Doctrine of Privity in Contract in Contract Law

Contract Law

Introduction

In considering whether or not the traditional doctrine of privity of contract within contract law has become outdated and in dire need of reform, an analysis must be made of what the doctrine of privity states and what its purpose is. Its component parts will undergo analysis. Consideration will be given to criticisms that have made of the doctrine and the many calls for reform that it has received. In undertaking the above analysis, consideration will be given to judicial interpretation of the doctrine and any recommendations for reform that may have arisen.

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According to Halsbury’s Laws of England[1] the doctrine of privity is that at common law a contract cannot confer rights or impose obligations on strangers to it, i.e. persons not party to it. The parties to a contract are those who reach agreement and whilst it may be clear in a simple case who those parties are it may not be so obvious where there are several contracts or several parties. Poole[2] simplifies this stating that the doctrine states that a person may not enforce a contractual promise and obtain remedies for breach even where the promise was expressly for that person’s benefit if he is not party to the contract. She states[3] that this corollary means that persons who are not a party to a contract may not have their rights diminished by that contract. It would appear that the doctrine is not based on the rule that a contract can only ever have two parties.

The doctrine of privity was accepted into English Law in Price v. Easton (1833) 4 b & Ad 433) despite earlier doubts. Since this, the House of Lords has provided a more modern authority for the doctrine in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847. In his judgment Viscount Haldane[4] LC held:

“ My Lords, in the law of England certain principles are fundamental. One is that only a

person who is a party to a contract can sue on it … A second principle is that if a person

with whom a contract not under seal has been made is to be able to enforce it, consideration

must have been given by him to the promisor or to some other person at the promisor’s

request … A third proposition is that a principal not named in the contract may sue upon it if

the promisee really contracted as his agent. But again, in order to entitle him so to sue, he

must have given consideration either personally or through the promisee, acting as his agent

in giving it.”[5]

Poole[6] views this judgment as holding that the doctrine of privity being comprised of two elements, one that relates to the agreement component of the contract and the other relating to the consideration part of the contract. However, consideration of these two aspects must be brief for the purposes of this study.

The agreement component relates to confirming whether a person was party to the agreement itself. Therefore, according to Poole[7], it needs to be proved that the person took part as a principal in the negotiations which resulted in agreement. Difficulties can arise where someone signs the contract but only classifies as only a beneficiary or just an interested party[8].

It was in Tweedle v. Atkinson (1861) 1 B & S 393 that it was held that the consideration must move from the promisee. Poole[9] notes that this rule also appears to have been the ratio in the decision by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847. She states that this rule has resulted in certain complexities arising which aide loopholes aimed at avoidance of the doctrine. Such complexities, i.e. agency, are outside the scope of this study.

Before the spotlight can focus on criticisms of and calls for reform of the doctrine, due consideration must given to the Contracts (Rights of Third Parties) Act 1999. This Act provides a third party the right to seek enforcement of a contractual term without fearing defeat from a claim that the third party has failed to provide consideration to supporting the promise as long as support has been provided for by the promisee. Poole[10] notes that it is unclear whether there has been any alteration in the need to provide consideration in situations falling outside the Act. Stone[11] notes that this Act gave another opportunity to avoid the doctrine.

There have been a wide and varied number of criticisms pointed at the doctrine of privity. Koffman and Macdonald[12] hold that the reasons for having the doctrine are unclear. They refer to Toohey J.’s judgment in Trident General Insurance Co. Ltd. v. McNiece Brothers Proprietary Ltd. (1988) 165 CLR 107. In his judgment in the High Court of Australia, Toohey J considered the purpose of the doctrine and he viewed it as something that, “lacks a sound foundation in jurisprudence and logic’.

Can the doctrine be justified and in touch with modern English contract law? Stone[13] believes that it is out of tune with modern English contract law. He cites several reasons for this assertion. He believes that the doctrine has been weakened in terms of what constitutes consideration which has been expanded[14] which now makes it easier to regard third parties as having provided consideration. He suggests that where a third party has relied on a promise made in a contract between two other parties, it is well-reasoned to regard the promise as enforceable by the third party[15].

A second major reason cited by Stone[16] why the doctrine is out of tune with modern English contract law is that it does not accord with the reality of many commercial contracts. He cites Adams & Brownsword[17] who believe that many commercial contracts involve more than two parties. They involve multiple linked contracts which can be regarded as networks to which the doctrine of privity is simply inappropriate and unhelpful[18].

These two reasons were appear to provided weighty evidence that the doctrine is ready for reform and that such reform must be undertaken with due diligence. Koffman and Macdonald[19] state that despite being unpopular with the judiciary, the doctrine survived scrutiny[20] and developed. It has been subjected to the scrutiny f law reform bodies. In 1937 the Law Revision Committee in it is sixth Interim Report[21] held the view that a third party should be able to enforce a contractual promise received by another for his benefit. Support was given to the argument for reform in 1991 in a Law Commission Consultation Paper[22].

In conclusion it would appear that from the opinions considered above that the doctrine is widely unpopular and thus needs reform. Koffman and Macdonald[23] state that English Law must come into line with that of man European countries which allow for third party rights in the enforcement of contractual provisions. To finalise whether the call for reform can be supported, Stone[24] states that the doctrine has been ripe for reform for some time but he states that any attempt to do so will be faced with the question of to what extent the boundaries should be extended.

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Bibliography

1. 1. Textbook on Contract – 8th Edition by Jill Poole. Published by Oxford University Press in 2006.

1. 1. The Modern Law of Contract – 6th Edition by Richard Stone. Published by Cavendish Publishing in 2005.

1. 1. The Law of Contract – 6th Edition by Laurence Koffman & Elizabeth Macdonald. Published by Oxford University Press in 2007.

1. 1. Key Issues in Contract by J. Adams and R. Brownsword. Published by Butterworths in 1995.

1. 1. Halsbury’s Laws of England – Vol 9(1) Contract @ para 748.

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Footnotes

[1] Halsbury’s Laws of England – Vol 9(1) – Contract – para 748 The general rule

[2] Textbook on Contract Law – Jill Poole – 8th Edition – Oxford [2006] @ p. 429

[3] Poole supra 2

[4] Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847 @ 853 per Viscount Haldane LC

[5] Ibid 4

[6] Ibid 2 @ p. 430

[7] Textbook on Contract Law – 8th Edition – Jill Poole – Oxford [2006] @ p. 430

[8] Coulls v. Bagot’s Executor & Trustee Co. Ltd (1967) 119 CLR 460

[9] Poole supra 7

[10] Poole supra 7 @ p. 431

[11] The Modern Law of Contract – Richard Stone – 6th Edition – Cavendish (2005) @ p 127

[12] The Law of Contract – 6th Edition – Laurence Koffman & Elizabeth Macdonald – Oxford (2007) @ p. 476

[13] Stone supra 11 @ p 129

[14] Williams v. Roffey [1991] 1 QB 1; [1990] 1 All ER 512 – the growth of the area of ‘estoppel’ with the associated idea of reliance as a basis for the enforceability of promises has gained increased importance.

[15] Darlington Borough Council v. Wiltshier Northern ltd. [1995] 3 All ER 895 per Steyn LJ @ p. 904

[16] Stone supra 11 @ p 129

[17] Key Issues in Contract – J Adams & R. Brownsword – Butterworths 1995 @ p 149

[18] Adams and Brownsword suggest that a network of contracts for which a more rleaxed approach to third party rights would have the following characteristics: (i) there is a principal contract within the set giving the set an overall objective; (ii) other contracts (secondary and tertiary contracts) are entered into, an object of each of which is, directly or indirectly, to furtther the attainment of this overall objective; and (iii) the network of contractors expands until a sufficiency of contractors are obligated, whether to the parties to the principal contract, or to other contractors in the set, to attain the overall objective.

[19] The Law of Contract – 6th Edition – Laurence Koffman & Elizabeth Macdonald – Oxford (2007) @ p. 476

[20] Scruttons Ltd. v. Midland Silicones Ltd [1962] AC 446 (at 467 and 473) in which the House of Lords considered the doctrine in a different light. They considered it as being the stranger to the contract was not suing to enforce a positive rights, but instead was seeking the protection of a term of the contract as a defence to an action by one of the contracting parties under a separate cause of action. This case considered whether a third party can use a term of a contract as a shield, despite not being able to use a term intended for his benefit as a sword.

[21] (1937) Cmnd 5449 @ p 30 Para. 48: ‘We therefore recommend that where a contract by its express terms purports to confer a benefit directly on a third party, the third party shall be entitled to enforce the provision in his own name, provided that the promisor shall be entitled to raise as against the third party any defence that would have been valid against the promisee. The rights of the third party shall be subject to cancellation of the contract by the mutual consent of the contracting parties at any time before the third party has adopted it either expressly or by conduct.”

[22] ‘Privity of Contract: Contracts for the Benefit of Third Parties’ Law Commission Consultation Paper No. 121, 1991 @ p 95: “Over 50 years ago, The LAw Revision Committe recommended the abolition of the third party rule…Nothing has happened since [its] Report to suggest that its recommendation were misguided. Indeed, the greater complexity of the law as further exceptions and circumventions have developed, and the experience of statutory reform elsewhere, reinforce its conclusions’. These arguments were supported in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 WLR 68 per Steyn LJ at 76.

[23] The Law of Contract – 6th Edition – Laurence Koffman & Elizabeth Macdonald – Oxford (2007) @ p. 476

[24] Stone supra 11 @ p 129