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Discuss whether privity of contract is still a relevant rule in contract law.
'Even before the Contract (Rights of Third Parties) Act 1999 there were so many exceptions to the rule of privity that it could hardly be said to have been a rule at all.’ We will look at this statement and discuss whether privity is still a relevant rule in contract law in the light of this comment.
In contract law, privity means the relationships that exist between those engaged in contracts. 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. A third party is unable to enforce a contract where they suffer a loss as a result of its breach. The Contracts Rights of Third Parties Act 1999 creates an exception which lessens the harshness of this rule.
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 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 shipowners, the appellants, entered into a contract to charter a ship to a company. Under the contract the shipowners agreed to pay a sum of money to Walford who were the brokers and who had negotiated the charter. There was no contract between the shipowners and Walford’s. The French government requisitioned the ship for wartime duties and the shipowners refused to pay the broker’s fee to Walford so they sued the shipowners and won.
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 the property 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.
A restrictive covenant is a promise by one person to another, for example the person who is buying some land and the seller, and it will place restrictions not to do certain things with land/property. It relates to the land and not the individual and therefore "runs with the land". So the covenant will continue after the buyer has sold the land on to someone else. Although they may seem to be out of date and may have been made many years ago, restrictive covenants will continue to have effect.
In the case of Tulk, the plaintiff sold a vacant lot to another person in which the contract specified that the purchaser and all 'heirs and assignees' would allow the garden to remain as a pleasure garden, open to paying visitors from the locality. This specification would be referred to as a covenant nowadays. The Defendant, a future owner of the garden knew of the agreement but there was no mention of it in his deed, he wanted to start building on the land but Tulk sued to enable him to get an injunction and the court granted the injunction. The court agreed that, as the price of the land is affected by a covenant in the sales contract, the covenant must run with the land, otherwise the purchasers could simply resell the land to another purchaser, without the covenant, for a higher price.
Another example of where the courts have been prepared to develop exceptions to the general rule is if the courts have recognised the existence of collateral contracts. A contract between two people can be accompanied by a collateral contract between one of those two people and a third party. Should that third party make a collateral warranty and the formation of the contract depends on that warranty, then a party to the contract is able to sue on the promise despite the fact that it was not made by a party to the contract.
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, in Woodar Investment Development v Wimpey Construction (1980), 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. They preferred to liken the situation in Jackson to ordering a meal in a restaurant and felt that the award itself could be justified if not completely agreeing with the reasoning behind it.
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. It is also thought that the operation of assignment, as well as the existence and operation of an agency, will also provide exceptions to the general rule as will an action in tort for negligence.
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 entitle 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, to be able to enforce the contract.
Is the rule of privity still a relevant rule of contract law today? It is probably fair to say that the basis of the rule, that a party who has not provided consideration to a contract should not be able to enforce it, still holds good today in that the law of contract or commercial law exists in order to provide a means of enforcing and providing resolution to disputes arising from contracts or legally binding agreements.
There needs to be a means of giving effect to agreements which are based upon business activity but the law needs to have boundaries and limits and it seems as though the general rule of privity of contract is justifiable on that basis. If this were not the case how would the law limit those seeking to benefit from a contract? If a party is seeking to benefit but was not privy to the original bargain then it may simply be too difficult for the courts to establish any rights and any basis for determining their liabilities and obligations.
One could argue that a degree of flexibility is desirable provided it does not affect the certainty of the law and such an example can probably be found in the 1999 Act as the Act can be excluded so as to prevent a third party from enforcing the contract directly. The result being that the general rule will prevail.
It should not be forgotten that situations can arise where the 1999 Act does not apply and the general rule on privity of contract will apply unless it falls into one of the exemptions developed under judicial precedent.
This was the case in Shanklin Pier v Detel Products (1951) where the court accepted that a party had made a representation amounting to a warranty about a product. This resulted in a collateral contract being recognised and thereby bringing in the producer of the paint product who was found to be liable.
It is generally regarded that if someone buys a gift and then gives it to a third person, the 1999 Act is not thought to apply.
It is possible that where an exclusion clause falls outside the provisions of the 1999 Act, the general rule on privity of contract will apply and this will not extend to third parties to the contract but only apply to the parties themselves.
There are some situations when the courts take the view that it is only right and implicit that third parties can benefit even though they are not a party to the original contract. This is because to find otherwise would negate the long term value of the transaction as in St Martin’s Property Corporation Ltd v Sir Robert McAlpine (1994) which concerned the construction of a building with the intention of selling it on when it was completed. McAlpine was the contractor for a corporation development and on completion it was passed on to Corporation's sister company. It was after the development was passed on that faults were found which were said to be due to breaches by McAlpine under the contract. These faults were expensive to put right. McAlpine knew that the development would be occupied by third parties and it was foreseeable that the damage caused by a breach would incur loss to a later owner. On these grounds the corporation was entitled to recover the loss suffered by its sister company. Lord Browne-Wilkinson observed "In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach."
If we look back at the exceptions to the rule developed by the courts and those situations where privity will not be a bar to a claim, it is possible to argue that such situations have considerable equity and are limited in scope. The 1999 Act now provided that, where a party is specifically intended to benefit from the contract, the privity of contract rule will not apply so that the outcome in Tweddle v Atkinson need no longer arise. One could argue that the Act of 1999 is quite rightly giving affect to the intentions of the contracting parties.
The emergence of the further exception in the 'holiday cases' as evidenced in Jackson v Horizon Holidays (1975) which have effectively enabled third parties to be included in a claim, provide yet another example of how the rule of privity became riddled with exceptions. The 1999 Act means that such parties intended to be given rights, can now rely upon the provisions of the Act itself as opposed to the exceptions.
At the end of the day this area of the law is still fraught with difficulties especially for individuals who may not be aware of the law and their rights. Whilst it is true that many of the previous exceptions need to be relied upon, it is possible for the parties to exclude the 1999 Act and so the unwitting party may still be caught by the privity rule.
It is also possible that the contracting parties find it easier to rely upon the exclusion clauses that they have inserted and agreed to, rather than rely upon the 1999 Act. A number of exceptions to the privity of contract rule had developed prior to the enactment of the 1999 Act and it is easy to see why the courts were so reluctant to accept a blanket approach to the application of the rule. However, with its foundation in consideration and the striking of a 'bargain', it is arguable that the rule has some fundamental basis.
This essay takes a look at the principle of privity in contract law and examines the exceptions to the rule of privity which have been developed by the courts.
The essay then goes on to question whether the rule of privity is still a relevant rule of contract law today. It looks at the effect of the Contract (Rights of Third Parties) Act 1999.
The subject area is quite a complex one but this essay will give you an understanding of the topic and by using the links to the cases and other information provided you will have a thorough understanding of this area of contract law.
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