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LAW EXTENSION COMMITTEE WINTER COURSE 2005 CONTRACTS LECTURE NOTES WEEK FIVE
PRIVITY OF CONTRACT
The Pr Privit !" !" C! C!#tr$%t &! &!%tri#e
The privity of contract doctrine dictates that only persons who are parties to a contract are entitled entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a third party beneficiary) beneficiary) is not entitled to take any enforcement action if he or she is denied the promised benefit. Example: A promises B for consideration moving from B to pay ! " #$$. %ere A and B are parties to the contract & privy to the contract & and can s'e each other if there is a breach by the other. ! is not a party to the contract and cannot s'e A is A fails to pay ! the s'm of " #$$. A classic a'thority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co ##*+ A! ,- where at ,*/ 0isco'nt %aldane said: 1y 2ords in the law of England certain principles are f'ndamental. 3ne is that only a person person who was party to a contract contract can s'e on it. 3'r law knows nothing of a 4's 5'aesit'm tertio third party right of action+ arising by way of contract. 6ee also Coulls v Bagot’s Executor & Trustee Co Ltd (#7) (#7) ## !28 -7$ at -, per Barwick !9.
hen looking at the doctrine of consideration consideration we observed the r'le that consideration consideration m'st move from a promisee or in other words that only a person who has provided consideration can enforce a promise. ;n the above example one co'ld have arg'ed that ! co'ld not s'e on the basis that ! had not provided any consideration for A
This raises the 5'estion of whether there is a distinction between the privity and consideration r'les. This 5'estion has generated considerable disc'ssion in academic circles and there is a division of opinion between those who say the r'les are in fact one r'le differently expressed and those who arg'e that the two r'les are distinct. ;n the cases the relatively scant references to the 5'estion tend to s'pport the two separate r'les approach. 6ee Coulls v Bagot’s Executor at -, Barwick !9 and at -- per indeyer 9= Trident General nsurance Co Ltd v !c"iece Bros Pty Ltd (#,,) #7* !28 #$ at ##*>##7 1ason !9 ilson 9 and at #7- per Toohey 9.
%ere we are concerned with the remedies that can be p'rs'ed against a promisor who is in breach of his or her obligations to a third party. ;n o'r example above who can s'e A and what remedies are available? Beca'se ! is a third party and not privy to the contract ! has no right of action against A. %owever B as the promisee 'nder the contract and a party to the contract can s'e A. Two possible remedies arise namely damages at common law and specific performance in e5'ity. !an ! re5'ire B to s'e A? 6ee Coulls at *[email protected] per indeyer 9. (a)
amages at !ommon 2aw
Beca'se the remedy of common law damages for breach of contract will always be granted to a plaintiff B will always s'cceed. %owever the critical iss'e is the meas're of damages that will be recovered. !ritical to an 'nderstanding of the position of B in this context is the basic principle for the assessment of damages for breach of contract. As will be explored in more detail in the lect'res on remedies damages seeks to compensate the plaintiff for the loss s'ffered as a res'lt of the breach. ;f no loss is s'ffered then a nominal (or token) award of damages is made in favo'r of the plaintiff. ;f real loss is s'ffered an award of s'bstantial damages is made in favo'r of the plaintiff. ;n o'r example it is likely to be the case that the meas're of damages to be recovered by B wo'ld be nominal beca'se B s'ffers no loss as a res'lt of the breach by A. 't another way B will be awarded. 6ee Coulls at *$#>*[email protected] where indeyer 9.
/ Beca'se in most cases the meas're of damages recovered will be nominal there is little reason for B to p'rs'e common law damages. The fact that B cannot s'e to recover as damages the meas're of !*/ *-- more skeptical s'ggesting that it was Dan extraordinary defect< in the law that B sho'ld have no remedy for common law damages against A. (b)
6pecific erformance in E5'ity
nlike common law damages specific performance will not always be granted to a plaintiff 'pon proof of a breach of contract. There are vario's gro'nds 'pon which a co'rt will ref'se specific performance. A partic'larly important one in the present context is that the remedy will be ref'sed if common law damages wo'ld be an ade5'ate remedy. The critical decision in this respect is Bes$ic% v Bes$ic% #7,+ A! *,. From this case set o't: • • •
The facts The iss'e that had to be determined by the %o'se of 2ords The decision and reasoning of the %o'se of 2ords as to why damages were an inade5'ate remedy on the facts of the case?
6ee also Coulls at *$/ per indeyer 9.
The C$(e !"
Trident General Insurance v McNiece Bros
The most significant %igh !o'rt decision on privity has been Trident General nsurance Co Ltd v !c"iece Bros Pty Ltd (#,,) #7* !28 #$. From this case set o't: • •
The facts The different views on the stat's of the doctrine of privity set o't by the 4'dges of the %igh !o'rt. hat reasons did 1ason !9 G ilson 9 give for their Dradical< approach to privity and how did they compare and contrast with those of the other Dradical approach< given by Toohey 9? hat was the approach of the Dconservative< 4'dges Brennan eane G awson 99 to the stat's of privity? To which of the above two approaches does the 4'dgment of Ca'dron 9 belong?
;n interton Constructions Pty Ltd v 'am(ros #ustralia Ltd (##) #$# A28 /7/ C'mmow 9 after a long analysis of Trident concl'ded at /7, with the following observation:
At best ... there is s'pport by three only of their %ono'rs for the proposition ... that the old r'les do not apply in their f'll vigo'r. %is %ono'r was of co'rse referring to 1ason !9 ilson Toohey 99.
e#er$) L$ 3E4%e*ti!#( t! the &!%tri#e !" Privit
There are a n'mber of general law principles which enable a third party s'ch as ! in o'r example to overcome the doctrine of privity. Beca'se they rely 'pon establishing the elements of other established legal doctrines and instit'tions they are not tr'e exceptions. 8ather they constit'te means of circ'mventing the doctrine of privity beca'se these other legal principles apply on the facts of the given case. 6ome of the key exceptions are disc'ssed below. (a)
The r'le here is that if one of the contracting parties contracts as an agent then either the agent or the principal b't not both can s'e to enforce the contract. ;n o'r example if B is !
The facts The iss'e that had to be determined by the rivy !o'ncil The decision and reasoning of the rivy !o'ncil as to how the elements of !idland Silicones were satisfied in this case.
* ;n T-e Eurymedon the close relationship between the carrier and the third party was cr'cial to establishing the third element in !idland Silicones. ;t now appears that if the third party simply pleads the excl'sion emption when s'ed for damages that will be eno'gh: Life Savers v +rigmo(ile. ;f all the elements in 1idland 6ilicones are met a contract arises between the owner of the goods and the third party. There is th's no privity iss'e. The third party becomes a contracting party in a later contract that was anticipated by the principal contract between the cargo owner and the carrier. ;n this respect in 'om(urg 'outimport B. v #grosin Private Ltd )T-e Starsin* @$$/+ @ All E8 ,* at ,*#>,*@ 2ord 1illett said: ;t is well established by the a'thorities that the %imalaya cla'se has the effect of bringing into being a separate or collateral contract between the cargo owner and a third party 's'ally an independent contractor s'ch as a stevedore 'nder which the third party en4oys exemption from liability to the cargo owner. They also establish that the contract is a 'nilateral or IifI contract by which the third party 'ndertakes no obligation to the cargo owner of any kind b't the cargo owner promises that if the third party does anything in the co'rse of its employment which damages the cargo it will have the benefit of the protective provisions of the cla'se. ... 6'ch a contract is a promise for an act not a promise for a promise. ;f in the co'rse of its employment the third party performs an act in relation to the goods which it is 'nder no obligation to the cargo owner to perform it will at the one and same time bring the contract with the cargo owner into existence and s'pply the consideration for the cargo ownerIs promise of exemption from liability. ;n relation to the contract between the owner of the goods and the third party 2ord 1illet went on to say at ,*/: 6'ch a contract cannot properly be characterised as a contract of carriage. ;t is rather a contract of exemption which is ancillary or collateral to other contract'al arrangements (the time charter and the bill of lading) which were necessary to achieve the carriage of the goods on the chosen vessel. (b)
The law of tr'sts can enable a third party beneficiary to initiate action that will enforce the promisor
7 The 'se of tr'st law here does not give rise in the strict sense to an exception to the doctrine of privity. ;n concept'al terms the action against A is p'rs'ed by B albeit at !#* per awson 9. hat were the reasons why eane 9 fo'nd in favo'r of 1cHiece Bros on the basis of tr'sts b't awson 9 did not? hen the tr'st exception is p'rs'ed and B s'es for damages the meas're of damages that is recovered reflect the loss to ! the beneficiary of the tr'st. The damages that are recovered are held by B on tr'st for !: Lloyd’s v 'arper (#,,$) 28 #7 !h @$= Eslea 'oldings Ltd v Butts (#,7) 7 H628 #*. (c)
Following the decision in altons Stores )nterstate* Ltd v !a-er (#,,) #7- !28 /, a third party may be able to seek relief against a promisor on the basis of promissory estoppel principles. To s'cceed the third party wo'ld need to establish the elements of promissory estoppel. 6ee Trident at #-* per eane 9. ;n Trident 1ason !9 ilson 9 at #@/>#@- were of the view that it was likely that estoppel co'ld be established on the facts of the case b't it was not necessary for them to determine the iss'e on the basis that they had decided the case on other gro'nds. (d)
hen we examine the remedy of /uantum meruit later in this co'rse we shall see that the principle of 'n4'st enrichment is the principle that 'nderpins the remedy. The essence of the principle is that it re5'ires a defendant Dto make fair and 4'st restit'tion derived at the expense of a plaintiff<: Pavey & !att-e$s Pty Ltd v Paul (#,) #7@ !28 @@# at @*7>@* per eane 9.
;n Trident eane 9 at #-*>#-7 indicated that the principle co'ld possibly be the basis for a third party to seek relief. %owever it was Ca'dron 9 especially at #7 in Trident who based her decision in favo'r of 1cHiece Bros on the basis of the principle of 'n4'st enrichment. The action based 'pon 'n4'st enrichment is not based on the contract b't independent of it. %owever 's'ally it will correspond in content and d'ration with the promisor
St$t7t!r E4%e*ti!#( t! the &!%tri#e !" Privit
nsurance Contracts #ct #,* (!th) s. -, Bills of Exc-ange #ct #$ (!th) ss. /7>-/ C-e/ues #ct #,7 (!th) s. / !otor .e-icles )T-ird Party nsurance* #ct #-@ (H6) s. #$()