Tag: Tweddle verses Atkinson

The Contracts (Rights of Third Parties) Act [1999]

In the previous two posts’ we have examined the Doctrine of Privity and a consequence of 3rd Party Rights in relation to Collateral Warranties. We should now examine the legislation which effectively replaced the doctrine and that also led to the decision reached in Parkwood Leisure Limited v Laing O’Rourke Wales and West.

The Contracts (Rights of Third Parties) Act 1999 significantly reformed the common law, Doctrine of Privity and removed the second rule of the Doctrine that a third party could not enforce a contract for which he had not provided consideration.

The Act allows third parties to enforce terms of contracts that benefit them or which the contract allows them to enforce as well as allowing access to a range of remedies if the terms of the contract are breached. The ways a contract can be changed without the permission of an involved third party is also dealt with by the legislation. It further provides protection for the promisor and promisee where there is a dispute with the third party, and allows parties to a contract to specifically exclude the protection afforded by the Act if they want to limit the involvement of third parties.

 Scope and implementation

As Scots Law has its own rules on privity and third party rights, the legislation applies only in England, Wales and Northern Ireland and came into law on 11 November 1999 although the act did not fully come into force until May 2000. During this period contracts negotiated after the acts passage but before its implementation fell under its provisions if they included language saying that they had been made under the terms of the act.

This legislation had a number of consequences, including allowing third parties to enforce terms. There were also exceptions, such as claiming on behalf of another party, (Jackson v Horizon Holidays Ltd) although the legislation did not repeal or abolish these exceptions and this effectively allows the courts to accept cases based on the old common law exceptions as well as this legislation. It is fundamental to the legislation that allows parties to exempt an agreement from the Acts provisions.

However, despite a largely supportive reception from the judiciary, legal profession and academia; the legislation was criticised by the construction industry for its refusal to make an exception for complex construction contracts and the vagueness of the term “purports to confer a benefit”. Although on balance it was deemed unfair to exempt a particular industry and case law has clarified the meaning of “purports to confer a benefit”.

The legislation is divided into 9 sections and we will now examine each of these.

Section 1: Right of third party to enforce contractual term

The old common law rule that a third party could not enforce the terms of a contract (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd) or that a third party could not act against a promisor (Tweddle v Atkinson) and allows a third party to enforce terms of a contract in one of two situations:

  • if the third party is specifically mentioned in the contract as someone authorised to
  • if the contract “purports to confer a benefit” on him

An exception to the second rule involves contracts that include language barring third parties from applying the rule. A further exception applies to contracts between solicitors and their clients to draft wills.

Where a third party can enforce terms that “purport to confer a benefit on him” have been described as too broad and it was the view that it would be “un-workable” in situations such as complex construction contracts involving dozens of sub-contractors with chains of contracts among them. The phrase “purport to confer a benefit” was originally found in the 1937 Law Commission paper on reform of the doctrine of privity and was used in the New Zealand Contracts (Privity) Act 1982 before being adopted in the English legislation.

The third party must be identified by name or a member of a group even if that party does not exist when the contract is formed. This can cause issues however where for example, Party A enters a contract to have Party B construct a building. Party A later sells the building to Party C who finds that it has structural problems; Party C has no cause of action against Party B because he was not named in the original contract.

If a third party chooses to enforce the terms of a contract, he can do so against the promisor and has the right to any remedy that would be available if he was party to the contract, such as specific performance. The only exception is the ability to terminate the contract and have it rendered void as this may be contrary to the promisee’s wishes or interests”.

Section 2: Variation and rescission of contract

This section governs changes to and rescission of contracts whereby it prevents the parties rescinding or altering to remove or modify the terms that affect a third party where the third party has told the promisor that he “assents” to the term, or that has relied on the contract (and the promisor knows this, or could be expected to have known this).

However, this is the default position and the parties may insert clauses into the contract allowing them to rescind or alter the contract without the consent of the third party. The courts can ignore the consent of the third party and allow the promisor and promisee to change the contract if the third party is mentally incapable, unfindable or if it is impossible to tell if the third party has truly consented, although the courts may add conditions to that decision, such as requiring the promisor or promisee to pay compensation to the third party.

Assenting is considered complete when the third party “communicates” his assent to the promisor, which can be done in a variety of ways, although the contract may specify the communication method(s). If a communication method is specified then no other method is valid.

The third party does not have to have suffered a detriment from his “reliance”; it is enough that he has relied on the contract. If the third party has relied on the terms of the contract, which are breached, he can claim damages for any loss suffered from relying on the contract as well as “standard” damages, such as loss of profit.

Section 3: Defences available to promisor

This section deals with the defences available to the promisor if the third party brings an action against him. In a dispute between the promisor and the third party over a term, the promisor can rely on any defence he would have if the dispute was with the promisee, as long as the defence is applicable to the term under dispute. And has been modelled on the similar section of the New Zealand Contracts (Privity) Act 1982.

The legislation further allows the promisor to list additional defences that are able to be used against the third party in the contract. During the drafting stage the Law Commission rejected a suggestion the promisor should have every defence in a dispute with a third party that he would have in a dispute with the promise, irrespective of whether or not it could be applied to the disputed term. By allowing additional defences this can be used to circumnavigate this decision to not give the promisor equal defences against both the third party and promisee by listing those additional defences the promisor would like access to.

However, the legislation does take a different stance in relation to defences available to the third party in counterclaims. Here the Law Commission’s view was that to apply the same rules would be “misleading and unnecessarily complex” as the counterclaim could be more valuable than the original claim. This which would impose an obligation on the third party to pay the promisor money. This is inappropriate under the Doctrine of Privity where it prohibits the placing of a burden or obligation on a third party.

However the parties are able to the contract can insert a clause overriding this.

Section 4: Enforcement of contract by promisee

This section preserves the right of the promisee to enforce any term of the contract which allows the promisee to sue for losses to themselves, but not for losses of the third party.

Section 5: Protection of promisor from double liability

This section protects the promisor from double liability, having to damages for the same breach to both the third party and the promisee if the promisor breaches the contract.

However this is limited as the promisor is only protected if he has first paid damages to the promisee, and the third party’s claim comes after that. Payment has been made. Further the legislation only limits damages paid in this situation and do not eliminate them. If the promisee brings action against the promisor and wins, any damages paid to the third party in a subsequent action must take the previous damages paid to the promisee into account.

If the third party brings action and the promisee does so following this then the promisee cannot claim any damages as it was determined during the drafting stage that the promisee would have no interest in the dispute any more.

This does not take into account situations where the promisee has suffered personal loss from the breach of contract. If the promisee brings an action first then the third party is prohibited from doing so, unless the promisee’s action fails at which time the third party is free to pursue his own claim.

Section 6: Exceptions

This section defines exceptions to the scope of the Act.

Where the Act applies to standard contracts and contracts made by deeds, it does not apply to contracts made as a part of negotiable instruments, bills of exchange or promissory notes, or contracts governed by the Companies Act 1985, such as the articles of association.

transport of goods across national boundaries is also exempt as this is governed under international trade laws.

Further, terms in employment contract which allow a third party to sue an employee are exempt. This for two distinct reasons:

  • Either the position of third parties in those types of contract are too well established to be easily changed, or
  • For reasons of public policy the involvement of third parties is not a good idea

Section 7: Supplementary provisions relating to third party

This section includes supplementary provisions relating to the rights of third parties.

It prevents third parties from using the definition of “third party” in this Act when applying any other Act of Parliament, and excludes the section of the Unfair Contract Terms Act 1977 that covers negligence from applying to actions against a third party.

Further, Section 7(1) ensures any exceptions to the rule of privity which existed prior to this legislation remain valid.

Section 8: Arbitration provisions

The legislation allows for arbitration clauses, which require the parties to submit to specific arbitration procedures in the event of disputes to be inserted into contracts.

Although initially The Law Commission excluded arbitration clauses in the draft bill, this was later amended to allow third parties to take advantage of arbitration proceedings.

Section 9: Northern Ireland

This section recognises and takes into account differences between English and Northern Irish law. It further modifies how to interpret the legislation in Northern Ireland.

The use of “Companies Act 1985” in Part VI is substituted with the Northern Irish equivalent, the Companies (Northern Ireland) Order 1986 and Part IX also repeals sections 5 and 6 of the Law Reform (Husband and Wife) (Northern Ireland) Act 1964.

 

The consequences of this legislation is that while a blot on the legal landscape has been removed with the Contract (Right of Third Parties Act [1999], it has at the same time made drafting of contracts with third party rights more onerous in order to take advantage of the situations that exist in the legislation to insert overriding clauses.

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The Doctrine of Privity

The Doctrine of Privity is an area of English contract law covering the relationship between parties to a contract and other parties or agents (3rd parties). At a basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, the 3rd party.

Historically, 3rd parties were able to enforce the terms of a contract, as evidenced in Provender verses Wood in 1630. A series of further cases during the 19th and early 20th century changed how this was interpreted, the most well-known cases Tweddle verses Atkinson in 1831 and Dunlop Pneumatic Tyre verses Selfridge and Co Limited in 1915.

For various reasons the Doctrine of Privity was seen as unfair as it made no exception for cases where the parties to a contract obviously intended for it to be enforced by a third party, and it was inconsistently applied and provided no solid rule. It was seen as “bad” law. The doctrine attracted criticism from numerous figures and as early as 1937 the Law Revision Committee recommended that significant alterations should be made.

With the ascent of the Contract (Right of Third Parties) Act [1999] on 11th November 1999, the Doctrine was significantly altered, 3rd Parties can now enforce the terms of a contract where the 3rd party is specifically authorised to do so by the Contract or if the contractual terms “purport to confer a benefit” to such 3rd party.

Original doctrine

The original Doctrine of Privity consisted of two rules

  • A 3rd Party may not have obligations imposed by the terms of a contract
  • A 3rd Party may not benefit from the terms of a contract

The first rule was not contested, however the second rule was universally criticised and disliked.

This second rule was not originally held to be valid, and during the 17th Century 3rd Parties were allowed to enforce terms of a contract that benefited them, such as in Provender verses Wood where the judgement stated that “the party to whom the benefit of a promise accrues, may bring his action.”

The first reversal was in 1669 in Bourne verses Mason where it was found that a 3rd Party had no rights to enforce a contract that benefited him. However this case was quickly reversed, and decisions immediately after Bourne verses Mason took the view 3rd Parties could enforce contracts that benefited them.

Judicial decisions then differed over the next 200 years as to whether or not a 3rd Party could enforce a contract that benefitted them before the issue was finally settled in 1861. This was in the case of Tweddle verses Atkinson which confirmed a 3rd Party could not enforce a contract that benefited him. This decision was affirmed by the House of Lords in 1915 in Dunlop Pneumatic Tyre verses Selfridge and Co Limited where Lord Haldane stated only a person who was party to a contract could sue on it.

This version of the doctrine is commonly known as the original or basic doctrine.

Views of the original doctrine

Supporters of the original Doctrine of Privity argued it was reasonable not to allow third parties to enforce contracts as this would harm the rights of the original parties to amend or terminate Contracts. A further argument put forward was the doctrine was deliberately retained by judges to protect consumers from exclusion clauses designed to protect third party manufacturers from liability.

The second rule that a 3rd Party could not claim benefits from a contract, was widely criticised by the judiciary, legal professionals and academics, particularly as the rule made no exceptions for cases where it was obviously intended for the third party to claim a benefit.

In Beswick verses Beswick in 1968, an uncle gave his nephew a business, on the condition his nephew would pay his uncle a certain amount per week. In the event of his uncle’s death, a similar amount would be given to his widow. Clearly in this instance it was intended that 3rd Parties benefit.

A further argument used was the large number of exceptions to the rule that various Acts of Parliament passed. This indicated parliament had issues with the Doctrine of Privity and it is clear that the large number of inconsistencies and exceptions made the Doctrine of Privity “bad” law as there were no reliable rule in how law worked in theory to how it was enforced by the courts.

Loopholes

As the Doctrine of Privity was extremely unpopular, several ways of circumnavigating it were developed which were at times both complex and extremely artificial. These exceptions were extremely limited in how they could be used however.

 Estates

In Beswick verses Beswick as described above, when the Uncle passed away his nephew refused to pay the widow the money required, arguing that as she was not party to the original agreement she could not benefit from it.

Lord Denning in the Court of Appeal tried to use this as an opportunity to claim that the Doctrine of Privity was invalid. However this was rejected by the House of Lords although they agreed Mrs Beswick could sue, not as a 3rd Party to the contract but as Executrix of her husband’s estate. The consequence of this was she was acting as a representative of Mr Beswick, and the Doctrine of Privity would not apply.

Trusts

Trusts (an arrangement where the owner of property gives it to a second party (The Trustee) to manage on behalf of a 3rd Party (The Beneficiary) have been a method of circumnavigating the Doctrine of Privity. In Les Affreteurs verses Walford in 1919 the House of Lords determined that that the trustee’s ability to sue the owner of the property is to be exercised on behalf of the beneficiary, a 3rd Party. This is known as a “trust of the promise.” While an artificial measure, it bypassed the Doctrine of Privity. The trust exception has been heavily undermined by the decision in 1944 in the Court of Appeal (Re Schebsman) which required a court to find evidence of an intent to create a trust of the promise rather than simply using the requirement as an intention as a fiction to allow the courts to enact the trust exception.

Insurance contracts

As parliament is not bound by the common law several acts of parliament unwittingly created valid exceptions to the Doctrine of Privity.

The Road Traffic Act [1988] obliges motorists to take out third party liability insurance which allows victims of car accidents to can claim monies from the insurer of the driver at fault, even though they are not part of the original contract. Under the Married Woman’s Property Act [1882] a husband can take out insurance in his own name, but make it enforceable by his wife and children despite the Doctrine of Privity.

 Claiming on behalf of another

In 1975 in Jackson verses Horizon Holidays Limited a second exception was created where a party could sue on behalf of another, if the other party would have benefited from the contract.

In this case, Mr Jackson booked a holiday in his own name with Horizon Holidays Limited which did not match the particulars as laid down in the contract. Mr Jackson sued with the company accepting liability but claimed no damages were due to the family as under the Doctrine of Privity they could not sue. The Court of Appeal found that the loss of enjoyment suffered by the family was also a loss to Mr Jackson as he had paid for a family holiday but not received it. As such damages were awarded.

Collateral Contracts

A Collateral Contract exists side by side with the Main Contract where this contract is a consideration into another subordinate contract. As normally this involves parties who are not parties to the Main Contract it was able to circumnavigate the Doctrine of Privity, which co-exists side by side with the main contract. Because this normally involves parties who are not part of the main contract, it has been used as a way around the doctrine of privity. The courts allowed an injured party to sue under this Collateral Contract despite it being artificial. The Contracts (Right of Third Parties) Act [1999] has now limited this significantly.

In the 1951 case of Shanklin Pier Limited verses Detel Products Limited, Shanklin were having their pier refurbished and contracted with a painting contractor where they were required to use Detel products. This was as Detel had provided assurances their paint would last for 7 years. However after 3 months the paint was already flaking. While Shanklin had no contractual relationship with Detel the Court of Appeal found like there was a collateral contract they could use to sue.

The use of Collateral Contracts as a loophole are however limited as the courts must first find evidence to imply some kind of Collateral Contract, as well as consideration. Attempts by the courts to do this have added to the perception of this as an artificial device, such as in Charnock verses Liverpool Corporation in 1968 where the Collateral Contracts used were described as “invented” consideration, and “fictitious”.

In certain commercial contracts, such as goods sold to consumers by a dealer, there is automatically a collateral contract between the consumer and the manufacturer of the goods.

 Exceptions

There are several ways around the original doctrine which were not loopholes created by case law but situations which by their very nature must involve three parties. We will now look at the 3 most common examples.

 Negotiable instruments

A Negotiable Instrument is a type of contract that allows the transfer of money, such as a Credit Card which involves three parties.

  • The person who holds the credit card
  • The entity who the card is given to, to pay for a transaction
  • The entity who issues the holder of the credit card and promises to make payment to the entity who the holder of the credit card transacted with

Assignment

Assignment is covered by both Contract Law and Property Law that governs the transfer of rights from one party to another, including the right to enforce a debt. In this situation the party who is assigned the debt can sue the debtor despite any contractual agreement between them. This being permitted by the Law of Property Act [1925].

 Agency

Agency is a relationship between a Principal who authorises an Agent to make a contract on his behalf with a 3rd Party.

In agency, the agent can make a contract with a 3rd Party that is binding on the principal, even though he was not privy to the original contract. The Consumer Credit Act [1974] is an example as this allows a dealer for a financial company to set up credit agreements as a representative of that company, for example.

It could be argued this is not a genuine exception to the Doctrine of Privity as once the contract is made the “agent” plays no further part and it is effectively an agreement between the two parties.

Although certain elements of the Doctrine of Privity are believed to clash Agency. An example would be where the principal could sue the 3rd Party even when the agent has not disclosed to the third party that he is acting as an agent to the principal. In this situation, the third party can be sued by somebody that he had no idea was involved in the contract.

 Privity and consideration

A general consensus is that privity is distinct from consideration although there is a strong relationship between the two. This causes problems with the idea that the Doctrine of Privity should be abolished, as the idea that third parties can claim benefits from promises that they gave nothing for clashes with the doctrine of consideration, which prevents parties who did not contribute something to the agreement from benefiting from it.

Consideration is a rule that there must be a “benefit or detriment” involved in any contract, and that this must initially come from the promisee. It is argued this rule and the Doctrine of Privity are two ways of saying the same thing, that someone not party to the contract is the same as saying that they gave no consideration in the initial agreement.

In Tweddle verses Atkinson the decision made was reached because the claimant had not provided consideration. In Dunlop Pneumatic Tyre verses Selfridge and Co Limited a similar conclusion was reached, although it should be noted that Lord Haldane noted that independent of consideration, it was a rule in English law that “only a person who is party to a contract can sue on it”.

As with most elements of law where rules and precedents have evolved over centuries the arguments are often complex and must be based on the facts presented, such as how well the contract documents have been drafted. At the same time this post over a centuries old legal rule shows that even attempts to reform the law can make it more complex by unintended consequences, such as Collateral Warranties being defined as “Construction Contracts” in accordance with the Housing Grants, Construction and Regeneration Act [1996].

However the Contracts (Right of Third Parties) Act 1999, which we will examine in the next post, has gone some way to clear up this anomaly.