Capacity

Capacity to contract refers to the parties of the contract being in a mental and physical state to
engage in such arrangements. It therefore means that if one party is incapacitated in any way,
then he cannot enter into a contract.
Circumstances such as age, intoxication, a disease of the mind (mental incapacitation) can all
affect capacity of a contract. There are certain situations where corporations or companies may
not have the capacity to contract with an individual.
Privity of Contract
The doctrine of privity of contract requires the consumer to have a contractual relationship with
someone in order for the said consumer to make claims or to file a lawsuit on that contract.
Firstly, a contractual relationship must be established in order for a consumer to make claims or
file a lawsuit. The whole concept of privity is encapsulated within the confines of contractual
relationships existing between parties.
Treitel defines the ‘privity of contract’ as:
“At common law, the doctrine of privity means that a person cannot acquire rights or be
subjected to liability arising under a contract in which he is not a party to.”
In the case of Price v Easton, a debtor owed money to the plaintiff. The defendant promised that
he would pay the debt if the debtor carried out works for him. The debtor carried out these
works, but the defendant failed to pay the debt that was due to the plaintiff. The plaintiff sued the
defendant for the failure to pay the debt. It was held that the plaintiff could not enforce the
contract.
In Beswick v Beswick, an uncle and a nephew entered into an agreement for the sale and purchase
for the uncle’s business on the terms that the nephew upon purchase would pay annuity to the
uncle for life and, after the uncle’s death, an annuity to his widow. The uncle later died, and the
nephew refused to pay the annuity to the widow. The widow sued for specific performance of the
uncle’s agreement. It was found, on a strict application of the doctrine of privity of contract, that
the wife was not involved in the contract. The courts, however, found that the widow could have
sued for specific performance of the said contract in her capacity as executrix of the estate of her
deceased husband.
For some time during the 17th century, the authorities suggested that third parties should be able
to benefit from a contract which they were not a party to. However, as the doctrine developed,
the House of Lords and the Court of Appeal restricted themselves to a very narrow interpretation
that was suggested by Treitel. In the case of Tweedle v Atkinson, the House of Lords established
this doctrine of privity of contracts in the 19th century. In the said case, John Tweedle had a son
who was to marry William Guy’s daughter. The two fathers entered into an agreement wherein
each was to pay a sum of money to the son after he married the daughter. The agreement stated
that the son will have full power to sue for the payments. After the son was married to the
daughter, William Guy did not pay the money which he was contracted to pay. The son then
sued William Guy for the outstanding payments. The court applied the strict interpretation of the
doctrine of privity of contract and excluded the son from having any benefit under the contract
whatsoever. The fathers made the contract and only they had the capacity to sue under it.
In the 20th century, the House of Lords gave its seal of approval to this doctrine in the case of
Dunlop Pneumatic Tyre Company v Selfridge. In this case, Dunlop wanted to ensure that all of
their dealers sold them at a particular price. Accordingly, they obtained written promises from
their dealers that they would obtain an undertaking, from any third party, that they would not
resell below Dunlop’s price. The primary dealers sold Dunlop tires to the defendants, Selfridge,
and obtained a written undertaking that Selfridge would abide by the list price. Selfridge decided
to sell below the list price and Dunlop sued Selfridge for damages and an injunction to stop the
sales. The court ruled that Dunlop provided no consideration to stop the sale. As a consequence,
the courts said that they could not sue Selfridge for any breach of agreement.
This doctrine has face a lot of criticism. Common among the criticisms is the fact that it has the
effect of allowing persons who made genuine agreements to disregard the bargains that they
made, where others may be seeking to enforce the agreements.
Another criticism is that the doctrine provides for commercial inconvenience, in that it provides
an obstacle in agreements intended to confer benefits to third parties.
Exceptions to the Doctrine
Collateral contracts
In Shanklin Pier Ltd v Detel Products Ltd, the defendants, Detel Products, represented to the
plaintiffs, Shanklin Pier, that their paint was sufficient to paint the pier and that it will last for
seven to ten years. Shanklin Pier employed contractors to paint the pier and told the contractors
to buy the paint from Detel products. The contractors bought the paint, painted the pier, but in
less than three years, the paint deteriorated and as a consequence, Shanklin sued Detel products
for breach of contract. The court found that there was a collateral contract between Shanklin Pier
and Detel because of the representation that they made about the quality of their paint. The court
ruled that a warranty had been given to Shanklin Pier and there was consideration for that
warranty in entering into the main contract and that warranty extended to third parties. See full
case.
Wherever there is the collateral contract, however, it is the duty of the claimant to prove the
existence of such a contract.
Trust of a contractual right
A trust arrangement is an arrangement wherin the trustee holds property for the benefit of one or
more beneficiary. By holding property under a trust, the third party acquires proprietary rights
and can assert those rights against someone else. In Les Affréteurs Réunis SA v Leopold Walford,
a broker helped to negotiate a charter party between a ship owner and a charterer, under which
the shipowner promised the broker a commission. The House of Lords found that it was the
practice in the shipping business for the charterer to sue to enforce the commission as a trustee
for the broker. See Re Schebsman, and in this case the courts ruled that the trust exception will
not apply where there is no evidence of an intention by the parties to create such a trust.
Assignment and agency
At Common Law, the benefit of a contract could be assigned subject to some formalities. Under
the rules of agency, a third party may enforce a contract which is concluded by his authorised
agent.
Land covenants
This exception to the doctrine of privity says that where one has land covenants, subsequent
owners are bound by the terms of those covenants. This exception to the doctrine of privity of
contracts requires or allows third parties to share in the burdens or liabilities of contractual
relationships.
Insurance agreements
These allow a person who is not a party to an insurance contract or policy to benefit or lose as a
result of the contract between the policyholder and the insurer.
Manufacturer’s liability
In the general scheme of things, consumers buy from retailers and not from manufacturers.
Legislation can make provisions for manufacturers to be liable to consumers’ claims. This is also
a common law right that was established and traces of it can be found in the case of Donoghue v
Stevenson.
Negotiable instruments
These are bills of exchange, promissory notes, and cheques and may be enforced by persons who
were not parties to their creation, provided that a valid negotiation of the instrument to the
enforcer exists.