LAW EXTENSION COMMITTEE WINTER COURSE 2005 CONTRACTS LECTURE NOTES WEEK FIVE PRIVITY OF CONTRACT 1.

The Privit !" C!#tr$%t &!%tri#e

The privity of contract doctrine dictates that only persons who are parties to a contract are entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a third party beneficiary) is not entitled to take any enforcement action if he or she is denied the promised benefit. Example: A promises B for consideration moving from B to pay ! " #$$. %ere A and B are parties to the contract & privy to the contract & and can s'e each other if there is a breach by the other. ! is not a party to the contract and cannot s'e A is A fails to pay ! the s'm of " #$$. A classic a'thority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co (#)#*+ A! ,-. where at ,*/ 0isco'nt %aldane said: 1y 2ords in the law of England certain principles are f'ndamental. 3ne is that only a person who was party to a contract can s'e on it. 3'r law knows nothing of a 4's 5'aesit'm tertio (third party right of action+ arising by way of contract. 6ee also Coulls v Bagots Executor & Trustee Co Ltd (#)7.) ##) !28 -7$ at -., per Barwick !9. 2. Privit $#' it( Re)$ti!#(hi* t! the &!%tri#e !" C!#(i'er$ti!#

:hen looking at the doctrine of consideration we observed the r'le that consideration m'st move from a promisee or in other words that only a person who has provided consideration can enforce a promise. ;n the above example one co'ld have arg'ed that ! co'ld not s'e on the basis that ! had not provided any consideration for A<s promise to pay ! the s'm of " #$$.

This raises the 5'estion of whether there is a distinction between the privity and consideration r'les. This 5'estion has generated considerable disc'ssion in academic circles and there is a division of opinion between those who say the r'les are in fact one r'le differently expressed and those who arg'e that the two r'les are distinct. ;n the cases the relatively scant references to the 5'estion tend to s'pport the two separate r'les approach. 6ee Coulls v Bagots Executor at -., Barwick !9 and at -)- per :indeyer 9= Trident General nsurance Co Ltd v !c"iece Bros Pty Ltd (#),,) #7* !28 #$. at ##*>##7 1ason !9 :ilson 9 and at #7- per Toohey 9. +. Re,e'ie( A-$i#(t $ Pr!,i(!r i# .re$%h !" O/)i-$ti!#( t! $ Thir' P$rt

%ere we are concerned with the remedies that can be p'rs'ed against a promisor who is in breach of his or her obligations to a third party. ;n o'r example above who can s'e A and what remedies are available? Beca'se ! is a third party and not privy to the contract ! has no right of action against A. %owever B as the promisee 'nder the contract and a party to the contract can s'e A. Two possible remedies arise namely damages at common law and specific performance in e5'ity. !an ! re5'ire B to s'e A? 6ee Coulls at *$@ per :indeyer 9. (a) Aamages at !ommon 2aw

Beca'se the remedy of common law damages for breach of contract will always be granted to a plaintiff B will always s'cceed. %owever the critical iss'e is the meas're of damages that will be recovered. !ritical to an 'nderstanding of the position of B in this context is the basic principle for the assessment of damages for breach of contract. As will be explored in more detail in the lect'res on remedies damages seeks to compensate the plaintiff for the loss s'ffered as a res'lt of the breach. ;f no loss is s'ffered then a nominal (or token) award of damages is made in favo'r of the plaintiff. ;f real loss is s'ffered an award of s'bstantial damages is made in favo'r of the plaintiff. ;n o'r example it is likely to be the case that the meas're of damages to be recovered by B wo'ld be nominal beca'se B s'ffers no loss as a res'lt of the breach by A. B't another way B<s position is the same irrespective of whether or not A pays the s'm of " #$$ to !. ;n special circ'mstances it may be that B will s'ffer a real loss in which case s'bstantial damages which reflect the val'e of B<s loss & not !<s loss > will be awarded. 6ee Coulls at *$#>*$@ where :indeyer 9.

/ Beca'se in most cases the meas're of damages recovered will be nominal there is little reason for B to p'rs'e common law damages. The fact that B cannot s'e to recover as damages the meas're of !<s loss from A<s breach of contract was recently confirmed by fo'r members of the %o'se of 2ords in #lfred !c#lpine Construction Ltd v Panato$n Ltd (@$$#+ # A! *#, at *@@ *7/ *.* and *,$. The fifth 2aw 2ord 2ord Coff was at */,>*/) *-- more skeptical s'ggesting that it was Dan extraordinary defect< in the law that B sho'ld have no remedy for common law damages against A. (b) 6pecific Berformance in E5'ity

Enlike common law damages specific performance will not always be granted to a plaintiff 'pon proof of a breach of contract. There are vario's gro'nds 'pon which a co'rt will ref'se specific performance. A partic'larly important one in the present context is that the remedy will be ref'sed if common law damages wo'ld be an ade5'ate remedy. The critical decision in this respect is Bes$ic% v Bes$ic% (#)7,+ A! *,. From this case set o't: The facts The iss'e that had to be determined by the %o'se of 2ords The decision and reasoning of the %o'se of 2ords as to why damages were an inade5'ate remedy on the facts of the case?

6ee also Coulls at *$/ per :indeyer 9. 0. The C$(e !" Trident General Insurance v McNiece Bros

The most significant %igh !o'rt decision on privity has been Trident General nsurance Co Ltd v !c"iece Bros Pty Ltd (#),,) #7* !28 #$.. From this case set o't: The facts The different views on the stat's of the doctrine of privity set o't by the 4'dges of the %igh !o'rt. :hat reasons did 1ason !9 G :ilson 9 give for their Dradical< approach to privity and how did they compare and contrast with those of the other Dradical approach< given by Toohey 9? :hat was the approach of the Dconservative< 4'dges Brennan Aeane G Aawson 99 to the stat's of privity? To which of the above two approaches does the 4'dgment of Ca'dron 9 belong?

;n &interton Constructions Pty Ltd v 'am(ros #ustralia Ltd (#))#) #$# A28 /7/ C'mmow 9 after a long analysis of Trident concl'ded at /7, with the following observation:

At best ... there is s'pport by three only of their %ono'rs for the proposition ... that the old r'les do not apply in their f'll vigo'r. %is %ono'r was of co'rse referring to 1ason !9 :ilson Toohey 99. 5. 1e#er$) L$2 3E4%e*ti!#(5 t! the &!%tri#e !" Privit

There are a n'mber of general law principles which enable a third party s'ch as ! in o'r example to overcome the doctrine of privity. Beca'se they rely 'pon establishing the elements of other established legal doctrines and instit'tions they are not tr'e exceptions. 8ather they constit'te means of circ'mventing the doctrine of privity beca'se these other legal principles apply on the facts of the given case. 6ome of the key exceptions are disc'ssed below. (a) Agency

The r'le here is that if one of the contracting parties contracts as an agent then either the agent or the principal b't not both can s'e to enforce the contract. ;n o'r example if B is !<s agent then either B or ! can enforce the contract against A. ;n these cases it is immaterial as to whether A knew that B was !<s agent. A partic'lar sit'ation where agency principles arise is with contracts for the carriage of goods. Typically the sit'ation will be where a carrier incl'des in the contract an excl'sion cla'se and the excl'sion cla'se is expressed to be for the benefit of not only the carrier b't third parties that might be engaged by the carrier for the p'rpose of transporting the goods. A common example in the cases is in shipping contracts where the third party is the stevedore who 'nloads the goods at the port of destination. ;n s'ch cases can the stevedore rely on the benefit of the excl'sion cla'se when the stevedore ca'ses damage to the goods? 6ee elements that have to be satisfied in !idland Silicones Ltd v Scruttons (#)7@+ A! --7 at -.- per 2ord 8eid. 3riginally these principles were only applied to contracts for carriage of goods by sea. %owever they have been applied to road carriage cases: Life Savers )#ustralasia* Pty Ltd v +rigmo(ile Pty Ltd (#),/+ # H6:28 -/#. Bres'mably they wo'ld also apply to contracts for carriage of goods by rail or air. ;t may even be the case that these principles co'ld apply to excl'sion cla'ses in any context where it is intended to extend their protection to third parties. An ill'stration of the application of the principles is in "e$ ,ealand S-ipping Co v # ! Sattert-$aite & Co Ltd )T-e Eurymedon* (#).*+ A! #*-. From this case set o't: The facts The iss'e that had to be determined by the Brivy !o'ncil The decision and reasoning of the Brivy !o'ncil as to how the elements of !idland Silicones were satisfied in this case.

* ;n T-e Eurymedon the close relationship between the carrier and the third party was cr'cial to establishing the third element in !idland Silicones. ;t now appears that if the third party simply pleads the excl'sion emption when s'ed for damages that will be eno'gh: Life Savers v +rigmo(ile. ;f all the elements in 1idland 6ilicones are met a contract arises between the owner of the goods and the third party. There is th's no privity iss'e. The third party becomes a contracting party in a later contract that was anticipated by the principal contract between the cargo owner and the carrier. ;n this respect in 'om(urg 'outimport B. v #grosin Private Ltd )T-e Starsin* (@$$/+ @ All E8 .,* at ,*#>,*@ 2ord 1illett said: ;t is well established by the a'thorities that the %imalaya cla'se has the effect of bringing into being a separate or collateral contract between the cargo owner and a third party 's'ally an independent contractor s'ch as a stevedore 'nder which the third party en4oys exemption from liability to the cargo owner. They also establish that the contract is a 'nilateral or IifI contract by which the third party 'ndertakes no obligation to the cargo owner of any kind b't the cargo owner promises that if the third party does anything in the co'rse of its employment which damages the cargo it will have the benefit of the protective provisions of the cla'se. ... 6'ch a contract is a promise for an act not a promise for a promise. ;f in the co'rse of its employment the third party performs an act in relation to the goods which it is 'nder no obligation to the cargo owner to perform it will at the one and same time bring the contract with the cargo owner into existence and s'pply the consideration for the cargo ownerIs promise of exemption from liability. ;n relation to the contract between the owner of the goods and the third party 2ord 1illet went on to say at ,*/: 6'ch a contract cannot properly be characterised as a contract of carriage. ;t is rather a contract of exemption which is ancillary or collateral to other contract'al arrangements (the time charter and the bill of lading) which were necessary to achieve the carriage of the goods on the chosen vessel. (b) Tr'sts

The law of tr'sts can enable a third party beneficiary to initiate action that will enforce the promisor<s obligation. Esing the above example if B had contracted with A in the capacity of tr'stee for ! ! as beneficiary 'nder the tr'st has enforceable rights. These rights arise beca'se the law of tr'sts gives a beneficiary certain rights against a tr'stee. ;n the context of privity if ! is a beneficiary 'nder a tr'st ! can bring an action against B the tr'stee that has the effect of compelling B to s'e A for breach of contract. ;n formal proced'ral terms ! s'es in an action in which B and A are 4oined as defendants.

7 The 'se of tr'st law here does not give rise in the strict sense to an exception to the doctrine of privity. ;n concept'al terms the action against A is p'rs'ed by B albeit at !<s insistence. For the tr'st relationship to arise @ points need to be examined. First for a tr'st to exist their m'st be property that is held on tr'st. There can be no tr'st witho't a tr'stee holding property on tr'st for the beneficiary. The law a tr'sts has a broad and flexible definition of property. ;n this case the property is the promise made by the promisor. ;n other words the contract between A and B it is the promise made by A to B that is held on tr'st by B for !. 6econd for the tr'st to arise in this context it m'st be established that there is an intention at the time of the contract between A and B that B was contracting in the capacity of tr'stee. 3n intention in this context see Trident at #-) per Aeane 9. ;n ascertaining whether the intention is present a co'rt will look to the lang'age in the contract the nat're of the transaction and relevant circ'mstances attending the relationship between the parties: &interton Constructions v 'am(ros at /.$. !ertain types of contracts may be more readily amenable to finding a tr'st intention than others. !o'ld a tr'st be fo'nd in the context of Trident? 6ee Trident at #-, per Aeane and at #**>#*. per Aawson 9. :hat were the reasons why Aeane 9 fo'nd in favo'r of 1cHiece Bros on the basis of tr'sts b't Aawson 9 did not? :hen the tr'st exception is p'rs'ed and B s'es for damages the meas're of damages that is recovered reflect the loss to ! the beneficiary of the tr'st. The damages that are recovered are held by B on tr'st for !: Lloyds v 'arper (#,,$) 28 #7 !hA @)$= Eslea 'oldings Ltd v Butts (#),7) 7 H6:28 #.*. (c) Estoppel

Following the decision in &altons Stores ) nterstate* Ltd v !a-er (#),,) #7- !28 /,. a third party may be able to seek relief against a promisor on the basis of promissory estoppel principles. To s'cceed the third party wo'ld need to establish the elements of promissory estoppel. 6ee Trident at #-* per Aeane 9. ;n Trident 1ason !9 :ilson 9 at #@/>#@- were of the view that it was likely that estoppel co'ld be established on the facts of the case b't it was not necessary for them to determine the iss'e on the basis that they had decided the case on other gro'nds. (d) En4'st Enrichment

:hen we examine the remedy of /uantum meruit later in this co'rse we shall see that the principle of 'n4'st enrichment is the principle that 'nderpins the remedy. The essence of the principle is that it re5'ires a defendant Dto make fair and 4'st restit'tion derived at the expense of a plaintiff<: Pavey & !att-e$s Pty Ltd v Paul (#),.) #7@ !28 @@# at @*7>@*. per Aeane 9.

;n Trident Aeane 9 at #-*>#-7 indicated that the principle co'ld possibly be the basis for a third party to seek relief. %owever it was Ca'dron 9 especially at #.7 in Trident who based her decision in favo'r of 1cHiece Bros on the basis of the principle of 'n4'st enrichment. The action based 'pon 'n4'st enrichment is not based on the contract b't independent of it. %owever 's'ally it will correspond in content and d'ration with the promisor<s obligation. 6. St$t7t!r E4%e*ti!#( t! the &!%tri#e !" Privit

nsurance Contracts #ct #),* (!th) s. -, Bills of Exc-ange #ct #)$) (!th) ss. /7>-/ C-e/ues #ct #),7 (!th) s. ./ !otor .e-icles )T-ird Party nsurance* #ct #)-@ (H6:) s. #$(.)