Privity of contract
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The doctrine of privity of contract is a
common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
principle which provides that a
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
cannot confer rights or impose obligations upon any person who is not a party to the contract. The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such. However, the doctrine has proven problematic because of its implications for contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties. In England and Wales, the doctrine has been substantially weakened by the
Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 (c. 31) is an Act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby emovedone of the most universally disliked and criticised b ...
, which created a statutory exception to privity (enforceable third party rights).


Third party rights

Privity of contract occurs only between the parties to the contract, most commonly
contract of sale A contract of sale, sales contract, sales order, or contract for sale is a legal contract for the purchase of assets (goods or property) by a buyer (or purchaser) from a seller (or vendor) for an agreed upon value in money (or money equivalent). ...
of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or corporation. If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer. This, however, does not mean that the parties do not have another form of action: for instance, in ''
Donoghue v. Stevenson was a Lists of landmark court decisions, landmark court decision in Scots delict law and English tort law by the House of Lords. It laid the foundation of the modern law of negligence in Common law jurisdictions worldwide, as well as in Scotlan ...
'' a friend of Ms. Donoghue bought her a bottle of ginger beer, which contained the partially decomposed remains of a snail. Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer was in breach of a
duty of care In tort law, a duty of care is a legal obligation that is imposed on an individual, requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be establis ...
owed to her. Accordingly, she was awarded damages in the tort of negligence for having suffered
gastroenteritis Gastroenteritis, also known as infectious diarrhea and gastro, is an inflammation of the gastrointestinal tract including the stomach and intestine. Symptoms may include diarrhea, vomiting, and abdominal pain. Fever, lack of energy, and dehydra ...
and "nervous shock".


History

Prior to 1861 there existed decisions in English Law allowing provisions of a contract to be enforced by persons not party to it, usually relatives of a promisee, and decisions disallowing third party rights. The doctrine of privity emerged alongside the doctrine of
consideration Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions. The court in ''Currie v Misa'' declared ...
, the rules of which state that consideration must move from the promise, that is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a
deed In common law, a deed is any legal instrument in writing which passes, affirms or confirms an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions, sealed. It is commonly associated with transferring ...
. 1833 saw the case of '' Price v. Easton'', where a contract was made for work to be done in exchange for payment to a third party. When the third party attempted to sue for the payment, he was held to be not privy to the contract, and so his claim failed. This was fully linked to the doctrine of consideration, and established as such, with the more famous case of '' Tweddle v. Atkinson''. In this case the plaintiff was unable to sue the executor of his father-in-law, who had promised to the plaintiff's father to make payment to the plaintiff, because he had not provided any consideration to the contract. The doctrine was developed further in '' Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd.'' through the judgment of Lord Haldane. Privity of Contract played a key role in the development of negligence as well. In the first case of ''
Winterbottom v. Wright ''Winterbottom v Wright'' (184210 M&W 109was an important case in English common law responsible for constraining the law's 19th-century stance on negligence. Facts The plaintiff Winterbottom had been contracted by the Postmaster-General to drive ...
'' (1842), in which Winterbottom, a postal service wagon driver, was injured due to a faulty wheel, attempted to sue the manufacturer Wright for his injuries. The courts however decided that there was no privity of contract between manufacturer and consumer. This issue appeared repeatedly until ''
MacPherson v. Buick Motor Co. ''MacPherson v. Buick Motor Co.''is a famous New York Court of Appeals opinion by Judge Benjamin N. Cardozo that removed the requirement of privity of contract for duty in negligence actions. Facts The plaintiff, Donald C. MacPherson, a stonecutt ...
'' (1916), a case analogous to ''Winterbottom v Wright'' involving a car's defective wheel. Judge
Cardozo Cardozo is a Portuguese and Spanish surname. It is an archaic spelling of the surname "Cardoso (surname), Cardoso". Notable people with this surname *Aaron Cardozo (1762–1834), Gibraltarian consul for Tunis and Algiers *Albert Cardozo (1828–18 ...
, writing for the New York Court of Appeals, decided that no privity is required when the manufacturer knows the product is probably dangerous if defective, third parties (e.g. consumers) will be harmed because of said defect, and there was no further testing after initial sale. Foreseeable injuries occurred from foreseeable uses. Cardozo's innovation was to decide that the basis for the claim was that it was a tort not a breach of contract. In this way he finessed the problems caused by the doctrine of privity in a modern industrial society. Although his opinion was only law in New York State, the solution he advanced was widely accepted elsewhere and formed the basis of the doctrine of
product liability Product liability is the area of law in which manufacturers, distributors, suppliers, retailers, and others who make products available to the public are held responsible for the injuries those products cause. Although the word "product" has b ...
.


Exceptions


Common law exceptions

There are exceptions to the general rule, allowing rights to third parties and some impositions of obligations. These are: *Collateral Contracts (between the third party and one of the contracting parties) *
Trusts A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...
(the beneficiary of a trust may sue the trustee to carry out the contract) *Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighbouring land) *Agency and the
assignment Assignment, assign or The Assignment may refer to: * Homework * Sex assignment * The process of sending National Basketball Association players to its development league; see Computing * Assignment (computer science), a type of modification to ...
of contractual rights are permitted. * Third-party insurance - A third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums. *
Contracts for the benefit of a group A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to t ...
, where a contract to supply a service is made in one person's name but is intended to sue at common law if the contract is breached; there is no privity of contract between them and the supplier of the service. Attempts have been made to evade the doctrine by implying trusts (with varying success), constructing the
Law of Property Act 1925 The Law of Property Act 1925c 20 is a statute of the United Kingdom Parliament. It forms part of an interrelated programme of legislation introduced by Lord Chancellor Lord Birkenhead between 1922 and 1925. The programme was intended to moderni ...
s. 56(1) to read the words "other property" as including contractual rights, and applying the concept of restrictive covenants to property other than real property (without success). # in case of trust/beneficiary # in case of family arrangement # in case of acknowledgment of debts # in case of assignment of contract.


Statutory exceptions

In England and Wales, the
Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 (c. 31) is an Act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby emovedone of the most universally disliked and criticised b ...
provided some reform for this area of law which has been criticised by judges such as
Lord Denning Alfred Thompson "Tom" Denning, Baron Denning (23 January 1899 – 5 March 1999) was an English lawyer and judge. He was called to the bar of England and Wales in 1923 and became a King's Counsel in 1938. Denning became a judge in 1944 when ...
and academics as unfair in places. The act states: : 1. - (1) Subject to the provisions of this act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if- :: (a) the contract expressly provides that he may, or :: (b) subject to subsection (2), the term purports to confer a benefit on him. : (2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. This means that a person who is named in the contract as a person authorised to enforce the contract or a person receiving a benefit from the contract may enforce the contract unless it appears that the parties intended that he may not. The Act enables the aim of the parties to be fully adhered to. In ''
Beswick v Beswick was a landmark English contract law case on privity of contract and specific performance. The Lords, overruling the decision of Lord Denning in the Court of Appeal, ruled that a person who was not party to a contract had no independent standin ...
'', the agreement was that Peter Beswick assign his business to his nephew in consideration of the nephew employing him for the rest of his life and then paying a weekly annuity to Mrs. Beswick. Since the latter term was for the benefit of someone not party to the contract, the nephew did not believe it was enforceable and so did not perform it, making only one payment of the agreed weekly amount. Yet the only reason why Mr. Beswick contracted with his nephew was for the benefit of Mrs. Beswick. Under the Act, Mrs. Beswick would be able to enforce the performance of the contract in her own right. Therefore, the Act realises the intentions of the parties. The law has been welcomed by many as a relief from the strictness of the doctrine, however it may still prove ineffective in professionally drafted documents, as the provisions of this statute may be expressly excluded by the draftsmen. In Hong Kong, the
Contracts (Rights of Third Parties) Ordinance A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to t ...
provided for a similar legal effect as the
Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 (c. 31) is an Act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby emovedone of the most universally disliked and criticised b ...
.


Third-party beneficiaries

In
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
, it has been held that
third-party beneficiaries Third party may refer to: Business * Third-party source, a supplier company not owned by the buyer or seller * Third-party beneficiary, a person who could sue on a contract, despite not being an active party * Third-party insurance, such as a Ve ...
may uphold a promise made for its benefit in a contract of insurance to which it is not a party ('' Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd'' (1988) 165 CLR 107).High Court of Australia
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 (8 September 1988)
/ref> It is important to note that the decision in ''Trident'' had no clear
ratio In mathematics, a ratio shows how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ...
, and did not create a general exemption to the doctrine of privity in Australia.
Queensland ) , nickname = Sunshine State , image_map = Queensland in Australia.svg , map_caption = Location of Queensland in Australia , subdivision_type = Country , subdivision_name = Australia , established_title = Before federation , established_ ...
, the
Northern Territory The Northern Territory (commonly abbreviated as NT; formally the Northern Territory of Australia) is an states and territories of Australia, Australian territory in the central and central northern regions of Australia. The Northern Territory ...
and
Western Australia Western Australia (commonly abbreviated as WA) is a state of Australia occupying the western percent of the land area of Australia excluding external territories. It is bounded by the Indian Ocean to the north and west, the Southern Ocean to th ...
have all enacted statutory provisions to enable third party beneficiaries to enforce contracts, and limited the ability of contracting parties to vary the contract after the third party has relied on it. In addition, section 48 of the Insurance Contracts Act 1984 (Cth) allows third-party beneficiaries to enforce contracts of insurance. Although damages are the usual remedy for the breach of a contract for the benefit of a third party, if damages are inadequate,
specific performance Specific performance is an equitable remedy in the law of contract, whereby a court issues an order requiring a party to perform a specific act, such as to complete performance of the contract. It is typically available in the sale of land law, ...
may be granted (''
Beswick v. Beswick was a landmark English contract law case on privity of contract and specific performance. The Lords, overruling the decision of Lord Denning in the Court of Appeal, ruled that a person who was not party to a contract had no independent standing ...
''
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AC 59). The issue of third-party beneficiaries has appeared in cases where a
stevedore A stevedore (), also called a longshoreman, a docker or a dockworker, is a waterfront manual laborer who is involved in loading and unloading ships, trucks, trains or airplanes. After the shipping container revolution of the 1960s, the number o ...
has claimed it is covered under the exclusion clauses in a
bill of lading A bill of lading () (sometimes abbreviated as B/L or BOL) is a document issued by a carrier (or their agent) to acknowledge receipt of cargo for shipment. Although the term historically related only to carriage by sea, a bill of lading may toda ...
. In order for this to succeed, three factors must be made out: * The bill of lading must clearly intend to benefit the third party. * It is clear that when the carrier contracts with the
consignor The consignor, in a contract of carriage, is the party A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or ...
, it also contracts as an
agent Agent may refer to: Espionage, investigation, and law *, spies or intelligence officers * Law of agency, laws involving a person authorized to act on behalf of another ** Agent of record, a person with a contractual agreement with an insuranc ...
of the stevedore. That is, either the carrier must have had authority by the stevedore to act on its behalf, or the stevedore must later ratify (endorse) the actions of the carrier. * Any difficulties with consideration moving from the stevedores must be made out. The last issue was explored in '' New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd''
975 Year 975 ( CMLXXV) was a common year starting on Friday (link will display the full calendar) of the Julian calendar. Events By place Byzantine Empire * Arab–Byzantine War: Emperor John I raids Mesopotamia and invades Syria, using ...
AC 154, where it was held that the stevedores had provided consideration for the benefit of the exclusion clause by the discharge of goods from the ship.
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
has enacted the Contracts Privity Act 1982, which enables third parties to sue if they are sufficiently identified as beneficiaries by the contract, and in the contract it is expressed or implied they should be able to enforce this benefit. An example case of not being "sufficiently identified" is that of '' Field v Fitton'' (1988).


See also

*
Contract law A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
*
Consumer protection Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...
*
Privity Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. It is an important concept in contract law. Contract law {{main article, Privity of contract The ...
** Privity of estate **
Privity in English law Privity is a doctrine in English contract law that covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, any ...


References

* *Beatson, J, Q.C. (1998). ''Anson's Law of Contract'' (27th Ed.). Oxford University Press {{United States contract case law Common law Contract law English law Legal doctrines and principles