Doctrine of Privity of contract

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CONTRACTS NOTES

PRIVITY OF CONTRACT

1. The Privity of Contract Doctrine

The privity of contract doctrine dictates that only persons who are parties to a contractare entitled to take action to enforce it. A person who stands to gain a benefit from thecontract (a third party beneficiary) is not entitled to take any enforcement action if heor she is denied the promised benefit.

Example:

A promises B, for consideration moving from B, to pay C $ 100.

Here A and B are parties to the contract privy to the contract and can sue eachother if there is a breach by the other. C is not a party to the contract and cannot sue Ais A fails to pay C the sum of $ 100.

A classic authority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge &Co [1915] AC 847, where at 853, Viscount Haldane said:

My Lords, in the law of England certain principles are fundamental. Oneis that only a person who was party to a contract can sue on it. Our lawknows nothing of a jus quaesitum tertio [third party right of action] arising

by way of contract.

See also Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460, at 478,per Barwick CJ.

2. Privity and its Relationship to the Doctrine of Consideration

When looking at the doctrine of consideration we observed the rule that consideration

must move from a promisee, or, in other words, that only a person who has providedconsideration can enforce a promise. In the above example one could have argued thatC could not sue on the basis that C had not provided any consideration for As

promise to pay C the sum of $ 100.

This raises the question of whether there is a distinction between the privity andconsideration rules. This question has generated considerable discussion in academiccircles and there is a division of opinion between those who say the rules are in factone rule differently expressed and those who argue that the two rules are distinct.

In the cases, the relatively scant references to the question tend to support the two

separate rules approach.


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See Coulls v Bagots Executor, at 478, Barwick CJ and, at 494, per Windeyer J;Trident General Insurance Co Ltd v McNiece Bros Pty Ltd(1988) 165 CLR 107, at115-116, Mason CJ, Wilson J and at 164, per Toohey J.

3. Remedies Against a Promisor in Breach of Obligations to a Third Party

Here we are concerned with the remedies that can be pursued against a promisor whois in breach of his or her obligations to a third party. In our example above, who cansue A, and what remedies are available?

Because C is a third party and not privy to the contract, C has no right of actionagainst A.

However, B as the promisee under the contract and a party to the contract can sue A.

Two possible remedies arise, namely, damages at common law and specificperformance in equity.

Can C require B to sue A? See Coulls, at 502, per Windeyer J.

(a) Damages at Common Law

Because the remedy of common law damages for breach of contract will always begranted to a plaintiff, B will always succeed. However, the critical issue is themeasure of damages that will be recovered.

Critical to an understanding of the position of B in this context is the basic principlefor the assessment of damages for breach of contract. As will be explored in moredetail in the lectures on remedies, damages seeks to compensate the plaintiff for theloss suffered as a result of the breach. If no loss is suffered then a nominal (or token)award of damages is made in favour of the plaintiff. If real loss is suffered, an awardof substantial damages is made in favour of the plaintiff.

In our example it is likely to be the case that the measure of damages to be recoveredby B would be nominal because B suffers no loss as a result of the breach by A. Putanother way, Bs position is the same irrespective of whether or not A pays the sum of

$ 100 to C. In special circumstances it may be that B will suffer a real loss, in whichcase substantial damages which reflect the value of Bs loss not Cs loss - will beawarded. See Coulls, at 501-502, where Windeyer J.

Because in most cases the measure of damages recovered will be nominal, there islittle reason for B to pursue common law damages.

The fact that B cannot sue to recover as damages the measure of Cs loss from Asbreach of contract was recently confirmed by four members of the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd[2001] 1 AC 518, at 522, 563, 575and 580. The fifth Law Lord, Lord Goff was, at 538-539, 544, more skeptical,

suggesting that it was an extraordinary defect in the law that B should have noremedy for common law damages against A.

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(b) Specific Performance in Equity

Unlike common law damages, specific performance will not always be granted to aplaintiff upon proof of a breach of contract. There are various grounds upon which a

court will refuse specific performance. A particularly important one in the presentcontext is that the remedy will be refused if common law damages would be anadequate remedy. The critical decision in this respect isBeswick v Beswick[1968] AC58. From this case set out:

The facts

The issue that had to be determined by the House of Lords

The decision and reasoning of the House of Lords as to why damages were aninadequate remedy on the facts of the case?

See also Coulls, at 503, per Windeyer J.

4. The Case of Trident General Insurance v McNiece Bros

The most significant High Court decision on privity has been Trident GeneralInsurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. From this case setout:

The facts

The different views on the status of the doctrine of privity set out by the judges

of the High Court. What reasons did Mason CJ & Wilson J give for their radical approach to

privity and how did they compare and contrast with those of the other radicalapproach given by Toohey J?

What was the approach of the conservative judges, Brennan, Deane &Dawson JJ to the status of privity?

To which of the above two approaches does the judgment of Gaudron Jbelong?

In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363,Gummow J, after a long analysis of Trident, concluded, at 368, with the followingobservation:

At best ... there is support by three only of their Honours for theproposition ... that the old rules do not apply in their full vigour.

His Honour was, of course, referring to Mason CJ, Wilson, Toohey JJ.

5. General Law Exceptions to the Doctrine of Privity

There are a number of general law principles which enable a third party, such as C inour example, to overcome the doctrine of privity. Because they rely upon establishing

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the elements of other established legal doctrines and institutions, they are not trueexceptions. Rather they constitute means of circumventing the doctrine of privity

because these other legal principles apply on the facts of the given case. Some of thekey exceptions are discussed below.

(a) Agency

The rule here is that if one of the contracting parties contracts as an agent, then eitherthe agent or the principal, but not both, can sue to enforce the contract. In ourexample, if B is Cs agent then either B or C can enforce the contract against A. Inthese cases it is immaterial as to whether A knew that B was Cs agent.

A particular situation where agency principles arise is with contracts for the carriageof goods. Typically the situation will be where a carrier includes in the contract anexclusion clause and the exclusion clause is expressed to be for the benefit of not onlythe carrier but third parties that might be engaged by the carrier for the purpose of

transporting the goods. A common example in the cases is in shipping contracts,where the third party is the stevedore who unloads the goods at the port of destination.

In such cases, can the stevedore rely on the benefit of the exclusion clause when thestevedore causes damage to the goods? See elements that have to be satisfied in

Midland Silicones Ltd v Scruttons [1962] AC 446, at 474, per Lord Reid.

Originally these principles were only applied to contracts for carriage of goods by sea.However, they have been applied to road carriage cases: Life Savers (Australasia) Pty

Ltd v Frigmobile Pty Ltd[1983] 1 NSWLR 431. Presumably they would also apply tocontracts for carriage of goods by rail or air.

It may even be the case that these principles could apply to exclusion clauses in anycontext where it is intended to extend their protection to third parties.

An illustration of the application of the principles is inNew Zealand Shipping Co v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. From this case set out:

The facts

The issue that had to be determined by the Privy Council

The decision and reasoning of the Privy Council as to how the elements of

Midland Silicones were satisfied in this case.

In The Eurymedon, the close relationship between the carrier and the third party wascrucial to establishing the third element in Midland Silicones. It now appears that ifthe third party simply pleads the exclusion emption when sued for damages that will

be enough:Life Savers v Frigmobile.

If all the elements in Midland Silicones are met a contract arises between the owner ofthe goods and the third party. There is, thus, no privity issue. The third party becomesa contracting party in a later contract that was anticipated by the principal contract

between the cargo owner and the carrier. In this respect inHomburg Houtimport BV v

Agrosin Private Ltd (The Starsin) [2003] 2 All ER 785, at 851-852, Lord Millett said:

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It is well established by the authorities that the Himalaya clause has theeffect of bringing into being a separate or collateral contract between thecargo owner and a third party, usually an independent contractor such as astevedore, under which the third party enjoys exemption from liability tothe cargo owner. They also establish that the contract is a unilateral or 'if'

contract by which the third party undertakes no obligation to the cargoowner of any kind, but the cargo owner promises that if the third partydoes anything in the course of its employment which damages the cargo itwill have the benefit of the protective provisions of the clause. ... Such acontract is a promise for an act, not a promise for a promise. If in thecourse of its employment the third party performs an act in relation to thegoods, which it is under no obligation to the cargo owner to perform, itwill at the one and same time bring the contract with the cargo owner intoexistence and supply the consideration for the cargo owner's promise ofexemption from liability.

In relation to the contract between the owner of the goods and the third party LordMillet went on to say, at 853:

Such a contract cannot properly be characterised as a contract of carriage.It is rather a contract of exemption which is ancillary or collateral to othercontractual arrangements (the time charter and the bill of lading) whichwere necessary to achieve the carriage of the goods on the chosen vessel.

(b) Trusts

The law of trusts can enable a third party beneficiary to initiate action that willenforce the promisors obligation. Using the above example, if B had contracted withA in the capacity of trustee for C, C as beneficiary under the trust has enforceablerights. These rights arise because the law of trusts gives a beneficiary certain rightsagainst a trustee.

In the context of privity, if C is a beneficiary under a trust, C can bring an actionagainst B, the trustee, that has the effect of compelling B to sue A for breach ofcontract. In formal procedural terms C sues in an action in which B and A are joinedas defendants.

The use of trust law here does not give rise, in the strict sense, to an exception to thedoctrine of privity. In conceptual terms, the action against A is pursued by B, albeit atCs insistence.

For the trust relationship to arise 2 points need to be examined.

First, for a trust to exist their must be property that is held on trust. There can be notrust without a trustee holding property on trust for the beneficiary. The law a trustshas a broad and flexible definition of property. In this case the property is the promisemade by the promisor. In other words, the contract between A and B, it is the promisemade by A to B that is held on trust by B for C.

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Second, for the trust to arise in this context, it must be established that there is anintention, at the time of the contract between A and B, that B was contracting in thecapacity of trustee. On intention in this context see Trident, at 149, per Deane J.

In ascertaining whether the intention is present, a court will look to the language in

the contract, the nature of the transaction and relevant circumstances attending therelationship between the parties: Winterton Constructions v Hambros at 370. Certaintypes of contracts may be more readily amenable to finding a trust intention thanothers.

Could a trust be found in the context ofTrident? See Tridentat 148, per Deane and at155-157, per Dawson J. What were the reasons why Deane J found in favour ofMcNiece Bros on the basis of trusts but Dawson J did not?

When the trust exception is pursued and B sues for damages, the measure of damagesthat is recovered reflect the loss to C, the beneficiary of the trust. The damages that

are recovered are held by B on trust for C:Lloyds v Harper(1880) LR 16 ChD 290;Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175.

(c) Estoppel

Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR387, a third party may be able to seek relief against a promisor on the basis of

promissory estoppel principles. To succeed the third party would need to establish theelements of promissory estoppel. See Trident, at 145, per Deane J.

In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it was likely thatestoppel could be established on the facts of the case, but it was not necessary forthem to determine the issue on the basis that they had decided the case on othergrounds.

(d) Unjust Enrichment

When we examine the remedy ofquantum meruitlater in this course, we shall see thatthe principle of unjust enrichment is the principle that underpins the remedy. Theessence of the principle is that it requires a defendant to make fair and just restitutionderived at the expense of a plaintiff: Pavey & Matthews Pty Ltd v Paul(1987) 162

CLR 221 at 256-257, per Deane J.

In Trident, Deane J, at 145-146, indicated that the principle could possibly be thebasis for a third party to seek relief. However, it was Gaudron J, especially at 176, inTrident who based her decision in favour of McNiece Bros on the basis of the

principle of unjust enrichment.

The action based upon unjust enrichment is not based on the contract but independentof it. However, usually it will correspond in content and duration with the promisorsobligation.

6. Statutory Exceptions to the Doctrine of Privity

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Insurance Contracts Act1985 (Cth), s. 48Bills of Exchange Act1909 (Cth), ss. 36-43Cheques Act1986 (Cth), s. 73

Motor Vehicles (Third Party Insurance) Act1942 (NSW), s. 10(7)

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Doctrine of Privity of contract

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