Rights of Third Parties in Contract

Discuss Why It Was Thought Necessary To Introduce The Contract (Rights Of Third Parties) Act 1999, And To What Extent The Act Overcomes The Judicial Criticism Levelled At The Privity Doctrine Prior To Its Enforcement.

The doctrine of privity of contract has been a long established and controversial principle of English law. We will look through our present discussion for the changes that have been brought by the Act defining the doctrine and the extent to what has the Act been successful in mitigating the obsolete privity problems along with satisfying the judicial and academic criticism.

In common law Doctrine of Privity means that a contract can not as a general rule, confer rights or impose obligations arising under it on any person except the parties to it. The doctrine was a compound of two general rules: the first one was that the third party does not take burden where he was not a contracted party. Secondly, a person would not be able to sue on the contract to which he was not a party obtaining the performance promised even in the case where the contract was entered into with the very object of benefiting him.

The most controversial issue was the second rule which was likely to be based on the rule of consideration to the effect that consideration must move from the promisee. In Tweddle v Atkinson (1861) the court denied the husband’s claim for two reasons. Firstly, he did not pay any consideration and secondly, he was not privy to the contract.

Before 1861 in some cases the third party was held to be entitled to sue upon a contract entered into for their benefit as shown in Provender v Wood (1627), Dutton v Poole (1677).But in 1861 by tweddle v Atkinson that development brought into halt. The decision of Tweddle v Atkinson was affirmed by the House of Lords more than 50 years later in Dunlop V Selfridge

Tweddle and Dunlop both demonstrate that there is close relation ship between the doctrines of privity and that the consideration must move from the promisee. On one view there is no difference between them .both are pointed at the same direction .on another view privity and consideration are two separate rules. They are not linked with each other. Lord Dunedin expressed in Dunlop v Selfridge:

“……..my Lords, I confess that this case is to my mind apt to nip any budding affection which one might have had for the doctrine of consideration .for the effect of the doctrine in the present case is to make it possible for a person to snap his fingers at a bargain deliberately made, a bargain not in itself unfair, and which the person seeking to enforce it has a legitimate interest to enforce……”.

The more widely accepted view was expressed by Viscount Haleden in Dunlop namely that the doctrine of privity is separate and distinct from the rule that consideration must move from the promisee.

Beside the consideration problem the doctrine consisted with the following problems for which the doctrine seemed unjust and inconvenience:

1. The foremost problem of privity doctrine is the failure to honor the intention of the parties. For instance in Tweddle v Atkinson the doctrine of privity impeded the contracting parties’ intention. The agreement was frustrated by the doctrine of privity.

2.The ways by which the court tried to divert the doctrine of privity were found complex, artificial and also they raised the doubt as to whether a third party is in particular case could circumvent the doctrine. The privy council’s view on the case of New Zealand Shipping company ltd v A.M. Satterthwait & Co. Ltd. (the Eurymedon)demonstrated that the unnecessary complexities which could came out in case of diversion of the doctrine and giving effect to the parties’ intension.

3. The person who has suffered loss can not sue but the person having no loss can sue.

In Beswick v Beswick the widow had suffered actual loss. She could not sue in her personal capacity but the estate had the right to sue without having suffered any loss. The same position can be observed in Dunlop v selfridge. Dunlop suffered loss but could not sue selfridge while dew had not suffered loss but have had the right to sue selfridge.

4. The law commission pointed out the injustice that could be suffered by the third party when he regulated his affairs with exceptions that he would be beneficial from the promise of the promisor on which he was relying.

Following exceptions to the rule of privity have therefore been developed to reduce injustice and inconvenience:

A) COLLATERAL CONTRACTS

A contract which is ancillary to the main contract is a collateral contract .In Shanklin Pier v Detel Products [1951] although there was not any contract between the plaintiff and the defendant the court decided that the plaintiffs could sue the defendants on a collateral contract.

B) Agency

The concept of agency is an exception to the doctrine of privity where an agent may contract on behalf of his principal with a third party and form a binding contract between the principal and third party. For example, if in Dunlop v Selfridge, Dunlop would stand on Selfrodge’s behalf Dunlop could have sued Dew. In Scruttons Ltd v Midland Silicones Ltd, the court has determined how to prove genuine agency relationship between the parties.

C) Trusts

As an exception to the doctrine of privity trust was approved by the House of Lords in Les Affreteurs Reunis v Leopold Walford [1919].

 D) Tort

Under Tort law there are monstrous exceptions to the rule of privity. For example in Donoghue v Stevenson the plaintiff was entitled to sue the defendant despite the fact that she did not buy the ginger beer where the snail was found. She got her friend to buy it.

Further exceptions developed between 1937 and 1999:

The privity problems caused lot of people to get upset and lot of people argued that there should be some statutory reform.

Law revision committee in 1937 recommended that,

“Where a contract by express terms purports to confer a benefit on a third party it shall be enforceable by the third party in his own name subject to any defences……”

The judges were very fed up and Lord Wilberforce in Wooder v Wimpey said that if the parliament does not act soon the court will be forced to.

Parliament later acted on this warning and added some more exceptions in addition to those listed above by introducing the Contract (Rights of third Parties) Act 1999.

Between 1937 and 1999 some more exceptions were introduced by case law.

The first one was Jackson v Horizon holidays .in this case the court awarded for wife and children’s disappointment along with the plaintiff. Lord Denning’s decision was controversial as he tried to circumvent the privity rule by awarding for wife and children who were not the parties to the contract. After Jackson and Horizon we have found series of cases where the facts are almost identical. Linden gardens v Lenesta sludge and St. Martin Property v Mc Alpine both were based on the same facts. In both cases the rights were assigned to third parties and they failed because of the prohibition of assignment. In St Martin the assigned party got B to sue on his behalf and it was thought that his claim would be failed. Surprisingly the court said he can sue on the basis of Alba-0 principle. The fact of Darlington Borough Council V Wiltshire Northern was similar to the fact of St. Martin’s case. The only difference between them was in St.Martin there was a prohibition of assignment but in Darlington there was not. The court afterward held that the Alba-0 principle would be applicable on this situation. The last case in this respect is Mc Alpine v Panatown .in this case the fact was similar to the above. There was only one thing extra i.e. Duty of care deed. A and C had direct communication .A gave C a duty of care deed which was a price made to C as consideration to get the job done. In that case B sued A on behalf of C on the basis of Alba-0 principle but the court rejected the B’s claim and held that as C got the direct right to sue C should have exercised it.

Basic Features Of The Act-

No Consideration Required:

The act impliedly mitigated the consideration problem that was existing with the doctrine of privity in common law. Although the Act does not expressly deal with the doctrine of consideration the fact that section 1 states that “the third party may in his own right enforce a term of the contract” was thought to be sufficiently explicit to confer a right of action on the third party whether or not he had provided consideration.

Right To Enforce:

section 1 states that a third party may “in his own right to enforce a term of a contract” if the contract expressly provides that he may (1)(a)or the term purports to confer a benefit on him.(1)(b).in case of section 1(b) if the problem is like the contracting parties do not make their intention express and the contract term purports to give a benefit on the third party then the third party may be given the right to enforce the term but that right is subject to limitation imposed by section 1(2) which provides that the right of action is not triggered where it appears that on an actual construction of the contract the parties’ intension was not to made the contract enforceable by third party. Regarding the onus of the promisor to prove the wrong application of the second rule i.e.section1 (b) Guenter Treitel’s argument was that in one circumstance where it was held by the promisor that the onus would be upon the promisor where in the contract the second rule’s application was wrong.

Treitel’s above reasoning was later supported by the high court in Nishin shipping Co. Ltd. V Cleaves co ltd [2003] EW HC 2602. About the nature of the third party’s right section 1(6) provides that it may be a right to sue to enforce a positive right for example to payment or it may be a right to rely on limitation clause contained in the contract between the two contracting parties. Under section 1(5) the term of a contract against the promisor can be enforced if he has the choice to do so, he also has the available remedy if he was a contracted party such as specific performance. But according to section 1(3) to enforce the above right the third party needs to be identified by a name or to be a particular group member and there is no need of his existence when the contract was made.

Variation And Recession Of Contract:

Section 2 of the Act prevents the removal or modification of the terms of the contract by the parties if the third party has “assents” to that term or that he has relied on the contract and his right may be affected by such removal or modification. To rescind or to alter the term of a contract the parties must have the consent of third party. The parties only can insert the clause in to contract to rescind or alter a term if they so choose at the time of entering in to contract. The consent of the third party can be ignored by the court when he is mentally incapable or he is unfindable or if the third party’s consent is not possible to be determined but at the same time the court can add a condition to compensate the third party for such removal or alteration brought by the promisor and promise.

Defences Available To Promisor:

Section 3 deals with the available defences of the promisor against the third party in case of any action brought by him. It provides that in a dispute between the third party and the promisor over a term the promisor can rely on any defence he would have if the dispute was with the promisee as long as the defence is applicable to the term under dispute.

Avoiding Double Liability:

Where the third party has recovered damages from the promisor the promisee’s claim for damages is likely to fail on the ground that the promisee has suffered no loss but the difficulty arises where the promisee has sued and recovered damages from the promisor and the third party then brings an action against the promisor. Section 5 of the Act seeks to deal with this issue which provides that where a contractual term is enforceable by a third party in accordance with section 1 of the Act, the promisee recovered a sum from the promisor in respect of

a) Loss of the third party in the term’s respect or

b) The promise of the making good of the expenses to the third party as promisor’s default.

Then any award to the third party to be reduce by the court or arbitral tribunal in any proceedings brought by the third party in reliance of the section to such length as it thinks proper of taking the sum recovered by the promise.

There Are Some Exceptions:

The section 6 of the Act deals with the exceptions to the scope of the Act. The Act does not apply to contracts made as a part of negotiable instruments, Bills of Exchange or promissory Notes or contract governed by the Companies Act 1985. the act also excludes contract for the transport of goods across national line which are subject to International Trade Laws and terms in employment contract which allow a third party to sue an employee.

The privity rule was thought controversial because the second rule of the doctrine prevented the third party from having benefit of a contract to which he was not a party. The intention of the parties to a contract was thought irrelevant and as such although the contract was entered into for his benefit, the party was not allowed to avail it. In general sense it seemed unjust that is why the reformation of the doctrine has been called for and accordingly the contract (Rights of third parties Act) 1999 had been brought in to existence. despite the fact that the 1999 Act introduce some more new and general exceptions to the doctrine rather than abolish it, it has become easier for the contracting parties to confer right on the third party by way of inserting a simple clause in to their contract. The contracting parties will not face any substantial difficulties if they make their intention clear in relation to the existence and scope of the third party right.

Bibliography:

Poole, J. (2008) Textbook on Contract Law (9th Edition), Oxford University Press, Oxford

Poole, J. (2008) Casebook on Contract Law (9th Edition), Oxford University Press, Oxford

Rose, F.D. (2007-2008) Blackstone’s statutes on Contract, Tort & Restitution, Oxford University Press, Oxford

McKendrick, E. Contract Law (7th Edition), Palgrave Macmillan.

Fafinski S. and Finch E. (2009), Contract Law, Pearson Education Limited, England

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