The Problem of Privity in Cases

This problem of privity invites the discussion the right of Harriet, a third party vis a vis the contract between Ivor and Jerry Builders Ltd (“JB”), to enforce a term of that contract; the methods she can use under common law exceptions and most importantly the Contracts (Rights of Third Parties) Act 1999 (the “Act”).

“The doctrine of privity means that as a general rule, a contract cannot confer rights or impose obligations arising under it on any person except the parties to it.” [1] Consequently, even if the parties had intended to confer some sort of benefit on the third party, she would not be able to enforce that promise against the Promisor. (Tweddle v Atkinson [2] , Dunlop Pneumatic Tyre Co v Selfridge [3] , Beswick v Beswick [4] ) In our case, it is expressed that Ivor arranged with JB to replace the wiring, plumbing and central heating of the house; therefore it is assumed that the contract was between Ivor and JB. A term of the contract specified that work is to be completed on January 1st and that JB will be liable to pay compensation to Ivor and Harriet for delays; giving Harriet a clear positive benefit although she is not a party to the contract. (The variation of contract to limit the right to enforce the contract exclusively to Ivor will be discussed within the application of the Act). According to the general rule of the privity doctrine, Harriet would not be able to enforce this term against JB; however she could act via Ivor or by herself in certain exceptional circumstances or she could try to employ the Act.

Enforcement by Promisee:

Under the doctrine of privity which states that only parties to a contract will be able to enforce it, the natural solution would be that Ivor should enforce the compensation term of the contract. In general, this approach is seen to be problematic as the Promisee would have difficulty proving that he has suffered a loss beyond nominal as a result of Promisor’s breach and would not be able to recover third party’s damages as per Panatown Ltd v Alfred McAlpine Construction Ltd [5] , (except for some special circumstances like family holidays and group bookings – introduced in Jackson v Horizon Holidays [6] , restricted by Woodar Investment Developments v Wimpey Construction [7] ). In our case, since the compensation was to be paid to “Ivor and Harriet” there would be no problem of damages for Ivor as their benefits would be identical. However as he seems to have refrained from exercising his (exclusive) right to take action against the delay until now, we shall assume that for some unfathomable reason he is reluctant/unable to pursue this method and evaluate other alternatives for Harriet to bypass Ivor and enforce the contact term.

Enforcement by the Third Party under Common Law Exceptions

The doctrine of privity in English law has given to a multitude of exceptions in common law to alleviate its negative effects on the third parties. Most of those are not applicable in our context: the contract was not assigned to Harriet, it did not involve negotiable instruments or subjects such as insurance or shipping contracts that are excepted by statute [8] ; therefore can be immediately ruled out as possible routes. The other exceptions need more examination:

i. Agency: As Viscount Haldane stated in Dunlop v Selfridge, if the promisee was an agent of the principal, the principal could sue upon the contract even if he were not part of it. However as a general rule, an agent when contracting upon the principal’s behalf; would drop out of the picture so that he can neither sue nor be sued upon the contract [9] ; therefore in our case where Ivor is a party of his own right; Harriet would not be able to claim he was her agent.

ii. Trust of a contractual right: Under some earlier cases courts have resolved the problem of privity by deeming that the Promisee was a trustee of the contractual rights of the third party and they could jointly act against the Promisor for breach of promise (Lloyd’s v Harper) [10] . However Courts became reluctant unless there was a clear intention to create a trust relationship between the Promisee and the third party (Re Schebsman [11] ). It was also discussed by Lord Denning in Jackson v Horizon Holidays that it would be absurd to say a father contracting on behalf of and for the benefit of the family was acting as trustee (or agent, for that matter). In our case there is no indication that the couple intended to create a trust; and also, from the reluctance of Ivor’s behaviour, Harriet would be hard pressed to join him in a case against JB and use this exception.

iii. Tort: If Harriet can establish that JB were negligent and breached their duty of care as in Donoghue v Stevenson, [12] White v Jones [13] and Junior Books Ltd v Veitchi Co Ltd. [14] she will be able to sue for damages in compensation without relying on a contractual relationship. However Junior Books case was criticized as going too far in allowing the tort of negligence to operate as an exception [15] . Also, courts have been reluctant to find liability in tort in cases of pure economic loss (D & F Estates Ltd. v Church Commissioners for England [16] ) and Harriet would be in a stronger position to use this exception if JB causes additional property damage or personal injury due to its “slip-shod” and careless work.

iv. Collateral contracts: Existence of a collateral contact as in Shanklin Pier Ltd v Detel Products Ltd [17] is another exception. The problem here is determining the formation: if JB’s offer to undertake the work on the house can be construed to be addressed to the occupants of the house in general, then Harriet’s allowing JB’s workers into the house may also be deemed as acceptance. The consideration in this case is problematic: we do not know how the contract value is being paid. In Coulls v Bagot’s Executor & Trustee Co Ltd [18] the Australian High Court had established a qualifying principle that if the husband and wife were “Joint Promisees”, consideration given by the husband would also be acceptable for her and she could sue the Promisor even though she wasn’t a party to the contract. However as a Commonwealth case it is unlikely that the Court will accept this precedent; especially when Ivor has been named as the exclusive party who can act on the poor quality workmanship and delays, which seems an express declaration of the contracting Parties’ intentions.

Enforcement by using the Contracts (Rights of Third Parties) Act 1999

The Contracts (Rights of Third Parties) Act 1999, when it came into force on May 11, 2000 did not abolish the privity rule, left the common law exceptions in place and became a legislative super exception itself, enabling a third party to have legally enforceable rights in certain circumstances. The Act cannot be used in exceptional cases (s.6) such as employment contracts, carriage of goods or certain contracts relating to companies etc, but these are not applicable in our case.

Establishing third party’s right to enforce, identity

Harriet will be able to enforce the contractual term if the contract expressly provides she can (per s.1(1)(a)) that she can or if the term purports to confer a benefit on her (per s.1(1)(b)) and such presumption was not rebutted from the construction of the contract (s.(1)(2)). In our case, Harriet does not have an express right to enforce, but the compensation clause does confer a positive benefit on her and Ivor. (According to Prudential Assurance [19] , for the Act to be used, the sole purpose does not have to be the third party’s benefit.) The original contract did not prohibit her from enforcing her right; it was only the variation that did (see below discussion). Harriet was also identified by name in the particular clause so s. 1(3) of the Act is satisfied.

The variation

S.2 (1) of the Act restricts the right of the parties to vary or rescind the contract where a third party has a right to enforce a term of the contract, to extinguish or alter his entitlement under that right without his consent, (a) if the third party had assented to the term and communicated this to the Promisor, (b) Promisor is aware that third party relied on the term or (c) his reliance was reasonably foreseeable and third party had in fact relied upon it.

The formation of the variation contract is not disputed: JB offered and Ivor accepted for a consideration of £1 [20] . However this variation is extinguishing Harriet’s right to enforce the term that benefits her. We are not specifically told if Harriet had assented to the term. One can claim that the phrase “[JB] refuse to pay any money for this delay to Harriet” means that she initially had requested to be compensated to warrant such refusal, and thus relied on the term. The timing of her request would be important: if it was before the variation then the variation would be invalid and her right to enforce the term would be intact. If the request was after the variation, then unfortunately as per s.1 (2) of the Act, she loses the right to enforce the contract. On the other hand, in Precis (521) Plc v William M Mercer Ltd [21] obiter, it is explained that parties may not vary/rescind the contract as they wished, unless they had retained such right in the original contract; which can be used to invalidate this variation.

The remedies

If the variation is found to be invalid and Harriet is able to enforce her rights in accordance with the conditions of the Act, then as per s.1(5) she can enjoy any remedy that would have been available to her as if she had been a party to the contract. This right does not affect Ivor’s right to enforce any term of the contract (s.4) however if JB does compensate Harriet for the full amount they owe for the delay, then they will not be held liable to compensate Ivor as per s.5 that protects the promisor from double liability. It is important to note that the contract clause regarding compensation is limited to the delay in the works and not to any breach of contract due to partial / bad performance. Therefore even if they paid the compensation relating to the timing to Harriet, Ivor could still ask for damages in case of poor workmanship.

However if the variation is deemed valid depending on the explanations above, then she will not have the right to enforce the contract, and thus will not be able to claim remedies under the Act.

Role of the promisee vis-à-vis the third party

In her article [22] C. MacMillan explains that the promisee would have some interest in providing an enforceable right to the third party; have superior knowledge of the contract compared to her and should not misrepresent the contents to her. In a case where actions of the Promisee prohibit a valid right from being enforced, Third party may ask the Promisee to make good the breach by the Promisor. Although we must distinguish our case as the relationship between the Promisee and the third party is marital and not commercial, which would restrict the application of such remedy.