Privity

The Privity of Contract Doctrine

The privity of contract doctrine dictates that only persons who are parties to a contract are entitled to take action to enforce it.

A classic authority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co

Facts: D entered into an agreement with its wholesale W, to sell tyres. W sold the tyres to the retailer S, the defendants. W agreed with D that it could not sell tyres below a certain price. In retuire, D gave W a 30% discount on its products. However, S decided to sell discunted tyres. D sued for breach of contract.
Held: Viscount Haldane said: “My Lords, in the law of England certain principles are fundamental. One is that only a person who was party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio [third party right of action] arising by way of contract.”

A person who stands to gain a benefit from the contract (a third party beneficiary) is not entitled to take any enforcement action if he or she is denied the promised benefit.

This is seen in Coulls v Bagot’s Executor and Trustee Co Ltd

Barwick Cj said, “It must be accepted that, according to our law, a person not a party to the contract may not himself sue upon it so as directly to enforce its obligations….Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another.”

Privity and its relationship to the Doctrine of Consideration

The rule of consideration is it must move from a promisee, or, in other words, that only a person who has provided consideration can enforce a promise. There is a distinction between the privity and consideration rules.

Coulls v Bagot’s Executor and Trustee Co Ltd

Is there a useful distinction between denying a right of action to a person because no promise was made to him AND denying a right to action to a person to whom a promise was made because no consideration for it moved from him?

His Honour noted that a third party beneficiary was said to fail in some cases because he was not the promisee and in others because he had not furnished consideration.

The formula “consideration must move from the promisee” assumes satisfaction of the privity requirements; it is only to the promisee that the requirement of consideration need be applied.

Also

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)

The majority of the High Court of Australia recently decided that a company which was intended to be benefited by an insurance policy could, even though it was not a party to the contract of insurance and provided no consideration for it, recover from the insurance company the indemnity promised in the policy.

This approach, were it to be established, would be a direct modification of the doctrine of privity and, indeed, could hardly in principle be limited to contract of insurance. Since the likely impact of the Trident’s decision cannot be understood without an appreciation of the privity doctrine.

Remedies against a Promisor in Breach of Obligations to a Third Party
(Legal effect of contracts for the benefit of a Third Party)

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

Damages at Common Law

Because the remedy of common law damages for breach of contract will always be granted to a plaintiff. Damages seek to compensate the plaintiff for the loss 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 award of substantial damages is made in favour of the plaintiff.

In special circumstances it may be that B will suffer a real loss, in which case substantial damages that reflect the value of B’s loss – not C’s loss - will be awarded. This seen in,

Coulls v Bagot’s Executor and Trustee Co Ltd

“Yet I do not see why, if A sued B for a breach of it, he must get no more than nominal damages. If C were A’s creditor, and the $500 was to be paid to discharge A’s debt, then B’s failure to pay it would cause A more than nominal damage. I think that, in accordance with the ordinary rules for the assessment of damages for breach of contract, they could be substantial. They would not necessarily be $500, they could I think be less, or more.”

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

The fact that B cannot sue to recover as damages the measure of C’s loss from A’s breach of contract was recently confirmed by four members of the House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd [2001]. 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 no remedy for common law damages against A.

Specific Performance in Equity

Unlike common law damages, specific performance will not always be granted to a plaintiff upon proof of a breach of contract. The inadequacy of damages as a remedy for breach of a contract to pay money to a third party suggests that specific performance is an appropriate remedy for such a breach.

The Courts will refuse specific performance if common law damages would be an adequate remedy. This critical decision in this respect is,

Beswick v Beswick

Peter Beswick sold his business as a coal merchant in consideration of his nephew’s promise to pay, after his uncle’s dead a weekly amount to his aunt for her life. The aunt was not a part to the agreement. . After her husband’s death she brought an action against the nephew. She did so in 2 capacities: on behalf of the estate – as administratix and in her personal capacity.

Although it was held that she was not entitled to enforce the contract as third party beneficiary, she was, in her capacity as administratix, entitled to an order for specific performance of the nephew’s undertaking and since this had been to pay money to her own right, she benefited in fact in her own capacity as third party beneficiary.

Lord Reid held that, “the proper way of enforcing the provision is to order specific performance, that would produce a just result”

Strangers to a contract cannot sue on it, but an executer of a party to a contract can.

If the promise obtains an order for specific performance, this will give the third party beneficiary the benefit, which he or she contemplated getting from the contract.

[Important]
The decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)

Facts: Blue Circle entered into a Contract of Insurance with Trident. Subsequently to this fact, McNiece became the principal contractor for construction work being carried at Blue Circle’s plant. The policy identified “all contractor and subcontractors “as among the assured”. A worker was seriously injured at the construction site and recovered judgement against McNiece. McNiece claimed indemnity under the policy but Trident denied liability because McNiece was not a contractor of Blue Circle at the time the policy was taken out.

Held: The NSW Court of Appeal held that McNiece could recover on the ground that at common law a beneficiary under a Contract of liability insurance can sue on the policy even though it’s not a party to the Contract and provides no consideration for it. Trident appealed to the HC.
Issue: Whether McNiece can recover not being privy to the contract?
Held: By 5 of the 7 judges held that McNeice could recover. Insurance companies are exceptions to the privty rule.

Mason CJ and Wilson J in their joint judgment concluded that “it is the responsibility of this court to reconsider in appropriate cases of common law rule which operates unsatisfactorily and unjustly and that the principled development of the law required that McNiece be entitled to succeed

Toohey also held that McNiece could recover however his decision was based in narrow terms (in certain insurance situations). Even though, he recognized the implications of this decision for the doctrine of privity.

Per Deane J, the policy created a trust in the contractors favour of the benefit of the insurer’s promise to indemnify it. Deane J’s viewed the prima facie effect of the policy here was to create a trust for McNiece and it was difficult to conceive of circumstances, which would negative or modify that conclusion.

Gaudron allowed McNiece to recover on a principle of unjust enrichment. Her Honour held that a promisor who has accepted consideration for a promise to benefit a third party is unjustly enriched to the extent that the promise is unfulfilled and the non-fulfilment does not attract proportional legal consequences.

Brennan and Dawson considered that this wasn’t an appropriate situation for the HC to overturn well-established doctrine. Both thought that the path of future development to avoid any injustice caused by the doctrine lay in the further development of other principles such as the law of trust, estoppel and damages.

In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991)

Gummow J, after a long analysis of Trident, concluded, at 368, with the following observation:
At best ... there is support by three only of their Honours for the proposition ... that the old rules do not apply in their full vigour.His Honour was, of course, referring to Mason CJ, Wilson, Toohey JJ

General law “exception” to the Doctrine of Privity.

There is a number of general law principles of “exceptions”, which enable a third party to overcome the doctrine of privity. Some of the key exceptions are discussed below.

Agency - The privity rule does not apply to the third party if they can show that one of the contracting parties was acting as his or her agent.

The general rule is the agent contracts “on behalf of” the principal. The rule here is that if one of the contracting parties’ contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract.

It is immaterial as to whether A knew that B was C’s agent. An undisclosed principal is a person whom another acts as agent but whose existence and identity is not disclosed to the person with whom the agent is dealing. The doctrine of the undisclosed principal is stated in,

Tehran-Europe Co Ltd v S T Belton (Tractors) Ltd

“It is a well established rule of English law that an undisclosed principal can sue and be sued upon a contract, even though his name and even his existence is undisclosed”

The special case of Third Parties and the Benefit of Exclusion clauses

A particular situation where agency principles arise is with contracts for the carriage of goods.

Typically the situation will be where a carrier includes in the contract an exclusion clause and the exclusion clause is expressed to be for the benefit of not only the carrier but third parties that might be engaged by the carrier for the purpose of transporting the goods.

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

*Bill of lading attempted to exclude or limit liability in respect of the cargo, not only of the immediate issuer of the bill (ship owner or carrier), but of other persons involved in their carriage as well. This type of bill is seen in,

Elder Demper & Co v Paterson Zochonis & Co

“On behalf of and as the agents of the charterers, and so can claim the same protection as their principals”. In such cases, can the stevedore rely on the benefit of the exclusion clause when the stevedore causes damage to the goods?

The elements that have to be satisfied are seen in, Midland Silicones Ltd v Scruttons [1962]

Facts: The privity rule denied the protection of an exclusion clause in a bill of lading to a stevedore. The bill was signed on behalf of the ship owner and provided for a monetary ceiling on the liability of the ‘carrier’, which was defined in standard form to include ‘the owner or the charterer who enters into a contract of carriage with a shipper’.
The House of Lords held that the term ‘carrier’ did not include the stevedores, that the bill did not, expressily or by implication, purport to extend the benefit of the limitation on liability provision to stevedores, and that the carrier did not contract as agent for the stevedores.

However, Lord Reid held elements that need to be established for the agency argument:

“I can see a possibility of the agency argument if

(first) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability,

(secondly) the bill of lading makes it clear that the carrier, in addition to contracting for this provisions on his own behalf, is also contracting as agent for the stevedore that these provisions should apply to the stevedore,

(thirdly) the carrier has authority from the stevedore to do that, or perhaps later ratification (approve) by the stevedore would suffice (be adequate), and

(fourthly) that any difficulties about consideration moving from the stevedore were overcome”

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

An illustration of the application of the principles is in, New Zealand Shipping Co v A M Satterthwaite & Co Ltd (The Eurymedon)

Facts: A drilling machine was shipped from Liverpool to Wellington (NZ) under a bill of lading which incorporated the Hague Rules in the schedule to the Carriage of Goods by Se Act 1924. The bill of lading contained a special limitation clause, which was expressed to be available to, and made on behalf of, agents of the carrier. Under article II rule 6 of the Hague Rules, the carrier was discharged from all liability for loss or damage if suit was not brought within one year after delivery. The machine was damaged during unloading as a result of a stevedore’s negligence.

The plaintiff (respondent before the privy council) brought an action after the lapse of one year against the stevedore for negligence. The stevedore pleaded the time limit in the bill of lading. In the Sup Court of NZ, Beattie gave judgement for the defendant stevedore. The Court of Appeal of NZ allowed the consignee’s (Satterthwaite) appeal. The stevedore appealed to the Privy Council.

Issue: Whether the stevedore can relied on the clause not being privy to the contract?
* A stevedore is a person who works at loading or unloading a ship. A commercial stevedoring company is one that is involved in shipping logistics between sea and land transport.

Held: Appeal allowed (by majority) the bill clearly purported to protect the stevedore but was he a contracting party? Lord Wilberforce (for the majority) “the bill of lading brought into existence a bargain initially unilateral but capable of becoming mutual between the shipper and the appellant (stevedore), made through the carrier as agent. This became a full contract when the appellant performed services by discharging the goods. The performance of these services for the benefit of the shipper was the consideration for the agreement by the shipper that the appellant should have the benefit of the exemptions and limitations contained in the bill of lading”.

Viscount Dilhorn and Lord Simon of Glaisdale accepted that a third party could be protected by a clause appropriately framed.

In The Eurymedon, the close relationship between the carrier and the third party was crucial to establishing the third element (authority by a stevedore) in Midland Silicones. It now appears that if the third party simply pleads the exclusion exemption when sued for damages that will be enough: Life Savers v Frigmobile.

The High Court and the Privity Council, following The Eurymedon, held a stevedore entitled to the benefit of a time bar clause bar clause in the bill of lading issued by the charterer. The Midland Silicones test that was applied in The Eurymedon case is applied in Australia by Barwick J in,

Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The New York Star)

Facts: 37 cartons of razor blades had been shipped on the New York Star from Canada to Sydney, where the stevedore unloaded them and stored them in its wharf side shed, from which 33 cartons were stolen. The shipment was covered by a bill of lading issued by the charterer to, and accepted by, the consignor to, and accepted by, the consignor, and transmitted to and accepted by the plaintiff consignee by the time of the loss. Clause 2 of the bill was identical to the clause in The Eurymedon and as in the case there was a one-year time bar provision. Further, as in that case, the stevedore had for years acted as stevedore in the discharge of the carrier’s ships in the port of discharge. It knew the contents of the carrier’s form of bill of lading for shipments to Australia.

Issue: Was the stevedore entitled to such protection as the time bar clause offered? AND if so, did that clause properly construed, cover the facts?

Held: The High Court by three to two majorities answered ‘Yes’. The Himilaya Clause clearly satisfied the first and second of Lord Reid’s requirements in Midland Silicones case, and according to their Honours forming the majority on the first issue, Barwick CJ, Mason and Jacobs JJ, the facts supported an inference of fact that the carrier had contracted with the stevedore’s authority

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]. Presumably they would also apply to contracts for carriage of goods by rail or air.

In relation to Lord Rieds forth condition, Mason and Jacobs JJ thought that the relevant provisions of the bill constituted an offer capable of acceptance and that when the stevedore, knowing of it and of its conditions, performed its conditions by unloading, it accepted that offer and provided the consideration for it.

By contracts Barwick CJ thought that the provisions constituted at the outset an agreement with the stevedore as distinct form an offer to it, for which the stevedore gave consideration by unloading.

On this approach “the performance of the contemplated act both supplies the occasion for those conditions to operate and the consideration which makes the arrangement contractual.

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]

Presumably they would also apply to contracts for carriage of goods by rail or air.

Hutley JA’s observed in this case that, “The form of contract here used, patterned on provisions in favour of stevedores and other subcontractors in bill of ladings, strains doctrines of privity of contract and consideration but these difficult views have been overcome”

If all the elements in Midland Silicones are met a contract arises between the owner of the goods and the third party. There is, thus, no privity issue. The third party becomes a contracting party in a later contract that was anticipated by the principal (acting agent) contract between the cargo owner and the carrier. In this respect in, Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003]

In relation to the contract between the owner of the goods and the third party Lord Millet went on to say:

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 other contractual arrangements (the time charter and the bill of lading), which were necessary to achieve the carriage of the goods on the chosen vessel.

Trust - The law of trusts can enable a third party beneficiary to initiate action that will enforce the promisor’s obligation.
OR
The effect of a trust is to impose, inequity, a fiduciary duty upon the promisee to exercise their contractual rights for the benefit of the third party. The third party beneficiary will thus have an equitable right to force the promisee to enforce the contract.

For the trust relationship/principle to arise 2 points need to be examined:
For a trust to exist there must be property that is held on trust. There can be no trust without a trustee holding property on trust for the beneficiary. The law of trust has a broad and flexible definition of property. In this case the property is the promise made by the promisor.

1. It must be established that there was an intention, at the time of the contract between A and B that B was contracting in the capacity of trustee or the promisee intended to create trust.

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 the relationship between the parties.

Could a trust be found in the context of, Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)

Issue: What were the reasons why Deane J found in favour of McNiece Bros on the basis of trusts?

In trident, Deane J explained when the creation of a trust will be inferred: “The requisite intention should be inferred if it clearly appears that it was the intention of the promisee that the third party should himself be entitled to insist on performance of the promise and receipt of the benefit and it trust is, in the circumstances, the appropriate legal mechanism for giving effect to that intention”

“A fortiori, equity’s requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee”

“The terms of the contract itself will, in the context of the nature of insurance, ordinarily manifest an intention to the effect that each non-party assured is to be fully entitled to the benefit of the promisor’s promise to indemnify him, that Is to say, that the promise should hold the chose in an action constituted by the right to enforce that promise upon trust for the relevant non-party assured. The intention so manifested will commonly be a joint intention of promisor and promise. It would suffice, however, that it be the intention of the promise alone”

When the trust exception is pursued and B sues for damages, the measure of damages that is recovered reflects the loss to C, the beneficiary of the trust. The damages that are recovered are held by B on trust for C: Eslea Holdings Ltd v Butts (1986).

Estoppel

Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988), a third party may be able to seek relief against a promisor on the basis of promissory equitable principles. To succeed the third party would need to establish the elements of equitable estoppel

The requirement of estoppel need to be made out by the third party relying on the assumption induced by the party to the contract that a benefit would be conferred upon them.

Equitable estoppel will prevent injustice arising form the party relying to his or her detriment on an expected benefit or entitlement arising from a contract to which he or she is not a party, provided the promisor can be said to have induced or encouraged the adoption of the expectation.

In Trident, Mason CJ, Wilson J, were of the view that it was likely that estoppel could be established on the facts of the case, but it was not necessary for them to determine the issue on the basis that they had decided the case on other grounds:

“In the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind”

“This argument has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its subcontractors. It stands to reason that many subcontractors will assume that such an insurance is an effective indemnity in their favour and that they will refrain from making their own arrangements for insurance on that footing.”

Unjust Enrichment

Where:
* A promisor accepts consideration for the promise to benefit a third party
* The promisor is unjustly enriched by this consideration at the expense of the third party
* The promise is not fulfilled

In tridents case, the elements of unjust enrichment are made out on the facts, Per Gaudron J:

* Trident received money from Blue Circle for the promise to indemnify Blue Circle and Third Parties
* Trident has kept the money
* Trident has not performed their side of the promise

Trident cannot be allowed to keep the premium money and not perform its side of the bargain; to do so would be to allow it to be unjustly enriched.
The essence of the unjust enrichment principle is that it requires a defendant ‘to make fair and just restitution derived at the expense of a plaintiff’: Pavey & Matthews Pty Ltd v Paul (1987).

In Trident, Deane J, at 145-146, indicated that the principle could possibly be the basis for a third party to seek relief.

However, it was Gaudron J, especially at 176, in Trident who based her decision in favour of McNiece Bros on the basis of the principle of unjust enrichment. (As seen above)
The only way to rectify the unjust enrichment is to permit the third party to enforce the promise. However, by enforcing the promise (rather than refunding the consideration), the court is really giving effect to an expectation-based remedy, which is typically not the concern of restitution (Pavey v Matthews).

Statutory Exceptions to the Doctrine of Privity

- Insurance Contracts Act 1985 (Cth), s. 48

This legislation provides for enforecement of insurance policies by persons other than the proponent and the insurer.

-Bills of Exchange Act 1909 (Cth), ss. 36-43
-Cheques Act 1986 (Cth), s. 73
-Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)
Legislation providing that compulsory third party motor vehicle insurance shall indemnify no-party drivers.