Privity Of Contract

By Privity of Contract we mean that the contract creates rights and obligation on such persons who are actually parties to it whether in shape of legal person, parties or agents, no other person have rights under such contract and such third parties cannot enforce or be enforced under a particular contract. Foundational case law can be traced in the case of Tweddle v Atkinson (1861) ;

Tweddle v Atkinson [1861] EWHC QB J57 Queen`s Bench Division

A couple were in process of getting married. The father of the bride entered an agreement with the father of the groom that both the fathers will pay the bride and groom some money. The father of the bride died without having paid and so as the father of the son. The groom made a claim against the executor of the will.

The Court held that groom was not party to the agreement and the consideration did not move from him. Therefore he was not entitled to enforce the contract.

In common law third party cannot enforce a contract nor they can gain benefit in it. The situation has been reformed by The Contracts (rights of third parties act) 1999 which you will read in coming paragraphs. Lets now read some of the important cases below which give rise to situation of Privity of contract ;

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1 The Dunlop company produces tyres and decided that it should maintain a minimum price, It was agreed with its dealer Dew & Co to not to sale the tyres below agreed price and also agreed that the dealer should also restrict the other purchaser to sell below price. The Selfridge purchased the tyres and sold it below the agreed price. The Dunlop sued the Selfridge, and the court of appeal held that the Dunlop and the Selfridge did not have any contract as the consideration is not present and also on the basis of Privity of contract, in the words of Lord Haldane ' only a person who is a pary to a contract can sue on it'.

Scruttons Ltd v Midland Sillicones Ltd (1962) A shipping company higher the company of stevedores (dock workers) to unload the vessels, namely Scruttons. In the contract between the two parties there was a limitation of liability clause for £500 per box. The Stevedores (dock workers) damaged the goods in transit due to negligence. The stevedores were under contract with the shipping company which contained an exclusion clause. Midland (goods owners) were unaware of the relationship between the carriers and the stevedores. The Court (House of Lords) refused to allow the stevedores the benefit of the exemption clause entered into between the carrier and the goods owner. As a general rule a stranger to the contract cannot take advantage of its provisions even were the provisions are intended to benefit him.

Beswick v Beswick (1968) An uncle contracted with his nephew to transfer the all legal rights of ownership to his nephew in coal business, in exchange of weekly payments to the uncle in his life and after the death of the uncle to his aunt. After the death of the uncle the nephew refused to pay the weekly payments to the aunt. This leads to the litigation. The Court held that the aunt is not party to the contract therefore, cannot enforce its rights under the contract, however she is entitled in the capacity of legal representative of her deceased husband.

In the above case laws you must have noticed that a party to a contract did intended to create an enforceable benefit to a third party or their loved ones. Apparently it is indeed be injustice with benefit receiving party and Privity of contract in this areas seems not be providing fair justice. To reform it various steps had been taken and law Commission recommended a legislative reform of the doctrine of Privity of contract ( Law Com No 242, Privity of Contract : Contract for the Benefit of third Parties). This has been resulted in the following law which discussed as under ;

Third Parties Rights in Statute ; The Contracts (Rights of third Parties) Act 1999 The above act refine the doctrine of Privity of Contract as it provides statutory protection for the rights of intended third parties in a contract. The said act does not abolish the doctrine altogether. As per section 1 of the act a person who is not a party to a contract but has been named in the contract for a benefit, can enforce his rights under such contract if the intention of the parties to the contract are clear and creating benefit for such person. The benefit can also be a protection or exclusion of a liability and the third party can avail a remedy as in breach of a contract. Over the years the s.1 of the above act had been applied in cases before the honorable courts such as in case of Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003) EWHC 2602 wherein Cleaves & Co Limited was a firm of chartering brokers. It acted as middleman for the deal between Nisshin Shipping Co Limited, the shipowner, and various charterers. Cleaves was not a party to any of contract. Nisshin expressly agreed to pay a commission to Cleaves. In each charterparty was an agreement between Nisshin and the charterer to arbitrate disputes. Nisshin subsequently declined to pay the commissions to Cleaves. The court of Appeal held that Cleaves are entitled under s.1 of the CRTPA 1999 to the unpaid commissions.

In case of Avraamides v Colwill (2006) the Court of Appeal in considering the application of s.1(3) required the contract to be expressly identifying the third party, as per the facts the Avraamides contracted with the Bathroom Trading Company (BTC) to renovate/refurbish two bathrooms. Afterwards BTC was sold to Colwill and Martin. The contract to refurbish the bathrooms was in between Avraamides and BTC, therefore, Colwill was in Privity of contract. However, by a term in the contract of sale of BTC to Colwill and Martin, Colwill and Martin agreed to ".complete outstanding customer orders taking into account any deposits paid by customers as at 31 March 2003.". Eventually, the refurbishment was not carried out to the Avraamides satisfaction. Since they had no contract with Colwill and Martin they tried to enforce their rights against Colwill and Martin under the Contracts (Rights of Third Parties) Act 1999. The Court held that the contract does not mention the third party by name and class (as required under s.1(3) of CRTPA 1999). Therefore, claim did not succeeded.

The courts have been reluctant to prevent the application of the CRPTA 1999 where there chain of contracts are involved. For instance in case of ; Leamthong International Lines Compnay Ltd v Artis and Others (No.2), [2005]

The "Laemthong Glory" was voyage chartered under an amended form of sugar charterparty dated 8 December 2003. Clause 42 provided: "In the event of the Original Bills of lading not being available at discharge port on vessel`s arrival, if so required by Charterers, Owners/Master to release the cargo to Receivers on receipt of Faxed letter of Indemnity. Such letter of Indemnity to be issued on Charterers head paper, wording in accordance with the usual P&I Club wording and signed by Charterers only always without a bank counter-signature". In common practise, the bills of lading would have been delivered to the receivers, who would present them to the owners to obtain delivery of the cargo. But before the vessel was due to arrive at its destination, the receivers sent a fax to the charterers stating that the original bills had not been received and required from them to issue a letter of indemnity under above clause 42 of the charterparty. The charterers asked the receivers to provide their own letter of indemnity first, which they did. The charterers then sent this, along with their letter of indemnity to the owners, and the master released the cargo. After this process, the vessel was arrested by the bank, which alleged that it held the original bills of lading and made a claim for the value of the cargo. The owners issued proceedings for a declaration that they were entitled to be indemnified in respect of any liability to the bank under both letters of indemnity. The receivers` letter was only addressed to the charterers, but the owners claimed they were entitled to enforce its terms under the Contract (Rights of Third Parties) Act 1999.

The Court held that the provisions of a letter of indemnity ("LOI") issued by receivers to voyage charterers requesting delivery of cargo without presentation of original bills of lading purported to confer a benefit on the shipowners in their capacity as the agents of the charterers for the purpose of delivering the cargo. Consequently, the owners were entitled to enforce the LOI in their own name pursuant to section 1(1) of the Contracts (Rights of Third Parties) Act 1999 (the "Act") which allows a third party to enforce in his own right a term of a contract if the contract expressly provides that he may do so or if the term "purports to confer a benefit on him". According to section 2 of the act if a person have benefit under a contract as per section 1 of the contract, his such benefit cannot be revoked without his consent, it also mentioned that how his such benefit could revoked from the contract, such his consent could be implied also. Further in addition to this the section 4 of the act does not bar the promisee to enforce his/her rights in relations to the terms of the contract, which indicates that the promisee wishes be upheld in the contract. Section 3 empowers the promisor in respect of claim by the third party. Wherein the promisor can take any defense as depending on the terms of the contract, considering being the claim is by the promisee. Section 5 of the act reduces the liability of the promisee in courts and tribunal in situation where the promisee have already fulfill any or part of the obligation to the third party. Section 6 deals with the exception to section1 of the act wherein it is been provided that section 1 confers ; a. no rights on a third party in the case of a contract on a bill of exchange, promissory note or other negotiable instrument. b. no rights on a third party in the case of any contract binding on a company and its members under section 14 of the M1Companies Act 1985. c. no rights on a third party in the case of any incorporation document of a limited liability partnership or any limited liability partnership agreement as defined in the Limited Liability Partnerships Regulations 2001 (S.I. No. 2001/ ).] no right on a third party to enforce- (i)any term of a contract of employment against an employee, (ii)any term of a worker's contract against a worker (including a home worker), or (iii)any term of a relevant contract against an agency worker. d. no rights on a third party in the case of- (i)a contract for the carriage of goods by sea, or (ii)a contract for the carriage of goods by rail or road, or for the carriage of cargo by air, which is subject to the rules of the appropriate international transport convention, except that a third party may in reliance on that section avail himself of an exclusion or limitation of liability in such a contract. Lastly, section 7 of the CRPTA 1999 provides that the promisor can limit his liability for negligence (except for death and personal injury) in the performance of his obligation to the third party.