PRIVITY OF CONTRACT “The doctrine of privity means that a contract cannot, as a general rule, confer rights and obligations
arising under it on any person except the parties to it” (G.H. Treitel, The Law of Contract). It is a general rule that a contract can only impose rights or obligations on persons who are parties to it. This is the doctrine of privity and its operation may be seen in Dunlop v Selfridge (1915). If the doctrine was inflexibly applied, it would cause considerable injustice and inconvenience. There are, however, a number of ways in which consequences of the application of strict rule of privity may be avoided to allow a third party to enforce a contract. These occur in the following circumstances: . The beneficiary sues in some other capacity. Although an individual may not originally be party to a particular contract, they may, nonetheless, acquire the power to enforce the contract where they are legally appointed to administer the affairs of one of the original parties. An example of this can be seen in Beswick v Beswick (1967) . The situation involved a collateral contract A collateral contract arises where one party promises something to another party if that other party enters into a contract with a third party; for example, A promises to give B something if B enters into a contract with C. In such a situation, the second party can enforce the original promise, that is, B can insist that A complies with the original promise. It may be seen from this that, although treated as an exception to the privity rule, a collateral contract conforms with the requirements relating to the establishment of any other contract, consideration for the original promise being the making of the second contract. An example of the operation of a collateral contract will demonstrate, however, the way in which the courts tend to construct collateral contracts in order to achieve what they see as fair dealing. In Shanklin Pier v Detel Products Ltd (1951 . There is a valid assignment of the benefit of the contract.
A broker (C) negotiated a charterparty by which the shipowner (A) promised the charterer (B) to pay the broker a commission. . the promise is considered as a trustee of the contractual promise for the benefit of the third party. The device of a trust was approved by the House of Lords in Les Affreteurs Reunis SA v Leopold Walford (London) Ltd (1919. even where the existence of the agency has not been disclosed. thereby bringing the third party into a direct relationship with the plaintiff. In such limited circumstances. One of the parties has entered the contract as a trustee for a third party Equity developed a general exception to the doctrine of privity by use of the concept of trusts. v. For example a third party may be able to take the benefit of an exclusion clause by proving that the party imposing the clause was acting as the agent of the third party.There exists the possibility that a party to a contract can create a contract specifically for the benefit of a third party. the third party must act through the Promise by making them a party to any action. (1) that the bill of lading makes it clear that the stevedore is intended to be protected by
. who could thus enforce it against A. In Linden Gardens Trust Ltd. In Scruttons Ltd. Where it is foreseeable that damage caused by any breach of contract will cause a loss to a third party. Midland Silicones Ltd 1962 AC 446. The burden of a contract cannot be assigned without the consent of the other party to the contract. A trust is an equitable obligation to hold property on behalf of another. v Lenesta Sludge Disposals Ltd.A party to a contract can transfer the benefit of that contract to a third party through the formal process of assignment. In order to enforce the contract. . where the agent brings about contractual relations between two other parties. It was held that B was trustee of this promise for C. (1994 . The other main exception to the privity rule is agency. The assignment must be in writing and the assignee receives no better rights under the contract than those which the assignor possessed. Lord Reid suggested that the stevedore could be brought into a contractual relationship with the owner of the goods through the agency of the carrier provided that certain conditions were met.
All the above conditions were satisfied in New Zealand Shipping Co. CONTRACTS (Rights of Third Parties) Act 1999
. in order for the third party to gain rights of enforcement. In the area of motoring insurance. Interestingly.the exclusion clauses therein (2) that the bill of lading makes it clear that the carrier is contracting as agent for the stevedore (3) the carrier must have authority from the stevedore to act as agent. statute law has intervened to permit third parties to claim directly against insurers. later ratification by the stevedore would suffice. So. Satterthhaitte. Restrictive Covenants may if certain conditions are satisfied. the contract in question must either expressly confer such a right on the third party or have been clearly made for their benefit (s 1). The Law Commission’s draft Third Parties (Rights Against Insurers) Bill seeks to remedy some of the deficiencies of current legislation in this area. ltd v. Restrictive Covenants. The Eurymdon 1975 . 1996).242. the requirement is that. The Act establishes the circumstances in which third parties can enforce terms of contracts. run with the land and bind purchasers of it to observe the covenants for the benefit of adjoining land owners. or as answering a particular description. for example. Tweddle v Atkinson (1861) discussed above. so it is possible for parties to make contracts for the benefit of unborn children or a future marriage partner. Case: New Zealand Shipping Co. which gives statutory effect to the recommendations of the 1996 Law Commission Report into this aspect of contract law (No. the third person need not be in existence when the contract was made. would be differently decided today because the contract expressly named the son as beneficiary and stated that he could enforce the contract. or as a member of a class of persons. it is required that the third party be expressly identified in the contract by name. Essentially. however. In order to benefit from the provisions of the Act. See Tulk v. ltd v. Moxhay 1846 . Section 148(4) of the Road Traffic Act 1972 allows an injured party to recover compensation from an insurance company once he has obtained judgment against the insured.M. A. Satterwhite & Co. ltd ( The Eurymdon) 1975 AC 154. or perhaps.
Significant inroads into the operation of the doctrine of privity have been made by the Contract (Rights of Third Parties) Act 1999.
a third party stated as benefiting from an exclusion clause in a contact for the carriage of goods by sea my rely on such a clause if sued. and the actual parties to the contract can place conditions on the rights of the third party. therefore. The Act reforms the doctrine of privity.This provision should also reduce the difficulties relating to pre-incorporation contracts in relation to registered companies. It provides. Section 5 removes the possibility of the promisor suffering from double liability in relation to the promisor and the third party. unless the original contract contained an express term to that effect. Such rights are. subject to the terms and conditions contained in the contract. So. it does not abolish same. Section 1. The third party may exercise the right to any remedy which would have been available had they been a party to the contract. However.
The benefit provided may be either a positive benefit or the protection of an exclusion or limitation clause section 1(6) Section 2 of the Act provides that where a third party has rights by virtue of the Act. that any damage awarded to a third party for a breach of the contract be reduced by the amount recovered by the promisee in any previous action relating to the contract. the third party can get no better rights than the original promise. Second 3 allows the promisor to make use of any defences or rights of setoff that they might have against the promisee in any action by the third party. however. an independent firm of stevedores damaging cargo during loading might claim the protection of a
. contracts of employment or contracts for the carriage of goods. s 14 of the Companies Act 1985. negotiable instruments. Section 6 of the Act specifically states that it does not alter the existing law relating to. and confers no new rights on third parties in relation to. the original parties to the contract cannot agree to rescind it or vary its terms without the consent of the third party. A third party to a contract can enforce a term of the contract in his own right in two circumstances (a) (b) Where the contract expressly provides that he may section 1(1)(a) Where the terms of the contract purport to confer a benefit upon him and nothing else in the contract denies the purported benefit section 1(1)(b) and section 1(2). These rights are subject to any express provision in the contract to the contrary.
Section 10.clause in the contract of carriage between the cargo owner and the shipowner.
. unless the. 1999. Although the Contract (Rights of Third Parties) Act came into force on 11 November.contract in question specifically provides for its application. it does not apply in relation to contracts entered into before the end of the period of six months beginning with that date.