39.4 Privity of Contract

  • 39.4.1 the general principle of privity of contract
  • 39.4.2 the relationship between privity and consideration
  • 39.4.3 Common law exceptions
  • 39.4.4 Statutory Exceptions
  • general principle of privity of contract = a contract cannot confer right nor impose obligation on someone who is not a party to the contract
  • a contract between A and B cannot result in C claiming rights (or having obligations imposed) under the contract.
  • the rule of privity can be seen in:

Dunlop Pneumatic Tyre Co. Ltd v Selfridge (1915)


  • dunlop manufacture tyres & sold some to Dew, who agreed not to resell them below a certain price.
  • Dew resold to Selfridge on the basis of the same term, not to sell below a certain price.
  • Selfridge sold below this price
  • because Due refused to sue Selfridge, Dunlop sued them
  • because Dunlop wasn't a party to the contract between Dew & Selfridge, it couldn't sue Selfridge for selling below the agreed price.
  • rule of privity is based on the rule that consideration must move from the promisee, as in Tweddle v Atkinson (1861) (the claim failed because he had given no consideration and was not a party to the agreement himself)
  • privity rule is seen as causing injustice and so the courts try to find ways to avoid using it.
  • there are special cases where a contracting party may sue on the behalf of another who was intended to benefit from the contract.

Jackson v Horizon Holidays Ltd (1975)


  • Mr. Jackson booked a holiday from him and his family
  • the holiday was very disappointing
  • he sued for damages for himself and his family
  • court decided it would be unfair to limit the damages awarded to Mr. Jackson
  • damages awarded reflected the loss suffered by all members of the holiday party
  • it was decided that the rule didn't apply to contracts where one person would be expected to make contracts on behalf of themselves and others, such as holidays and restaurants.
  • there are some exceptions where the rule of privity doesn't apply.

AGENCY

  • agency arises when one person, the agent, is authorised to make a contract on behalf of another person, the principal.
  • the principal and the agent are treated as being the same person, so the principle is a party to the contract.
  • this occurs, e.g., when an employee make a contract on behalf of the company
  • the doctrine of the privity usually prevents a third party from relying on the terms of a contract - means an exclusion clause in the contact may not offer protection to anyone other than the parties to the contract

Scruttons Ltd v Midland Silicones Ltd (1962)


  • claimant was the owner of goods which were shipped for it by a carrier
  • the contract limited the liability of the carrier for damage caused to the goods to $500.
  • the carrier contract with the defendant to unload the goods.
  • when doing so D negligently damaged them
  • d was not party to the contract between the owner and the carrier & so the the doctrine of privity of contract prevent D being awarded the $500.

COLLATERAL CONTRACTS

  • court may be able to avoid the strict rule of privity by finding a second contract alongside the main agreement
  • Shanklin Pier Ltd v Detel Products Ltd (1951)

  • contractors employed to paint the pier were instructed by the pier company to use paint manufactured by Detel
  • paint was brought by the contractors from Detel
  • Detel made a representation to the pier company that the paint would last for seven years
  • paint only lasted 3 months
  • there was no privity of contract between the pier company and the defendant paint manufacturer but the court found that there was a collateral contract between them to the effect that the paint would last for 7 years.
  • the consideration was the instruction given by the pier company to its contractors to order the paint from D.

RESTRITIVE COVENANTS

  • In English land law, if a purchaser of land promises the seller in contract for the purchase of land that they will not do something on the land, then this is a restrictive covenant.
  • this becomes part of the title to land that an owner had
  • that promise will 'run with the land', meaning that all subsequent purchasers of that land are legally bound by that promise even thought they aren't the parties to the initial contract.

Tulk v Moxhay (1848)


  • Tulk sold a house and the centre gardens in Leicester Square to Elms.
  • contract included a restrictive covenant that the gardens were not to be built on
  • Elm sold the gardens to Moxhay who intended to build on them
  • because the covenant ran with the land, Tulk could enforce it against Moxhay even though they had no direct contract.

CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

  • Section 1 of the Contract (Rights to Third Parties) Act 1999 states:

(1) Subject to the provisions of this Act, a person who is not a party to the 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

(3) the third part must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

  • therefore, someone who isn't party to a contact ('a third party') may enforce the contract against wither both of the actual parties to the contract if:

(1) the third party is expressly identified by name, or as a member of a class, or as answering a particular description, and

(2) the contract expressly provides that the third party may enforce the contract, or

(3) the contract term is an attempt to conger the benefit of the term on the third party

Beswick v Beswick (1967)


  • Mr Beswick made a contract with his nephew to sell his coal merchant's business, in exchange for weekly payments to the uncle for life, and after his death, to his wife, the nephew's aunt.
  • after the death of the uncle, the nephew refused to pay the weekly payments to his aunt
  • court decided that the aunt wasn't party to the contract and so there was no privity of contract.
  • reason the aunt would now be able to claim under the Contract (Right of Third Parties) Act 1999 is that she was named in the contract, and the contract intended to confer a benefit on her
  • Nisshin Shipping Company Ltd v Cleaves & Co. Ltd & Others (2003) makes it clear that if parties to a contract wish to ensure that a benefit isn't conferred upon third parties, the parties should use an express term in their contract to rebut any presumption that might be made under s 1(1)(b) of the 1999 act
  • parties to the contract have the right to exclude the Act from benefiting a third party
  • where the act applies, under s 3 if the contract is being enforced by a third party, the person who made the contract could rely on any defence or valid exclusion clause that was available to original contracting party: if A books a holiday with B and the list given to A of those going on that holiday includes another C, C will be able to claim rights under the contract
  • a will however will be able to rely on any defence they might have, including relying on any valid term of the contract limiting their liability for any breach of that contract
  • one success among many attemot to evade the consequences of the privity rule in this context is found in New Zealand Shipping Co. v Satterthwaite (1974)

OTHER STATUTORY EXCEPTIONS

  • there's a number of statutory exceptions:

(1) these include giving rights to third parties under insurance contracts, both marine and motor

(2) for motor insurance this would include named drivers on a policy, and someone driving another car in an emergency under 'driver of other cars' terms in the insurance policy

(3) some aspects of life assurance also fall within these exceptions