Elements in a Contract 28
The privity rule applies to third parties in a contract.
Third parties in a contract are defined as persons who have not provided any
consideration but stand to derive some benefit from the contract. In Beswick v
Beswick (1968) the plaintiff’s husband sold a business to his nephew with the
stipulation that an annual income be made to him, and upon his death to his
wife.
The nephew failed to make the stipulated payments, following
his uncle’s death, as agreed, and the plaintiff sued. Under normal circumstances
the plaintiff would not be able to sue because she was not privy to the
contract but because she was also the executor of the deceased’s estate, she
was able to bring the matter before the courts.
The Law Commission Report 1996 – Privity of Contract,
highlighted some of the difficulties caused by the rule especially in insurance
contracts and other contracts that sought to confer rights on third parties
like construction contracts and in such instances the aggrieved party had to
commence an action in tort as opposed to suing for a breach of contract to
obtain a remedy.
Subsequently
the Contracts (Rights of Third Parties Act) 1999 was enacted and it diminished
the application or the scope of the privity rule. Section 1 (1) - Subject to
the provisions of this Act, a person who is not a party to a contract (a “third
party”) may in his own right enforce a term of the contract if -
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a
benefit on him
Section 1 (2) - Subsection (1) (b) does not apply if on a
proper construction of the contract it appears that the parties did not intend
the term to be enforceable by the third party.
It is however worth knowing the privity rule because a lot
of cases in contract law were decided prior to 1999 and at a time when the
privity rule was very much alive. The basis of the rule is straightforward
enough i.e. one cannot hope to obtain some form of benefit under a contract
unless one has provided some form of consideration, which sometimes left
parties who intended to confer benefits on their next of kin for example a spouse
or their children, out on a limb.
The Contracts (Rights of Third Parties Act) 1999 has however
remedied any shortcomings that may result from strict application of the
privity rule and it paves the way for more equitable outcomes.
In Tweddle v. Atkinson (1861) the parents of the bride and
groom agreed to pay a certain sum of money to the groom upon his marriage to
the bride. The bride’s father died before the payment could be made and the
groom brought a claim against his estate. The court ruled that because
consideration did not move from him, he was unable to claim i.e. he was a third
party to the contract and therefore he was not entitled to claim.
In Scruttons Ltd v Midland Silicones Ltd (1962) the carriers
(a shipping company) and the plaintiffs entered into a contract to transport
drums of chemicals. The contract contained an exclusion clause which limited
liability for any damage incurred to the amount of £179 per drum. While the
stevedores were loading the drums onto the ship one of the drums incurred
damage in excess of £179 and the plaintiffs sued for the full extent of the
damage. The defendants (the stevedores) claimed that the damage should only be
limited to £179 but the court found in favor of the plaintiff. Applying the
privity rule it was held that the defendants could not limit their liability to
the amount stated in the contract because they were not privy to the contract.
Despite the application of the rule prior to the enactment
of the Contracts (Rights of Third Parties Act) 1999, the courts have displayed
a willingness, depending on the facts of the case, to depart from the rule.
In Jackson v Horizon Holidays (1975) the plaintiff booked a
holiday with his family abroad based on what had been advertised. When they
arrived at their holiday destination they found that the living accommodations
were nothing like the advertisement and the conditions were unsatisfactory. As
a result, the plaintiff sued for compensation not only for himself but also for
his wife and family. It was held that the plaintiff was not only entitled to
recover for the disappointment that he’d suffered but he was also able to
recover for the disappointed incurred by his wife and children, despite the
fact that the wife and children were not privy to the contract.
Copyright © 2019 by Dyarne Ward and Kathiresan
Ramachanderam
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