privity of contract assignment pdf

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PRIVITY OF CONTRACT – EXCEPTIONS AND CIRCUMVENTIONS OF THE RULE

Privity doctrine, even though it was meant to protect third parties, created numerous commercial hassles. Contracts (Rights of Third Parties) Act 1999 helped to reform Third Party rights aspects of the Privity. At the same time, the Act which is based on the Law Commission report (1996), did not abolish the doctrine, left the rule and exceptions intact for cases not covered by the statute. The Act has improved the law, but has not simplified it much . Third party rights would be effective only when the contract expressly states it or if the terms in contract expressly purported to confer a benefit on the third party and it can be interpreted that the third party can be permitted to have a remedy in pursuing such benefit against them . So, all these exceptions and statutes explained above are considered important and highly beneficial in circumventing the rule when third party rights need to be established.

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Privity of Contract

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Introduction

⇒ A third party is not under the obligations of a contract

⇒ Privity of contract means that only parties privy (i.e. in the contract) are subject to those rights and obligations in the contract

⇒ There are three parts to privity of contract:

• A 3rd party cannot get a benefit from a contract they are not in
• A 3rd party cannot be sued for a contract they are not in
• A 3rd party cannot enforce any contract they are not in

Justification of the doctrine of privity of contract

⇒ Why do third parties have no rights/obligations for a contract they are not in?

• They have made no agreement
• They have provided no consideration

⇒ Dunlop Pneumatic Tyre v Selfridge [1915]: It is “fundamental’ for a party to have agreed and provided consideration if they are a party to a contract

⇒ In Tweddle v Atkinson [1861] , it was said that even if the 3rd party has an interest in the contract, he/she will NOT be able to enforce it

⇒ In Beswick v Beswick [1968] , it was said that even if a contract gives rights and obligations to a third party they will not be enforced

Exceptions to the doctrine of Privity

⇒ Privity of contract can be unfair especially where there is a benefit in the contract for a 3rd party; so there are some exceptions to the doctrine of privity of contract

⇒ Exceptions at common law:

• Agency = Agent (x) contracts with 3rd party (y) and acts on behalf of another party (z)
• There is then an enforceable contract between the 3rd party and the principal

• Lockett v Charles [1938]: Agents can bind the principal legally e.g. estate agents are the agents and not the landlords
• You can assign your rights/obligations to a third party, particularly if the original contract says so
• In certain cases someone else can fill your role in the contract e.g. continue the tenancy

Third party and damages

⇒ Only a party in a contract can get damages

⇒ However, in Jackson v Horizon Holidays [1975] Denning said a third party was able to claim damages. This case was doubted in Woodar Investment Development v Wimpey Construction [1980]

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Contracts (Rights of 3rd parties) Act 1999

⇒ An additional exception to privity of contract is seen in statute: the Contracts (Rights of 3rd parties) Act 1999

⇒ This Act is essentially created to to help 3rd parties to a contract where there was a benefit for them in that contract

⇒ There are two situations where 3rd parties could enforce a contract:

• s1(1)(a) = If the contract says the 3rd party can enforce it
• s1(1)(b) = If the contract appears to be for the benefit of the third party

⇒ See the case of Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening [2009] and Nishin Shipping Co. Ltd v Cleaves & Co. Ltd [2004]

⇒ But, the third party must be identified in the contract if they are to enforce it: “The third party must be expressly identified in the contract by name” s1(3)

• In Avraamides v Colwill [2006], the court said that the 3rd party must be expressly state because the court will not imply the existence of a third party

Remedies for 3rd parties

⇒ If the contract gives rights to a 3rd party then “any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract” will be available (s1(5))

• In other words, the remedies available to third parties are same to the parties in the contract

⇒ Third parties do not need to provide consideration (they are unlikely to if they are not a party to the contract)

• Dunlop v Selfridge [1915] even said a third party is a party that has not provided consideration

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Legal development

High Court rules on privity of contract Is there another way through

09 March 2022

What you need to know

• The doctrine of privity of contract remains intact as a settled and fundamental rule of law.
• However, the doctrine does not necessarily preclude a third party having standing to seek declaratory relief about the interpretation or effect of a contract.
• A mere commercial interest in the meaning of a contract will not, on its own, give rise to a sufficient interest for standing to apply for a declaration. Yet in exceptional cases a third party may be able to demonstrate a sufficient interest.
• One relevant consideration is whether a party to the contract against whom the declaration is sought is a public authority or executive government acting in the public interest.
• Declaratory relief is distinct from the notion of a third party suing on a contract to enforce contractual rights, which the doctrine of privity is designed to protect against.

What you need to do

• Consider the potential consequences of contractual clauses that may confer a benefit on, or create an interest for, a third party.
• Take particular care when drafting such clauses, to ensure that these clauses are clear and avoid unintended consequences.
• As a third party, recognise the limitations of this High Court decision and the need for a sufficient interest to arise, and hence whether it is preferable to be a party.

The High Court today delivered an important decision about a third party's right to seek a declaration of law on the proper construction of a contract. Whilst the decision does not impact directly on the rule about privity of contract, the High Court recognised that a qualification to the privity rule does exist where a third party has a relevant interest.

Privity of contract

The doctrine of privity provides that only parties to a contract can enforce or be subject to the benefits or obligations under that contract. A third party has no such rights or obligations, even if the contract was made for the benefit of that party. This has long been considered a settled, fundamental aspect of contract law.

The doctrine has in more recent time been the subject of criticism and has to some degree been eroded by case law and statutory intervention. The criticisms include:

• injustice can arise by denying a third party a benefit or right that it reasonably expects is owed to that party;
• a party to a contract can be denied the opportunity to enforce an intention to confer benefits upon a third party; and
• a third party who has suffered a loss has no entitlement to damages because it is not a party to the contract.

The privity rule has been modified by statute to enable third parties to enforce contractual obligations in some states or certain limited circumstances. For example, the Insurance Contracts Act 1984 (Cth) provides that a person covered by a general insurance policy can recover from the insurer even though he or she is not a party to the contract of insurance. In addition, modifications to property law in Queensland, Northern Territory and Western Australia enable a third party beneficiary to enforce a contractual obligation to do or to refrain from doing an act for the benefit of the beneficiary.

Privity of contract may also not apply, or can be circumvented,  for example, in circumstances where a contracting party:

• acts an agent for a third party;
• transfers contractual benefits to a third party through an assignment or novation;
• holds contractual rights on trust for a beneficiary; or
• sues to enforce a contractual term which confers a benefit on a third party.

Hobart International Airport Pty Ltd v Clarence City Council

Dispute over calculation of payments in lieu of rates.

In 1998 the Commonwealth entered into leases with operators of the Hobart Airport and Launceston Airport as part of a project to privatise Australia's federal airports. Clause 26.2(a) of the leases provided that, in lieu of paying rates, the lessees were to pay Clarence City Council and Northern Midlands Council an amount equivalent to that which would have been payable had the airports not been on Commonwealth land. The Councils sought declaratory relief as to the proper construction of clause 26.2(a) and the lessees' obligations to make payments, in circumstances where the Commonwealth and the lessees were not in dispute about the operation of, or the lessees' compliance with, that provision of the contract.

The Federal Court

The primary judge (O' Callaghan J) dismissed the proceeding on the basis that the Councils had no standing to seek declaratory relief, and that to allow such standing would "involve jettisoning the doctrine of the privity".

The Full Court (Jagot, Kerr and Anderson JJ) overturned that decision and found that the Councils did have standing, and that declaratory relief about the interpretation of the leases would not infringe the doctrine of privity. Rather, the question of standing should be determined by reference to the existence and quality of the controversy regarding the Councils' claim to declaratory relief, and the quality or character of the Councils' interest in that relief.

The High Court

On 9 March 2022, the High Court dismissed the lessees' appeal. The Court determined that a stranger to a contract seeking declaratory relief in relation to private rights may, in exceptional circumstances, for reasons other than having legally enforceable rights, have a "sufficient" or "real" interest to seek declaratory relief as to the meaning and effect of a contract between contracting parties.

The Councils had argued, among other things, that the Full Federal Court had adopted an unduly narrow characterisation of the doctrine of privity of contract and erred by excluding applications for declaratory relief from the ambit of the doctrine.

All members of the Court recognised that the doctrine of privity will ordinarily prevent a person who is not a party to a contract being able to establish standing to seek a declaration about the content of a contractual obligation based on a legal interest. However, the three judgments of the Court differed as to whether the Councils ultimately had standing.

Kiefel CJ, Keane and Gordon JJ reasoned that non-parties may have standing where they are made active participants in a process established under the contract, they notify a party of amounts they calculate as contemplated by the contract, and have a real commercial interest because it would advance their interests in future negotiations. The Court considered that the Councils were active participants in the leases and not "outsiders". Although the interests of the Councils were commercial, their commercial interests constituted exceptional circumstances, giving them standing to seek declaratory relief.

The concurring judgment of Gageler and Gleeson JJ noted that a weighty consideration in determining standing is whether the declaration is sought against a public authority or executive government which acts in the public interest. Here, the Court considered that the Councils having a fiscal or governmental interest in obtaining or being refused the declaration was significant in identifying a sufficient interest to establish standing to seek the declaration.

The dissenting judgment of Edelman and Steward JJ considered that allowing a non-party with a commercial interest to seek a declaration would undermine the rule that private rights are enforceable only by those who hold the relevant right. Their Honours emphasised that the rights between lessees and lessor are purely private rights. The language of the leases did not create liability for the lessees to make payments to the Councils, but rather contemplated that the Councils and lessees would enter into a separate binding agreement which had not yet been undertaken by the parties.

Practical implications

The High Court's decision has ramifications for contracts that may confer a benefit on third parties or affect third party rights. These contracts commonly arise in sectors where complex commercial arrangements involve a number of stakeholders, such as construction, mining and finance.

Parties entering into contracts that may have an impact on third parties should be aware of the potential for a third party to obtain declaratory relief. To minimise the risk of subsequent disputes, care should be taken when drafting clauses that confer a benefit on third parties, to ensure that effect of these clauses is clear and does not lead to unwanted or unforeseen consequences.

The potential for a third party to circumvent the privity rule by seeking a declaration on the meaning of a contract depends on its ability to demonstrate exceptional circumstances. This will be most relevant where a contracting party is a public authority or an executive government acting in the public interest. The majority expressed some caution about how this applies to purely commercial interests.

Parties should take note of the limitations of this decision. While a third party may have standing to seek declaratory relief in respect of a contract to which it is not a party, the decision does not broaden the law in respect of a third party being entitled to directly enforce rights under the terms of a contract. Multi party contracts may be preferable where there is a need for additional parties to be able to enjoy enforceable benefits under a contract.

Parties should also be aware that the doctrine of privity means that a third party seeking declaratory relief in respect of a contract will not be bound by any dispute resolution provisions in the contract. A party to a contract may, in exceptional circumstances, find itself facing court proceedings commenced by a third party, despite the contractual parties having agreed to resolve disputes by arbitration. Multi-party arbitration agreements can be used in projects where there are multiple contracts involving various entities; however, these may not be suitable or practicable in all situations.

Authors: Andrew Harpur, Partner; James MacDonald, Senior Associate; and Claire Potter, Lawyer. 

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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• Contract Law
• Contractual breach
• Indian Contract Act 1872

The doctrine of privity and exceptions to its application

This article is written by Adhila Muhammed Arif , a student of Government Law College, Thiruvananthapuram. This article elucidates on the Doctrine of Privity and the exceptions to its application. 

Table of Contents

Introduction

According to Section 2(h) of the Indian Contract Act, 1872, a contract can be defined as an agreement that subsists between two or more parties that is enforceable in the courts of law. When one party fails to perform their obligations provided in the contract, the other party can sue them for the breach and obtain adequate remedy. Consideration is one of the major requisites for the validity of a contract and it is defined in Section 2(d) of the Indian Contract Act. It refers to any act or abstinence performed by the promisee or any other person at the request of the promisor. Indian law permits consideration to be moved by persons who are not parties to the contract as long as it is at the request of the promisor. 

What is privity of contract?

The doctrine of privity of contract is one of the major principles that govern the law of contracts. The word ‘privity’ means ‘with knowledge and consent’. According to this doctrine, only parties to a contract have the right to enforce the rights and obligations provided by the contract and strangers to the contract are barred from enforcing any obligation on any party. This doctrine protects parties to a contract from obligations that they never agreed to incur. Only those parties that have an interest in the contract can sue for its enforcement. The first case in India that affirmed the applicability of the doctrine was the case of Jamna Das v. Ram Autar Pande (1916). 

For example, A and B entered into a contract where A gave Rs.100 in return for which B agreed to deliver a watch to C. Here since C is a stranger to the contract he cannot sue B if he fails to deliver the watch. 

Though consideration can be provided by third parties, they can never enforce the performance of the contract as they are strangers to the contract. It is important to note that there is a difference between a stranger to contract and stranger to consideration. As a stranger to consideration remains a party to the contract in spite of not providing consideration, he can still file a suit challenging the contract. 

Doctrine of privity in english law

English law is more restrictive in comparison to Indian law in the application of the doctrine of privity. This is because English law only recognizes consideration that moves from the promisee himself and not from anyone else, which puts both strangers to contract and strangers to consideration on the same footing. Thus, when the promisee to a contract does not provide the consideration himself, he loses his right to enforce the contract as he is a stranger to consideration. 

The doctrine of privity of contract was first recognized in English law in the case of Tweddle v. Atkinson (1861). In this case, John Tweddle William Guy entered into a contract where they agreed that both of them would pay a sum of money to their children who were engaged. However, the father of the bride William passed away before he fulfilled his obligation. The father of the groom died too before he filed for a suit. The groom filed a suit against the executor of William for the payment of the sum of money. The Court ruled that since the son was both a stranger to the contract and a stranger to the consideration, his suit was not maintainable. 

The relevance of the doctrine was affirmed again when it was cited in the well-known case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915). In this case, Dunlop Company manufactured tyres and they entered into an agreement with Dew & Co., who were dealers. Dunlop entered into the agreement so that they can maintain a standard market price for the tyres and Dew & Co. agreed that they would not sell the tyres below the fixed price. Dunlop also insisted that the dealers must have the same terms in their agreements with the retailers. Dew & Co. entered into a contract with a retailer Selfridge, which had a provision that if the tyres were sold below the fixed price, they would have to pay 5 Pounds per tyre as damages to Dunlop & Co. When Selfridge sold some tyres below the fixed price, Dunlop sued them for damages and the decision was in favour of Dunlop. But, on appeal the decision was reversed and it was held that Dunlop did not have the right to claim damages as the contract was only between the retailer Selfridge and Dew & Co. 

Exceptions to the rule that a Third Party to contract cannot sue

The doctrine of privity of contract is however not absolute. There are several exceptional situations in which a third party to a contract can sue. The following are the exceptions to the doctrine of privity in Indian law : 

Trust of contractual rights or beneficiary under a contract

A trust refers to something created by a contract for the benefit of a third party. In a contract of trust, the trustor transfers the title of a property to the trustee, so that the trustee holds it for the benefit of a third party who is also called the beneficiary. Even though beneficiaries are third parties to a contract they have the right to enforce the provisions of trust. 

To cite an example, in the case of Rana Uma Nath Baksh Singh v. Jang Bahadur (1938), the trustor was a father who transferred all of his estates to his son for him to hold in trust for the benefit of the trustor’s illegitimate son. The son had the obligation to provide the illegitimate son with money on a regular basis. When the son failed to perform his obligation, the illegitimate son filed a suit to recover the amount to be paid and the suit was maintainable even though he was not a party to the contract. 

Provision for marriage or maintenance under family arrangement

In a contract for a family settlement either for marriage or maintenance, where the contract is intended to benefit a third party, he may sue on the contract to secure his rights. 

For example, in the case of Lakshmi Ammal v. Sundararaja Iyeng a r  (1914), there was an agreement among the brothers of a Hindu joint family to pay for the expenses to be incurred for the marriage of their sister. Despite being a third party to the agreement, the sister had the right to enforce the provision that was made for her. 

In the case of Veeramma v. Appayya (1955) the daughter of the family had the responsibility of taking care of the father. So, there was a family arrangement made for conveying the father’s house to her. Since the agreement benefited her, she had the right to file a suit for the specific performance of the contract. 

Acknowledgement or Estoppel

According to the law of estoppel, if a person by words or conduct suggests something, he is not allowed to contradict it later. Thus, if a party to a contract acknowledges by words or conduct that a third party has the right to sue him, he cannot deny that later by the rule of estoppel. In such cases, a suit filed by that party, despite being a stranger to the contract, is maintainable. 

For example, A and B enter into a contract where A pays B a sum of money that has to be given to C. B acknowledges to C that he is holding the sum for him. If B defaults in the payment, C will have the right to recover the sum from him. 

In the case of Devaraj Urs v. Ramakrishnayya (1951), A bought a house from B. B asked A to pay the price for the sale to B’s creditor. The buyer paid a part of the price to the creditor and promised him that he would pay the rest later. On his default, the creditor filed a suit against him. The court ruled in favour of the creditor, though he was a third party to the contract. 

Contracts entered into through an agent

It is not uncommon for people involved in commerce and business to enter into contracts through their agents. These agents can enter into contracts for them and represent them in the relations that arise in such contracts. Thus, whatever contracts entered into by an agent while acting within the scope of his authority can be enforced by the principal. It may seem that the agent is the party to the contract, but in reality, he is more of a representative of the principal. 

For example, A appoints B as his agent. He asks B to buy a bag of rice from C on his behalf. Here, B enters into a contract with C when he buys the bag of rice, but it is A who has the right to enforce the contract as B is a mere representative of A. 

Charge created on a specific immovable property 

In certain cases, charges or covenants are made on a specific immovable property, like land for the benefit of a third party. In such cases, these third parties can enforce the contract, though they are strangers to the contract. 

Assignment of a contract

Assignment of contract refers to the transfer or assignment of the rights and liabilities arising from contractual relations to a third party. In cases where the benefits of a contract are being assigned, the assignee of the benefits can sue upon the contract though he is not a party to the contract. 

For example, a husband assigns his insurance policy in favour of his wife. As the benefit of the contract is assigned to her, she has the right to enforce the contract though she is not a party to it. 

Collateral contracts

Collateral contracts refer to the contracts subsidiary to the original contract. It could be entered into by the same parties or one of the original parties with another party. It can be made before or after the main contract is formed. When a third party has entered into a collateral contract, he can also file a suit to enforce the main contract in spite of not being a party to it. The best example of a collateral contract is a manufacturer’s guarantee regarding the goods sold. The sale of the goods is the main contract and the guarantee is the contract collateral to it. 

In the case of Shanklin Pier Ltd. v. Detel Producers Ltd . (1951), a person A was employed as a contractor by B. B asked A to buy some paint manufactured by C. B wanted A to buy C’s paint because of a statement that was once made by C that the paint would last for seven years. But the paint only lasted for three months. In this case, the guarantee given by C to B forms a contract that is collateral to the contract made by A and B. The suit filed by B was maintainable even though he was not a party to the main contract. 

To sum up, the doctrine of privity of contract is not an absolute rule. There are many cases in which a person who is not a party to a contract can enforce the contract as explained above. The doctrine of privity of contract protects the parties to a contract from legal action taken by strangers against them, as they are obligated to only the party with whom they contracted. But, there are situations where third parties can be aggrieved by the breach of a contract and the exceptions to the doctrine enable them to take action against the parties to the contract. 

• https://blog.ipleaders.in/doctrine-of-privity-of-contract/  
• http://www.legalservicesindia.com/article/378/Privity-of-contract-&-third-party-beneficiary-in-a-contract.html  
• https://www.legalserviceindia.com/legal/article-1143-whether-stranger-to-consideration-can-sue-.html  
• https://www.upcounsel.com/privity-of-contract-exceptions  
• https://www.casemine.com/judgement/uk/5a8ff8d060d03e7f57ecdbc0  
• https://www.lawteacher.net/cases/tweddle-v-atkinson.php  
• https://www.lawteacher.net/cases/dunlop-v-selfridge.php  
• https://blog.ipleaders.in/privity-rule-contract-law-ground-reform/#Exceptions_to_the_privity_rule_of_Contract_Law .

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