#3515 - Privity Theory - Contract Law

Pre-1999 Common Law

1. TP can’t be subject to a burden by contract to which he isn’t a party

• NOT affected by 1999 Act

2. Person not a party to the contract couldn’t sue on it to obtain the promised performance, even where contract’s been entered into with the object of benefiting him

• reformed by 1999 Act

Law Commission’s criticisms of TP rule (1996) & Smith responses (2004)

1. Frustrates intention of contracting parties theoretical justification for enforcement is realisation of promises or will/bargain of contracting parties & failure of law to afford remedy to TP where parties so intended frustrates it

• Stevens: but intentions have the habit of changing & effect of conferring right of action on TP may be to deny original parties right to change their minds by taking away TP’s entitlement

2. Causes injustice to TP where contract between A&B engendered his expectations & he relied on it to regulate own affairs

• NB: difficult issue – when parties’ changed intentions should trump injustice caused to TP and vice versa. Law Comm.: when TP has relied on or accepted the contr. promise

• Stevens: it may be queried how deserving of sympathy a party who relies upon promise made to another is

3. Even if promise can obtain satisfactory remedy for TP, he may not want/be able to sue e.g. promisee dies & his estate takes reasonable view it’s not in its best interests, deterrence of stress & cost of litigation etc.

• Stevens: it’s for promisee to decide whether or not he wants to enforce his rights – even if he chooses not to, that doesn’t justify conferring a right of action on TP

4. Existence of so many legislative/common law exceptions demonstrates the basic injustice of TP rule

• Stevens: some aren’t even exceptions and even if they are they don’t justify creation of a further one

5. Existence of the rule + exceptions has given rise to complex body of law relying on artificial structures to give TP enforceable rights = commercially inconvenient

• Stevens: 1999 Act hasn’t simplified the law but made it more complex. If common law solutions in cases like Eurymedon are artificial, should find a more readily defensible solution instead

6. Almost all EU countries recognise rights of TP beneficiaries under contract + growing recognition of need to harmonise EU contract law

• Stevens: Roman law didn’t recognise TP right of action on the contract + look at the rule in context in reality French, German laws recognise existence of TP rights in different types of cases so shouldn’t speak of European consensus & of UK law being out of line.

Justice doesn’t demand recognition of TP right of action b/c:

1. TP is not a promisee (Smith)

• Contractual obligations = voluntary obligations undertaken to particular persons, extending only to those persons. Promise is formed by communicating intention to undertake an obl. which is the gen. feature of such obligations. TP shouldn’t be able to enforce A’s promise for the simple reason that A didn’t make it to him.

• A well recognised feature of ordinary moral reasoning is that promisees & non promisees are in different position vis a vis enforcement of the promise difference isn’t merely that they didn’t provide consideration or that they’re less likely to rely on the promise but simply that they aren’t the person to whom duty is owed.

• Law Comm. – this is to take an unnecessarily narrow view of the morality of promise keeping where it’s intended to benefit a TP.

2. TP hasn’t provided consideration (Kincaid)

• Bargain, the common law’s present gen. theory, suggests that only persons to whom a promise was made & who have paid the price for it as requested by promisor should be able to enforce it on this view, TP doesn’t qualify. It’s not that TPs shouldn’t have a right to sue but that it would entail development of new theory of promissory liability which would also have to include gratuitous promises.

• But TP isn’t seeking to enforce wholly gratuitous promise – he hasn’t paid for it but promisee did leads to conclusion that promisee should be the one to enforce...

Contract (Rights of TPs) Act 1999

Where TP seeks to benefit by way of relying on contractual term

• S1 establishes 2 tests of enforceability:

1. TP has right to enforce a term where contract expressly provides so (S1(1)(a)) = express conferral

• Identified as a member of class or answering to a particular description

• Doesn’t need to be in existence when contract is made

• Covers exclusion & limitation clauses

• Burrows: produces a solution to Himalayan clause difficulties in contracts for carriage of goods by sea where stevedores seek to take advantage of exclusion clause

2. Where the term purports to confer a benefit on him = implied conferral of rights (s1(3))

• Burrows – criticised but justifiable:

1. Contractual rights b/w 2 parties aren’t merely a matter of express rights & include implied rights through concept of implied terms + if we seek to give effect to their intent, it’s not always express

2. Magic formula in s1(1)(a) will only be used in well drafted contracts/consumer may not always be able to afford it

3. Uses presumption of intent that can be rebutted by something in ordinary contractual interpretation indicating this wasn’t in fact parties’ intent

• NB: presumption is triggered only where TP stands to receive a benefit directly from promisor (not consequential/incidental benefit) + normal objective approach to interpretation applies.

• But presumption is strong Coleman J in Nishin Shipping: not sufficient for contracting parties to show contract is neutral in order to negate TP right – must show they didn’t intend TP enforcement by pointing to express term to that effect. Arguments used in its absence – i.e. a) TP already has a right of action so no need to give him one or b) recognition of TP right is inconsistent w/contr. structure have failed.

• Real concern is that promisor may find himself in situation where he owes obl. to TP he didn’t subjectively intend but unintended liabilities are a risk of any contract, given objective interpretation (Burrows).

• McKendrick – s1 gives contracting parties incentive to make their intentions clear

• S2(1) – variation & rescission aims to strike a balance b/w rights of TP & original parties by limiting right of latter to rescind/vary rights of TP w/out his consent where:

1. TP communicates his assent to the term to promisor s(2)(1)(a)

2. TP relies on that term & promisor is aware of it/ought to have foreseen it s2(1)(b)(c)

• Andrews: latter will inevitable excite litigation

Unless parties to the contract have expressly reserved the right to vary/rescind s2(3)

• Preserves freedom of contract – remain entitled to define TP’s right but, in event they don’t lose right to rescind or vary if TP satisfies requirements above

• Some disagreement as to how broad is the meaning of ‘rescind’

• Defences available to promisor (s3)

• Protects the position of promisor in so far as it entitles him to rely in action brought by TP on same defences as vis a vis the promisee except in so far as they’re limited by s3(2):

1. Entitled to rely on a defence/a set off but can’t bring into acc a counterclaim against promisee

2. The matter must have arisen from or in connection w/contract + be relevant to the term

• Parties can contract out of it

• Doesn’t affect rights of the promisee to enforce the contract (s4)

• Promisor is protected against double liability (s5)

• Exceptions (s7)

Parties to a contract can’t impose burdens on TPs w/out their consent

• Subject to exceptions

1. Collateral contracts

2. Trust of contractual right – Viscount Haldane in Dunlop Pneumatic: English law recognises a TP right of action arising by way of contract conferred by way of property; e.g. under trust. Promisee agrees to hold his contractual right to sue promisor on trust for TP and, as beneficiary under trust, promisee acquires a property right which he can assert against promisor, if he interferes with it.

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