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11.

3 Rights conferred on third parties at common law As already noted, the Contracts (Rights of Third Parties) Act 1999 did not abolish privity. In addition, the Act preserved any rights the third party o!ld have at co""on la (s.#(1)). This section e$a"ines the nat!re of these rights, "ost of hich derive fro" vario!s %devices% or "ethods created in a n!"ber of cases for the p!rpose of circ!"venting the doctrine of privity of contract. The s!ccess of these devices varies greatly.

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11.3.1 Enforcement by the promisee

This is an obvio!s proposition. It is, essentially, hat occ!rred in Confi" the doctrine of privity The estate of the pro"isee as able to enforce the pro"ise. Th!s, if A (the pro"isor) pro"ises & (the pro"isee) to pay C (the third party) '1((, & can s!e to enforce this pro"ise. The 1999 Act, s.), retains the pro"isee%s right to enforce the contract. *hile this "ethod eli"inates "any proble"s presented by privity +nforce"ent by the pro"isee

Beswick v Beswick.

, it is not without difficulty.

A (the pro"isor) contracts ith & (the pro"isee) to pay C (the third party) '1((. & can s!e A to enforce the pro"ise beca!se of the A,& contract.
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T o diffic!lties can arise hen the enforce"ent is to be "ade by the pro"isee. The
o
promisee may be unwilling, or unable, to enforce the contract (in these circ!"stances, there is little C can do to co"pel & to enforce the contract).

The second As e ill see in Chapter 1-. %/a"ages%, the general p!rpose of an a ard of da"ages is to p!t the party here they o!ld have been b!t for the breach of contract. The proble" in these circ!"stances is that & o!ld never have received the "oney in the first place. She is thus no worse off hen the contract is breached by A than if it ere perfor"ed by A.
o
difficulty is to find an appropriate remedy for B.

Another possible vie of this proble" is that !ourts are reluctant to recognise
(0((()).

B has a performance interest in the contract and that da"ages sho!ld be a arded to & beca!se this interest has not been realised.

s!ch an interest (see "anatown v #lfred $c#lpine !onstruction %td

The proble" of an ade1!ate re"edy as considered in *here the pro"ise as "ade solely for the benefit of the third party, the
'ouse of %ords had difficulty in awarding damages.

Beswic& v Beswic&.

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In that case, an This res!lt as agreed, in obiter, by the 2o!se of 3ords in (oodar v (impey !onstruction (194().
order was made for specific performance.

2o ever, i

n Radford v )e*rober+ille (19##), the Co!rt held that B s claim against # for damages was not reduced by the fact that the contract bet een A and & also conferred a benefit !pon C.

There are a n!"ber These are considered belo .


promisee has been able to recei+e an award of damages.

of circumstances in which the

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Special treatment case

In
o

-ac&son v 'ori.on 'olidays (19#5), 3ord /enning recognised that a person ho boo6ed a holiday on behalf of hi"self and fa"ily "e"bers as able to recover da"ages on behalf of the fa"ily "e"bers here the contract as breached.

In this case it as a h!sband "a6ing a contract for the benefit of hi"self, his ife and children. In all these cases there is only one person ho "a6es the contract. . . It o!ld be a fiction to say that the contract as "ade by all the fa"ily, the real tr!th is that in each instance, the father as "a6ing a contract hi"self for the benefit of the whole party. In short, a contract by one for the benefit of third persons.7 3ord /enning tho!ght that in s!ch cases the contracting party co!ld recover da"ages not only for their o n loss b!t also for the other "e"bers of the gro!p. 7I consider it to be an established r!le of la that here a contract is made with # for the benefit of B, # can sue on the contract

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for the benefit of B and reco+er all that B could ha+e reco+ered if the contract had been made with B himself.7 (re8ected)

The 2o!se of 3ords The case 0-ac&son1 rested on principles of agency. o


decision in (oodar v (impey !onstruction (194().

later restricted the ambit of this

Their 3ordships confir"ed that here a contract provided for a s!" of "oney to be paid to a third party, a promisee who has himself suffered no loss, cannot reco+er substantial damages for non9pay"ent of that s!" unless it co!ld be sho n that the promisee was acting as agent or trustee for the third party.

(so beneficiary for :


is only applied hen agent or tr!stee case)

rd

party r!ling is re8ected, it

They f!rther I a" not prepared to dissent fro" the act!al decision in ;<ac6son v 2ori=on 2olidays 3td> o
/enning so it is not totally o+erruled2

limited the scope ruling (beneficiary of 3rd party) by 3ord

It "ay be s!pported possibly as an e$a"ple of a type of contract 9 e$a"ples of hich are persons contracting for family holidays, ordering meals in restaurants, hiring a ta3i for a gro!p 9 calling for special treatment . . .

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Sellers' contracts with carriers to take buyers' goods for delivery In This can occ!r here, for e$a"ple, a seller of goods contracts ith a carrier to deliver the goods to a b!yer. After this first contract has been entered into, the seller enters a second contract of sale ith the b!yer and sells the goods to the b!yer. The b!yer has no contract ith the carrier. The 5he #lba.ero

5he #lba.ero (19##), 3ord /iploc6 recognised a limited ability on the part of one party to reco+er damages on behalf of another.

;so buyer is 3rd party from the ctt btw seller and carrier>

seller has a contract with the carrier, b!t beca!se he has transferred the goods to the buyer, he is no worse off if the contract is breached and the goods are in so"e ay da"aged.

recognised that hen the seller and carrier contract in conte"plation of a second contract ith the b!yer, the seller can reco+er substantial damages on behalf of the buyer where the goods are lost or damaged.

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Contracts where the subject matter will be acquired by a third party The decision in
(exception to Alba ero case!

The Albazero as s!bse1!ently e$tended in %inden 6ardens 5rust v %enesta Sludge (199:) to cover the sit!ation here A and & contract on the basis that the property hich is the s!b8ect "atter of A%s obligations "ay at so"e point be ac1!ired by a third party, C, and on the footing that & sho!ld be able to enforce the contract to its f!ll e$tent for the benefit of C.

?nder a b!ilding contract # employed B to carry out wor& on his land, it as !nderstood that A as li&ely to transfer the property to !. The property as later transferred to C. 2o ever, the wor& done by B was defecti+e C co!ld not s!e since the assign"ent of contract!al rights as contract!ally e$cl!ded. The 2o!se of 3ords did not accept the arg!"ent and held that this as a sit!ation in hich s!bstantial da"ages co!ld be recovered. 3ord &ro ne9*il6inson relied on an e$ception developed in shipping la (Alba=ero).
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2e said. (it is related to s!b8ect "atter of A@s obligation hich ill ac1!ired rd by : party) 7The contract as for a large de+elopment of property hich, to the &nowledge of both ;A> and ;&>, was going to be occupied, and possibly p!rchased, by third parties 0#1 would be able to enforce contractual rights for the benefit of those T

and not by ;A> itself.

Therefore it could be foreseen that damage caused by breach would cause loss to a later owner and not "erely to the original contracting party, ;A> . . .

03rd party1 ho suffered from defecti+e performance b!t !nder the ter"s of the contract, co!ld not ac1!ire any right to hold ;&> liable for the breach . . .

ho,

he r!le provides a remedy where no other would be a+ailable to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it .8

*hile this approach initially "et ith 8!dicial approval, its application has been s!bse1!ently A had never o ned the land in 1!estion b!t there as a difference in that the third party ! had also entered into a direct contractual obligation with B
#lfred $c#lpine !onstruction %td (0(((). limited by the 'ouse of %ords decision in "anatown v

& to !se reasonable care and s6ill in carrying o!t the

or6s.

(a 7d!ty of care deed7)

hich re1!ired

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o
o

A "a8ority of the 2o!se of 3ords held that, co!ld not recover s!bstantial da"ages.

here the

or6 carried o!t by &

as defective, A

(here ! had a direct right to sue the contractor, there was no necessity to depart from the general rule
that s!bstantial da"ages cannot be recovered by the pro"isee.

Aollo ing this case,

third party has a direct remedy of some sort against the promisor, the e3ception will not be applied.

here the

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An order for the promisor to perform In so"e sit!ations & co!ld see6 an order of specific perfor"ance against A (that is an order of the co!rt that the pro"isor carry o!t his pro"ise). &!t, no that in a case s!ch as

it may be possible for the court to ma&e an order for the specific performance of the contract, as in "eswick+ "eswick# ($rd party seek for continue in paying!

Beswick v Beswick, ! is li&ely to result in an action for damages under the 1999 #ct ;as it is for C@s benefit), but it "ay be harder for the promisee to demonstrate that damages would not be an ade<uate re"edy and, if damages are not inade<uate , then specific performance may not be ordered (later chapter).

5his being the case, &!t, even

one effect of the 1999 #ct may be to diminish the li&elihood of a promisee obtaining a specific performance order (altho!gh it co!ld be arg!ed that s!ch a concl!sion is, in fact, contrary to the clear ords of s )9 allo pro"isee to enforce his right).

if B is entitled to specific performance , it sho!ld be noted that there does not appear to be any procedure by which ! can compel B to sue #, so that B could refuse to sue # and thereby lea+e ! without a remedy.

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%egative action promise

If the
something.

promise hich B see&s to enforce is a negati+e one then & can, in an appropriate case, claim an in=unction to restrain the threatened breach of contract by #

In other sit!ations, it "ay be possible for a co!rt to Th!s, if the pro"isor A contracts ith pro"isee & not to s!e third party C, & can as6 the co!rt to stay the proceedings against C. see Contrasting case. o There is a ter" of negative liability 2o ever the ter" being void by stat!te 2o ever, / arg!ed that negative liability ter" is i"plied that no proceeding can be raised against hi"
enforce a promise not to do Snelling v John GSnelling (19#:). allowed

6ore v >an )er %ann (19-#)9 no implication is

ot to be liable for any in8!ry or loss cannot be construed as a promise not to institute proceedings against.

# contractual promise not to sue the corporation s ser+ant cannot be implied

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(hat is the relationship between the 1999 #ct and the common law with regard to the pro+ision of e3ceptions to pri+ity@

The 1999

#ct preser+es e3isting e3ceptions to pri+ity (subsection 7;1)) and the 3a Co""ission, in its report on privity, %Privity of Contract, Contracts for the &enefit of Third Parties% (3a Co" Bo. 0)0 C" ::09 <!ly 199-), e$pressed the hope that legislation o!ld not ha"per the f!rther 8!dicial develop"ent of third party rights.

The res!lt is that any sit!ation concerning privity of contract and a third party beneficiary ill fall ithin one of fo!r scenarios. In the first scenario, the problem will be dealt with by the 1999 #ct alone.
o o

In the second scenario, the problem will be dealt with by an e3isting common law de+ice and does not fall within the 1999 #ct. In the third scenario, the proble" can be dealt ith
1999 #ct and an e3isting common law de+ice. by both the

In the fo!rth scenario, the

does not come within either the e3isting common law de+ices or the 1999 #ct.

problem

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As it li&ely that courts will accept a performance interest on the part of a promisee and allow the promisee to reco+er substantial damages for a breach which depri+es the third party of his intended benefit@ There are t o opposing arg!"ents as to the f!t!re develop"ent of a %perfor"ance interest%. It is possible to vie cases hich appear to accept such a performance interest as situations here, in the absence of such recognition, there o!ld be no effecti+e sanction for a breach of contract. 2o ever, the 1999 Act provides parties ith the opport!nity to confer a benefit on a third party. If they have chosen not to, the co!rt can vie the lac& of this conferment as indication that there is no performance interest. Cee, for e$a"ple, the approach ta6en in Panato n v Alfred
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DcAlpine Constr!ction 3td (0(((). 2o ever, this "ay ca!se harsh res!lts in circ!"stances here the parties have not, by accident, bro!ght the"selves ithin the a"bit of the Act. In s!ch a circ!"stance, the lac6 of a %perfor"ance interest% hich entitles the pro"isee to s!bstantial da"age allo s a pro"isor to breach a contract ith i"p!nity
;if no confer benefit to third party, then e+en breach, there is no damages needed to be gi+en by promisor, then left promisee with substantial own loss if there is no performance interestB

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11.3.2 #gency

Agency is
necessity.

not so much an e3ception to privity as a general commercial

Af # cannot, or does not choose to, negotiate directly with ! As a general r!le, the res!lting
he "ay authorise B to do so on his behalf.

contract creates pri+ity between # and !, with B dropping out of the picture . Cee Shanklin Pier Ltd v Detel Products Ltd (1951).

Cccasionally legislation uses agency to a+oid the difficulties caused by pri+ity


.

At point (i), # contracts with B as ! s agent.


The res!lt is ill!strated by point (ii) 9 # has a contract with ! and thus ! can enforce the contract.

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Agency9

hen principal appoint an agent on his behalf

A contract of Ence the


transaction.

agency arises here one person ;the 8principal8B appoints an agent to enter contracts on their behalf with third parties.

contract has been made with third party, the agent drops out of the

As a general r!le, the

principal, e+en if undisclosed (ie the third party is !na are of the principal%s e$istence at the ti"e of the contract) may sue and be sued by the third party.

Agency is possibly only a gen!ine e$ception to privity hen the principal is !ndisclosed since in the nor"al case, the
and agent are, in law, one and the same person. principal

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An e$a"ple of here agency as !sed to circ!"vent privity is the case Eurymedon, Be Fealand Chipping Co 3td v AD Catterth aite G Co 3td in the conte$t of whether a third party could rely on an e3clusion clause

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&ype of agency

Agency arises here the a there "ay be


there "ay be actual authorityHthis "ay be express or impliedI or

gent has a!thority to bring abo!t a change in the principal%s legal position. This a!thority "ay be ac1!ired in a n!"ber of ays.

apparent ;or 8ostensible8 authorityBD and there "ay be a separate category of a!thority ter"ed 7!s!al7 a!thority.

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'

Actual authority

Act!al a!thority is the "ost straightfor ard and is based !pon agree"ent bet een the principal and agent, i.e. here the The
parties agree that the agent should ha+e such authority. third party is a stranger to this agree"ent and, as of the e3istence of any authority on the agent s part.

e have noted above, "ay be unaware

Act!al a!thority is said to be 7


hen created in ords either orally or in writingI

e3press7

it is said to be 7 C
parties and the circumstances of the case

implied7

hen it is inferred from the conduct of the

!ch as director.

here the board of directors of a co"pany appoint one of their "e"bers to be managing

'

Apparent Authority

#pparent authority arises from the state of affairs as it appears to the third party This "ay occ!r here the
.

principal has made a representation to the third party that a person has authority to act as agentHhaving "ade s!ch a representation, the principal "ay be estopped fro" denying it.

The representation "ay

ta&e a +ariety of forms of hich the "ost co""on is a representation by cond!ct and, in general, the representation that gi+es rise to such authority must come from the principal, not the agent.

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*reeman E %oc&yer + Buc&hurst "ar& "roperties ;$angalB %td


19-) The co"pany%s articles contained the power to appoint a managing director but none was appointed .

2o ever, the
had been so appointed and appoint *%

board permitted a director, F ;3rd partyB, to act as if he

*hen the or6 is done, the company refused to pay them on the basis that F had not been appointed as managing director and therefore had no authority
. It as held that the co"pany his apparent authority. ere bo!nd by the contract hich J had "ade as it as within the scope of

The co"pany had effectively represented that J had a!thority to bind the co"pany and A3 had relied on that by entering the contract.

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9(atification

The principal ill bo!nd by a contract "ade by an agent clothed ith any of the types of a!thority disc!ssed above, providing the contract falls ithin the scope of that a!thority. 2o ever, e+en where an agent acts without authority or in e$cess of a!thority, the principal may subse<uently ratify the transaction that the agent has entered into and become liable upon it
. Aor ratification to be effective,

the principal must be in e3istence at the ti"e the agent enters into the transaction and

Felner + Ba3ter

14--

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the agent "!st p!rport to act as agent for a named or ascertainable principal.

Feighley $a3sted E !o + )urant E !o


;19(1> acting d!ring

"rincipal must capable Ratification ill not be possible here the agent enters into a contract hich the principal, at the ti"e, as incapable of ma&ing. Th!s a contract of fire ins!rance as held not to be ratifiable here the property in 1!estion as destroyed by fire at the ti"e of the p!rported ratification. 6ro+er E 6ro+er %td + $atthews ;191(>
agent enter into contract

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*here it occ!rs, ratification operates retrospecti+ely, that is to say, the contract ill be regarded as binding on the principal and third party fro" the date the contract as "ade by the agent.

That this can

operate harshly as far as the third party is concerned

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Ratification related to the ti"e of !na!thori=ed act therefore revocation is invalid

Bolton E "artners + %ambert here on /ece"ber 4 3 "ade an offer to a director of the clai"ant co"pany to ta6e a lease of certain factory pre"ises. The offer as accepted altho!gh the En <an!ary 1: 3
1779

director concerned had no authority in that regard.

withdrew the offer, b!t the company later purported to ratify the contract and clai"ed specific perfor"ance of the agree"ent.

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The Co!rt of Appeal held that the

ratification related bac& to the time of the original contract , th!s the purported re+ocation was ineffecti+e.

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Contrast.

Ratification not applied where ctt sub=ect to ratification where 3rd o (here mutual consent that agent and 3 (alt
(atson + )a+ies

party can withdraw anytime

rd party ha+e cancelled the unauthori.ed transaction before ratification 0cannot ratify after this1

er + -ames

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)octrine of undisclosed principal

*here the

principal is undisclosed in that the third party does not allow that the agent is acting for a principal, the position is governed by 7the doctrine of the !ndisclosed principal7.

The doctrine, hich is pec!liar to +nglish la , provides that despite the fact the principal is undisclosed, the third party will find themsel+es contractually bound to, and ha+e rights against
6no ledge at the ti"e of the contract. , a person of ho" they had no The doctrine cannot really be reconciled

ith privity of contract and has been accepted as an ano"alo!s

doctrine

hich can be =ustified on the grounds of commercial e3pediency .

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Feighley $a3sted E !o + )urant E !o


19(1 3ord 3indley e$plained the rationale of the doctrine as follo s.

;T>here is an ano"aly in holding one person bound to another of whom he &nows nothing and with whom he did not, in fact, intend to contract.

Bu

t middlemen, through whom contracts are made, are common and useful in business transactions, and in the great "ass of contracts it is a "atter of indifference to either party hether there is an !ndisclosed principal or not

If he e$ists, it is, to say the least, e3tremely con+enient that he should be able to sue and be sued as principal
, and he is only allo ed to do so on ter"s hich e$cl!de in8!stice.7 hen

It is s!b"itted that this reasoning holds 8!st as good today as it did at the t!rn of the t entieth cent!ry the case as decided.

2o ever, t

here is an i"portant 1!alificationHthe doctrine will not apply where the agent does not ha+e authority at the time of the contract.

ubject to conditions about if principal want to ratify later

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&!t

e+en here the agent does ha+e authority, there are certain situations have r!led that the undisclosed principal cannot sue on the contract.

here the co!rts

Airst, the !ndisclosed Th!s if the


with the terms of the contract.

principal "!st be consistent

agent signs a contract in his own name and describes himself as 8owner8 of the property the s!b8ect "atter of the contract, evidence ill not be ad"issible to sho that another person as the o ner and that the agent as "erely acting as s!ch.

The 'umble + 'unter

undisclosed principal will be unable to sue or be s!ed on the contract. (14)4)

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Cecondly, here the It as accepted by the Privy Co!ncil in Siu Gin Fwan + Eastern Ansurance !o %td In that case, 3ord 3loyd stated. 7;T>here is a class of personal contract here the b!rden cannot be perfor"ed vicario!sly. 5he e3ample often gi+en is a contract to paint a portrait. C!ch a contract cannot be enforced by an !ndisclosed principal since . . . his intervention in s!ch a case o!ld be a breach of the very contract in hich he see6s to intervene.7 As long as the Ence the e$istence of the !ndisclosed principal has been revealed, the

character or personality of the agent is of importance to the third party, the !ndisclosed principal "ay not be allo ed to intervene.

This arg!"ent "ay prevail

here the contract is one re1!iring personal s6ills.

principal remains undisclosed, the agent remains personally liable to the third party on the contract.

third party "ay s!e either the principal or the agent.

2o ever, once the third party, ith 6no ledge of all the facts, !ne1!ivocally elects that he is going to s!e the one and not the other, he is st!c6 ith that choice.

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"reach of warranty of authority

An agent ho p!rports to act for a principal b!t


e3isting authority, "ay be liable for 7breach of who has no authority to do so, or arranty of a!thority7. ho e3ceeds their

C!ch a arranty "ay be e3press or implied and it "!st be relied on by the third party
, e.g. by entering into the contract ith the principal.

!ollen + (right
It as held that As personal representatives he had the a!thority to enter into the lease.

145#

A professed to act on behalf of P and leased P%s far" to the clai"ant. ere liable to the clai"ant as # had impliedly warranted that

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3iability for breach of arranty of a!thority is strict and it see"s that the third party cannot sue the agent if he &new or ought to ha+e &nown that the agent as not warranting their a!thority.

Gonge + 5oynbee

;191(>

Ci"ilarly, the agent

%illy (atson E !o + Smales Eeles E !o


;1490>

ill not be liable if the contract e3cluded their liability.

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3iability for breach of

arranty of a!thority

3iability for breach of arranty of a!thority "ay e$tend idely. "enn + Bristol and (est Building Society here it as held by the Co!rt of Appeal that the A In the co!rse of negotiations, the solicitor arranted to the p!rchaser%s solicitors that he as acting for h!sband and ife 8ointly. Relying on this, the The contract of sale as declared n!ll and void at the instigation The Co!rt of Appeal allo ed the
of warranty

third party could hold the agent liable for breach here the loss res!lted fro" the third party contracting ith so"e party other than the principal. ife as

solicitor erroneously belie+ed that he had a!thority to act for both a h!sband and 8oint o ners of a ho!se b!t he had no s!ch a!thority to act for the ife.

arranged for the p!rchaser to e$ec!te a charge over the ho!se.

b!ilding society and their solicitors

of the

ife.

building society s claim for breach of warranty of authority and ordered the solicitor to pay the building society s costs.

The level of co"pensation for breach of arranty of a!thority is arrived at by considering the difference in the Per 3ord +sher D.R. in *irban&s E3ecutors + 'umphreys (144-)

position that the third party ;or other person relying on the warrantyB would ha+e been in had the representation been true and the position they are actually in as a result of it being untrue.

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11.3.3 E3emptions and limitations of liability

*here

# and B contract for B to perfor" a service, it "ay be intended that B will render part of his performance through !, a third party to the contract.

Aor e$a"ple, if A (the o ner of goods) contracts ith &

(the carrier) to deliver goods fro" Port 1 to Port 0, C "ay s!bcontract the !nloading of the goods at Port 0 to a third party (the stevedores).

& has t o contracts in this e$a"ple. the first is ith A for the carriage of goods and the second is ith C for the !nloading of the goods. It is co""on practice for & to see6 to li"it or e$cl!de his liability for breach of contract thro!gh the incl!sion of a cla!se to this effect. B may also see& to e3tend the benefit of this clause to !. It is at this point that a proble" arises, beca!se 5he lac& of a contract between # and ! is no bar to # suing ! in
! is not a party to this first contract. tort should ! damage # s goods.

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&y contract 1, A contracts ith & to carry A%s goods and a cla!se is incl!ded hich li"its or e$e"pts the liability of & and C. &y contract 0, & contracts ith C to !nload A%s goods. Should ! damage the goods, # may bring an action in tort
;duty of careB against !.

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! is

unable to protect himself using the e3emption clause in contract 1 since he is not a party to that contract.

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Co!rts have
provide the third party

stretched the agency concept in one partic!lar sit!ation to ith the benefit of the e$cl!sion cla!se in contract 1.

This as established in 5he Eurymedon, ew !ealand Shi""ing v Satterthwaite (19#5) and applied again in "ort -ac&son Ste+edoring v Salmond and Spraggon (194(). In
The #ur$%edon, the Privy Co!ncil established that in the sit!ation o!tlined above, it "ay be possible for B to contract with # as ! s agent.

5hrough B, # offered an e3emption of liability to !. !, in performing their contract with B


a contract between ! and #

and !nloading the vessel, accepted this offer and as for"ed such that ! could rely on the e3emption clause.

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Page 39 of 72

In Aig!re 11.- the follo ing chain of events ta6es place. in (i) A offers i""!nity to C thro!gh & in (ii) C !nloads the ship and perfor"s contract 0 the res!lt is (iii), a contract bet een A and C hereby C is given so"e for" of i""!nity fro" action by A the final res!lt is (iv), that sho!ld A s!e C in tort for any da"age, C can defend the action on the gro!nds of the e$e"ption cla!se in contract (iii).

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&

onditions must be met in order for the exemption clause to protect the third party through 5he Eurymedon device

5he conditions were those set out by %ord Reid in Scruttons %td + $idland Silicones %td ;1942B that2 the contract "ade it clear that the In Ccr!tton case, it is held that the cla!se of li"iting liability refer to Kcarrier@ did not e$tend to stevedores the contract "ade it clear that the carrier, in addition to contracting on his o n behalf, as also contracting on behalf of the ste+edores the carrier had authority from the ste+edore to enter into the contract on his behalf d. C%s consideration as the performance of the contract with BI that is to say, the !nloading of the ship. (perfor"ing of rd contract!al d!ty for : party is a good
a.
ste+edores were intended to recei+e the protection of the e$e"ption cla!se

b.

c.

o!ld s!ffice), and

(or, possibly, a later ratification of the contract by the stevedores

any difficulties about consideration mo+ing from the ste+edores were o+ercome.

Page ,1 of 72

consideration !nder Ccott v Pegg) It as good consideration beca!se their perfor"ance th!s pro+ided # with the benefit of a direct obligation hich they co!ld enforce

In +!ry"edon case, stevedores negligently da"age the "achine d!ring !nloading so protected by the cla!se

Page ,2 of 72

Hnilateral contract argument2

This decision is reached based on !nilateral contract. E ners pro"ised to confer the benefit to stevedores if they o!ld !nload the ship.

Page ,3 of 72

Dah6!tai. Act "ay applied to this sit!ation

An e$cellent s!""ary of the develop"ent of the la in this area is provided by 3ord Loff in
5he $ah&utai ;1994B.

3ord Loff observed that in the late t entieth cent!ry the pend!l!" of the
Silicones Ltd.

law swung away from Scruttons Ltd v 'idland

The effect of the 1999 Act !pon this pend!l!" is, as yet, !ncertain. 2o ever, follo ing the 1999 Act, the third party can still ta&e ad+antage of an e3ception clause in a contract for the carriage of goods by sea. s.-(5) Act does not create any enforceable third party rights in the case of. a contract for the carriage of goods by seaI a contract for the carriage of goods by rail or road or for the carriage of cargo by air hich is s!b8ect to the r!les of the appropriate international transport convention ;s.4;/BB. 2o ever, there is an e3ception in that a third
o o

Page ,, of 72

party "ay in reliance on s.l !;RC5"B# avail the"selves of an e3clusion or limitation clause
in s!ch contracts. This "eans that a third party may rely on an e3clusion or limitation clause in a contract of carriage without ha+ing to rely on the agency de+ice in Be Fealand Chipping Co 3td v AD Catterth aite G Co 3td ;19#5>

It re"ains to be seen
o

whether it would be possible to use the de+ice in &he *urymedon to confer other benefits (see The 'ahkutai (199-)).

The Contracts (Rights of Third Parties) Act 1999 has "ade it possible for a third party to clai" the benefit of an e$cl!sion cla!se in a "!ch "ore straightfor ard ay than has been possible !nder case la . The test of enforceability in s.l of the Act of partic!lar i"portance is s.l(-) of the Act hich provides. 7*here a ter" of a contract e$cl!des or li"its liability in relation to any "atter references in this Act to the third party enforcing the ter" shall be constr!ed as references to his availing hi"self of the e$cl!sion or li"itation.7 This "eans that providing the cla!se is enforceable !nder
Page ,/ of 72

the Act, the third party "ay shelter behind the cla!se. The ording of the contract!al provision ill be i"portant beca!se it ill need to specifically
or independent contractors. refer to the third parties hether they be servants, agents *here the test of enforceability !nder the Act is not satisfied, the common lawIprinciples ill contin!e to apply.

Page ,4 of 72

# contracts with B for B to carry goods between )o+er and !alais by sea. Ancluded in this contract is a clause that e3empts B and B s agents, employees and subcontractors from liability for any damage, howsoe+er caused. B contracts with ! for ! to unload the ship. 5he ship carries se+eral cargoes besides # s goods. An unloading goods belonging to J, ! accidentally destroys # s goods. (hat ad+ice do you gi+e to ! as to his liability to # for the damage@

To ans er this 1!estion, yo! need to consider hat C%s potential liability is and hat defence they co!ld !se to "eet this liability. They have no contract ith A and th!s are not liable for a breach of contract in ca!sing the da"age. *here their liability probably arises is for the tort of negligence. The iss!e then beco"es hether or not they have a contract!al defence to this action based !pon the e$e"ption cla!se negotiated by &. To deter"ine this, yo! need to apply the criteria (noted in section 11.:.:) set o!t in The +!ry"edon to see if they are "et. It is li6ely that criteria (a), (b) and (c) are "etI th!s the proble" is concentrated on (d). The consideration in The +!ry"edon as the stevedores% perfor"ance of the contract bet een the carriers and the stevedores.
Page ,7 of 72

2ere, the da"age occ!rs before the &,C contract is perfor"ed. In the circ!"stances, it o!ld appear that no consideration has been provided s!ch that a contract of i""!nity can arise bet een A and C. C did not perfor" as he is perfor"ing another obligation (F@s) If there is no s!ch contract, then C cannot raise a contract!al defence of i""!nity.
o

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11.3., !ollateral contracts

Thirty party ind!ce A ;by pro"ise> so that : A ill be ctt ith & If anything happen in the ctt, cannot s!e : Co there is another ctt for"ed bt A and : C The

rd

collateral contract is a contract secondary to a main contract

party can have benefit fro" ctt A and &

rd

party as he is not the party

rd

party

onsideration provided for the :rd party@s pro"ise is the benefit he got fro" the ctt bt

A and &

promised inducement beco"es enforceable as a separate 8collateral8 contract as, by entering the main contract, # pro+ides consideration

Page ,9 of 72

The previo!s e$a"ples of collateral contracts that e have loo6ed at involved t o parties b!t here there are three parties the device provides a "eans of evading the doctrine of privity.

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Shan&lin "ier + )etel "roducts %td 1951


the clai"ants ere the o ners

They e"ployed contractors to repaint and specified that the defendants% )


paint

efendants ;3rd partyB had pre+iously represented to the claimants that the paint would last from se+en to ten years.

The defendants sold the paint to the contractors and it as !sed b!t it only lasted for three "onths. !

laimants could not sue the defendants on the contract for the sale of the paint, to which they were not a party

Page /1 of 72

Dc Bair <. held that the clai"ants co!ld s!e the defendants on a collateral contract arising from their promise as to the longe+ity of the paint.

The clai"ants% consideration to So promisor is 3 "romisee pro+ide the consideration ie ma&e the contractor to buy the paint from promisor ;)B
enforce this promise consisted of their causing the contractors to enter into a contract to buy paint from the defendants.

rd

owner ;claimantB is the promisee.

party in this situation whereas the

Page /2 of 72

The 8!dge e$plained the principle in the case as follo s.

If, as is ele"entary, the consideration for the arranty in the !s!al case is the entering into of the "ain contract in hich rd the arranty is given, I see no reason hy there "ay not be an enforceable arranty bet een A ;: rd party> and & s!pported by the consideration that & sho!ld ca!se C to enter into a contract ith A ;: party> or that & sho!ld do so"e other act for the benefit of A.7

Page /3 of 72

Statute and common law Pres!"ably, the co!rts ill be less illing to find the e$istence of a collateral contract no that C(RETP)A provides for an enforceable third party rights. &!t if the Act did not provide the right then co""on la applied.

The collateral contract device has also been !sef!lly e"ployed in cases of hire9p!rchase.

of collateral contract

Page /, of 72

Area covered by collateral ctt b!t not stat!te

In "any cases cons!"ers are !na are of the e$act legal technicalities of hire9p!rchase agree"ent. These technicalities are that the
dealer will generally sell the goods to the finance house consumer on hireIpurchase terms. ho in t!rn ill hire the goods to the

Th!s the

contracts are between the dealer and the finance house and between the finance house and the consumerI

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there is no contract between the dealer and the consumer !ustomer as 3rd party
(and indeed this is li6ely to re"ain the position !nder the 1999 Act so that the cons!"er have a right of action against the dealer !nder the 1999 Act). ill not generally

!ustomer
financier

Ks name may not be identified in the ctt btw dealer and

#ndrews + 'op&inson ;195#> it as held that the dealer s false warranty as to the roadworthiness of a car ga+e rise to a collateral contract between the dealer and the consumer, thereby enabling the consumer to bring an action against the dealer for breach of contract

Page /4 of 72

&onsideration issue The re1!ire"ent


of consideration can give rise to so"e diffic!lty, as is ill!strated by the case of !harnoc& + %i+erpool !orp ;19-4>

he claimant s car was damaged in an accident and he left the car to be repaired by the defendants garage 03rd party1, the defendants having pro"ised to do the repairs reasonably 1!ic6ly.

5he car was repaired under a contract between the claimant s insurance company and the defendants
&!t it as held that the claimant could ne+ertheless bring an action in respect of the defendants failure to carry out the repair reasonably <uic&ly.

Page /7 of 72

It as held that there as consideration to support the collateral contract beca!se, altho!gh there as no detri%ent to the clai%ant, the defendants were benefited by +irtue of the opportunity given to the" to enter into a contract with the insurance company for the repair of the car

(note that Treitel, 19#-, treats this as a case of %invented% consideration and Atiyah, 194-c, 00: arg!es that this is a case of fictitious consideration beca!se the real consideration was supplied by the insurers and not by the claimant).

Page /7 of 72

+ven applied

In

hen no specific "ain ctt

(ells ;$ersthamB %td + Buc&land Sand and Silica %td the principle as e$tended, perhaps 1!estionably, to a sit!ation here at the ti"e of the arranty there as no specific "ain contract in vie .

+d"!nd /avies <. held that

it was sufficient that there as ani"!s contrahendi, i.e. that it as within the parties contemplation that a main contract based on the warranty would be entered into in the near future.

Page /9 of 72

(eluctant from the court to enforce A co!rt ill


the experienced commercial

be slo to find the e$istence of a collateral contract here the parties to the alleged collateral contract are e$perienced co""ercial parties ho co!ld easily have created a direct contract!al relationship bet een the"selves if they ished to do so.

In s!ch a case, a co!rt is !nli6ely to be illing to %s!pple"ent% the parties% contract!al arrange"ents by creating a collateral contract (*u=i Seal Europe %td + !atalytic !ombustion !orp ;0((5>)

?ote2 In strict theory, the collateral contract is not really an e$ception to privity since there is a binding contract bet een the parties to the collateral contract. It is best seen as a "eans available to the co!rts of circ!"venting the doctrine.

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11.3./ 5rusts9 can get rid of privity

It is possible for the

promisee as owner of the promise to constitute a trust of the promise (i.e. B holds # s promise on trust for !).

*here this happens,

B may reco+er from # the whole of the loss suffered by ! because of # s nonIperformance2 Llo$d(s v )ar"er (144() 1- Ch / 09(.

Ta6en to its f!rthest e$tent, a

trust of a promise negates pri+ity altogether, for the third party must simply assert that B is the trustee of the promise and that the benefit of the promise is the third party s.

"ossibly for this reason, this de+ice has not met with fa+our. There have been Tr!st i The concept of the tr!st as
few successful decisions since the 19:(s. n e1!ity in e<uity.

de+eloped

Th!s
tr!st ill arise

if # con+eys property to B (the trustee) to hold on trust for ! (the beneficiary) a hereby, in e1!ity, the trustee must ha+e regard to the interests of the beneficiary .

The

beneficiary has an e<uitable interest in the property and has rights that can be enforced against the trustee.

Page 41 of 72

The tr!st device offers a "eans of The


third party is provided ith a re"edy denied at co""on la

e+ading the pri+ity rule, th!s if # contracts with B to confer a benefit on !, if & can be regarded as holding their contractual rights on trust for !, ! may be able to as& B to sue as trusteeI in the event of a ref!sal, C "ay bring proceedings 8oining the tr!stee as co9defendant

o ing to the doctrine of privity.

Page 42 of 72

(equirement of building the trust' +ntention of the parties (stricten the law!

Re a co"pany pro"ised a retiring e"ployee to pay an 5he court held that there was no trust in fa+our of the widow or daughter. The reason for ref!sing to find a tr!st is !s!ally a
Schebsman ;19))> annuity to his widow and to his daughter if she ;the widowB died within the annuity period.

intention to create a tr!st.

failure to pro+e any positi+e

This

intention to create a trust as originally a fiction in this conte$t. its strict re1!ire"ent "eans that there are +ery few cases where the trust concept will circum+ent the doctrine of pri+ity.

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Re<uirement 22 benefit to 3rd party irre+ocable >andepitte + "referred #ccident !orp of ?ew Gor& ;19::> To establish the e$istence of a tr!st of the pro"ise it "!st no be sho n that the pro"isee intended the benefit of the contract to be en8oyed by the third party *) and the pro"ise to benefit the third party must be intended to be irre+ocable. In "ost cases, it is unli&ely that the contracting parties will intend their promise to be irre+ocable beca!se they ill then be depri+ed of the ability to change their mind.

Page 4, of 72

Bote. By a rigorous insistence upon compliance with these re<uirements, the courts ha+e rendered this de+ice practically insignificant.

Page 4/ of 72

+$a"ple.

In

)arlington B! v (iltshier, t o "e"bers of the Co!rt of Appeal fo!nd in obiter that the case co!ld have been resolved on the basis that Dorgan Lrenfell could, before any assign"ent to the Co!ncil, have sued for damages for the breaches and reco+ered substantial damages as constructi+e trustee for the council.

This there being a prohibition on the assignment of rights rd against 3 party !nder the b!ilding contracts
flowed from the particular wording of the co+enant.

Page 44 of 72

Statute and common law It is interesting to co"pare the relative advantages and disadvantages of the tr!st device over the right of action created by the 1999 Act. The disadvantage of the tr!st, fro" the perspective of the contracting parties, is that it confers an irrevocable right on the beneficiary, hereas the right created by the Act can be varied or rescinded by the" ( ithin the li"its set o!t above at Cection #.9). In this respect the Act offers greater fle$ibility to the contracting parties than the tr!st. En the other hand, the third party may prefer to be a beneficiary of a trust on the ground that his rights are irre+ocable ;common lawB and are not sub=ect to defences or setIoffs hich o!ld be available to the pro"isor in a clai" bro!ght against hi" by the pro"isee.
Page 47 of 72

*here a beneficiary ishes to obtain s!ch an irrevocable right it "ay be that the tr!st device ill retain so"e practical !tility

Page 47 of 72

11.3.4 %egislation

Aor the sa6e of co"pleteness, yo! sho!ld be a are that in so"e specific instances, a stat!te "ay overco"e the proble"s that o!ld other ise be posed by privity. +$a"ples of this can be seen in the Third Parties (Rights Against Ins!rers) Act 19:( s.5-, s.#5 Cons!"er Credit Act 19#) and s.5- 3a of Property Act 1905. *hile yo! do not need to 6no the specific details of the operation of these provisions, yo! sho!ld be a are that in partic!lar circ!"stances the diffic!lty created by privity "ay have been overco"e by legislation. Ever the years, a n!"ber of specific stat!tory e$ceptions to the privity r!le have been introd!ced, !s!ally on gro!nds of co""ercial convenience. Th!s !nder the as a"ended, a spo!se "ay obtain the benefit of a contract of life ass!rance
o o o
$arried (omen s "roperty #ct 1772 s.ll,

Page 49 of 72

hich is "ade for the benefit of the other spo!seI !nder the Bills of E3change #ct 1772 s.09, a third party "ay sue on a bill of e3change or che<ueI and !nder the Road 5raffic #ct 1977 s.l,7;7B o
o
an in8!red third party "ay proceed directly against the "otorist%s ins!rance co"pany even tho!gh they are not a party to the contract.

?one of the established statutory e3ceptions are affected by !;RC5"B#.


To the list of stat!tory e$ceptions to privity "!st no "ade possible by C(RETP)A itself. be added, of co!rse, the enforceable third party rights

Page 7: of 72

Summary

The harshness ca!sed by a strict application of privity led to the 8!dicial develop"ent of a n!"ber of devices and approaches to circ!"vent the application of privity. The application, or the lac6 of an available application, of these devices and approaches co!ld itself ca!se in8!stices to arise. Aollo ing the 1999 Act, these devices and approaches contin!e to e$ist. Their f!rther develop"ent, in sit!ations here the parties have e$pressly chosen not to avail the"selves of the 1999 Act, is 1!estionable.

Page 71 of 72

#!5A>A5G 11.9

a. (ould the widow in


better off if there had been a trust@

(e Schebsman ha+e been

b. An what way, if at all, does the decision in c. 'ow would the !ontracts ;Rights of 5hird "artiesB #ct 1999 affect the decision in
"eswick,

"eswick + "eswick form an e3ception to pri+ity@

"eswick +

d. 'ow would the !ontracts ;Rights of 5hird "artiesB #ct 1999 affect the decision in
Shipping + A. Satterthwaite,

%ew -ealand

e. *ollowing the enactment of the 1999 #ct, is it li&ely that courts will continue to de+ise e3ceptions to the doctrine of pri+ity@

Page 72 of 72