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Elements in a Contract XXVIII - Privity of contract
The privity rule applies to third parties in a contract. Third parties in a contract are defined as persons who have not provided any consideration but stand to derive some benefit from the contract. In Beswick v Beswick (1968) the plaintiff’s husband sold a business to his nephew with the stipulation that an annual income be made to him and upon his death to his wife. The nephew failed to make the stipulated payments, following his uncle’s death, as agreed, and the plaintiff sued. Under normal circumstances the plaintiff would not be able to sue because she was not a privy to the contract but because she was also the executor of the deceased’s estate, she was able to bring the matter before the courts.
The Law Commission Report 1996 – Privity of Contract, highlighted some of the difficulties caused by the rule especially in insurance contracts and other contracts that sought to confer rights on third parties like construction contracts and in such instances the aggrieved party had to commence an action in tort as opposed to suing for a breach of contract to obtain a remedy.
Subsequently the Contracts (Rights of Third Parties Act) 1999 was enacted and it diminished the application or the scope of the privity rule. Section 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
Section 1 (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.
It is however worth knowing the privity rule because a lot of the cases in contract law were decided prior to 1999 and at a time when the privity rule was very much alive. The basis of the rule is straightforward enough i.e. one cannot hope to obtain some form of benefit under a contract unless one has provided some form of consideration, which sometimes left parties who intended to confer benefits on their next of kin for example spouse or their children, out on a limb.
The Contracts (Rights of Third Parties Act) 1999 has however remedied any shortcomings that may result from strict application of the privity rule and it paves the way for more equitable outcomes.
In Tweddle v. Atkinson (1861) the parents of the bride and groom agreed to pay a certain sum of money to the groom upon his marriage to the bride. The bride’s father died before the payment could be made and the groom brought a claim against his estate. The court ruled that because consideration did not move from him, he was unable to claim i.e. he was a third party to the contract and therefore he was not entitled to claim.
In Scruttons Ltd v Midland Silicones Ltd (1962) the carriers (a shipping company) and the plaintiffs entered into a contract to transport drums of chemicals. The contract contained an exclusion clause which limited liability for any damage incurred to the amount of £179 per drum. While the stevedores were loading the drums onto the ship one of the drums incurred damage in excess of £179 and the plaintiffs sued for the full extent of the damage. The defendants (the stevedores) claimed that the damage should only be limited to £179 but the court found in favor of the plaintiff. Applying the privity rule it was held that the defendants could not limit their liability to the amount stated in the contract because they were not privy to the contract.
Despite the application of the rule prior to the enactment of the Contracts (Rights of Third Parties Act) 1999, the courts have displayed a willingness, depending on the facts of the case, to depart from the rule.
In Jackson v Horizon Holidays (1975) the plaintiff booked a holiday with his family aboard based on what had been advertised. When they arrived at their holiday destination they found that the living accommodations were nothing like the advertisement and the conditions were unsatisfactory. As a result, the plaintiff sued for compensation not only for himself but also for his wife and family. It was held that the plaintiff was not only entitled to recover for the disappointment that he’d suffered but he was also able to recover for the disappointed incurred by his wife and children, despite the fact that the wife and children were not privy to the contract.
© 2017 Kathiresan Ramachanderam and Dyarne Jessica Ward