Privity of Contract 8.0

Privity of contract

At common law, a contract creates rights and obligations only between the parties to it. A contract does not confer enforceable rights on a third party to the contract, nor does it impose obligations on a third party. It is a fundamental principle of the common law that no person can sue or be sued on a contract unless he is a party to it. This is known as privity of contract. The rule that consideration must move from the promisee is closely related to the doctrine of privity of contract. The rules on consideration and privity are distinct legal principles but they are analogous and the effect of these rules is that no person can sue on a contract unless (a) he is a party, and (b) he has provided consideration. In the case of Tweddle v Atkinson (1861) 1 B & S 393, the judgments concentrated on the fact that the consideration for the promise was not provided by the plaintiff groom but by his father. However, the claim could also have failed on the ground that the groom was not a party to the contract; the contract was between his father and the father of the bride. (See the BPP Contract Law Casebook, Chapter 5, for an extract of this case.) The fact that the two principles are distinct was made clear by Viscount Haldane LC in Dunlop Pneumatic Tyre Co. v Selfridge & Co. [1915] AC 847. This case concerned contracts for the purchase of tyres. The first contract, dated 12 October 1911, was between Dunlop and Dew & Co. Under the first contract, Dew agreed to purchase a quantity of tyres from Dunlop. This contract contained an undertaking from Dew not to sell at prices below Dunlop's current list prices except to genuine trade customers, to whom they could sell at a discount. Where such trade sales took place, Dew undertook to obtain from the customer a written undertaking that they similarly would not sell on to private customers below the list prices. On 2 January 1912 Dew entered into a second contract, with Selfridge, who agreed to purchase tyres made by Dunlop from Dew. Selfridge gave the required undertaking to resell at the current list prices. Selfridge broke this undertaking by selling at less than list prices, and Dunlop sued Selfridge for breach of contract. HELD by the House of Lords: the agreement of 2 January 1912 was between Selfridge and Dew only. Dunlop was not a party to that contract and furthermore no consideration had moved from it to Selfridge. Lord Dunedin was of the view that the agreement was made by Dew as agent for Dunlop. As undisclosed principal, Dunlop would be a party to the contract and could theoretically sue to enforce it. Nonetheless, in order to bring an action, Dunlop would have had to show that consideration had moved from it to Selfridge. Both these rules were the subject of discussion in the Law Commission Report No 242: 'Privity of Contract: Contracts for the Benefit of Third Parties' (1996) Cmnd. 3329. This report has now been implemented in the Contracts (Rights of Third Parties) Act 1999 which came into force on 11 November 1999 (discussed in detail at 8.5.6). In relation to the doctrine of privity, it has always been uncontroversial that a third party should not be subjected to a burden by a contract to which he is not party. What is more controversial is the rule that a third party should not be able to obtain a benefit from a contract to which he is not a party. Consequently, the Act allows a third party, who is neither a party to the contract, nor has provided consideration, to enforce a term of the contract in certain circumstances (see s1). However, it leaves the current position on the imposition of obligations on a third party unchanged, i.e. a third party cannot be sued in respect of a contract to which he is not a party. The Act does not affect the existing common law rules in this area - the doctrine of privity is not abolished - instead, the Act provides a statutory exception to the doctrine of privity. The Act is clear (in s7) that the right of enforcement given in s1 'does not affect any right or remedy of a third party that exists or is available apart from this Act.' Consequently, the old common law and statutory devices for circumventing privity may still be utilised and may well give superior rights to the third party concerned, as they will not be subject to the limitations in the Act. Thus there will, for the foreseeable future, continue to be circumstances in which the rights of a third party will only be enforceable apart from the Act. These are considered below prior to considering the Act itself.

Carriage of Goods by Sea Act 1992 ('CGSA')

By virtue of s2 of the CGSA, the holder of a bill of lading (which is a specific shipping document) has all the rights and liabilities under the contract of carriage transferred to him, and accordingly, the holder of such a bill can enforce the contract of carriage as if he were a party to it.

Ways of circumventing the privity requirement

Even prior to the 1999 Act, there were a number of common law and statutory methods of circumventing the doctrine of privity. The judicial creativity in circumventing the doctrine which is clear in some of the cases is evidence of the courts' growing uneasiness with the doctrine.

Collateral contract

If the court can establish the existence of a separate collateral contract between the promisor and the third party, it can avoid the difficulties of privity

Beswick v Beswick [1968]

Lord Reid referred to the Law Revision Committee's recommendation made more than thirty years earlier that the third party should be able to enforce a contractual promise taken by another for his benefit. He observed that 'if one had to contemplate a further long period of Parliamentary procrastination, this House might find it necessary to deal with this matter.' Lord Scarman concurred with this view and concluded that '[i]f the opportunity arises, I hope the House will reconsider Tweddle v Atkinson and the other cases which stand guard over this unjust rule.'

Law of Property Act 1925 ('LPA')

Section 56(1) of the LPA provides that: 'A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he may not be named as a party to the conveyance or other instrument.' The LPA further provides, by s205, that: 'unless the context otherwise requires, the following expressions have the meaning hereby assigned to them respectively', that is to say, 'Property includes any thing in action, and any interest in real or personal property.' An unsuccessful attempt to use these sections to circumvent the doctrine of privity was made in Beswick v Beswick [1968] by extending the meaning of 'property' to include rights accruing under a contract. If the argument in Beswick v Beswick had succeeded, this section would have had the effect of revolutionising the law relating to privity. A third party would have been entitled to claim the benefit of a contract to which he was not a party. Beswick v Beswick [1968]: in March 1962, a coal merchant, Peter Beswick, agreed to sell his business to his nephew, John, in return for the following undertakings: (a) that John should pay to Peter the weekly sum of £6 10s during the rest of Peter's life; and (b) that, in the event of Peter's wife surviving him, John should pay her an annuity of £5 weekly. Peter died intestate in November 1963 and in 1964 his widow took out letters of administration. After Peter's death, John made one payment of £5 only to the widow, refusing to make any further payments. The widow, who brought this action as administratrix of her husband's estate and also in her personal capacity, claimed arrears of the annuity and specific performance of the contract between Peter and John. HELD by the Court of Appeal: she was entitled, as administratrix, to specific performance of the contract. Lord Denning MR and Danckwerts LJ held further that she could succeed in her personal capacity under s56(1) of the Law of Property Act 1925. John appealed to the House of Lords. HELD by the House of Lords: the widow, as administratrix, was entitled to specific performance of the agreement to which her deceased husband was a contracting party, but the statute gave her no right of action in her personal capacity against John. Lord Hodson said: 'Section 56 had as long ago as 1937 received consideration by the Law Revision Committee presided over by Lord Wright, then Master of the Rolls, and containing a number of illustrious lawyers. The committee was called on to report specially on consideration including the attitude of the common law towards the jus quaesitum tertio. ...By its report (Cmd. 5449) it impliedly rejected the revolutionary view [that its effect was to circumvent the rule of privity of contract], for it recommended that 'Where a contract by its express terms purports to confer a benefit directly on a third party, it shall be enforceable by the third party in his own name'. Like my noble and learned friend, Lord Reid, whose opinion I have had the opportunity of reading, I am of opinion that s56, one of the 25 sections of the Act of 1925 appearing under the cross-heading 'Conveyances and other instruments', does not have the revolutionary effect claimed for it, appearing as it does in a consolidation Act. I think, as he does, that the context does otherwise require a limited meaning to be given to the word "property" in the section.'

The Contracts (Rights of Third Parties) Act 1999

This is perhaps the biggest change to the doctrine of privity ever enacted. The Act allows a third party, in limited circumstances, to enforce a term of a contract to which he is not a party. This is the case even if the third party has not provided any consideration. The Act does not, however, allow a contract to be enforced against a third party. The Act is based on Law Commission Report: 'Privity of Contract: Contracts for the Benefit of Third Parties' (1996) which sets out the purpose of the Act: 'Our proposed statute carves out a general and wide-ranging exception to the third party rule but it leaves the rule intact for cases not covered by the statute.' In other words, the doctrine of privity remains intact and the Act simply operates as a further exception to the doctrine which sits alongside the previous exceptions already discussed. The Act states, in s7(1), that the existing common law and statutory exceptions are preserved. In addition, the Act leaves the common law unchanged for those contracts excluded from the operation of the Act by virtue of s6. Contracts listed under s6 include, inter alia, employment contracts and contracts between a company and its members. As stated above, the circumstances in which a third party may enforce a term of a contract to which he is not a party are limited. The circumstances are set out in s1. Note that s1(1)(a) and s1(1)(b) create alternative circumstances in which a third party can enforce a term. For s1(1)(a), the contract must specifically provide that the third party can enforce a term of the contract. For example, s1(1)(a) would apply if the contract specifically stated: 'X has the right to enforce this contract' or 'X has a right to sue on this contract'. For s1(1)(b), it need not be stated specifically that the third party has the right to enforce a term. However, it must be established (i) that the agreement purported to confer a benefit on the third party and (ii) that it was not the case that the contractors 'did not intend the term to be enforceable by the third party'. Where it is clear that an agreement is designed to confer a benefit on an identified third party, it will surely be implausible to argue that the contractors did not intend that the third party should have a right to enforce the agreement. However, the Law Commission always emphasised that the statutory test of purporting to confer a benefit on a third party is more demanding than one that simply requires the contract to be of benefit to a third party. The significance of this point is underlined by Dolphin & Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening, The Swedish Club [2009] EWHC 716 (Comm). To simplify and abstract the somewhat complex facts of the Dolphin case, imagine that A has unliquidated claims against C (Sveriges). A employs B (Dolphin) to pursue these claims against C (Sveriges). Under the contract between A and B, B is to be paid a commission of 10% on all monies recovered from C. C issues a letter of undertaking to A essentially accepting that it will pay court-ordered damages up to a certain amount. But, then, C deals directly with A to agree an out-of-court settlement of the claims that A has against C. B's first line of complaint against C is that this unlawfully interferes with the contract between A and B (because B now has no claim for commission). But, B also argues that it has a claim based on the letter of undertaking issued by C to A. We do not need to go into the details of this claim. Suffice it to say that, for our purposes, the relevant question is whether the letter of undertaking (viewed as a contract between C and A) is intended to confer a benefit on B within the meaning of s1(1)(b). Holding that it did not, Christopher Clarke J. said (at para. 74): 'A contract does not purport to confer a benefit on a third party simply because the position of that third party will be improved if the contract is performed. The reference in the section to the term purporting to "confer" a benefit seems to me to connote that the language used by the parties shows that one of the purposes of their bargain (rather than one of its incidental effects if performed) was to benefit the third party.' Even if it were conceded that the letter of undertaking purported to confer a benefit on Dolphin (B), Christopher Clarke J. held that, 'in its commercial context', there was no intention that its provisions should be enforceable by Dolphin (see para. 82). We return shortly to the possibility raised by s1(2) of the Act of the contractors intending that the third party should not be entitled to enforce the term. The fact that there is no requirement that the third party be in existence at the date of the contract means that a right can be conferred on, for example, an unborn child, being expressly identified as a member of an identified class or answering a particular description. The requirement under s1(3) that the third party must be expressly identified was tested in the case of Avraamides and another v Colwill and another [2006] EWCA Civ 1533. In this case, a contractor had refurbished Mr. and Mrs. Avraamides's bathroom. The contractors then transferred all their rights and liabilities under the contract between themselves and Mr. and Mrs. Avraamides to Colwill. Paragraph 3 of the transfer agreement stated that Colwill agreed 'to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003.' The refurbishment had been done defectively and the Avraamides sued Colwill. At first instance, it was held that Mr. and Mrs. Avraamides were third parties on whom paragraph 3 of the transfer agreement had conferred a benefit. The defendants, Colwill, appealed. Lord Justice Waller held that the transfer agreement did not confer a benefit on the Avraamides as they had not been expressly identified in accordance with s1(3). He stated: 'The answer I am afraid is that section 1(3), by use of the word "express", simply does not allow a process of construction or implication. In essence, where a term 'purports to confer a benefit' on a third party, s1(1)(b) creates a rebuttable presumption that he will be able to enforce the term. Section 1(2) provides that this presumption will be rebutted 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'. Although, on the facts of the Dolphin case, Christopher Clarke J held that the contractors had no intention that the third party should be entitled to enforce the agreement, this was stated as a rider to the primary holding that the letter of undertaking did not purport to confer a benefit on the third party. More generally, the indications are that the courts will be slow to hold that, where the contract does purport to confer a benefit on a third party, there is an intention that the third party should not have a right to enforce the term. In other words, once it is held that the contract purports to confer a benefit on a third party, there will be a rebuttable presumption in favour of the third party having a right to enforce the term and it will be difficult to rebut that presumption (see, e.g., Nisshin Shipping Co. Ltd v Cleaves & Co. Ltd [2004] 1 Lloyd's Rep 38; and The Laemthong Glory (No. 2) [2005] EWCA Civ 519). Importantly, it should be noted that the Act also allows third parties to rely on exemption or limitation clauses in contracts to which they are not a party in the same way in which it allows third parties to enforce contractual terms (s1(6)). So, for example, in a case such as Scruttons v Midland Silicones (above), the defendant stevedores, C, would now be able to argue that they were entitled to limit their liability to the cargo owners, A, by reference to the terms of the head carriage contract (the contract between A and B). If the carriage contract expressly provided that the stevedores were entitled to plead the limitations, this would be under s1(1)(a) of the Act; if there was no such express provision, but the carriage contract purported to confer the protection of the limitations on the stevedores, this would be under s1(1)(b) of the Act. The rights conferred by s1 would be of little use if the contracting parties were able, without the consent of the third party, to vary or rescind the contract so as to extinguish or alter his rights. Consequently, s2(1) states: Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if: a) the third party has communicated his assent to the term to the promisor, b) the promisor is aware that the third party has relied on the term, or c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it. For the purposes of s2(1)(a) the third party may communicate his assent by 'words or conduct' (s2(2)(a)) but, if the assent is sent by post, s2(2)(b) stipulates that such communication will not be effective until received by the promisor. If the contracting parties wish to allow variation or rescission without the consent of the third party or in circumstances not provided for in s2(1), they can do so by including an express term in the contract (s2(3)). Section 2 also provides that the court can dispense with the third party's consent where his whereabouts cannot reasonably be ascertained (s2(4)(a)), where he is mentally incapable of giving his consent (s2(4)(b)) or where his reliance on the term cannot be reasonably ascertained (s2(5)). In such circumstances, where the court or arbitral tribunal sees fit to dispense with such consent, it may impose such conditions, for example a requirement to pay compensation, as may be thought fit (s2(6)). By virtue of s3, the promisor's defences against the third party are both the same as they would be against the promisee and anything specific that they may be able to claim against the third party. Section 3(6) provides that a third party is not, by virtue of s1, to be placed in a better position than if he had been a party to the contract himself. If, as such a party, he would not for whatever reason have been able to enforce the term (including, in particular, a term to exclude or limit liability) then he may not enforce it under s1. Obvious examples would include where the benefit to be given would have been illegal under the contract or where the third party lacks contractual capacity. As a breach of a relevant term could expose the promisor to actions by both the promisee and the third party, s5 sets out to protect him from double liability. It provides that any award to a third party may be reduced by the court or arbitral tribunal to such extent as is thought appropriate if the promisee has already recovered a sum in respect of the third party's loss or the expense incurred by the promisee in making good to the third party the default of the promisor.

Common Law: Agency

An agency relationship occurs where one party, the agent, is authorised either expressly or by implication, by the principal, to contract on his behalf. Where a person acts as an agent for the principal, the principal will be bound by any contract made with another party (X) that falls within the scope of that authority. It could be argued that this is an exception to the doctrine of privity since the principal and X do not deal directly with each other. However, it has been cogently argued that this is not a true exception to the doctrine of privity since it is the principal rather than the agent who is a party to the contract with X. It is the principal who can sue and be sued on the contract. The agent is not a party to the contract and, once the contract has been concluded, the agent's existence is no longer relevant. The principle of agency in this sense is simply a method of getting around the doctrine of privity, otherwise it would lead to difficulties in a business context. However, when the agent contracts with X on behalf of an undisclosed principal, the situation is different. An undisclosed agency is one where X is not informed of the principal's existence and instead, believes he is contracting with the agent. Generally, both the agent and the undisclosed principal can sue or be sued on the contract. Consequently, X can sue or be sued by the principal even though he had no idea of the principal's existence at the time of contracting. This is clearly an exception to the doctrine of privity. The other instance in which agency seems to provide a true exception to the doctrine of privity is where an agent contracts without authority on behalf of a named principal. The person named as principal may ratify the contract so that it becomes binding as between himself and X. The principal can enforce the contract as they are treated as being a party to that contract. An attempt was made to rely on the principle of agency in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 in order to allow a third party to rely on an exemption clause in a contract to which he was not a party. In this case, a drum of chemicals was shipped from the United States to England. The contract of carriage was between the shipper and the carrier and it contained a clause limiting the liability of the carrier to $500 (£179) per package. The carriers contracted with Scruttons, the stevedores, to unload the ship. A drum was damaged and its contents (valued at £593) lost as a result of the negligence of the stevedores. The stevedores were sued by the shippers in the tort of negligence. It was held by the House of Lords that the stevedores could not rely on the limitation clause in the contract of carriage (between the shipper and the carrier) because they were not a party to that contract. The House of Lords considered the argument that the carriers were acting as the stevedores' agents, but ultimately they rejected it. However, the case left open the possibility for the agency argument to succeed in a future case provided the exemption clause was suitably drafted. Lord Reid stipulated four conditions as necessary prerequisites to the success of such an argument: (1) the contract of carriage makes it clear that the stevedore is intended to be protected; (2) the contract of carriage makes it clear that the carrier is contracting not only on his own behalf but also as agent for the stevedore; (3) the carrier has authority from the stevedore so to contract; and (4) consideration moves from the stevedore. By explicitly detailing how such a clause may then succeed, the House of Lords appeared to be giving judicial recognition to the fact that such clauses are commercially effective in allocating the risks and the burden of insurance in contracts of carriage. In New Zealand Shipping Co. Ltd v A.M. Satterthwaite & Co. Ltd. (The Eurymedon) [1975] AC 154, the facts were very similar to those in Scruttons but, in this case, the exemption clause in the contract between the shipper and the carrier had been carefully drafted to fulfil Lord Reid's criteria. The Privy Council held that the exemption clause could be relied upon by the stevedores, as the four conditions stipulated by Lord Reid were satisfied. On the facts, the first three conditions were easily met, and the fourth condition, that of consideration, was provided by the stevedores by virtue of their unloading the goods. Remember that there are two contracts visible at face value: the first is the contract of carriage between the shipper and the carrier, and the second is a contract to unload the goods between the carrier and the stevedores. Lord Wilberforce found there to be a third contract between the shippers and the stevedores. The analysis of this third contract, according to Lord Wilberforce, was that a unilateral offer to exempt the stevedores from liability was made by the shipper to the stevedores through the carrier as agent for the stevedores. This unilateral offer was accepted when the stevedores unloaded the goods. In a unilateral contract, the act of performance is both the acceptance of the unilateral offer and the consideration for the contract. It did not matter that the stevedores were already under an existing contractual obligation to the carrier to perform unloading services because performance of an existing contractual obligation owed to a third party is good consideration. The case of Scotson v Pegg (1861) 6 H & N 295 was expressly approved. The adequacy of the alleged consideration in these cases has already been discussed (see para. 5.3.5.3). However, if the connected contracts between the shipper and the carrier, and the carrier and the stevedores, had been recognised as a 'network', and if one of the 'network effects' had been to relax the usual privity restrictions, then it would not have been necessary to engage in the kind of fiction that Lord Wilberforce openly admitted in such cases.

Scruttons Ltd v Midland Silicones Ltd [1962]

An attempt was made to rely on the principle of agency to allow a third party to rely on an exemption clause in a contract to which he was not a party. In this case, a drum of chemicals was shipped from the United States to England. The contract of carriage was between the shipper and the carrier and it contained a clause limiting the liability of the carrier to $500 (£179) per package. The carriers contracted with Scruttons, the stevedores, to unload the ship. A drum was damaged and its contents (valued at £593) lost as a result of the negligence of the stevedores. The stevedores were sued by the shippers in the tort of negligence. It was held by the House of Lords that the stevedores could not rely on the limitation clause in the contract of carriage (between the shipper and the carrier) because they were not a party to that contract. The House of Lords considered the argument that the carriers were acting as the stevedores' agents, but ultimately they rejected it. However, the case left open the possibility for the agency argument to succeed in a future case provided the exemption clause was suitably drafted. Lord Reid stipulated four conditions as necessary prerequisites to the success of such an argument: (1) the contract of carriage makes it clear that the stevedore is intended to be protected; (2) the contract of carriage makes it clear that the carrier is contracting not only on his own behalf but also as agent for the stevedore; (3) the carrier has authority from the stevedore so to contract; and (4) consideration moves from the stevedore. By explicitly detailing how such a clause may then succeed, the House of Lords appeared to be giving judicial recognition to the fact that such clauses are commercially effective in allocating the risks and the burden of insurance in contracts of carriage.

The Married Women's Property Act 1882 ('MWPA')

By virtue of s11 of the MWPA, a husband can take out a policy of insurance on his own life for the benefit of his wife and children. The effect of this proviso is that, when the husband dies, the proceeds of the policy are held on trust for the wife and the children. Consequently, the proceeds do not comprise part of the husband's estate and are not taken into account in the assessment of inheritance tax. If the insurance company fails to pay out on the policy, it can be directly enforced by the wife and/or children.

Road Traffic Act 1988 ('RTA')

By virtue of s143 of the RTA, the driver of a motor vehicle is obliged to take out a policy of insurance to cover possible claims by persons suffering injury as a consequence of the actions of the driver of the vehicle. The RTA permits an injured third party to make a claim directly against the insurance company despite the fact that he is not a party to the contract (s151).

The Companies Act 2006 ('CA 2006')

By virtue of s33 of the CA 2006, a company's constitution is binding on the company and each of its shareholders. The result is that an individual shareholder can sue another shareholder on the basis of the company's constitution (defined in s17 as its articles of association and relevant resolutions and agreements).

Nisshin Shipping Co. Ltd v Cleaves & Co. Ltd [2004]; and The Laemthong Glory (No. 2) [2005]

More generally, the indications are that the courts will be slow to hold that, where the contract does purport to confer a benefit on a third party, there is an intention that the third party should not have a right to enforce the term. In other words, once it is held that the contract purports to confer a benefit on a third party, there will be a rebuttable presumption in favour of the third party having a right to enforce the term and it will be difficult to rebut that presumption

Application of the Contracts (Rights of Third Parties) Act 1999

The application of the Contracts (Rights of Third Parties) Act 1999 is potentially extremely wide as it applies to just about every type of contract, with very limited exceptions. Therefore practitioners must, when considering the application of the 1999 Act to a particular contract: •Identify relevant contracts. •Identify potentially relevant third parties: on whom do you want to confer rights and whose rights do you want to preserve? An example might include the original supplier in respect of a supply contract between a retailer and a customer or the head franchisor in a franchise agreement between franchisee and sub franchisee. •Consider whether third parties should be given enforceable rights: it might be a question either of preserving an existing mechanism which circumvents the privity doctrine and confers a right on a third party; making the third party a contracting party in the first place; or, making use of the Act, either to give a third party the right to enforce a positive obligation or permitting a third party to avail itself of an exclusion or limitation of liability. •If enforceable rights are given to third parties, should there be any restrictions on their ability to enforce such rights: e.g. jurisdiction? More fundamentally, consideration will be given as to whether the Act should be excluded. As discussed above, there is a rebuttable presumption under the Act that, if a term purports to confer a benefit on a third party, this will be enforceable unless it is clear from the construction of the contract that the parties did not intend to confer such a benefit on the third party. In practice, you will find that there will often be express exclusion of the Act.

Trusts

The concept of privity is restricted to contracts and does not extend to trusts. A trust may attach to property of any kind, including a chose in action, which is a form of intangible property right such as a right to enforce an obligation. It follows from that definition that a right under a contract is a chose in action and thus may be the subject of a trust. The possibility is raised therefore that the promisee, under a contract, might declare himself trustee of the benefit of the promise in question on behalf of a third party and by that means avoid the privity doctrine. Where a trust of a contractual right is found to have been created, the principal effect is to permit the third party to enforce the benefit. This is merely an apparent exception to the common law doctrine of privity because the rights of the third party are those of the beneficiary and, as such, are equitable. Lord Greene MR has stressed that 'it is not legitimate to import into the contract the idea of a trust when the parties have given no indication that such was their intention': In Re Schebsman [1944] Ch 83. Refer to the Equity & Trusts subject material for further detail on this point.

Dunlop Pneumatic Tyre Co. v Selfridge & Co. [1915]

This case concerned contracts for the purchase of tyres. The first contract, dated 12 October 1911, was between Dunlop and Dew & Co. Under the first contract, Dew agreed to purchase a quantity of tyres from Dunlop. This contract contained an undertaking from Dew not to sell at prices below Dunlop's current list prices except to genuine trade customers, to whom they could sell at a discount. Where such trade sales took place, Dew undertook to obtain from the customer a written undertaking that they similarly would not sell on to private customers below the list prices. On 2 January 1912 Dew entered into a second contract, with Selfridge, who agreed to purchase tyres made by Dunlop from Dew. Selfridge gave the required undertaking to resell at the current list prices. Selfridge broke this undertaking by selling at less than list prices, and Dunlop sued Selfridge for breach of contract. HELD by the House of Lords: the agreement of 2 January 1912 was between Selfridge and Dew only. Dunlop was not a party to that contract and furthermore no consideration had moved from it to Selfridge. Lord Dunedin was of the view that the agreement was made by Dew as agent for Dunlop. As undisclosed principal, Dunlop would be a party to the contract and could theoretically sue to enforce it. Nonetheless, in order to bring an action, Dunlop would have had to show that consideration had moved from it to Selfridge.

Dolphin & Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening, The Swedish Club [2009]

To simplify and abstract the somewhat complex facts of the Dolphin case, imagine that A has unliquidated claims against C (Sveriges). A employs B (Dolphin) to pursue these claims against C (Sveriges). Under the contract between A and B, B is to be paid a commission of 10% on all monies recovered from C. C issues a letter of undertaking to A essentially accepting that it will pay court-ordered damages up to a certain amount. But, then, C deals directly with A to agree an out-of-court settlement of the claims that A has against C. B's first line of complaint against C is that this unlawfully interferes with the contract between A and B (because B now has no claim for commission). But, B also argues that it has a claim based on the letter of undertaking issued by C to A. We do not need to go into the details of this claim. Suffice it to say that, for our purposes, the relevant question is whether the letter of undertaking (viewed as a contract between C and A) is intended to confer a benefit on B within the meaning of s1(1)(b). Holding that it did not, Christopher Clarke J. said (at para. 74): 'A contract does not purport to confer a benefit on a third party simply because the position of that third party will be improved if the contract is performed. The reference in the section to the term purporting to "confer" a benefit seems to me to connote that the language used by the parties shows that one of the purposes of their bargain (rather than one of its incidental effects if performed) was to benefit the third party.' Even if it were conceded that the letter of undertaking purported to confer a benefit on Dolphin (B), Christopher Clarke J. held that, 'in its commercial context', there was no intention that its provisions should be enforceable by Dolphin (see para. 82). We return shortly to the possibility raised by s1(2) of the Act of the contractors intending that the third party should not be entitled to enforce the term.

Common Law: Assignment

Where A is under a contractual obligation to B and B assigns his contractual right to C, it may be possible for C to sue A on his promise to B. B is assigning his rights to C and, therefore, the extent of C's rights can never exceed the rights of B. Consider this limitation on assignment when reading the joined cases at 8.4 of Linden Gardens Trust v Lenesta Sludge Disposals Ltd and St Martins Property Corporation Ltd and another v Sir Robert McAlpine & Sons Ltd [1994] 1 AC 85.

Actions in tort

Where a contracting party owes a duty of care to the other contracting party, a breach of contract may also constitute a breach of the duty of care in tort. Where this is the case, the aggrieved party may sue for damages in contract or in tort. Sometimes, there will be an advantage in pleading the action as a breach of contract or as a tort (for example, to benefit from different statutory limitation periods). In some legal systems, the claim is designated as exclusively in contract or exclusively in tort. However, in English law, claimants are permitted to elect between pursuing a remedy in either contract or tort (see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145). During the development of the (tort) law of negligence, a critical question arose as to whether a person, A, who is not a party to the contract (between B and C) may be owed a duty of care, so that a breach on the part of one of the contracting parties will constitute a breach of the duty of care, giving a third party (A) the right to sue that contracting party for damages in tort. In the landmark case of Donoghue v Stevenson [1932] AC 562, the majority of the House of Lords (led by Lord Atkin) held that, in principle, a claim of this kind was available. In fact, in Donoghue, the plaintiff (A) was not only a third party in relation to the contract of sale between the manufacturer of the bottle of ginger beer and the retailer (the contract between B and C) but was also a third party in relation to the contract of sale between the retailer and the purchaser of the bottle of ginger beer (the contract between C and D). Nevertheless, it was held that the plaintiff, as the ultimate consumer of the goods, could bring a claim in the tort of negligence directly against the manufacturer (B). In effect, this seminal decision held that the privity principle that restricted the range of claims for breach of contract did not also restrict the range of claims in tort - and, in so doing, it opened up the possibility of a far more extensive liability regime for negligence. The minority judgments in Donoghue expressed a concern that the majority view would open the floodgates to claims and to claimants. So long as Donoghue applied only to claims for negligence leading to physical injury (the claimant in Donoghue alleged that the ginger beer caused her to suffer gastroenteritis) or to property damage, the law was not destabilised. However, in the notorious case of Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520, the majority of the House of Lords held that, in principle, it was open to A to plead the tort of negligence in order to recover purely financial losses caused by a breach of a contract between B and C even though such an action was not sustainable (because of the doctrine of privity of contract) in contract. In other words, Junior Books licensed third-party claimants to invoke the law of negligence as a means of bypassing the restrictions imposed by privity on claims for breach of contract. Such a situation could not be tolerated. To restore coherence to the law, it was necessary either to treat Junior Books as a one-off case having no general value as a precedent or to relax the restrictions that privity imposed on third-party claims for breach of contract. In the event, both measures were taken. Accordingly, under the current law, it is a little easier for third parties who have an interest in the performance of a contract to bring an action for breach of contract and more difficult for such third parties to recover their financial losses by relying on the tort of negligence (but, compare White v Jones [1995] 2 AC 207, where third-party claimants did succeed in negligence). As has been frequently noted, in all legal systems, contract and tort play complementary roles (see e.g. Markesinis, 'An Expanding Tort Law - The Price of a Rigid Contract Law' (1987) 103 LQR 354). However, there are plenty of occasions when, at the interface of the two bodies of law, there are tensions; and one of the most difficult challenges for any legal regime is to lay down clear and coherent rules at the points where the laws intersect (see e.g., Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; and, generally, see Brownsword, Contract Law: Themes for the Twenty-First Century, Ch. 9).

Common Law: Guarantor's right of subrogation

Where a guarantor has paid the principal creditor, he is subrogated to the rights of the principal creditor against the debtor, i.e. the guarantor 'stands in the principal creditor's shoes' and has the same rights that the principal creditor would have had against the debtor.

Judicial attempts to avoid the doctrine

Whilst you cannot confer a right on a third party to the contract, you can contract for another's benefit. In Jackson v Horizon Holidays [1975] 1 WLR 1468, the plaintiff booked a holiday for himself, his wife and his two children at a total cost of £1,200. The defendant's brochure described the holiday hotel as having excellent facilities. This proved not to be the case and the plaintiff brought an action for breach of contract. At first instance, the judge made an award of £1,100 damages, which was just less than the full cost of the family holiday, despite his assertion that he would only consider the mental distress of the plaintiff and not that of his wife and children. The defendant appealed against the amount of damages. The Court of Appeal upheld the award on the basis that the plaintiff had contracted for the benefit of himself and his family and, therefore, as well as recovering for his own loss, he could also recover for that suffered by his family as a result of the breach of contract. Therefore, the damages awarded were not excessive. Lord Denning MR relied upon the following extract of Lush LJ in Lloyd's v Harper (1880) 16 Ch D 290: 'I consider it to be an established rule of law that where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself.' Lord Denning MR concluded that if the award was to compensate for the damage suffered by Mr Jackson alone it would indeed have been excessive, but it could not be deemed to be so when extended to his wife and children. Lord Justice Orr agreed with Lord Denning MR's judgment whilst James LJ confined his comments to a statement that this was a contract for a family holiday and the plaintiff had not received this. However, the currency of this analysis proved to be short-lived. In Woodar v Wimpey [1980] 1 WLR 277, the reasoning put forward in the Court of Appeal by Lord Denning MR in Jackson was disapproved by the House of Lords. Although Lord Wilberforce stated that he was not prepared to 'dissent' from the actual decision in Jackson, he went on to state that it may be supported either as a broad decision on the measure of damages (per James LJ) or possibly as an example of a particular type of contract - examples of which are persons contracting for family holidays, ordering meals in restaurants for a party, hiring a taxi for a group - calling for special treatment. Lord Wilberforce expressly disagreed with the reasoning of Lord Denning MR in Jackson, in particular his reliance on the judgment of Lush LJ. He maintained that the extract in question was only an established principle of law in relation to the rights of an agent to sue on a contract where the contract specifically gives him such a right. He therefore concluded that it could not be utilised as an authority for the proposition in the Jackson case, still less in relation to the facts before the House of Lords in the Woodar case. Lord Scarman's judgment in Woodar v Wimpey is instructive in that his Lordship expressed his dissatisfaction with the doctrine of privity. He stated, 'I regret that this House has not yet found the opportunity to reconsider the two rules which effectually prevent A or C recovering that which B, for value, had agreed to provide.' On the one hand, a claimant contracting party has no substantial loss; on the other, a claimant third party, with substantial loss, has no contract on which to claim. Lord Scarman expressly agreed with Lord Reid's assertion, made over a decade earlier, that the denial by English law of a 'jus quaesitum terti' be reconsidered. In Beswick v Beswick [1968] A.C. 58, Lord Reid referred to the Law Revision Committee's recommendation made more than thirty years earlier that the third party should be able to enforce a contractual promise taken by another for his benefit. He observed that 'if one had to contemplate a further long period of Parliamentary procrastination, this House might find it necessary to deal with this matter.' Lord Scarman concurred with this view and concluded that '[i]f the opportunity arises, I hope the House will reconsider Tweddle v Atkinson and the other cases which stand guard over this unjust rule.' However, Parliament failed to act. The decision of the House of Lords in the joint appeals of Linden Gardens Trust v Lenesta Sludge Disposals Ltd and others and St. Martins Property Corporation Ltd and another v Sir Robert McAlpine & Sons Ltd [1994] may illustrate the efforts of the judiciary to remedy this situation. The facts of both cases are very similar, which is why the appeals were heard jointly. Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994]: the case involved a contract between an 'employer' and a 'contractor' (Lenesta) whereby the latter was to remove asbestos from a property in which the employer had a leasehold interest. The property was ultimately destined to be developed as shops, offices and residential flats. Both parties knew that the building was going to be leased on to a third party. The contract contained a clause preventing the employer from assigning its rights under the contract to anyone else without the written consent of the contractor. The work under this contract was completed in 1980 and in 1985 the employer transferred its interest in the property to the plaintiffs, Linden Gardens Trust, who subsequently discovered asbestos in the property that should rightly have been removed under the original contract. Linden Gardens Trust paid to have the asbestos removed and, when the original contracting party (the employer) assigned their right to sue the contractors to them, they (Linden Gardens Trust) brought an action to recover the losses sustained in remedying the defective performance under the contract between the employer and Lenesta. HELD: the plaintiffs had no right to sue due to the prohibition of assignment contained within the original contract between the employer and the contractor. St. Martins Property Corporation Ltd and another v McAlpine (1994) has very similar facts to Linden Gardens Trust v Lenesta Sludge Disposals Ltd and the court held that the third party should fail on the same point as above, i.e. the assignment of the employer's rights to the third party was ineffective due to the prohibition against assignment without consent. However, unlike in Linden Gardens, the employer had been joined as a party to the legal action. On appeal, the employer argued that a principle arising from a shipping case, The Albazero [1976] 3 All ER 129, should be applied to this situation. In The Albazero, the court had ruled that where a contract was entered into by A and B, both of whom knew that the end benefit of the contract was going to reside in a third party, C, then in that situation, either party breaching the contract could be sued by the other party on behalf of the contemplated third party. In St. Martins Property Corporation Ltd and another v McAlpine the court held, applying The Albazero principle, that the employer could sue to recover the contemplated third party's loss. Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 applied the principle from St. Martins Property Corporation Ltd and another v McAlpine, and extended it to cases in which the employer had never had a proprietary interest in the property affected. However, this judicial boldness has been stemmed by the decision by the House of Lords in McAlpine v Panatown [2001] 1 AC 518, where their Lordships reversed the Court of Appeal decision and prevented a claim on behalf of a third party where they had their own right of action by an alternative route (i.e. based on a separate duty of care deed). The Albazero principle will only be applied if the third party has no other means of recourse, which is consistent with the judicial intention to obviate the harshness of the doctrine of privity.

Darlington BC v Wiltshier Northern Ltd [1995]

applied the principle from St. Martins Property Corporation Ltd and another v McAlpine, and extended it to cases in which the employer had never had a proprietary interest in the property affected. However, this judicial boldness has been stemmed by the decision by the House of Lords in McAlpine v Panatown [2001] 1 AC 518, where their Lordships reversed the Court of Appeal decision and prevented a claim on behalf of a third party where they had their own right of action by an alternative route (i.e. based on a separate duty of care deed). The Albazero principle will only be applied if the third party has no other means of recourse, which is consistent with the judicial intention to obviate the harshness of the doctrine of privity.

Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994]:

case involved a contract between an 'employer' and a 'contractor' (Lenesta) whereby the latter was to remove asbestos from a property in which the employer had a leasehold interest. The property was ultimately destined to be developed as shops, offices and residential flats. Both parties knew that the building was going to be leased on to a third party. The contract contained a clause preventing the employer from assigning its rights under the contract to anyone else without the written consent of the contractor. The work under this contract was completed in 1980 and in 1985 the employer transferred its interest in the property to the plaintiffs, Linden Gardens Trust, who subsequently discovered asbestos in the property that should rightly have been removed under the original contract. Linden Gardens Trust paid to have the asbestos removed and, when the original contracting party (the employer) assigned their right to sue the contractors to them, they (Linden Gardens Trust) brought an action to recover the losses sustained in remedying the defective performance under the contract between the employer and Lenesta. HELD: the plaintiffs had no right to sue due to the prohibition of assignment contained within the original contract between the employer and the contractor.

Avraamides and another v Colwill and another [2006]

contractor had refurbished Mr. and Mrs. Avraamides's bathroom. The contractors then transferred all their rights and liabilities under the contract between themselves and Mr. and Mrs. Avraamides to Colwill. Paragraph 3 of the transfer agreement stated that Colwill agreed 'to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003.' The refurbishment had been done defectively and the Avraamides sued Colwill. At first instance, it was held that Mr. and Mrs. Avraamides were third parties on whom paragraph 3 of the transfer agreement had conferred a benefit. The defendants, Colwill, appealed. Lord Justice Waller held that the transfer agreement did not confer a benefit on the Avraamides as they had not been expressly identified in accordance with s1(3). He stated: 'The answer I am afraid is that section 1(3), by use of the word "express", simply does not allow a process of construction or implication.'

New Zealand Shipping Co. Ltd v A.M. Satterthwaite & Co. Ltd. (The Eurymedon) [1975]

facts were very similar to those in Scruttons but, in this case, the exemption clause in the contract between the shipper and the carrier had been carefully drafted to fulfil Lord Reid's criteria. The Privy Council held that the exemption clause could be relied upon by the stevedores, as the four conditions stipulated by Lord Reid were satisfied. On the facts, the first three conditions were easily met, and the fourth condition, that of consideration, was provided by the stevedores by virtue of their unloading the goods. Remember that there are two contracts visible at face value: the first is the contract of carriage between the shipper and the carrier, and the second is a contract to unload the goods between the carrier and the stevedores. Lord Wilberforce found there to be a third contract between the shippers and the stevedores. The analysis of this third contract, according to Lord Wilberforce, was that a unilateral offer to exempt the stevedores from liability was made by the shipper to the stevedores through the carrier as agent for the stevedores. This unilateral offer was accepted when the stevedores unloaded the goods. In a unilateral contract, the act of performance is both the acceptance of the unilateral offer and the consideration for the contract. It did not matter that the stevedores were already under an existing contractual obligation to the carrier to perform unloading services because performance of an existing contractual obligation owed to a third party is good consideration. The case of Scotson v Pegg (1861) 6 H & N 295 was expressly approved.

Henderson v Merrett Syndicates Ltd [1995]

in English law, claimants are permitted to elect between pursuing a remedy in either contract or tort

Donoghue v Stevenson [1932]

majority of the House of Lords (led by Lord Atkin) held that, in principle, a claim of this kind was available. In fact, in Donoghue, the plaintiff (A) was not only a third party in relation to the contract of sale between the manufacturer of the bottle of ginger beer and the retailer (the contract between B and C) but was also a third party in relation to the contract of sale between the retailer and the purchaser of the bottle of ginger beer (the contract between C and D). Nevertheless, it was held that the plaintiff, as the ultimate consumer of the goods, could bring a claim in the tort of negligence directly against the manufacturer (B). In effect, this seminal decision held that the privity principle that restricted the range of claims for breach of contract did not also restrict the range of claims in tort - and, in so doing, it opened up the possibility of a far more extensive liability regime for negligence. The minority judgments in Donoghue expressed a concern that the majority view would open the floodgates to claims and to claimants. So long as Donoghue applied only to claims for negligence leading to physical injury (the claimant in Donoghue alleged that the ginger beer caused her to suffer gastroenteritis) or to property damage, the law was not destabilised.

Junior Books Ltd v Veitchi Co Ltd [1983]

majority of the House of Lords held that, in principle, it was open to A to plead the tort of negligence in order to recover purely financial losses caused by a breach of a contract between B and C even though such an action was not sustainable (because of the doctrine of privity of contract) in contract. In other words, Junior Books licensed third-party claimants to invoke the law of negligence as a means of bypassing the restrictions imposed by privity on claims for breach of contract. Such a situation could not be tolerated. To restore coherence to the law, it was necessary either to treat Junior Books as a one-off case having no general value as a precedent or to relax the restrictions that privity imposed on third-party claims for breach of contract. In the event, both measures were taken. Accordingly, under the current law, it is a little easier for third parties who have an interest in the performance of a contract to bring an action for breach of contract and more difficult for such third parties to recover their financial losses by relying on the tort of negligence (but, compare White v Jones [1995] 2 AC 207, where third-party claimants did succeed in negligence).

Jackson v Horizon Holidays [1975]

plaintiff booked a holiday for himself, his wife and his two children at a total cost of £1,200. The defendant's brochure described the holiday hotel as having excellent facilities. This proved not to be the case and the plaintiff brought an action for breach of contract. At first instance, the judge made an award of £1,100 damages, which was just less than the full cost of the family holiday, despite his assertion that he would only consider the mental distress of the plaintiff and not that of his wife and children. The defendant appealed against the amount of damages. The Court of Appeal upheld the award on the basis that the plaintiff had contracted for the benefit of himself and his family and, therefore, as well as recovering for his own loss, he could also recover for that suffered by his family as a result of the breach of contract. Therefore, the damages awarded were not excessive. Lord Denning MR relied upon the following extract of Lush LJ in Lloyd's v Harper (1880) 16 Ch D 290: 'I consider it to be an established rule of law that where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself.' Lord Denning MR concluded that if the award was to compensate for the damage suffered by Mr Jackson alone it would indeed have been excessive, but it could not be deemed to be so when extended to his wife and children. Lord Justice Orr agreed with Lord Denning MR's judgment whilst James LJ confined his comments to a statement that this was a contract for a family holiday and the plaintiff had not received this. Currency of analysis short-lived.

Woodar v Wimpey

reasoning put forward in the Court of Appeal by Lord Denning MR in Jackson was disapproved by the House of Lords. Although Lord Wilberforce stated that he was not prepared to 'dissent' from the actual decision in Jackson, he went on to state that it may be supported either as a broad decision on the measure of damages (per James LJ) or possibly as an example of a particular type of contract - examples of which are persons contracting for family holidays, ordering meals in restaurants for a party, hiring a taxi for a group - calling for special treatment. Lord Wilberforce expressly disagreed with the reasoning of Lord Denning MR in Jackson, in particular his reliance on the judgment of Lush LJ. He maintained that the extract in question was only an established principle of law in relation to the rights of an agent to sue on a contract where the contract specifically gives him such a right. He therefore concluded that it could not be utilised as an authority for the proposition in the Jackson case, still less in relation to the facts before the House of Lords in the Woodar case. Lord Scarman's judgment in Woodar v Wimpey is instructive in that his Lordship expressed his dissatisfaction with the doctrine of privity. He stated, 'I regret that this House has not yet found the opportunity to reconsider the two rules which effectually prevent A or C recovering that which B, for value, had agreed to provide.' On the one hand, a claimant contracting party has no substantial loss; on the other, a claimant third party, with substantial loss, has no contract on which to claim. Lord Scarman expressly agreed with Lord Reid's assertion, made over a decade earlier, that the denial by English law of a 'jus quaesitum terti' be reconsidered.

Tweddle v Atkinson (1861)

the judgments concentrated on the fact that the consideration for the promise was not provided by the plaintiff groom but by his father. However, the claim could also have failed on the ground that the groom was not a party to the contract; the contract was between his father and the father of the bride

St. Martins Property Corporation Ltd and another v McAlpine (1994

very similar facts to Linden Gardens Trust v Lenesta Sludge Disposals Ltd and the court held that the third party should fail on the same point as above, i.e. the assignment of the employer's rights to the third party was ineffective due to the prohibition against assignment without consent. However, unlike in Linden Gardens, the employer had been joined as a party to the legal action. On appeal, the employer argued that a principle arising from a shipping case, The Albazero [1976] 3 All ER 129, should be applied to this situation. In The Albazero, the court had ruled that where a contract was entered into by A and B, both of whom knew that the end benefit of the contract was going to reside in a third party, C, then in that situation, either party breaching the contract could be sued by the other party on behalf of the contemplated third party. In St. Martins Property Corporation Ltd and another v McAlpine the court held, applying The Albazero principle, that the employer could sue to recover the contemplated third party's loss.