Topic: Privity of Contract

“Contract Law is premised on the principle that rights and duties can only arise in

respect of parties to a contract.”

Critically discuss this statement.

The doctrine of privity provides that a contract cannot, as a general rule, confer rights or

impose obligations arising under it on any person except the parties to it. The doctrine

seems to be correlated to doctrine of consideration, in that consideration must move from

the promisee and only a person who provides consideration can sue for the terms of a

contract. These principles emanate from the cases of Tweddle v Atkinson, where a

husband’s claim for his wife’s estate was dismissed as he had provided no consideration

for it, and Dunlop Pneutmatic Tyre Co. Ltd v Selfridge and Co Ltd, which established

that only a person who is party to a contract can sue for it. Notwithstanding this, the law

recognises certain instances where a person who is not privy to a contract may enjoy

certain rights and duties arising from its terms, thereby seeming to circumvent the privity

rule. These concessions have been developed for a more flexible operation of the

doctrine.

Undisclosed Principle

One exception to the doctrine of privity is the rule concerning the undisclosed principal in

agency law. An agency relationship occurs where one party, the agent, is authorized by

another, the principal, to negotiate and enter into contracts with a third party on behalf of

the principal. The general rule in this respect is that the principal, may sue and be sued by
a third party, even if the third party is unaware of the principal’s existence at the time of

the contract. In contrast however there is the case of Pople v Evans, where it was

established that where one of two parties to a contract was an agent for an undisclosed

principal, any trust relationship as between the principal and the agent could not be

recognized as between the other party to the contract and the principal (or the agent).

The undisclosed principle rule has come under a lot of scrutiny as it does not seem right

that a third party can find himself in a contractual agreement with a party whose

existence he was not aware of and may object to. For this reason the common law has

imposed some limits on the undisclosed principal’s right to intervene. The undisclosed

principal’s right to intervene is therefore subject to certain conditions which include that

his intervention is not incompatible with the terms of the contract made by the agent; and

that the agent had authority to act for the principal at the time the contract was entered.

The agency relationship also brings into question whether a person who is not a party to

the contract can benefit from the terms of the contract, in instances such as exemption

clauses which may limit their liability. This type of clause is known as a Himalaya

clause, a contractual provision which stipulates a benefit for a third party who is not party

to a contract. The locus classicus case on this point of law is Scruttons v Midlands

Silicones. Even though in this case the stevedores were held to not be able to rely on the

exemption clause, Lord Reid outlines the instances in which the agency argument may

succeed. According to Reid, firstly, the bill of lading makes it clear that the stevedore is

intended to be protected by the provisions in it which limit liability, secondly, the bill of

lading must make it clear that the carrier, addition to contracting for these provisions on

his own behalf, is also contracting as agent for the stevedore that these provisions should

apply to the stevedore, thirdly, the carrier has authority to do that, or perhaps later

ratification by the stevedore would suffice, and fourthly that any difficulties about
consideration moving from the stevedore were overcome. These principles were then

applied in the more recent case of New Zealand Shipping v Satterthwaite (The

Eurymedon) which concerned whether the stevedores in this instance could benefit from

the time limitation provision.

Restrictive covenant

Restrictive covenant refers to a contract in which a third party agrees to be

restricted in some regards as to his conduct concerning land originally owned by another

and sold to others. It involves a situation where an agreement on certain terms between

the original owner and original purchaser may be extended to include subsequent

purchasers of the same land. In this land transaction, the seller of a piece of land will

often wish to restrict the use to which the purchaser can put the land, particularly if the

seller has ownership of the adjacent land and there is knowledge by the subsequent

purchaser of the restrictive covenant . Restrictive covenants may therefore, if certain

conditions are satisfied, run with the land and bind purchasers. The case that reflects the

concept of restrictive covenant is that of Tulk v Moxhay, in this case the plaintiff who

owned several houses in Leicester Square sold the garden in the centre to Elms, who

covenanted that he would keep the gardens and railings in their present condition and

continue to allow individuals to use the gardens. The land was sold to the defendants who

knew of the restrictive covenant contained in the contract between the plaintiff and Elms.

The defendant announced that he was going to build on the land, and the plaintiff, who

still owned several adjacent houses, sought an injunction to restrain him from doing so. It

was held that the covenant would be enforced in equity against all subsequent purchasers

with notice as the conditions of the contract were satisfied, as the original purchaser still

had interest to protect in the land as continued owner of the adjacent land. The principle

that rights and duties can only rise in respect of parties to a contract is not applicable with
the concept of restrictive covenants as a third party can be made subject to the restriction

if there is interest of the land by the original owner and there is knowledge of the

restrictive covenant exists.

Assignment of Contractual Rights

Another qualification to the general rule is an assignment of contractual rights. The issue

in situations of assignment is whether the right created by a contract can be expressly

assigned by its owner to a third party. According to the Jamaica Supreme Court Act

s.49 (f) any absolute assignment by writing under the hand of the assignor of any debt of

which express notice in writing has been given to the debtor from whom the assignor

would have been entitled to claim such debt shall be deemed to have been effectual in

law to pass and transfer the legal right to such debt from the date of such notice and all

legal power to give a good discharge for the same without the concurrence of the

assignor. Thus under the law the assignee of a debt may sue the debtor without joining

the assignor provided it is an absolute assignment.

An absolute assignment is one by which the entire interest of the assignor in the contract

is for the time being transferred unconditionally to the assignee and placed completely

under his control. To be absolute however it is not necessary, that the assignment should

take the form of a transfer which deprives the assignor forever of all further interest in the

subject matter. A case in point is Hughes v Pump House Hotel Company where a building

contractor executed a written instrument, in consideration of his bankers allowing him an

overdraft. By way of security to them for all money due or falling due in the future under

his account, the contractor assigned to them all moneys due or to become due to him

under his building contracts. It was held that the written instrument constituted an

absolute assignment.

Finally, the assignment must fulfil some basic requirements. Written notice must be given
to the debtor; the debtor may plead against the assignee all defences that he could have

pleaded against the assignor at the time when he received notice of the assignment; and

some rights are incapable of assignment including pensions and salaries payable out of

national funds to public officers.

Collateral Contract

The fourth qualification to the doctrine is a collateral contract which generally takes the

form of a unilateral contract where only one party makes a promise to do something in

return for something else. A collateral contract can be defined as a contract, formed

against the background, that one of the contracting parties will enter into another contract

with a third party. The secondary contract not only co exists with the primary contract but

the entrance into the collateral contract forms consideration for the original contract

between the original contracting parties. Additionally, there must be an intention to create

legal relations in forming a collateral contract. Lord Moulton in the case Clarke v

Dunraven provides a precise and simple sum up of the concept of a collateral contract.

He defines it as a “…a contract, the consideration for which is the making of some other

contract”. The concept of a collateral contract was deemed to be present in the case of

Shanklin Pier Ltd v Detel Products. Shanklin had contracted a party to paint their pier. .

Included in this contract was the option to specify which paint was to be used The

defendant, Detel, told the plaintiffs that the paint would last for years and as such

Shanklin used the defendant’s paints but when the party contracted applied the paint it

was not effective. Shanklin had to spend £4000 to fix the matter and thus sued Detel for

breach of contract as the paint was not up to standard. The defendants, Detel, argued that

there was no contract between them and Shanklin however the courts held that there was

a collateral contract as the plaintiffs, Shanklin, had provided consideration for the

defendant’s promise of the good quality of the paint by entering into another contract
with the painters which had entailed the purchase of the paint from the defendants. It

would seem then, that the purpose of collateral contracts is to enforce a promise given

prior to the main contract, but for which aspects of the main contract would not have

been made. This principle is also frequently applied to hire-purchase cases where the

agent may make misleading statements or assurances, which when the buyer enters the

contract it turns out to be substantially different. The concept of collateral contracts is

evidently a qualification of the privity doctrine as third party is implicated in the original

contract as the secondary or collateral contract was the basis or the foundation of the first

or original contract.

Trust Device

The next qualification is that of trust. A trust is an equitable principle which refers to an

arrangement where a party, termed the trustee, holds property for the benefit of another,

the beneficiary. In this, the beneficiary is afforded the right to bring an action against the

trustee for performance of a contract, between the trustee and another contracting party,

which concerns the interest of the beneficiary. In other words, the trustee can sue the

other person in the contract, on insistence by the beneficiary. Additionally, if the trustee

fails in the performance of the contract which is in the interest of the beneficiary, the

beneficiary is allowed to bring an action against both parties of the contract as joint

defendants. This is obviously a qualification to the doctrine as the third party is able to

sue based on a contract that he is not personally contracting in. At most, the contract

contemplates and implicates the third party. This equitable principle also extends to

money. The concept of the trust device was seen at work in the case of Les Affreteurs v

Walford where a broker aided in negotiations of a charterparty, i.e an agreement between

a ship owner and a charterer, which stipulated that the ship-owner promised and thus was

obligated to pay commission to the broker. The House of Lord held that the broker could
bring an action against the charterer to lead to the performance of the contract, as the

charterer was the trustee of the promise and thus could enforce the promise which would

benefit the broker.For the trust device to be utilized, there are three conditions that have

to be met. Firstly, there must be an intention to create a trust. Du Parc LJ in Re

Schebsman, Official Receiver v Cargo Superintendant (London) Ltd and Schebsman

states “…an intention to create a trust is clearly to be collected from the language used

and the circumstances of the case. I think the court ought not to be astute to discover

indications of such an intention.” Secondly, there has to be clear intention of the

conferment of benefit onto thethird party and not unto the promisee. Lastly, the trust must

be of an irrevocable nature. However, if there is any indication of discretion within the

contractual document, this last element may not be mandatory to satisfy.

Claims/ Action by the promisee for the benefit for a third party

The last diversion from the privity doctrine is where a contracting party can contract for

the benefit of a third party. This constitutes a qualification to the privity doctrine as this

exception contemplates that an external party to the contract is able to claim damages as

well as to benefit from a contract that they, themselves, have not contracted to. The case

on point is that of Beswick v Beswick where a coal merchant had made a contract with his

nephew to sell his business to, with the stipulation that his wife, after his death, would be

paid an annuity of 5 pounds per week. The other contracting party, after his death, paid

the wife for one week and then stopped. The wife sued for the specific performance of

the contract between the nephew and Mr Beswick. She sued in the capacity as

administrator of Beswick’s estate as well as in her personal capacity. The House of Lords

held that she could only sue as administrator of her husband’s estate in which she could

benefit from the performance of the contract. The rule was again applied in the case of

Jackson v Horizon Holidays Ltd, where the plaintiff had contracted with the defendant for
a holiday but the Court of Appeal held that he could acquire damages for not only for

himself but also for his family. The family members would clearly be third parties to the

contract concerning Mr. Jackson and the company; however, the court held that they

could benefit from and receive redress under the contract.

In conclusion, although the privity doctrine is a fundamental principle of contract law and

is supported and underscored by the equally crucial concept of consideration, there are

numerous qualifications which undermine this very important concept. These

qualifications do, indeed, do violence to this very traditional understanding of the rights

and benefits of parties in a contract i.e. only those in a contract may sue under and benefit

from the contract. The qualifications contemplate the conferment of benefits on a third

party which is evidently an affront to the privity doctrine.