31 January 2009 Lecture & tutorial

Contract Law

C.A. MacMillan Privity

Contract Law: Privity and Third Party Rights

C.A. MacMillan 31 January 2009

I. Privity of contract
A. The general rules
Only a promisor or a promisee is a party to a contract. Everyone else is a stranger to the contract, or in present terms not 'privy' to the promise made; this is so even if he or she is mentioned by name or general description in the contract. From this two propositions are held to follow: 1. A contract between A and B cannot impose an enforceable obligation on C, nor in any other way limit C's legal rights. Haseldine v Daw [1941] 2 K.B. 343 2. Even if a contract between A and B contains a promise by A to B which is clearly intended to confer some benefit upon C, C may not enforce that promise against A. Dunlop Pneumatic Tyre Co v Selfridge [1915] AC 847. Beswick v Beswick [1966] AC 58

B. Privity and the Rights of Third Parties

Contracts (Rights of Third Parties) Act 1999. A copy can be found at http://www.hmso.gov.uk/acts/acts1999/19990031.htm

II. Enforcement by the promisee

The promisee is entitled to enforce the promise. The difficulty is that the promisee may not have suffered any loss. Is there a performance interest enforceable by the promisee? A. Damages Radford v de Froberville [1977] 1 W.L.R. 1262 Beswick v Beswick [1966] AC 58 Woodar v Wimpey Construction [1980] 1 W.L.R. 227 (i) Multiple bookings Jackson v Horizon Holidays [1975] 1 W.L.R. 1486

C.A.

MacMillan, 2008

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Elements of the Law of Contract

C.A. MacMillan Privity

but see also Woodar v Wimpey Construction [1980] 1 W.L.R. 227 (ii) Sellers' contracts with carriers to take buyers' goods for delivery The Albazero [1977] A.C. 774 (iii) Where A and B contract on the basis that the property which is the subject matter of A's obligations may at some point be acquired by a third party such as C, and on the footing that B should be able to enforce the contract to its full extent for the benefit of C Linden Gardens Trust v Lenesta Sludge [1993] 3 All E.R. 417; pp. 432-437; and 421-422 Darlington B.C. v Wiltshier Northern Ltd [1995] 1 WLR 68 Panatown Ltd v Alfred McAlpine Construction Ltd [2000] 4 All ER 97 Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079 B. Order promissor to perform (i) Enforcement of a positive promise Beswick v Beswick [1966] AC 58 (ii) Enforcement of a negative promise Gore v Van der Lann [1967] 2 Q.B. 31 Snelling v John G Snelling Ltd [1973] 1 Q.B. 87

III. Limitations and exceptions to the privity rules

A. Agency (i) Exemptions and limitations of liability Gore v Van der Lann [1967] 2 Q.B. 31 The Eurymedon, New Zealand Shipping v Satterthwaite [1975] A.C. 154 Raymond Burke Motors Ltd v Mersey Docks & Harbour Co [1986] 1 Lloyd's Rep 155 where damage occurs before performance (ii) Bailment and sub-bailment Morris v Martin [1966] 1 Q.B. 716 The Pioneer Container [1994] 2 A.C. 324 The Mahkutai [1996] 1 W.L.R. 1 But note the more recent decision in Horn Linie GmbH & Co v Panamericana Formas e Impresos SA (The Hornbay) [2006] EWHC 373 (doubts ? The Mahkutais restriction of Himalaya clauses) B. 'Collateral' agreements Andrews v Hopkinson [1957] 1 Q.B. 229

9 February, 2008 Lecture & Tutorial

Elements of the Law of Contract

C.A. MacMillan Privity

C. Promises as property or as generating interests attaching to property (i) Assignment (ii) Trust Lloyd's v Harper (1880) 16 Ch D 290 Re Schebsman [1944] Ch 43 Darlington B.C. v Wiltshier Northern Ltd, per Dillon and Waite L.JJ. (iii) Attached to property Tulk v Moxhay (1848) 2 Ph 774 Lord Strathcona v Dominion Coal [1926] A.C. 108 D. Liability in Tort Grant v Australian Knitting Mills [1936] A.C. 85 The Eurymedon Norwich CC v Harvey [1989] 1 W.L.R. 828 F. Statutory interventions

IV. Reform - The Rights of Third Parties

A. Background Law Commission (1991) Consultation Paper No. 121 Privity of Contract: Contracts for the Benefit of Third Parties Law Commission (1996), Law Com No 242, Privity of Contract: Contracts for the Benefit of Third Parties

B. The legislation Contracts (Rights of Third Parties) Act 1999 . A copy can be found at http://www.hmso.gov.uk/acts/acts1999/19990031.htm You may find the explanatory notes of assistance. This can be found at http://www.hmso.gov.uk/acts/en/1999en31.htm For a discussion of the Act, see MacMillan, A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999 (2000) 63 MLR 721

(i) (ii)

Purpose of the Act Reason for the Reform

9 February, 2008 Lecture & Tutorial

Elements of the Law of Contract

C.A. MacMillan Privity

Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242.

(iii)

Method of Reform (1) The Right s 1 (1) Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 Laemthong International Lines Company Ltd. v. Artis and Others, (The Laemthong Glory) (No. 2) [2005] EWCA Civ 519 Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 s1(2) Identity: s1(3) Avraamides v Colwill [2006] EWCA Civ 1533 terms of the contract s1(4) the method of enforcement s1(5) the nature of the right s1(6) an additional right s4

Exceptions - situations where the third party does not acquire any right: s 6(1), s. 6(2), s. 6(3), s. 6(5)

3. Variation of the Right Limits upon the contracting parties ability to rescind or vary their contract: s2(1) Precis Plc v. William M Mercer Ltd [2005] EWCA Civ 114 Ability of the contracting parties to vary the above statutory stipulation by contract: s2(3)] A court or arbitral tribunal may dispense with the third partys consent to a variation: s 2(4) & (5). Where this is done, the court or arbitral tribunal may impose conditions: s. 2(6). 4. Defences and set-offs Reliance by promisor: s3(2) & s. 3(3) & s. 3(4) The possibility exists of variance from the above statutory rights by the contractual stipulation of the parties: s3(5) The same procedure applies by analogy to any proceedings brought against the third party: s3(6). 5. Recovery of Sums s5 Panatown Ltd v Alfred McAlpine Construction Ltd [2000] 4 All ER 97

9 February, 2008 Lecture & Tutorial

Elements of the Law of Contract

C.A. MacMillan Privity

6. Act provides Additional Rights s7(1), 7(2) prevents a third party from invoking 2(2) of UCTA

(iv) Third party rights and Privity of Contract

Panatown Ltd v Alfred McAlpine Construction Ltd [2000] 4 All ER 97

Discussion Questions:
1. Mrs. Gordon is an art dealer. When Gordon sends goods abroad, she invariably ships them with Hernia S.A. In June, Gordon booked passage for her expensive collection of antique Majolica glass across the channel on the S.S. Hernia. Gordon was aware of cl. 8 on Hernia standard form contract that said:
"the carriers and any servants, agents or stevedores whom the carriers from time to time employ shall be exempt from all liability, howsoever arising, for any loss or damage howsoever caused, whether by negligence or otherwise, to any goods carried on the S.S. Hernia. Such exemption extends to the loading and unloading of any goods so carried."

Gordon knew (though it was not specified in the contract) that Hernia S.A. invariably used Easy-Go Ltd. (hereafter called "Easy-Go") as stevedores. It was also found that Gordon knew on broad lines that Easy-Go and Hernia always contracted Easy-Go's standard terms which included a clause exempting Easy-Go and their servants or agents from all liability for damage to goods unloaded. Gordon wrapped each piece of Majolica in newspaper and then styrofoam, and the goods were safely loaded on board. When the Hernia completed her journey, the stevedores began to unload her cargo. Before they had unloaded the Majolica, one Clutz, an Easy-Go employee, carelessly dropped a 200 lb crate of widgets into the hold and directly onto the Majolica, which was consequently crushed to bits. Gordon then sued Easy-Go and Clutz for 25,000, the value of the broken Majolica. Consider whether: (i) Hernia can be regarded as agents of Easy-Go and Clutz in negotiating the contract; (ii) Whether Easy-Go and Clutz had provided any consideration for the promise contained in cl. 8; and Will Easy-Go and Clutz successfully defend the action brought by Gordon?

9 February, 2008 Lecture & Tutorial

Elements of the Law of Contract

C.A. MacMillan Privity

2. The Contracts (Rights of Third Parties) Act 1999 was an unnecessary piece of legislation. Subsequent decisions concerned with the Act have shown it to be of limited impact upon the development of contract law. Discuss.

3. Big Equipment Ltd (BEL) is in the business of hiring out digging and excavation equipment to building contractors. Crash and Sons Ltd (Crash), building contractors, arrange with BEL to hire from it a Mitsubishi Gravel Cart. The equipment is to be operated by a driver employed by BEL. A condition of the BEL hire agreement to Crash is that BEL limits any liability arising to it from the use and operation of the equipment to 100. In addition, Crash agrees to indemnify BEL for any liability it may have to third parties. BEL delivers the equipment to Crashs building site. Doug, the BEL employee, arrives to operate the equipment according to Crashs instructions. In the second week that he is there, Doug (negligently) forgets to put the brake on the Gravel Cart. It runs down an incline on the building site and runs over a lorry owned by Crash and ultimately stops when it hits a building on the site. The building, which is largely destroyed, is owned by Crashs client, Eric. Eric and Crash sue Doug for damages. Advise Doug.