The ‘Privity Rule’ was once considered a fundamental law principle. The principle that a person who is not a party to a contract can neither enforce a contract by benefiting from it nor incur any liability was firmly established in English law. However, the principle has been profoundly criticized and is now subject to significant exceptions or circumvented by the drafting of relevant exemption clauses. The principle has also been abrogated in many jurisdictions because applying the ‘Privity Rule’ potentially results in gross injustices.
Question: Trace the demise of the ‘Privity Rule’ in international commercial law and explain, giving reasons, whether, in your opinion, the ‘significant exceptions’ to the application of this Rule benefit international trade.
Introduction
The principle of privity is a concept entitled to parties in a contract whereby parties have liabilities and rights under it.[1] It also upholds that a party may not be able to seek for recovery of damages in the light of breaching and has no right to enforce the contractual agreement if the party does not belong to the contract i.e. third party. This doctrine was the central focus of English law in the nineteenth century during the phase of bargaining. The implication that constitute the doctrine of privity is that the contracting parties may agree to benefit a third party and even impose obligations to the third party[2]. However, enforcement of these obligations is vulnerable to failure since the third party case is not defined in the doctrine of privity. The emerging issue in the application of the doctrine of privity is the rule in conjunction with benefits, which provides inconvenient practices. It is due to these reasons many courts have recognized several exceptions to this doctrine. Consequently, the principle of privity is rarely practiced in the modern world due to the profound complexities that came along with it. Therefore, this essay explores the existing literature of secondary sources in tracing the demise of the privity rule in international commercial law and assessing whether the significant exception to the application of this rule benefits international trade.
The principle of privity has faced huge assault and criticism from the judiciary, law bodies of reform and academics due to many pinpointed difficulties of applying it.[3] One of the crucial basis of this argument is the fact that a third party has no legal rights to act towards contract enforcement to gain benefits agreed between the contracting parties. Thus the intentions of the contracting parties may be thwarted and as well as going against the basic principles of contract freedom. This element has a significant impact on international commercial law because it undermines the expectations of parties in a contract. According to Lord Steyn, a contract is ineffective when a party is denied its benefits, which is a situation that brings about the element of unjust. Also, there is no reason to deny a third party for their benefit in a contract since there is no logical, policies and doctrines that will subject the third party to the same.[4] It is due to this reason, various countries have adopted other doctrines that govern parties entering into a contract. For instance, good faith and promissory estoppel principles among others. Their rationale behind this argument is the fact that the rule of privity is the main cause of thwarted contracts.
In the modern world, the principle of privity is rarely used in many countries. This aspect subject a great challenge in international trade when settling on a contract under it. The doctrine of privity is applied in a few countries across the globe, they include, India, England, Australia, France, and the United Kingdom. Besides, the current privity law has undergone numerous changes to fit in the context at which the economy is changing.
In 1983, Lord Diplock about the case of law society v Swim reaffirmed that the third party rights are non-recognized since they are prone to anachronistic shortcomings, which for quite a long time has been considered as a reproach to private English law. In the case of Wimpey Construction v Wooder Investment Development Ltd, Lord Salmon made a statement about damages incurred by the third party as unsatisfactory and wished if the statute was altered to cover these damages. The House of Lords would have considered the third party situation if the law had covered this aspect. Lord Reid made remarks concerning the forgotten case of Beswick v Beswick that lasted over twelve years since the call for reconsideration in coming up with a rule over the case.[5] In addition, many similar cases have remained unsettled because of unjust rule and there is a need to review it. In 1871 a third, party rule was established to cater for the third party beneficiaries of a given contract. The law required that a contract under which the third party is considered a beneficiary be entitled to receive the benefits of promised performance.
Vertical privity has undergone demise because of economic loss that works within the commercial code. This scenario is concerning product liability upon which it is viable under the warrant law[6]. Privity is regarded as a solution, for instance, the product possesses dangerous elements or is harmful for consumption. The recovery for this kind of damages, the court would want to investigate the privity of the product. The application of the privity doctrine results in very harsh results, which in some instances the harm became intolerable. The courts have made efforts to mitigate the consequences upon its strict application through various inroads. There is reluctance by various courts to provide legit viability of the doctrine of viability.[7] Even in the American courts, there is inconsistency in following and accepting the privity doctrine among many other common doctrines of law that are unquestioned. The doctrine of privity may not be relevant in the 20th century because of the changing dynamics of the economic system.
The area under which the privity rule causes difficulties is in conjunction with exempted clauses that limit or exclude tortious or contractual liability that is owned by the third party i.e. a sub-contractor, agent or employee of the party contracting. Strict compliance with the privity rule means that the third party may not depend on this clause. However, in some courts, the exemptions have been created to provide transparency and clear intentions that will be written in the commercial document. The intention of taking this initiative is to offer reliance on the exempted clauses by the third parties. Contrary this method is also limited. For example, it should be clear that the contractor acted as the agent of the third party at receiving liability limitation. However, the enforcement of exemption clauses is prone to failure since the intent to protect the third parties leads to ignorance over the allocation of obligations and risks agreed by the parties contracting. According to the law reform commission, a party in a contract that agrees to take certain risks or agrees to take action against a particular third party may be limited and will never be able to circumvent the established agreement. The current law bars third parties from depending on those clauses that are not well defined and may need reformation.[8]
Agency
Agency as an exception of privity rule that plays a significant role in international trade. Agency in this context refers to the existing relationship between two parties; whereby one party representatively appointed to act on behalf of the other to create a legally binding bond i.e. sale or purchase of goods. In international trade, there are many occasions where Agents need or involved. For instance, agents are involved in exportation, importation upon which there make contracts of storage, stevedoring and carriage on the client’s behalf. Contract general principles are vital for the aspect agency, which also govern various types of agency. The agent has to develop contract privity between himself and third party as well as the principle. The most important kind of agency is the agency between the principle and the agent. The privity between the third party and agent does not exist since the privity rule does not apply to third parties; however, it is important to establish a good rapport with the third party. The reason for integrating the aspect of agency in international trade is that it provides commercial convenience. The modern commerce cannot work with the absence of intermediaries especially in international trade and the law of agency. International trade, marine insurance, and goods carriage in most cases it frequently engages agency relationships.[9]
There are various types of agents, they include, Universal, general and special agents. The universal agent is an individual appointed to deal with all matters executed by his principle. This kind of agent possesses unlimited authority in any kind of action within his/her capacity. The general agent has the power and authority to act, as a representative in all kinds of businesses for his principle, for instance, a manager of a club is a general agent for the whole club. The special agents normally act on a particular occasion or purpose, for instance, signing the principle account cheque.
The duties of the agent in a contractual agreement are strictly obeying the instructions that are offered by the Principle. If the agent neglects and does an activity that is contrary to the agreed expectations, then the contract is breached. In the case between Bilton v Turpin, a broker belonging to insurance agreed with the principle about insuring his ship. Later on, the insurer failed to honor his obligation of insuring the ship.[10] The court ruled that the agent is liable for breaching the contract. Therefore, the agent must adhere to the principle of lawful instructions for instances of the contractual agency. Another duty that is relevant to international trade is exercise based on skill and care. All agents should possess the required care and skills to work as an agent. Failure to have a given standard of skill and care, the agent will be reliable for any damages caused.[11]
Trust
Another important exception in the principle of privity is trust. Parties agreeing must acknowledge that the party interested in the contract is trustworthy. Thus, trust is one of the most prevalent exceptions, whereby, trust is developed in the third party’s favor and the third party may go ahead and sue the breaching party. In many cases, no right can be conferred in the absence of trust. In the international trade context, the beneficiary has to create substantive evidence showing that indeed trust was established in favor of the third party in the contract. Failure to provide practical evidence then the third party may be denied to recover claims after breaching a contract.
The trusted device in the privity rule has failed due to incompatibility with other contractual concepts. The aspect of pf trust was implausible and awkward when trying to make a formalized argument in handling a specific case. Two problems emerge concerning the issue behind the trust, they include, and there must be practical evidence that the party interested in the contract had contractual trust intention. In a real sense, most contracting parties rarely do have the intention of trust. Secondly, trust should be binding without the beneficiary’s consent. Consequently, contracts are open to anytime termination and are as well as variating. In addition, the contracts that include the third party as a beneficiary will never make any intention to decline the power. The consequences with this perspective are that both the Canadian and English courts are not at liberty to use a trust or infer to it based on the third party receiving the benefit of the contract.
The effect of the third party rule complexities in commercial life
Upon several critics that were subjected to the law of privity regarding the unjust, the third-party faces.[12] The law had gone reformation to cater for this problem, which led to the formation of the third-party rule. Many pieces of research theoretically show that this rule had solved the problem of unjust; however, the practicability of the third rule is not effective in various ways.[13] This case is illustrated in two types of agreement or contract, they include, insurance contracts and construction contracts.
Constructive contracts
In the construction sector, contracts involve the builder and employer, especially for simple construction. On the other hand, complex construction engages a huge number of main contractors, several subcontractors, and other design professionals. In the complex construction, contracts are affected by the third party rule.
Contracts of simple construction have emerging difficulties when a contracting party agrees to pay another contracting party to work on its behalf, which in this case will benefit the third party[14]. For instance, a party agrees with a builder to do some work at the home of a particular relative. If the work does not meet the standards and it is defectively, the client has legal rights to sue the contracting party for damages caused and failure to execute his obligations to meet the requirement of the promised performance. The decisions made in Wiltshier Northern Ltd v Darlington BC and Lenesta Sludge Disposals Ltd v Linden Gardens Trust, reaffirm that, the recovery of damages can only be recovered based on nominal damages suffered.[15] This is because the client could have no suffering on the direct loss of finances because of the failure of the builder to execute his or her performance. The relative in this context has no right to sue the breaching party and in relation to the tort of negligence will not include the recovery of economic loss. This shows that the relative will not get repairs under the tort of negligence.
Contracts of complex construction, a series of agreements will be established between the project participants, responsibility allocations, overall constructor, sub-contractors specialist and other consultants i.e. surveyors, engineers, and architectures. In the United Kingdom, complex construction projects are normally documented and take the dimension of contractual procurement direction.[16]
The rule of privity asserts that only the contracting parties or the ones in the contractual relationship can sue each other. The unfortunate bit of it is that an individual in the main contracts cannot extend the advantage of engineers and architecture’s duties of skill and care to build and work following the standardized specifications to other subsequent tenants or purchasers of the funding or development institutions. This is because it might subject these institutions at incurring losses of any execution of defective work. In the modern law of the third party, this aspect may not be ascertained without binding the third party in the contract that has obligations which in this context the subsequent tenant or purchaser must make his/her identity known to commence with a given work. Failure to which the third rule may lack its relevance and become impractical to the situation. Also, the third party in question should seek the collateral warrant to allow extension of benefits. However, the actualization of this scenario involves a series of procedures and time, which might bring about confusion.[17] The problem that comes along with the third-party rule is that the succeeding owners of the fully completed buildings are not able to engage in contractual actions against the main contractor, architecture, engineer and any other third party whose execution of work might have caused defectives in performance and caused damages or loss.
Conclusion
The doctrine of privity has undergone tremendous changes since its foundation to fit within the structure of law. However, the earlier years the principle of privity faced very many challenges that contributed to unjust experiences to the parties that are contracting under it more especially for the third party. Various reformations have been created to curb some of the challenges encountered by the court in addressing cases within the doctrine of privity. Currently, the doctrine has been altered and the third party has considerations on specified exemption clauses in case the law of privity fails to address their issues. In the context of international trade, agency, as stipulated in the privity law, plays a major role in the international trade and commercial codes.
[1] See Trebilcock, “The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada”, (2007) 57 University of Toronto Law Journal 269.
[2] See the Contracts (Rights of Third Parties) Act, 1999, s. 1, which was enacted following the recommendations of the Law Commission in their 1996 Report Privity of Contract: Contracts for the Benefit of Third Parties (Law Com. No. 242, 1996).
[3] Garg, V. K. (2011). Doctrine of privity of contract and privity of consideration in India and British contaxt.
[4] Cheshire, Fifoot & Furmston’s Law of Contract (12th ed, 1991) pp 64-65; Treitel, The Law of Contract (9th ed, 1995) pp 534-536; Atiyah, An Introduction the Law of Contract (9th ed, 1995) pp 97-100. Shanklin pier Ltd v Detel Products Ltd [1951] 2 KB 854; Wells (Merstham) Ltd v Buckland Sand and Silica Ltd [1965] 2 QB 170; Charnock v Liverpool Cotpn [1968] 1 WLR 1498.
[5] See Beswick v Beswick (1968) AC 58, 72; Woodar Investment Developments Ltd v Wimpey Construction UK Ltd (1980) 1WLR 277, 291, 297-298, 300. See also dicta of Lord Diplock in Swain v Law Society (1983) 1AC 598,611; and of Lord Goff in The Pioneer Container (1994) 2 AC 324, 335 and White v Jones (1995) 2 AC 207, 262-263. See generally paras 2.63-2.69 below.
[6] Vertical privity concerns itself with “who, besides the immediate seller, is liable to the consumer for injuries caused by the defective product.” See Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848, 855 (1968).
[7] In Snipes Hall Farm Ltd v River Douglas Catchment Board (1949) 2 KB 500 in 1949 and Drive Yourself Hire Co (London) Ltd v Strutt (1954) 1 QB 250 in 1954. The existence of the doctrine of privity was, however, later doubted by Denning LJ in Smith See also G Treitel, The Law of Contract (cited above), at 588. However, the House of Lords once again affirmed the existence of the doctrine of privity in 1961 in Sruttons Ltd v Midland Silicones Ltd (1962) AC 446.
[8] The report, para. 2.45. See also paras. 3.15 – 3.18. It should be noted that this recommendation is subject to the normal rules on the incorporation and construction of exemption clauses so that exemption clauses should still be subject to close judicial control and scrutiny. In particular, legislative measures such as the European Communities (Unfair Terms in Consumer Contracts) Regulations, 1995 (S.I. No. 27 of 1995) would have to be taken into account: see Report, paras. 3.137 – 3.141.
[9] Roberts, R. T. (1962). Implied Warranties–The Privity Rule and Strict Liability–The Non-Food Cases. Mo. L. REv., 27, 194.
[10] Turpin v Bilton (1843) 5 Man & G 455
[11] See: In Keppel v. Wheeler (1926)136 L.T. Rep. 203. it was held that an Estate Agent must obtain the best price reasonably obtainable. Estate Agents were employed to sell a block of flats. They received an offer, which the owners accepted subject to contract. The agent then received a higher offer from someone else. They did not inform the owner of the higher offer but instead arranged a resale between the first and second offeror. Held: liable for breach of duty to obtain the best price obtainable and the damages payable was the difference between the two offers. The standard of care expected of an agent is that of the ordinary member of the trade or profession. A gratuitous agent must show the degree of care and skill that people ordinarily exercise in the conduct of their affairs.
[12] The first limb is that parties to the contract are legally entitled to enforce the contract; i.e. third parties do not obtain rights or benefits under the contract. The second limb prevents parties to the contract from imposing liabilities or obligations on third parties, See Pollock & Mulla, Pollock & Mulla on Indian Contract & Specific Relief Acts (12 ed, 2001), 25-26
[13] Andrews, N. (2001). Strangers to Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999. The Cambridge Law Journal, 60(2), 353-381.
[14] Franklin, When Worlds Collide: Liability Theories and Disclaimers in Defective Product Cases, 18 STAN. L. REv. 974, 991-92 (1966).
[15] Darlington Borough Council v. Wiltshier Northern Ltd (1995) W.L.R.1 68; Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd, 1994 A.C.1 85
[16] UK Law Commission, Privity of Contract (1991), Contracts for the Benefit of the Third parties, Consultation Paper No. 121 and UK Law Commission, Privity of Contract: Contracts for the Benefit of Third Party of Third parties, Report No 242 (1996)
[17] Cheshire, Fifoot & Furmston’s Law of Contract (12th ed, 1991) pp. 64-65; Treitel, The Law of Contract (9th ed, 1995) pp. 534-536; Atiyah, An Introduction to the Law of Contract (9th ed, 1995) pp. 97-100. Shanklin Pier Ltd. v. Detel Products Ltd. (1951) 2 KB 854; Charnock v. Lverpool Corpn. (1968) 1 WLR 1498
