the doctrine of privity of contract wiki

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The doctrine ofprivityin thecommon lawofcontractprovides that acontractcannot 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 thecontracting parties.

Contents

[hide]

1 Third-party rights

2 History

3 Exceptions

o 3.1 Common law exceptions

o 3.2 Statutory exceptions

o 3.3 Third-party beneficiaries

4 See also

5 References

Third-party rights[edit]

Privity of contract occurs only between the parties to the contract, most commonlycontract of saleof

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 betweenone 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.

Stevensonhere 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 aduty of careowed to their consumers and she was

awarded damages in tort.

Privityis 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[edit]

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.[1][2]

The doctrine of privity emerged alongside the doctrine ofconsideration,the rules of which

state that consideration must move from the promisee. That is to say that if nothing is given for thepromise of something to be given in return, that promise is not legally binding unless promised as
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adeed.1833 saw the case ofPrice 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 ofTweddle 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 inDunlop 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

ofWinterbottom 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 untilMacPherson v. Buick Motor Co.(1916), a case analogous

to Winterbottom v Wrightinvolving a car's defective wheel. JudgeCardozo,writing for theNew 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.

Exceptions[edit]

Common law exceptions[edit]

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 theassignmentof 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 groupwhere 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[edit]
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TheContracts (Rights of Third Parties) Act 1999now 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[edit]

InAustralia,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 Tridenthad no clearratio,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 par ty, if

damages are inadequate,specific performancemay be granted (Beswick v. Beswick[1968] AC 59).

The issue of third-party beneficiaries has appeared in cases where astevedorehas claimed it is

covered under the exclusion clauses in abill 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 thecarriercontracts with theconsignor,it also contracts as anagentof 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.

The last issue was explored inNew 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.
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New Zealandhas enacted theContracts Privity Act 1982,which enables third parties to sue if they

are sufficiently identified as beneficiaries by the contract, and in the contract it is expressed or implied

they should be able to enforce this benefit.
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