the relation between the parties in
a contract which entitles them to sue each other but prevents a third party
from doing so.
What is PRIVITY OF CONTRACT?
A legal document that states that
contracts give rights and imposes liabilites on the concerned parties. Only
they are given the right to sue each other according to the contract terms
Exceptions
Common law exceptions
There are exceptions to the general rule, allowing rights to third parties and some impositions of obligations. These are:- Collateral Contracts (between the third party and one of the contracting parties)
- Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)
- Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighbouring land)
- Agency and the assignment of contractual rights are permitted.
- Third-party insurance - A third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums.
- Contracts for the benefit of a group where a contract to supply a service is made in one person's name but is intended to sue at common law if the contract is breached; there is no privity of contract between them and the supplier of the service.
Statutory exceptions
In the United Kingdom, the Contracts (Rights of Third Parties) Act 1999 provided some reform for this area of law which has been criticised by judges such as Lord Denning and academics as unfair in places. The act states:1. - (1) Subject to the provisions of this act, a person who is not a party to a 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 subsection (2), the term purports to confer a benefit on him.
(2) Subsection (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.
This means that a person who is named in the contract as a person authorised to enforce the contract or a person receiving a benefit from the contract may enforce the contract unless it appears that the parties intended that he may not.
The Act enables the aim of the parties to be fully adhered to. In Beswick v Beswick, the agreement was that Peter Beswick assign his business to his nephew in consideration of the nephew employing him for the rest of his life and then paying a weekly annuity to Mrs. Beswick. Since the latter term was for the benefit of someone not party to the contract, the nephew did not believe it was enforceable and so did not perform it, making only one payment of the agreed weekly amount. Yet the only reason why Mr. Beswick contracted with his nephew was for the benefit of Mrs. Beswick. Under the Act, Mrs. Beswick would be able to enforce the performance of the contract in her own right. Therefore, the Act realises the intentions of the parties.
The law has been welcomed by many as a relief from the strictness of the doctrine, however it may still prove ineffective in professionally drafted documents, as the provisions of this statute may be expressly excluded by the draftsmen.
Third-party beneficiaries
In Australia, it has been held that third-party beneficiaries may uphold a promise made for its benefit in a contract of insurance to which it is not a party (Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd (1988) 165 CLR 107)Austlii. It is important to note that the decision in Trident had no clear ratio, and did not create a general exemption to the doctrine of privity in Australia.Queensland, the Northern Territory and Western Australia have all enacted statutory provisions to enable third party beneficiaries to enforce contracts, and limited the ability of contracting parties to vary the contract after the third party has relied on it. In addition, section 48 of the Insurance Contracts Act 1984 (Cth) allows third-party beneficiaries to enforce contracts of insurance.
Although damages are the usual remedy for the breach of a contract for the benefit of a third party, if damages are inadequate, specific performance may be granted (Beswick v. Beswick [1968] AC 59).
The issue of third-party beneficiaries has appeared in cases where a stevedore has claimed it is covered under the exclusion clauses in a bill of lading. In order for this to succeed, three factors must be made out:
- The bill of lading must clearly intend to benefit the third party.
- It is clear that when the carrier contracts with the consignor, it also contracts as an agent of the stevedore. That is, either the carrier must have had authority by the stevedore to act on its behalf, or the stevedore must later ratify (endorse) the actions of the carrier.
- Any difficulties with consideration moving from the stevedores must be made out.
What Is Meant By Privity of
Contract?
If Mr. A makes a contract with Mr.
B, he comes under a legal obligation to pay damages if he fails to keep his
promise. The enforceability or liability as regards this contract lies firmly
in the hands of A and B to the exclusion of others, this is the foundation of
the doctrine of privity of contract.
The doctrine of privity of contract
is that a contract cannot confer rights or impose those obligations arising
under it, on any person except the parties to it. The term "parties"
may seem simple enough but there are situations where it may become doubtful as
to exactly who the parties are and resultantly, who, in the eyes of the law
should be liable or should be compensated in event of inevitable breaches that
may occur from time to time.
The concept of privity is part of
the bedrock called common law which was made up of the collective judicial
decisions derived from court decisions. Today however the law has recognized
that with the increasingly complex world of commerce there must be some changes
to accommodate certain exceptions to the general rule and guarantee restitution
to the aggrieved. Growing consumer rights questions including warranty claims
have contributed to this amendment of approach.
Exceptions
to General Rule of Privity:
- Collateral Contracts: A collateral contract is one that accompanies the main contract between two parties. It is one involving either of them and a third party. A classic example of this happened in England in 1953 in the case of Shanklin Pier v. Detel Products Ltd. In this case Shanklin Pier (plaintiff) employed contractors to paint a pier. The contractors then instructed Detel Products to supply them paint. This instruction was given based on a statement made by the defendants to the plaintiffs that the paint would last for seven years. When after just three months the paint work fell apart, the plaintiff sued and was given the go ahead by the courts to proceed with the suit against the defendant because even though the main contract had been between the contractor and the defendant there was in existence a collateral contract between the plaintiff and the defendant guaranteeing seven years protection.
- Multilateral Contracts: When a person joins an unincorporated association such as a club, it could be said that he has gone into a contractual relationship with other members even if he may not be aware of their identity and if the person only liaises with the secretary of the organization. In one case the courts decided that a competitor in a race contracted not only with the organizers but with other competitors.
- Agency: The status and vicarious liability issues of an agent also create exceptions to the rule of privity. When an agent negotiates a contract between his principal and a third party, it is generally regarded as being between the principal and the third party. However there are situations where it is subject to question as to whether or not an agent acted on his own behalf or not. It may even reach new heights of complexity when an agent makes use of a sub-agent, spawning twin questions of whether or not the contract will now be between the principal and the sub-agent or the agent and the sub-agent.
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