This latin term was not recognised in English contract law a long time ago. The privity of contract is a ... mistake or misrepresentation. But, because the question ...
Contract Law Essay 2012 : Privity of Contract
PART I: INTRODUCTION Jus quaesitum tertio means a right vested in, or acquired by, a third person arising by way of contract.1 This latin term was not recognised in English contract law a long time ago. The privity of contract is a significant issue and worth researching since it is a very live issue and is a crucial premise in the English law of contract. The initial research showed that the issue of interpretation and application of this the doctrine of privity has been one of much controversy and difficulty in English law and has been raised by several important cases heard in the England courts as well as in other jurisdictions. For years, it was recommended by judges, lawyers and academics that this privity of contract should be reformed. As a result, it has been radically reformed by the Contracts (Rights of Third Parties) Act 1999 which provides parties to contract with a method of avoiding the difficulties of privity of contract. In constructing the doctrine of privity, this doctrine is simple to understand and we have to know what necessary elements to form a contract are. For instant, an offer and acceptance, consideration, terms of contract and vitiating elements of contract such as duress, mistake or misrepresentation. But, because the question involves the doctrine of privity only, discussing these elements except consideration’s issue would be irrelevant in this essay. The Contracts (Rights of Third Parties) Act 1999 (hereinafter known as the 1999 Act) has made a vital change in elements of law of contract in that it enacts a substantial exceptions to the doctrine of privity which had long been under criticisms and controversial part of English contract law. This doctrine has two distinct general rules. Firstly, the first rule has not been attacked by the 1999 Act where at common law a third party cannot be held responsible by a contract in which he is not a party to or unaware of it. However, this first rule is not controversial at all. This essay concerns with the second rule which has caused so many problems where we will discover what the problems are. The second rule is that a person who is not part of the contract could not sue upon it in order to gain promised performance, even though the contract entered into has benefited him. This second rule of privity doctrine of contract has been reformed by the 1999 Act.
1
Trayner’s Latin Maxims ( 4th edn, First Indian Reprint 1997, Universal Law Publishing Co Pvt Ltd)
pg. 1
Contract Law Essay 2012 : Privity of Contract
PART II: PRIVITY DOCTRINE AND CONSIDERATION A starting point will therefore be an analysis of the content and essence of the relationship between the doctrine of privity and the doctrine of consideration because historically the development of privity doctrine is very closely connected with the doctrine of consideration. In this part of essay, we shall examine cases which established the doctrine of privity prior the passing of 1999 Act. As far as the second rule is concerned, before the year of 1861, it was found that third parties were entitled to sue upon a contract they entered into. As in the case of Dutton v Poole2 where it was held that the daughter might sue defendant upon his promise on where the defendant’s father being about to cut down timber to raise a portion for his daughter, defendant, in consideration that he would forbear to do so, promised his father to pay her 1,000 pounds. But the development of this progress was halted by two principle cases of privity doctrine. Firstly, at common law a party i.e third party that not to a contract cannot get benefit or receive burden from real parties in a contract as describe in the case of Tweddle v Atkinson3. In this case, both John Tweddle and William Guy entered into an agreement where each promised to pay certain amount of money to William Tweddle on the event of William Tweddle’s marriage to William Guy’s daughter. However, William Guy failed to pay the promised amount and after he passed away, William Tweddle sued the executor of the deceased for the agreed money. It was held that the claimant had no such a cause of action to sue for the promised amount because he did not provide any consideration for the defendant’s promise. Indeed, Wightman, Crompton and Blackburn JJ agreed that a stranger to the consideration of a contract cannot sue upon it. The second landmark case is Dunlop Pneumatic Tyre Company Ltd v Selfridge4. In this case the claimants had tried to operate a price-fixing ring. For this purpose they obtained a promise from dealers called Dew & Co that they in turn would extract a written promise that created obligations from any third party to whom they sold the claimant’s products and the third party would not sell at a price lower than a retail price maintenance scheme. The defendants bought the tyres from Dew and gave the required written promise. But, the defendants had sold the tyres for a price less than the list price. As a consequence, the claimant sought for an injunction and damages against the defendants. He argued that the 2
(1678) 1 Vent 332; 86 ER 215. (1861) 1 B & S 393; 121 ER 762. 4 [1915] AC 847 (HL). 3
pg. 2
Contract Law Essay 2012 : Privity of Contract
Dew had contracted with the defendants as Dunlop’s agent. The House of Lords by majority held that the action failed because Dunlop provided no consideration for the promise of Selfridge. In powerful words of Lord Haldane, it was a fundamental principle of English law that ‘only a person who is a party to a contract can sue on it’ and ‘consideration must be provided if a person is to be able to enforce a contract’. The consideration had been provided by Dew. These two cases both present that there is a very close relationship between the privity doctrine and consideration. In assessing this, there is no difference between these two because consideration must move from the promisee. Then, privity becomes swallowed up in the larger rule that consideration must move from the promisee and any reform of privity it is a essential to take steps that the reform is not nullified by the practical effects of the doctrine of consideration.5
PART III: PRIVITY DOCTRINE AND DIFFICULTIES As describe above, only a party to a contract is privy to the contract. In addition, there are two limbs to privity in English law; only a party to the contract is bound by the contract and only a party to the contract can enforce the contract. It is agree that the first limb is inoffensive. However, the second limb can work an injustice and defeat the intentions of the contracting parties. A number of decisions of the House of Lords dealt the problems to which this doctrine arisen. Illustration for these problems can be seen clearly in Dunlop v Selfridge6 (as discussed above), Scruttons Ltd v Midland Silicones Ltd7 and Beswick v Beswick8. In Scruttons Ltd v Midland Silicones¸9 the claimant entered into an agreement with the carriers for the transportation of drums. The carriers employed the stevedores and later this third party negligently dropped the drum and sought to rely on exclusion clause contained in between the claimant and the carriers and in the contract between themselves and the carriers. The House of Lords refused to grant stevedores for the benefit of an exemption 5
Ewan McKendrick, Contract Law (8th edn, Macmillan 2009) Selfridge (n 3). 7 [1962] AC 446 (HL). 8 [1968] AC 58 (HL). 9 Scruttons (n 7) 6
pg. 3
Contract Law Essay 2012 : Privity of Contract
clause. As a general rule, a stranger to a contract cannot take advantage of its clauses even where the clauses were intended to benefit him. By the same token, in Beswick v Beswick10, an uncle had a contract with his nephew to receive a weekly sum of money to his widow for the rest of her life. As a return, the nephew would control the uncle’s coal business. After the uncle’s death, the nephew refused to pay and the aunt sought a cause of action to enforce the obligation to make the payments to her. The House of Lords agreed that she failed in her action in so far she used her name and she was not privity to the contract. But, she succeed in her capacity as the personal representative of her deceased husband’s estate. The circumstances of this second aspect that the parties in contract intend an obligation to confer to a third party. The denial of this obligation would manifest injustice and commercial inconvenience. As a result of these and similar cases, a called of reform or abolition grew. After gone thorough consideration and consultation, the Law Commission recommended a statutory reform of the privity doctrine by Law Com No. 242, Privity of Contract: Contracts for the Benefit of Third Parties. These recommendations have been implemented in the Contracts (Rights of Third Parties) Act 1999.
PART IV:THE CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 This 1999 Act does not abolish the privity doctrine but allows contracting parties to provide a third party with an enforceable benefit under their contract. The benefit can be either a positive right or a negative right.11 In addition, a third party can enforce a term of the contract in two circumstances: i)
Where the contract expressly provides that he can:12
ii)
Where the terms of the contract purport to confer a benefit upon him and nothing else in the contract denies the purported benefit.13
10
Berswick (n 8). See s 1(6) the 1999 Act where it states that ‘where a term of a contract excludes the term shall be construed as references to his availing himself of the exclusion or limitation’. 12 Section 1(1)(a) states ‘the contract expressly provides that he may’. 13 Section 1(1)(b), states ‘subject to subsection (2), the term purports to confer a benefit on him’, s 1(2) states ‘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. 11
pg. 4
Contract Law Essay 2012 : Privity of Contract
For illustration and application of s 1, it can be shown in cases of: Prudential Assurance Co Ltd v Ayres14 where the Court of Appeal considered the application of this legislation. The Court of Appeal held that it would be ineffective to accomplish that result without making the respondents parties to the deed did not outweigh the conclusion that was what had been intended. So construed, the supplemental deed did not purport to confer any benefit upon the respondents, but rather purported to limit their rights against the individual partners of A&G. Consequently, it provided no defence to appellant’s claim and no question arose as to the operation of the 1999 Act. Moore-Bick LJ said: “I do not think that the partnership's obligations under the lease are affected by the supplemental deed, which does no more than restrict the assets of the partners to which the Prudential is entitled to have recourse in order to satisfy them...For these reasons, I have reached the conclusion that neither the supplemental deed nor the terms of the 1995 Act operate to relieve the respondents from liability under the covenants contained in the licence.”15
iii)
Third party’s right is subject to the other terms of the contract.16 For application of this subsection, the third party need not be identified by name but must be identifiable by description as a member of a class. As can be seen in the case of: Avraamides v Colwill17. Where the Court of Appeal allowed the appeal brought by BTC. While Waller LJ stated that there was a great temptation to find BTC liable because they had taken over the assets of BTC Ltd and agreed with BTC Ltd to accept its liabilities, it could not be done.18
The difficulty lay in applying s 1(3) of the 1999 Act to the case. The subsection, the word ‘expressly’ does not allow a process of implication or construction. A was not mentioned expressly in the transfer agreement, nor was there a class or particular description into which A would expressly fit. Waller LJ said, “The difficulty is that the [s 1 of the 1999 Act] is concerned with the benefit conferred on a third party, and with the identification of that person. The benefit from the obligation to pay liabilities properly incurred would benefit 14
[2008] 1 EGLR 5 (CA). [2008] 1 EGLR 5, p 11 (CA). 16 Section 1(3) states that ‘the third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into. 17 [2006] All ER (D) 167 (Nov) (CA). 18 Ibid para 18. 15
pg. 5
Contract Law Essay 2012 : Privity of Contract
third parties but of a large number of unidentified classes”.19 On top of that, because of the failure to identify the party or parties to be benefited under the transfer agreement, it was doubtful as to whether on a true construction of the transfer agreement there was an intention to confer directly enforceable rights upon third parties and Leveson LJ also agreed on this. This decision provides clarity to this area of the law. It was a careful decision but also one in accordance with the 1999 Act. In the situation of this case, it is doubtful to determine who the parties might be who could be construed as being within the transfer agreement. It would be imprudent, and contrary to the Law Commission’s recommendations, to extend the ambit of the 1999 Act beyond those circumstances in which the parties to a contract had clearly intended to confer an enforceable benefit upon a third party. Act provides an enforceable right to third parties which is given in addition to any right or remedy available at common law.20 a) The effect if this subsection is that it means that existing common law devices to deal with privity remain. And, may well apply in a same situation or to the same factual situation as the Act itself does. b) The Act in other words, supplements rather than replace the common law. Then, as a general rule, a party to a contract can only recover damages for those losses he has suffered. This has meant that in some circumstances, where A contracts with B whereby B will confer a benefit solely upon C, that if B breaches his contract and does not confer a benefit, that: a) C cannot sue as he is a third party; and b) A can sue, but cannot receive substantial damages as she has not suffered any. In these instances the liability of B to pay damages appears to disappear into a black hole. Some of the problems are alleviated by the 1999 Act. These problems remain, however, when there is no identifiable third party (C) at the time A and B contract, it was exactly this situation that the Court of Appeal considered in Offer-Hoar v Larkstore21 where the Court of Appeal held that L had a right to sue T for substantial damage and was not barred from such a right because S had suffered no loss on the ground that it had parted with the site before the
19
Ibid para 19. Section 7(1) of the 1999 Act. 21 [2006] EWCA Civ 1079 (CA). 20
pg. 6
Contract Law Essay 2012 : Privity of Contract
landslide had occurred and before it had assigned its right to L. As what observed from Mummery LJ, para 55, that as this matter was at a preliminary stage that no argument had been heard on the proper measure or quantum of damages, and that this decision only resolved the right to sue for substantial damages. The significance of the decision in this case is that it indicates a strong inclination on the part of courts not to allow a party who has caused a real loss by their breach of contract escape liability for this breach. The case is also significance because this inclination may also indicate that courts will act, where possible, to assist a third party in instances where privity of contract or the rules concerning damage, might act to prevent recovery by the third party. It may be that this decision fulfils the hopes of the Law Commission, put forward in their report that existing common law exceptions to privity should be preserved and also paragraph 5.2 that the Law Commission did not want the proposed legislation which is now 1999 Act to hamper further judicial development of third party rights.
PART V: RIGHT CONFERRED ON THIRD PARTIES AT COMMON LAW As been discussed above, the 1999 Act did not abolish the doctrine of privity. This Act also preserved any rights of the third party would have under the common law. The promisee to the contract can enforce the terms of the contract to confer a benefit upon the third party as in Beswick v Beswick.22 Two difficulties can arise when the enforcement is to be made by the promisee: a) The promisee may be unwilling, or unable, to enforce the contract b) The second difficulty is to find an appropriate remedy for the promisee c) Damages where the general purpose of damages is to put the parties where they would have been but the breach of the contract. Promisee would never receive the money on the first place or the benefit on the first place if it is to be provided to a third party. The promisee is thus no worse off when the contract is breached if they had been performed. 22
Beswick (n 8)
pg. 7
Contract Law Essay 2012 : Privity of Contract
Courts reluctant to recognise that the promisee has a ‘performance interest’ as in Panatown v Alfred McAlpine Construction Ltd23. In the case of Beswick v Beswick24, House of Lords overcame of this difficulty by granted an order for specific performance. While in Radford v DeFroberville25 where High Court said that the promisee’s claim against the promisor for damages was not reduced by the fact that the contract between the two also conferred a benefit upon a third party.
PART VI: CURRENT LAW OF PRIVITY IN MALAYSIA For the purpose of this part, jus quaesitum tertio or rights of third party under a contract does not legislate in any Act of Parliament. The closest Act that shows the mere existence of this rule of privity can be found in the section 2(d) Malaysian Contracts Act 1950 (hereinafter known as the 1950 Act).26 In assessing whether the Privity doctrine applies in Malaysia, the Privy Council dealt with an appeal case from Malaysia in Kepong Prospecting Ltd v Schmidt27. This was the first case that determined whether the doctrine of privity in English contract law could be applied under s 2(d) of 1950 Act. Prior to that, at Federal Court, the Lordships applied the privity doctrine as decided in the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge.28 The Lordships in Privy Council referred to statutory provisions of the s 2(d) together with subsections of s 2 (a),29 (b),30 (c)31 and (e)32. The Lordships agreed that s 2(d) gave a wider meaning of “consideration” that applied as similar with England which the
23
[2000] 4 All ER 97 (HL). Beswick (n 8) 25 [1978] 1 All ER 33 (HC). 26 See section 2(d) states ‘when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise’. 27 [1968] AC 810 (PC). 28 Dunlop (n 4) 29 Section 2(a) states ‘when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to the act or abstinence, he is said to make a proposal’. 30 Section 2(b) states ‘when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted: a proposal when accepted, becomes a promise’. 31 Section 2(c) states ‘the person making the proposal is called the “promisor” and the person accepting the proposal is called the “promisee”. 32 Section 2(e) states ‘every promise and every set of promises, forming the consideration for each other, is an agreement.’ 24
pg. 8
Contract Law Essay 2012 : Privity of Contract
consideration moved from another person than promisee. But, the counsels for the appellant failed to show how this s 2 could provide an enforcement of contracts that involved with third parties. And other subsections (a), (b), (c) and (e) only proved that only the parties in a contract could sue. At the very least, therefore, it can be said that the doctrine of Privity does not apply in Malaysia. As been said by Clarence Edwin that, “it is safe to conclude that in Malaysia, the doctrine of privity is confined to the rule that only a party to a contract may sue on it. There appears to be no rule in Malaysia that a person who is alien to the consideration cannot enforce a contract.”33 In addition, the doctrine of privity in Malaysia is still remaining the same even after the enactment of 1999 Act. As agreed by Sakina Shaik, “sebenarnya undang-undang yang sedia ada ini adalah amat tidak memuaskan bagi seorang pihak ketiga, terutamanya dalam keadaan bila mana beliau sebenarnya telah diperuntukkan hak atau kaedah oleh pihak-pihak dalam kontrak itu sendiri atau telah mengalami samada kecederaan mahupun kerugian akibat dari kontrak tersebut”.34 The law in Malaysia in fact is still abide by the decision of Privy Council in Kepong’s case where commented by Sakina Shaik, “wujudnya lacuna dalam undang-undang kontrak yang memerihalkan kedudukan pihak ketiga dalam kontrak di Malaysia. Keputusan kes Kepong pada hakikatnya telah gagal untuk menjelaskan kedudukan sebenar hak pihak ketiga dalam kontrak di Malaysia”.35 Therefore, it would be unlikely Malaysia Parliament legislate or create a new Act that designed for rights of third party.
PART VII: CONCLUSION Consequently it can be said that the Contracts (Rights of Third Parties) Act 1999 marks a vital change in English common law privity of contract. It is where parties to a contract can get an enforceable benefit upon a third party. The intentions of the parties are prevail rather than being prevented by legal doctrine. The parties must put them within the ambit of the 1999 Act and them able to exclude its operation from their contract and ability to determine the seriousness of the benefit conferred upon the third party.
33
Clarence E, ‘Contracts for the Benefit of Third Parties – Will our Common Law SEE the Demise of Privity of Contract?’ (2000) 4 MLJ 1. 34 Sakina S, ‘Hak Pihak Ketiga dalam Kontrak: Pembukaan Ruang oleh Kreatif Kehakiman Menerusi Kaedah Kontracktual’ (2011) 4 MLJ 26. 35 Ibid p 36.
pg. 9
