Privity of contract
Encyclopedia
The doctrine of privity
in the common law
of contract provides that a contract
cannot confer rights or impose obligations arising under it on any person or agent except the parties to it.
The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such. However, the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
Privity of contract occurs only between the parties to the contract, most commonly
contract of sale
of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company.
If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.
This, however, does not mean that the parties do not have another form of action e.g. Donoghue v. Stevenson
here a friend of Ms. Donoghue bought her a bottle of ginger beer, which was defective. Specifically, the ginger beer contained the partially decomposed remains of a snail. Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer has a duty of care
owed to their consumers and she was awarded damages in tort.
Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.
, the rules of which state that consideration must move from the promisee. That is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed
. 1833 saw the case of Price v. Easton, where a contract was made for work to be done in exchange for payment to a third party. When the third party attempted to sue for the payment, he was held to be not privy to the contract, and so his claim failed. This was fully linked to the doctrine of consideration, and established as such, with the more famous case of Tweddle v. Atkinson
. In this case the plaintiff was unable to sue the executor of his father-in-law, who had promised to the plaintiff's father to make payment to the plaintiff, because he had not provided any consideration to the contract.
The doctrine was developed further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd.
through the judgment of Lord Haldane.
Privity of Contract played a key role in the development of negligence as well. In the first case of Winterbottom v. Wright
(1842), in which Winterbottom, a postal service wagon driver, was injured due to a faulty wheel, attempted to sue the manufacturer Wright for his injuries. The courts however decided that there was no privity of contract between manufacturer and consumer.
This issue appeared repeatedly until MacPherson v. Buick Motor Co.
(1916), a case analogous to Winterbottom v Wright involving a car's defective wheel. Judge Cardozo
, writing for the New York Court of Appeals
, decided that no privity is required when the manufacturer knows the product is probably dangerous if defective, third parties (e.g. consumers) will be harmed because of said defect, and there was no further testing after initial sale. Foreseeable injuries occurred from foreseeable uses. Cardozo's innovation was to decide that the basis for the claim was that it was a tort not a breach of contract. In this way he finessed the problems caused by the doctrine of privity in a modern industrial society. Although his opinion was only law in New York State, the solution he advanced was widely accepted elsewhere.
Attempts have been made to evade the doctrine by implying trusts (with varying success), constructing the Law of Property Act 1925 s. 56(1) to read the words "other property" as including contractual rights, and applying the concept of restrictive covenants to property other than real property (without success).
now provides 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. Taking the situation in Beswick v Beswick whereby the only reason why Mr Beswick and his nephew contracted 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.
, 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). 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, four factors must be made out:
The last issue was explored in New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd
[1975] AC 154, where it was held that the stevedores had provided consideration for the benefit of the exclusion clause by the discharge of goods from the ship.
New Zealand
has enacted the Contracts Privity Act 1982, which enables third parties to sue if they sufficiently identified as beneficiaries by the contract, and in the contract it is expressed or implied they should be able to enforce this benefit.
Privity (law)
Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. It is an important concept in contract law.-Contract law:...
in the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
of contract provides that a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
cannot confer rights or impose obligations arising under it on any person or agent except the parties to it.
The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such. However, the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
Third-party rights
Privity of contract occurs only between the parties to the contract, most commonly
contract of sale
Contract of sale
A contract of sale is a legal contract an exchange of goods, services or property to be exchanged from seller to buyer for an agreed upon value in money paid or the promise to pay same...
of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company.
If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.
This, however, does not mean that the parties do not have another form of action e.g. Donoghue v. Stevenson
Donoghue v. Stevenson
Donoghue v Stevenson [1932] UKHL 100 was a decision of the House of Lords that established the modern concept of negligence in Scots law and English law, by setting out general principles whereby one person would owe another person a duty of care...
here a friend of Ms. Donoghue bought her a bottle of ginger beer, which was defective. Specifically, the ginger beer contained the partially decomposed remains of a snail. Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer has a duty of care
Duty of care
In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant...
owed to their consumers and she was awarded damages in tort.
Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.
History
Prior to 1861 there existed decisions in English Law allowing provisions of a contract to be enforced by persons not party to it, usually relatives of a promisee, and decisions disallowing third party rights. The doctrine of privity emerged alongside the doctrine of considerationConsideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
, the rules of which state that consideration must move from the promisee. That is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...
. 1833 saw the case of Price v. Easton, where a contract was made for work to be done in exchange for payment to a third party. When the third party attempted to sue for the payment, he was held to be not privy to the contract, and so his claim failed. This was fully linked to the doctrine of consideration, and established as such, with the more famous case of Tweddle v. Atkinson
Tweddle v. Atkinson
Tweddle v Atkinson [1861] , 1 B&S 393, 121 ER 762 is an English contract law case concerning the principle of privity of contract and consideration.-Facts:...
. In this case the plaintiff was unable to sue the executor of his father-in-law, who had promised to the plaintiff's father to make payment to the plaintiff, because he had not provided any consideration to the contract.
The doctrine was developed further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd.
Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd.
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] is an English contract law case, with relevance for UK competition law decided in the House of Lords...
through the judgment of Lord Haldane.
Privity of Contract played a key role in the development of negligence as well. In the first case of Winterbottom v. Wright
Winterbottom v. Wright
Winterbottom v Wright 10 M&W 109 was an important case in English common law responsible for constraining the law's stance on negligence in the nineteenth century.-Facts:...
(1842), in which Winterbottom, a postal service wagon driver, was injured due to a faulty wheel, attempted to sue the manufacturer Wright for his injuries. The courts however decided that there was no privity of contract between manufacturer and consumer.
This issue appeared repeatedly until MacPherson v. Buick Motor Co.
MacPherson v. Buick Motor Co.
MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 is a famous New York Court of Appeals opinion by Judge Benjamin N. Cardozo which removed the requirement of privity of contract for duty in negligence actions.-Facts:...
(1916), a case analogous to Winterbottom v Wright involving a car's defective wheel. Judge Cardozo
Benjamin N. Cardozo
Benjamin Nathan Cardozo was a well-known American lawyer and associate Supreme Court Justice. Cardozo is remembered for his significant influence on the development of American common law in the 20th century, in addition to his modesty, philosophy, and vivid prose style...
, writing for the New York Court of Appeals
New York Court of Appeals
The New York Court of Appeals is the highest court in the U.S. state of New York. The Court of Appeals consists of seven judges: the Chief Judge and six associate judges who are appointed by the Governor to 14-year terms...
, decided that no privity is required when the manufacturer knows the product is probably dangerous if defective, third parties (e.g. consumers) will be harmed because of said defect, and there was no further testing after initial sale. Foreseeable injuries occurred from foreseeable uses. Cardozo's innovation was to decide that the basis for the claim was that it was a tort not a breach of contract. In this way he finessed the problems caused by the doctrine of privity in a modern industrial society. Although his opinion was only law in New York State, the solution he advanced was widely accepted elsewhere.
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 assignmentAssignment (law)An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
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.
Attempts have been made to evade the doctrine by implying trusts (with varying success), constructing the Law of Property Act 1925 s. 56(1) to read the words "other property" as including contractual rights, and applying the concept of restrictive covenants to property other than real property (without success).
Statutory exceptions
The Contracts (Rights of Third Parties) Act 1999Contracts (Rights of Third Parties) Act 1999
The Contracts Act 1999 was an Act of the Parliament of the United Kingdom that significantly reformed the common law Doctrine of Privity and "thereby [removed] one of the most universally disliked and criticised blots on the legal landscape"...
now provides 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. Taking the situation in Beswick v Beswick whereby the only reason why Mr Beswick and his nephew contracted 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 AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, 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). It is important to note that the decision in Trident had no clear ratio
Ratio decidendi
Ratio decidendi is a Latin phrase meaning "the reason" or "the rationale for the decision." The ratio decidendi is "[t]he point in a case which determines the judgment" or "the principle which the case establishes."...
, 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
Specific performance
Specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to award/ for awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential...
may be granted (Beswick v. Beswick
Beswick v. Beswick
Beswick v Beswick [1967] is a landmark English contract law case on privity of contract and specific performance. The House of Lords disagreed with Lord Denning MR's dicta in the Court of Appeal that someone specifically intended to benefit from a contract could enforce it.Today Lord Denning MR's...
[1968] AC 59).
The issue of third-party beneficiaries has appeared in cases where a stevedore
Stevedore
Stevedore, dockworker, docker, dock labourer, wharfie and longshoreman can have various waterfront-related meanings concerning loading and unloading ships, according to place and country....
has claimed it is covered under the exclusion clauses in a bill of lading
Bill of lading
A bill of lading is a document issued by a carrier to a shipper, acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified...
. In order for this to succeed, four factors must be made out:
- The bill of lading must clearly intend to benefit the third party.
- It is clear that when the carrierCommon carrierA common carrier in common-law countries is a person or company that transports goods or people for any person or company and that is responsible for any possible loss of the goods during transport...
contracts with the consignorConsignorThe consignor, in a contract of carriage, is the person sending a shipment to be delivered whether by land, sea or air. Some carriers, such as national postal entities, use the term "sender" or "shipper" but in the event of a legal dispute the proper and technical term "consignor" will generally be...
, it also contracts as an agentAgency (law)The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
of the stevedore. - The carrier must have had authority by the stevedores to act on its behalf, or the stevedores must later endorse the actions of the carrier.
- Any difficulties with consideration moving from the stevedores must be made out.
The last issue was explored in New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd
New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd
New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1974] , or The Eurymedon, is a leading case on contract law by the Judicial Committee of the Privy Council. The council gave conditions of when a third party may seek protection of an exclusion clause in a contract between two...
[1975] AC 154, where it was held that the stevedores had provided consideration for the benefit of the exclusion clause by the discharge of goods from the ship.
New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
has enacted the Contracts Privity Act 1982, which enables third parties to sue if they sufficiently identified as beneficiaries by the contract, and in the contract it is expressed or implied they should be able to enforce this benefit.