, privity means the relationships that exist between those engaged in contracts.

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The rule of privity of contract provides that a contract only creates obligations and liabilities as between the parties to the contract. The result of this rule is that the contract can only be enforced by and against the parties themselves and not third parties.

 

There is no better illustration of the principle of privity than the case of Tweddle v Atkinson (1861). The facts of the case were that the fathers of husband, William Tweddle, and his wife, entered into an agreement to the effect that they would both make a payment of £200.00 to the husband. The husband's father made his payment but William's father in law died before making the payment. The husband sued but his claim was not allowed on the principle that although he would have benefited he was not privy to the contract. The injustice to the husband is immediately apparent.

 

Similarly in Dunlop Pneumatic Tyre Co v Selfridge (1915) the issue of privity was plainly illustrated and upheld by the courts. In this case the claimants sold tyres to some wholesale distributors on the basis that they would obtain an undertaking from the retailers to whom they sold the tyres that they would not sell below a list price. The distributors sold some tyres to the defendants who went on to sell them below the list price. The action failed because the claimants were not a party to the contract between the distributors and the defendants.

 

The apparent unfairness of the rule can be dispelled by remembering that the principle stems from the rule that the contract incorporates the bargain struck between the parties to the contract and that third parties are not contributors to this bargain. It is similar but distinct from the principle that consideration must move from the promisee in return for the consideration made by the promisor. How else can a party justify enforcing the contract?

 

There have been a number of exceptions to the rule of privity which have been developed by the courts. We need to examine them as part of our discussion.

 

In the case of Les Affreteurs Reunis v Walford (1919) an implied trust was the justification used to enable the courts to allow a claim notwithstanding the rules of privity. The word 'device' is probably appropriate here as the House of Lords, in this case, used the principle of a trust. The House upheld this device where the terms agreed included a promise by a shipowner to the charterer of the ship that they would pay the commission. The use of this device is doubtful today because of the development of stricter requirements for establishing a trust so it is arguable that this exception is limited.

 

The law allows for the obligations arising under a covenant which is restrictive in nature to be enforceable as against a purchaser for a consideration. The principle seems to be that it is allowable on the basis that purchasers must take subject to any obligations as well as any benefits.

 

Tulk v Moxhay (1848) is a landmark case that decided that in certain cases a restrictive covenant can "run with the land" (ie. a future owner will be subject to the restriction) in equity. Restrictive covenants still operate and systems for their registration as against purchasers still exist.

 

The courts have recognised the existence of collateral contracts and this is just what happened in the case of Shanklin Pier v Detel Products (1951) whereby the claimants produced evidence to the effect that a collateral contract existed as a result of the pier owners entering into a contract following a representation that the defendant's paint had a life of 7 years. The pier owners had entered into a contract with the decorators to paint the pier only to find that the work only lasted a few months. The makers of the paint were not parties to the contract but were found liable under the collateral contract.

 

There have been a number of situations in which the courts have come to the conclusion that it is only right that an individual may sue to recover on behalf of another party. In Jackson v Horizon Holidays (1975) Lord Denning ruled that compensation was not excessive for a holiday failing to match the description of the holiday which had been purchased by the claimant, not only for himself, but for his family.

 

However the House of Lords, not for the first time, decided to cross swords with Lord Denning and disagreed with his reasoning behind the decision in Jackson and confirmed that a claimant could not recover damages for the loss of a third party not having privity to the original contract. However they preferred to liken the situation to ordering a meal in a restaurant and felt that the award itself could be justified.

 

In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1993), the Court of Appeal accepted that prohibitions against assignment or transfer would not preclude transfers on the basis that such transactions operated between the assignor and assignee.

 

Finally it should be noted that Parliament has enacted certain statutory exceptions. First the Married Woman's Property Act (1882) which amended common law principles to overcome the problem of divorced women who, under the law prior to the Act, were unable to take an interest in the marital property.

 

Secondly the Road Traffic Acts which also entitles an individual to enforce an insurance policy despite not being an original party under the requirement that vehicle users take out third party insurance cover.

 

 

Finally the Contract (Rights of Third Parties) Act 1999 which specifically entitles a party who was supposed to benefit under a contract, even though they were not a party, may enforce the contract. 

 

 

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