Thursday, 18 December 2014

DOCTRINE OF PRIVITY




 Introduction 

 
The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it. Therefore, as a general rule, only parties to a contract can;
                          -          acquire rights and obligations under it; or
                          -          can sue and be sued on it.
For example a contract between A and B cannot impose obligations on C. Similarly, a Contract between A and B cannot be enforced by C.
The doctrine of privity was recognized and enforced in the case of Tweddle v Atkinson. In this case, the father of a bride promised the father of the groom to pay the groom (plaintiff) a sum of money upon marriage. However, before making his payment, the bride’s father died and his estate refused to honor hi promise. The plaintiff sued for money but failed on the ground that, although the contract had been made for his benefit, he was not a contracting party.
Similarly, in Dunlop Tyre Co v Selfridge [1915] AC 847 - The plaintiffs sold tyres to Dew & Co, wholesale distributors, on terms that Dew would obtain an undertaking from retailers that they should not sell below the plaintiffs' list price. Dew sold some of the tyres to the defendants, who retailed them below list price. The plaintiffs sought an injunction and damages. The action failed because although there was a contract between the defendants and Dew, the plaintiffs were not a party to it and "only a person who is a party to a contract can sue on it," (per Lord Haldane).

Exceptions

Strict application of the doctrine can give rise to harsh results, particularly where a contract is intended to benefit a third party and a third party relies upon this. Therefore, some exceptions have emerged to avoid or limit those harsh results.

                       a)      Agency

An agent may contract on behalf of his principal with a third party and may form a binding agreement between the principal and the third party.

                      b)     Trusts

A trust is an equitable obligation to hold property on behalf of another. Gregory and Parker v Willimans 1817; P owed money to G and W. He agreed with W to transfer his property to W if W would pay his (P's) debt to G. The property was transferred, but W refused to pay G. G could not sue on the contract between P and W. It was held  that P could be regarded as a trustee for G, and G would therefore bring an action jointly with P.

                     c)      Restrictive covenants

Restrictive covenants may, if certain conditions are satisfied, run with the land and bind subsequent purchasers for the benefit of adjoining owners. in Tulk v Moxhay (1848) 2 Ph 774, the plaintiff who owned several houses in Leicester Square sold the garden in the centre to Elms, who covenanted that he would keep the gardens and railings in their present condition and continue to allow individuals to use the gardens. The land was sold to the defendants who knew of the restriction contained in the contract between the plaintiff and Elms. The defendant announced that he was going to build on the land, and the plaintiff, who still owned several adjacent houses, sought an injunction to restrain him from doing so. It was held that the covenant would be enforced in equity against all subsequent purchasers with notice.

                 d)     Collateral contracts

A collateral contract is written or oral agreement associated as a second, or side contract made between the original parties, or between a third party and an original party.

 This typically occurs before or at the same time the first or main contract is made. A collateral contract is independent and separate from the primary contract. In Shanklin Pier Ltd v Detel Products Ltd 1951: Shanklin Pier contracted with painters to have the pier repainted using products from Detel. Detel had already communicated their paint's suitability to the claimants. The paint was not suitable and Shanklin took action against Detel Products even though their contract was with the painters. It was held that a collateral contract existed between Shanklin and Detel. Detel had confirmed the paint's suitability in return for Shanklin requiring the painters to use it.


                  e)      Statutory exceptions

Certain exceptions to the doctrine of privity have been created by statute, including price maintenance agreements; and certain contracts of insurance enforceable in favour of third parties. For example, under s148(4) of the Road Traffic Act 1972, an injured party may recover compensation from an insurance company once he has obtained judgment against the insured person.

Additionally, the Contract (Rights of Third Parties) Act 1999 allows a person who is not a party to a contract to enforce it so long as the contract was for his benefit and he was expressly identified by name or description.

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