PRIVITY OF CONTRACT
1. The Privity of Contract
Doctrine
The privity of contract doctrine
dictates that only persons who are parties to a contract are entitled to take
action to enforce it. A person who stands to gain a benefit from the contract
(a third party beneficiary) is not entitled to take any enforcement action if
he or she is denied the promised benefit.
Example:
A promises B, for consideration
moving from B, to pay C $ 100.
Here A and B are parties to the
contract – privy to the contract – and can sue each other if there is a breach
by the other. C is not a party to the contract and cannot sue A is A fails to
pay C the sum of $ 100.
A classic authority for the doctrine
is Dunlop Pneumatic Tyre Co Ltd v
Selfridge & Co [1915] AC 847, where at 853, Viscount Haldane said:
My Lords, in
the law of England
certain principles are fundamental. One is that only a person who was party to
a contract can sue on it. Our law knows nothing of a jus quaesitum tertio [third
party right of action] arising by way of contract.
See also Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460,
at 478, per Barwick CJ.
2. Privity and its
Relationship to the Doctrine of Consideration
When looking at the doctrine of
consideration we observed the rule that consideration must move from a promisee,
or, in other words, that only a person who has provided consideration can
enforce a promise. In the above example one could have argued that C could not
sue on the basis that C had not provided any consideration for A’s promise to
pay C the sum of $ 100.
This raises the question of
whether there is a distinction between the privity and consideration rules.
This question has generated considerable discussion in academic circles and
there is a division of opinion between those who say the rules are in fact one
rule differently expressed and those who argue that the two rules are distinct.
In the cases, the relatively
scant references to the question tend to support the two separate rules
approach.
See Coulls v Bagot’s Executor, at 478, Barwick CJ and, at 494, per
Windeyer J; Trident General Insurance Co
Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, at 115-116, Mason CJ, Wilson
J and at 164, per Toohey J.
3. Remedies Against a
Promisor in Breach of Obligations to a Third Party
Here we are concerned with the
remedies that can be pursued against a promisor who is in breach of his or her
obligations to a third party. In our example above, who can sue A, and what
remedies are available?
Because C is a third party and
not privy to the contract, C has no right of action against A.
However, B as the promisee under
the contract and a party to the contract can sue A. Two possible remedies
arise, namely, damages at common law and specific performance in equity.
Can C require B to sue A? See Coulls, at 502, per Windeyer J.
(a) Damages at Common Law
Because the remedy of common law
damages for breach of contract will always be granted to a plaintiff, B will
always succeed. However, the critical issue is the measure of damages that will
be recovered.
Critical to an understanding of
the position of B in this context is the basic principle for the assessment of
damages for breach of contract. As will be explored in more detail in the
lectures on remedies, damages seeks to compensate the plaintiff for the loss
suffered as a result of the breach. If no loss is suffered then a nominal
(or token) award of damages is made in favour of the plaintiff. If real loss is
suffered, an award of substantial damages is made in favour of the
plaintiff.
In our example it is likely to be
the case that the measure of damages to be recovered by B would be nominal
because B suffers no loss as a result of the breach by A. Put another way, B’s
position is the same irrespective of whether or not A pays the sum of $ 100 to
C. In special circumstances it may be that B will suffer a real loss, in which
case substantial damages which reflect the value of B’s loss – not C’s loss -
will be awarded. See Coulls, at
501-502, where Windeyer J.
Because in most cases the measure
of damages recovered will be nominal, there is little reason for B to pursue
common law damages.
The fact that B cannot sue to
recover as damages the measure of C’s loss from A’s breach of contract was
recently confirmed by four members of the House of Lords in Alfred McAlpine Construction Ltd v Panatown
Ltd [2001] 1 AC 518, at 522, 563, 575 and 580. The fifth Law Lord, Lord
Goff was, at 538-539, 544, more skeptical, suggesting that it was ‘an
extraordinary defect’ in the law that B should have no remedy for common law
damages against A.
(b) Specific Performance in Equity
Unlike common law damages,
specific performance will not always be granted to a plaintiff upon proof of a
breach of contract. There are various grounds upon which a court will refuse
specific performance. A particularly important one in the present context is
that the remedy will be refused if common law damages would be an adequate
remedy. The critical decision in this respect is Beswick v Beswick [1968] AC 58. From this case set out:
- The facts
- The issue that had to be determined by the House of Lords
- The decision and reasoning of the House of Lords as to why damages were an inadequate remedy on the facts of the case?
See also Coulls, at 503, per Windeyer J.
4. The Case of Trident General Insurance v McNiece Bros
The most significant High Court
decision on privity has been Trident
General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. From this case set out:
- The facts
- The different views on the status of the doctrine of privity set out by the judges of the High Court.
- What reasons did Mason CJ & Wilson J give for their ‘radical’ approach to privity and how did they compare and contrast with those of the other ‘radical approach’ given by Toohey J?
- What was the approach of the ‘conservative’ judges, Brennan, Deane & Dawson JJ to the status of privity?
- To which of the above two approaches does the judgment of Gaudron J belong?
In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101
ALR 363, Gummow J, after a long analysis of Trident,
concluded, at 368, with the following observation:
At best ...
there is support by three only of their Honours for the proposition ... that
the old rules do not apply in their full vigour.
His Honour was, of course,
referring to Mason CJ, Wilson, Toohey JJ.
5. General Law
‘Exceptions’ to the Doctrine of Privity
There are a number of general law
principles which enable a third party, such as C in our example, to overcome
the doctrine of privity. Because they rely upon establishing the elements of
other established legal doctrines and institutions, they are not true
exceptions. Rather they constitute means of circumventing the doctrine of
privity because these other legal principles apply on the facts of the given
case. Some of the key exceptions are discussed below.
(a) Agency
The rule here is that if one of
the contracting parties contracts as an agent, then either the agent or the principal,
but not both, can sue to enforce the contract. In our example, if B is C’s
agent then either B or C can enforce the contract against A. In these cases it
is immaterial as to whether A knew that B was C’s agent.
A particular situation where
agency principles arise is with contracts for the carriage of goods. Typically
the situation will be where a carrier includes in the contract an exclusion
clause and the exclusion clause is expressed to be for the benefit of not only
the carrier but third parties that might be engaged by the carrier for the
purpose of transporting the goods. A common example in the cases is in shipping
contracts, where the third party is the stevedore who unloads the goods at the
port of destination.
In such cases, can the stevedore rely
on the benefit of the exclusion clause when the stevedore causes damage to the
goods? See elements that have to be satisfied in Midland Silicones Ltd v Scruttons [1962] AC 446, at 474, per Lord
Reid.
Originally these principles were
only applied to contracts for carriage of goods by sea. However, they have been
applied to road carriage cases: Life
Savers (Australasia) Pty Ltd v Frigmobile Pty
Ltd [1983] 1 NSWLR 431. Presumably they would also apply to contracts for
carriage of goods by rail or air.
It may even be the case that these
principles could apply to exclusion clauses in any context where it is intended
to extend their protection to third parties.
An illustration of the
application of the principles is in New
Zealand Shipping Co v A M Satterthwaite & Co Ltd (The Eurymedon) [1975]
AC 154. From this case set
out:
- The facts
- The issue that had to be determined by the Privy Council
- The decision and reasoning of the Privy Council as to how the elements of Midland Silicones were satisfied in this case.
In The Eurymedon, the close relationship between the carrier and the
third party was crucial to establishing the third element in Midland Silicones. It now appears that
if the third party simply pleads the exclusion emption when sued for damages
that will be enough: Life Savers v
Frigmobile.
If all the elements in Midland
Silicones are met a contract arises between the owner of the goods and the
third party. There is, thus, no privity issue. The third party becomes a
contracting party in a later contract that was anticipated by the principal
contract between the cargo owner and the carrier. In this respect in Homburg
Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] 2 All ER 785, at
851-852, Lord Millett said:
It is well
established by the authorities that the Himalaya
clause has the effect of bringing into being a separate or collateral contract
between the cargo owner and a third party, usually an independent contractor
such as a stevedore, under which the third party enjoys
exemption from liability to the cargo owner. They also establish that
the contract is a unilateral or 'if' contract by which the third party
undertakes no obligation to the cargo owner of any kind, but the cargo owner
promises that if the third party does anything in the course of its employment
which damages the cargo it will have the benefit of the protective provisions
of the clause. ... Such a contract is a promise for an act, not a promise for a
promise. If in the course of its employment the third party performs an act in
relation to the goods, which it is under no obligation to the cargo owner to
perform, it will at the one and same time bring the contract with the cargo
owner into existence and supply the consideration for the cargo owner's promise
of exemption from liability.
In relation to the contract
between the owner of the goods and the third party Lord Millet went on to say,
at 853:
Such a
contract cannot properly be characterised as a contract of carriage. It is
rather a contract of exemption which is ancillary or collateral to other
contractual arrangements (the time charter and the bill of lading) which were
necessary to achieve the carriage of the goods on the chosen vessel.
(b) Trusts
The law of trusts can enable a
third party beneficiary to initiate action that will enforce the promisor’s
obligation. Using the above example, if B had contracted with A in the capacity
of trustee for C, C as beneficiary under the trust has enforceable rights.
These rights arise because the law of trusts gives a beneficiary certain rights
against a trustee.
In the context of privity, if C
is a beneficiary under a trust, C can bring an action against B, the trustee,
that has the effect of compelling B to sue A for breach of contract. In formal
procedural terms C sues in an action in which B and A are joined as defendants.
The use of trust law here does
not give rise, in the strict sense, to an exception to the doctrine of privity.
In conceptual terms, the action against A is pursued by B, albeit at C’s
insistence.
For the trust relationship to
arise 2 points need to be examined.
First, for a trust to exist their
must be property that is held on trust. There can be no trust without a trustee
holding property on trust for the beneficiary. The law a trusts has a broad and
flexible definition of property. In this case the property is the promise made
by the promisor. In other words, the contract between A and B, it is the
promise made by A to B that is held on trust by B for C.
Second, for the trust to arise in
this context, it must be established that there is an intention, at the time of
the contract between A and B, that B was contracting in the capacity of
trustee. On intention in this context see Trident,
at 149, per Deane J.
In ascertaining whether the
intention is present, a court will look to the language in the contract, the
nature of the transaction and relevant circumstances attending the relationship
between the parties: Winterton
Constructions v Hambros at 370. Certain types of contracts may be more
readily amenable to finding a trust intention than others.
Could a trust be found in the
context of Trident? See Trident at 148, per Deane and at
155-157, per Dawson
J. What were the reasons why Deane J found in favour of McNiece Bros on the
basis of trusts but Dawson J did not?
When the trust exception is
pursued and B sues for damages, the measure of damages that is recovered reflect
the loss to C, the beneficiary of the trust. The damages that are recovered are
held by B on trust for C: Lloyd’s v
Harper (1880) LR 16 ChD 290; Eslea
Holdings Ltd v Butts (1986) 6 NSWLR 175.
(c) Estoppel
Following the decision in Waltons Stores (Interstate) Ltd v Maher
(1988) 164 CLR 387, a third party may be able to seek relief against a promisor
on the basis of promissory estoppel principles. To succeed the third party
would need to establish the elements of promissory estoppel. See Trident, at 145, per Deane J.
In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it
was likely that estoppel could be established on the facts of the case, but it
was not necessary for them to determine the issue on the basis that they had
decided the case on other grounds.
(d) Unjust Enrichment
When we examine the remedy of quantum meruit later in this course, we
shall see that the principle of unjust enrichment is the principle that
underpins the remedy. The essence of the principle is that it requires a
defendant ‘to make fair and just restitution derived at the expense of a
plaintiff’: Pavey & Matthews Pty Ltd
v Paul (1987) 162 CLR 221 at 256-257, per Deane J.
In Trident, Deane J, at 145-146, indicated that the principle could
possibly be the basis for a third party to seek relief. However, it was Gaudron
J, especially at 176, in Trident who
based her decision in favour of McNiece Bros on the basis of the principle of
unjust enrichment.
The action based upon unjust
enrichment is not based on the contract but independent of it. However, usually
it will correspond in content and duration with the promisor’s obligation.
6. Statutory Exceptions to
the Doctrine of Privity
Insurance Contracts Act 1985 (Cth), s. 48
Bills of Exchange Act 1909 (Cth), ss. 36-43
Cheques Act 1986 (Cth), s. 73
Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)
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