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.
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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