Privity

Contracts Affect Parties / Privity

The general principle is that a person who is not a party to a contract is not entitled to its benefit. This means that he may not enforce it. If A promises B to give something to C, for which B undertakes something in return, C has no right to enforce the agreement. Only A and B can enforce the agreement. C is a stranger to the contract and is not privy to it.

A person who is not a party to a contract cannot seek an order for its performance and cannot claim compensation for its breach. Correspondingly, a person who is not a party to a contract may not be subject to liabilities and obligations under it. A non-party cannot generally change the terms of the contract so as to affect the rights or obligations of parties to the contract.

In contrast to contract law, third parties may have rights under the law of civil wrongs and restitution. If B performs his contract with A negligently and causes loss to C, C may sue for compensation for the civil wrong. Similarly, if C is unjustly enriched at B’s expense, then B may make a claim for restitution of the benefit.

in England, Wales and Northern Ireland it is now generally possible grant a third-party beneficiary of a contract the right to enforce it.  It is proposed to introduce similar legislation in Ireland in the future.


Party must give Consideration

Another perspective on privity reflects that requirement that a party to a contract must give consideration for the promise made or benefit given to him or for the detriment suffered by the other party. In order for a person to enforce a contract, he must give consideration. Some promise or undertaking must come from him and he must have accepted the contract.

Each party to the contract must give consideration. If A promises B to pay €1,000 to C for consideration given by B, B may enforce A’s promise. If C has not given consideration, he is not a party to the contract and cannot enforce it.

It is possible to have a contract with multiple parties. In this case, if A and C jointly agree with B to pay B for specified work and each of A and C give consideration n something in return, then each will be able to sue to enforce the contract

Sometimes, the unexpected difficulties that the privity of contract principle may cause are avoided by an interpretation which finds that the third party is a co-party to the contract. Each party must give consideration. The court may find that a single consideration is given jointly. However, the courts will not strain to find a multi-party contract, where consideration cannot be reasonably regarded as given by each party.


Trust Exception to Privity Rule

A party to a contract may be able to recover loss incurred by a third party at common law, in some cases under trust and fidudicary principles.  This may be include a claims by as agent on behalf of a principal who is not disclosed and a claim by a trustee on behalf of a beneficiary.

It is possible for a party to a contract to hold the benefit of the contract in trust for a beneficiary.For example, A may give money to B in order to purchase an item for C. B’s agreement to do so may constitute a trust in favour of C, which C as beneficiary may enforce against B.

The Courts of Equity are willing in some cases to find a trust of contractual obligations, in order to mitigate the harshness of the privity rule in appropriate cases.  A beneficiary of a contractual obligation undertaken by a trustee can enforce the trust.

Under the broadest application of the principle, a contract entered for the benefit of a third-party individual might be held to be entered as trustee for the beneficiary where the party to the contract so intended. At the beginning of the 20th Century, the principle of a trust of a contractual obligation appeared to allow wholesale circumvention of the privity of contract principle.


Stricter Requirement for Trust

In the early 20th century, the courts became less willing to accept the existence of a trust, merely because of an intention by a party to the contract to benefit a third party. The courts began to insist that an intention to create a trust for the benefit of the third party must be evident.

The courts require that there is an intention to create a trust.  It must be shown that B has agreed to hold the benefit of the contract to purchase the item on trust for C. The mere fact that a third party is intended as beneficiary, is not of itself sufficient for the court to imply a trust.

If there is an existing fiduciary relationship with a third party, the court is more willing to find that contractual obligations are held in trust for the party to whom a fiduciary duty is owed. However, under the modern approach, a trust will not be found on the basis of a subjective intention to benefit a third party. There must be an existing trust or fiduciary relationship or there must be some objective manifestation of a trust in the circumstances.


Agency

The principles of agency allow an agent to bind his principal to contracts entered within the course of his authority. The principal may take the benefit of the contract and enforce it. Where the identity of the party is not critical, a previously undisclosed principal may enforce the contract directly. Similarly, the contract may be enforced against the principal, notwithstanding that the agency was undisclosed at the time the contract was made.

An agent can form a contract on behalf of his principal. Agency may apply, even where it is undisclosed. The agent may only bind his principal, only if he is, in fact, acting for him, within the terms of his appointment. If the agent acts on behalf of his principal without authority, the principal may later ratify or affirm the agent’s acts, in which event the principal will be bound. See the section in relation to agents and commercial agents.

Different considerations arise where the identity of the contracting party is critical to the other party. In this case, an undisclosed principal is not entitled to substitute himself as a party to the contract.

Where the principal is disclosed and mentioned, as where the agent expressly contracts on his behalf, it is almost invariably the case, that the contract can be enforced by and against the principal.


Land Covenants

Certain covenants and conditions affecting land can bind the successors of the original owners of the land, who make the agreement. Covenants (obligations undertaken in a deed) entered in relation to property can be enforced by and against the original parties to the deed and their successors as owners.  They effectively bind the owner of the land from time to time.

The principle that such covenants are enforced against successors, is limited largely to so called “restrictive covenants”. These are covenants which do not require the expenditure of money but rather, require one party to abstain from doing a particular act or thing.

The principle has now been confirmed and strengthened in the recent land law reforms. The obligation must relate to the property. If must generally be a restriction as opposed to a positive obligation.


Assets subject to Rights

It is a general principle that when a person acquires property, whether land or goods, which he knows are subject to rights and interests in favour of third parties for which that third party has paid valuable consideration, that he takes the property subject to those rights and interests.

A person who acquires or purchases property so as to cause a breach of contract affecting them, of which he is aware, may in principle be restrained from committing that breach. The possibility of an injunction to restrain a breach of the restrictions does not of itself necessarily compel the transferee to comply with them. However, he may in effect take the property subject to those restrictions, burdens and restraints in the sense that doing acts which are inconsistent with them, risks restraint.


Limits to Principle

The principle is limited in several respects and does not wholly undermine the doctrine of privity of contracts. The buyer of goods is not generally bound to perform positive obligations undertaken by the seller. The remedy is equitable in nature and is based on the notion that a person who takes the benefit of something should take the attendant burdens.

Where a known restriction affects a particular property, such that it is reflected in the price, equitable principles may be employed so as to restrain conduct which breaches the restrictions.

Resale price restrictions cannot generally be imposed on goods. Many such clauses are inconsistent with the common law restraint of trade doctrine. They are also likely to be prohibited by the Competition Act.


Collateral Contact

Another possibility for circumventing the apparent injustice caused by the privity principle is that the court finds a collateral contract in parallel with the main contract. Collateral contracts, may in some cases, avoid the harsh effects of privity.

A collateral contract is a separate parallel contract, which may come into being in the context of a transaction. If, for example, C recommends a particular product to A and A’s contractor B purchases that product on faith of this recommendation, the courts may be willing to find a contract between A and C. The consideration is A instructing B to enter the contract with C.

Once again, there are limits to which the courts will push this possibility. If such an interpretation would be artificial, the courts are unlikely to find a collateral contract.


Exemption Clauses I

An exemption clause in a contract is one which limits the responsibility of one-party for breach of his obligations. It may purport to exclude liability both for breach of the contract and for other civil liability. If the person who claims is not a party to the contract with the exclusion clause, then the clause can only be effective against him on the basis that an exception to the requirement that he be a party to contract applies.

In some cases, the courts apply an exemption clause to third parties under another contract, where it is the intention under that separate contract that the exemption clause in the first contract will apply.

The courts have allowed so called “Himalaya” clauses, named after the principal case in which the effectiveness of such clauses was first upheld. The clauses are typically incorporated in a contract between an entity and another and may extend the exemption from or limitation of liability to that entity’s employees and agents, who are third parties to the contract.

The benefit of such clauses may also be extended to independent contractors. There must be an intention to extend the benefit of the clause to the party concerned. The third party must provide consideration under a separate contract and upon due performance, it must be intended by both parties to the contract, that the third party is to be entitled to avail of the clause.


Exemption Clauses II

Where a person delivers goods under a contract to another, a bailment is created. If the bailee is allowed to subcontract to another, the question arises whether the sub bailee may rely on exemption clauses in the principal contract.  The courts have been willing to allow the benefit of exemptions and limitations of liability to third parties, on the same principles as those above.

Where the bailor permits the bailee to sub-contract, the bailor is bound by the terms of exemption clause, even where it is not expressly made for the benefit of the sub- bailee. Because the bailor has expressly or by implication authorised the bailee to make a sub- bailment containing those conditions, the bailor is bound by those conditions.

If a party to the contract sues on behalf of a third party, then he may in effect be enabled to enforce it. The party concerned may incur have little or no loss (which falls to the third-party beneficiary). However, he may be able to obtain an order of specific performance which provides for de facto performance.

In some cases, where the claimant’s loss appears at first to be minimal because the immediate loss has been suffered by the third party, he may nonetheless have significant loss, on closer examination. The claimant may have an obligation to the third party, which if not performed, will cause him to suffer loss. In this case, the claimant is entitled to recover substantial damages.


Notice Disclaiming Liability

Tort liability may be modified by the use of a notice disclaiming liability. A notice may be incorporated into a contract as an exemption clause. An exemption clause in a principal contract may act to give notice to the counterparty, so as to protect sub-contractors and others from civil liability for civil wrongs.

Some duties may not be modified under the Occupiers Liability Act. The duty of an occupier of premises owed to an entrant, may not be modified or excused by a contract to which he is a stranger, whether the occupier is bound by the contract to permit the entrant to use the premises or not. He is deemed a stranger to the contract when he is not for the time being entitled to the benefit of it as a party or as assignee.


Possible General Principle Re Goods

There is support for a general principle that where it is in the contemplation of the parties that a proprietary interest in the goods may be transferred to another after the contract has been entered, the original party may be treated as having entered the contract for the benefit of all persons who may acquire an interest in the goods, before they are lost and damaged.

The party who has so entered the contract is entitled to recover damages for breach of contract, the actual loss sustained for those for whose benefit the contract is entered. This is separate to the right of a third-party assignee to enforce the contract.

Where the third party himself has a right to recover damages, even if not identical, this exception to privity does not apply. The third party’s direct right also precludes the right of the party to the contract to recover substantial damages in those circumstances in his own right. He has not suffered loss where the third party has his own right to sue directly, either by assignment or direct agreement, so that the exception to the general rule would not apply.


Contracts for Family Members Generally

There are certain exceptions to the principle privity under legislation. Where a contract is made to benefit the spouse of a party to the contract, it is enforceable by the spouse in his or her own name as if he or she was a party.

The Married Women’s Status Act applies where a contract is made for the benefit of a spouse or a child of a contracting party. It is enforceable by the third person as his name as if he or she was a party to it. The same defences as would  be available under the contract, are available against the third party.

Unless the contract otherwise allows, it may be rescinded by agreement of the contracting party at any time before the third party has adopted it, either expressly or by implication/conduct. A child includes a stepchild, a non-marital child, an adopted person or person in loco parentis.

The Act  also provides that in the case of life insurance or an endowment policy made for the benefit of a spouse; the policy creates a trust in favour of the third-party spouse.

In everyday transactions such as for holidays and leisure services, damages may be recovered for loss and disappointment by family members who were not a party to the contract.


Contacts for Travel and Holidays

In claims arising from spoiled holidays, where one member of a family has made a contract for accommodation, services or a package holiday, the courts have permitted the party to the contract to recover compensation, not only for himself but also for loss (including disappointment) suffered by other members of the family.

Similar principles apply where a party makes a contract for accommodation or transport services on behalf of a group. The extension of recovery in this way has been controversial and some courts have sought to restrict this application of the principle.

The courts have sought to rationalise difficult cases under ordinary principles of privity, such as those above, arising from spoiled holidays, by reference to the difference between the value of what was contracted for and the value that was provided.


Various Other Common Law Exceptions

The rules of an unincorporated club or society are usually regarded as a multi-party contract. Each member is bound to the others and gives consideration by agreeing to be bound by the rules. In the case of a company, the Companies Act deems the Memorandum and Articles of Association (now the constitution) to be a contract between the parties.

The privity rule may be avoided in some cases if A can enforce the contract against C on behalf of A. A may be able to obtain an order for  specific performance to enforce the contract so that C thereby benefits. See the sections on specific performance and remedies.

A may recover against B where B promises to benefit C and where A was under a duty to reward or recompense C.


Various Statutory Exceptions

A person claiming against a third party, who is insured, may have direct rights against the insurer in certain circumstance where the insured becomes insolvent. The rights against Insurers are narrower in Ireland than in Northern Ireland and England.

It is an implied term in a contract for the sale of a motor vehicle, that at the time of delivery, it is free from any defect which would render it dangerous to the public, including persons travelling in it. The legislation provides that a person using the vehicle with the consent of the buyer of the vehicle who suffers loss as a result of the breach of the condition may sue for damages as if he was a buyer. Similar provisions apply in respect of a hire purchase arrangement.

A consumer who purchases on hire purchase, leases, or enters  similar consumer credit arrangements has statutory consumer rights against both the seller in respect of goods sold.  This is notwithstanding that his only contract is with the finance company.

Although the hirer has no relationship with the seller, the implied contractual rights applicable to the sale of goods are conferred. The seller is deemed a party to the sale, who together with the finance company, are jointly and solely liable for breach of the contract to sell and any misrepresentations made by the seller in respect of the goods.

There is an implied condition in the contract to the sale of a car by a motor dealer, that it is free from defects. The benefit of this right applies to passengers in the vehicle.


References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch. 17

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch.18

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.