'the rule of privity can cause injustice but reforms in both statute and common law have helped to avoid this injustice'. Discuss the extent to which this statement is true.

In contract law, privity means the relationships that exist between those engaged in contracts.

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The rule of privity of contract provides that a contract only creates obligations and liabilities as between the parties to the contract. The result of this rule is that the contract can only be enforced by and against the parties themselves and not third parties.  There is no better illustration of the principle of privity than the case of Tweddle v Atkinson (1861). The facts of the case were that the fathers of husband, William Tweddle, and his wife, entered into an agreement to the effect that they would both make a payment of £200.00 to the husband. The husband's father made his payment but William's father in law died before making the payment. The husband sued but his claim was not allowed on the principle that although he would have benefited he was not privy to the contract. The injustice to the husband is immediately apparent.  

 

Similarly in Dunlop Pneumatic Tyre Co v Selfridge (1915) the issue of privity was plainly illustrated and upheld by the courts. In this case the claimants sold tyres to some wholesale distributors on the basis that they would obtain an undertaking from the retailers to whom they sold the tyres that they would not sell below a list price. The distributors sold some tyres to the defendants who went on to sell them below the list price. The action failed because the claimants were not a party to the contract between the distributors and the defendants.

 

The apparent unfairness of the rule can be dispelled by remembering that the principle stems from the rule that the contract incorporates the bargain struck between the parties to the contract and that third parties are not contributors to this bargain. It is similar but distinct from the principle that consideration must move from the promisee in return for the consideration made by the promisor. How else can a party justify enforcing the contract?

 

There have been a number of exceptions to the rule of privity which have been developed by the courts. We need to examine them as part of our discussion.

 

In the case of Les Affreteurs Reunis v Walford (1919) an implied trust was the justification used to enable the courts to allow a claim notwithstanding the rules of privity. The word 'device' is probably appropriate here as the House of Lords, in this case, used the principle of a trust. The House upheld this device where the terms agreed included a promise by a shipowner to the charterer of the ship that they would pay the commission. The use of this device is doubtful today because of the development of stricter requirements for establishing a trust so it is arguable that this exception is limited.

 

The law allows for the obligations arising under a covenant which is restrictive in nature to be enforceable as against a purchaser for a consideration. The principle seems to be that it is allowable on the basis that purchasers must take subject to any obligations as well as any benefits. Tulk v Moxhay (1848) is a landmark case that decided that in certain cases a restrictive covenant can "run with the land" (ie. a future owner will be subject to the restriction) in equity. Restrictive covenants still operate and systems for their registration as against purchasers still exist.

 

The courts have recognised the existence of collateral contracts and this is just what happened in the case of Shanklin Pier v Detel Products (1951) whereby the claimants produced evidence to the effect that a collateral contract existed as a result of the pier owners entering into a contract following a representation that the defendant's paint had a life of 7 years. The pier owners had entered into a contract with the decorators to paint the pier only to find that the work only lasted a few months. The makers of the paint were not parties to the contract but were found liable under the collateral contract.

There have been a number of situations in which the courts have come to the conclusion that it is only right that an individual may sue to recover on behalf of another party. In Jackson v Horizon Holidays (1975) Lord Denning ruled that compensation was not excessive for a holiday failing to match the description of the holiday which had been purchased by the claimant, not only for himself, but for his family.

 

However the House of Lords, not for the first time, decided to cross swords with Lord Denning and disagreed with his reasoning behind the decision in Jackson and confirmed that a claimant could not recover damages for the loss of a third party not having privity to the original contract. However they preferred to liken the situation to ordering a meal in a restaurant and felt that the award itself could be justified.

 

In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1993), the Court of Appeal accepted that prohibitions against assignment or transfer would not preclude transfers on the basis that such transactions operated between the assignor and assignee.

 

Finally it should be noted that Parliament has enacted certain statutory exceptions. First the Married Woman's Property Act (1882) which amended common law principles to overcome the problem of divorced women who, under the law prior to the Act, were unable to take an interest in the marital property.

 

Secondly the Road Traffic Acts which also entitles an individual to enforce an insurance policy despite not being an original party under the requirement that vehicle users take out third party insurance cover.

 

Finally the Contract (Rights of Third Parties) Act 1999 which specifically entitles a party who was supposed to benefit under a contract, even though they were not a party, may enforce the contract.

 

Injustice flowing from the rule of privity of contract operates in many different ways. We need to examine some of these.

 

It may be that the rule operates in such a way as to prevent a party from enjoying a benefit as intended by the parties to the contract. This appears to fly in the face of the principle of freedom of contract in which both Parliament and the courts have respected the concept that ordinarily the parties are free to reach their own bargain.

 

The rule will appear to stop a sub contractor from being held liable on the basis that there is no contract with the original party who contracted for the work to be done.

 

The rule presents unnecessary issues about whether a consumer is entitled to benefit from consumer protection legislation if they were not a party to the original contract when the goods were purchased.

 

Finally problems may arise where a manufacturer tries to enforce contract terms against a retail business because the contract was with an intermediary of some sort.

 

There have been some occasions when the courts have avoided the consequences of the privity rule (as in the case of collateral contracts) but it could be argued that such interventions have been limited in scope with the result that the exceptions are of limited benefit. With regard to Parliament's attempts to intervene it could be said that ,although they too are subject to comment, the statutory exceptions are more helpful.

The measures have limited effect as in the case of motor insurance but they have had a real practical benefit and reflect the realities of the modern age. The Contract (Rights of Third Parties) Act 1999 is wider in its scope in that it includes a general exception to the privity rule. In addition it gives legitimacy to contracts in which a party has not been given consideration. Having said that, the act has been criticised for being rather vague about how the measures are intended to operate. For example the concept of who is intended to benefit from the contract in question could have been drafted more specifically.

 

It can be seen that Parliament has attempted to provide a more consistent and acceptable forum for excluding the application of the privity rule and this may be a more sensible and just approach. Certainly it could be argued that it is more acceptable and understandable than the ad hoc approach by the courts. It has been difficult for contractual parties and others to predict how and in what way the courts were going on the issue of privity. Whereas Parliament, in the form of the 1999 Act, has attempted to overcome in a broader way the injustices of the privity rule.


The work of Parliament is likely to be better in the sense that Parliament can, and is encouraged to, consult widely with interested bodies before introducing legislation and to that extent is able to giver greater consideration to the matter beyond the scope of the issue between the parties to the litigation before the courts. 

 

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