Download Topic 3(b): PRIVITY OF CONTRACT

Topic 3(b): PRIVITY OF CONTRACT
(1) The General Rule
 Only parties to a contract can acquire rights and liabilities under the contract (legally bound and can
enforce it).
 HC authority: Coulls v Bagot’s Executor and Trustee Co Ltd.
Background:
 Developed from BARGAIN theory of consideration, and must move from promisee.
 Distinguished between privity and consideration in: Barwick CJ in Coulls v Bagot’s Executor and
Trustee Company Ltd (1966) 119 CLR 460 and Mason CJ, Toohey and Wilson JJ in Trident concluded
that consideration and privity were two distinct concepts.
Beswick v Beswick [1968] AC 58: Agreed to sell coal merchant business to nephew in return for annuity to be
paid to him, and after his death – his wife. B died and nephew stopped paying. Wife sued, but HOL held she had
no right, as she was not party to contract. But the Estate of B sued for specific performance on nephew’s
promise and admin of the estate was wife, so she won.
Taddy and Co v Sterious & Co [1904] 1 Ch 354: Manufacturer T cannot sue retailer for selling below minimum
price. Retailer contracts with wholesaler, who contracts with manufacturer. No contract between retailer and
manufacturer. Now s 48 of TPA outlaws this practice of “resale price maintenance”.
(2) Exceptions to the Doctrine of Privity of Contract
1.
Agency
5.
Insurance Contracts
2.
Covenants on land
6.
statutory – abolition
3.
Negotiable
or incursions
instruments
7.
Exclusion clauses
4.
Trusts
8.
Assignment
9.
1.
10.
Unjust enrichment /
promissory estoppel
Tort
Abolition of the
Privity Rule
1. Agency
 Authorised agent discloses agency to 3rd party: contract between 3rd party and agent on behalf of
principal, P can enforce contract against 3rd party and vice versa.
 HC authority: International Harvester Co of Australia Pty Ltd v Camgan’s Hazeldene Pastoral Co
(1958) 100 CLR 644.
 Where agency is not discloser: if agent has actual authority and intends to contract on behalf then
undisclosed principal can sue and be sued upon the contract: see Teheran-Europe Co Ltd v ST
Belton (Tractors) Ltd [1968] 2 QB 545.
2. Covenants on land
 Law of real property allows for the attachment of restrictive covenants and easements to land.
 Eg. A transfer land to B who covenants (promises) not to build a piggery on the land. Subject to
proper legal formalities, B’s promise will bind future owners of the land. So if B sells the land to C,
C is bound by B’s promise. A or A’s successors in title can legally enforce the covenant.
 Authority: Tulk v Moxhay (1848) 41 ER 1143. Legislation is stepped in to restrict this exception.
3. Negotiable Instruments:
 Relates to negotiable instruments such as bills of exchange, promissory notes and cheques.
 Eg. X writes out a cheque payable to “Y or bearer” in satisfaction of a debt. Y negotiates the cheque
to Z. Z deposits the cheque in his bank for payment but X’s bank dishonours the cheque. Even
though there is no contractual relationship between X and Z (they may have never met each other), Z
can sue Y for the amount of the cheque.
4. Equitable doctrine of trust
 Involves: settlor (person who sets up the trust), the trustee (the person who manages the trust) and the
beneficiary (who benefits from the trust). Problem: trustee enters into contract with another party and
does not disclose that they are acting as trustee and contract is really for beneficiary.
 Beneficiary can sue to enforce such contract, but must prove trust exists, intention to create trust.
 Can trust be inferred? Cases contradictory.
 Trident v McNiece: “requisite intention (to create a trust) should be inferred if it clearly appears that
it was the intention of the promisee that the third party should himself be entitled to insist upon
performance of the promise and receipt of the benefit and if trust is, in the circumstances, the
appropriate legal mechanism for giving effect to that intention.”
5. Insurance contracts
 Section 48(1) of the Insurance Contracts Act 1984 (Cth): a person who is not a party to a contract of
insurance but who is otherwise specified in that contract to recover direct from the insurer.
 This section operates to indemnify a party in contracts of property insurance. (Barroora Pty Ltd v
Provincial Insurance Limited (1992) 26 NSWLR 170.
6. Other statutory remedies
 Overrules privity:
o Queensland section 55 Property Law Act, 1974
o Western Australia sections 11(2) and 11(3) Property Law Act, 1969
o Law of Property Act, 2000 (Northern Territory)
 Trade Practices Act (division 2A of Part V): no privity between consumer and manufacturer. But tort
law of negligence makes manufacturer liable for defective rpdocuts.
7. Exclusion clauses
 Exclude liability of one of contracting parties for any potential breaches: often worded widely to
protect the servants, agents and independent contractors of the benefiting parties.
 Sometimes held, sometimes not.
Wilson v Darling Island Stevedoring (1956) 95 CLR 43: shipping company contract to ship some cloth
from France to Sydney. On arrival, shipper engaged DIS to unload. Due to DIS’s negligence, crane broke a
water pipe and cloth ruined. W sued and DIS sought to rely on exclusion cause between W and shipping
company. Court held: DIS was stranger to contract, could not rely.
Scruttons Ltd v Midlands Silicones Ltd [1962] AC 446: Lord Reid stated criteria for 3rd parties to gain the
benefit of an exclusion clause. They were:
(i) The exclusion / limitation clause is intended to protect the stevedore
(ii) The carrier contracts on its own behalf and "is also contracting as agent for the stevedore"
(iii) The carrier must have authority to do this from the stevedore (later ratification is sufficient)
(iv) Any difficulties about the need for "consideration moving from the stevedore are overcome"
NZ Shipping Co Ltd v Satlerthwaite and Co Ltd [1975] AC 154:
 Exclusion clause held to cover the third party.
 Upon port, machinery being transported was damaged on unloading.
 Clause in the shipping agreement excluding negligence included a reference to the shipper acting as
agent for all persons who might be employed by it and all such persons were deemed to be parties to

the contract. When the ship reached port the machinery being transported was damaged during
unloading.
Court held: conditions laid down in Midlands had been satisfied. The stevedores gave consideration
by performing its services of unloading the goods from the ship.
Life-Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431:
 F transport chocolate from Sydney to Brisbane by refrigerated van. F hired subcontractor, who
transported chocolate at higher temp than specified, so ruined. Contract had exclusion cause
exempting F and its servants, agents and subcontractors
 Significance: principle extended to carriage of goods on land.
8. Assignment / Novation
 Transfer of rights and/or liabilities under the contract: original contract discharged and replaced by
fresh contract between new parties.
 Generally not permissible at common law but only in equity. Allowed in legislation: Conveyancing
Act1919 (NSW) s 12.
9. Unjust enrichment –restitution law
 Promisor accepted consideration for promise to benefit 3rd party: liable to 3rd party.
 See Gaudron J ‘s judgment in Trident at 176.
10.Tort
See Bryan v Mahoney (1995) 182 CLR 609 and Hill v Van Erp (1997) 188 CLR 159
11. Abolition of the Privity Rule
 Doubt on doctrine of privity?
Trident General Insurance Co. Ltd v McNiece Bros. Pty Ltd:
 M sought to take benefit of insurance contract between T and Blue Circle Southern Cement Ltd. M
was principal contractor for construction work on plant owned by B. B entered into contract of
insurance with T in which T agreed to indemnify ‘The assured’ to mean B, all of its related
companies and all contractors and suppliers. 1979: Hammond (crane operator) working for M but
employed by another company sued M for damages of personal injuries. M sought indemnity from T
under terms made with B. T argued that M was not party and gave no consideration.
 Insurance Contracts Act 1984 (Cth) passed. Does not apply to contracts before commencement. So
M had to rely on common law.
 Trial judge: held M entitled to contract with B as its agent.
 NSW COA: held that B had not contracted as agent, but upheld decision that exception of privity
rule should be recognized in insurance contracts for commercial convenience, practice and to
parallel statutory reforms.
 HC: upheld with 5-2 but different reasons:
o Mason Cj and Wilson J, Toohey J: privity does not apply to insurance contracts because
of injustice, third parties rely heavily on insurance contracts.
o Gaudron J: privity not apply because of unjust enrichment. Promisor unjustly enriched at
expense of 3rd party.
o Deane J: terms of contract indicated B held rights against T on trust for non-party
beneficiaries including M.
o Brennan and Dawson JJ: dissented as there was no basis for overruling doctrine of
privity, or special principle allowing third parties to enforce contracts of insurance.
Injustices caused by rule could be overcome by law of trusts, estoppel and damages.
CASES AFTER TRIDENT
Barroora Pty Ltd v Provincial Insurance Limited (1992) 26 NSWLR 170:
 Supreme Court had to decide whether contracts of property insurance fell within the exceptions to
the doctrine of privity and to the rule that consideration had to move from the promisee.
 Brownie J: Decision of Trident applied to this case of property insurance, though Trident was a case
of liability insurance. Did not attempt to define boundaries of the Trident exception. Used s 48 of the
Commonwealth Insurance Contracts Act.
Co-operative Bulk Handling Ltd v Jennings Industries Ltd (1996) WAR 257:
 WA Supreme Court: held Trident not limited to liability insurance nor could it be inferred that only
intended beneficiaries who had suffered detriment by reliance on the promise would be entitled to
enforce the promise.
Does Trident apply to any contract, and not just insurance?
Gummow J in Winterton v Hambros (1991) 101 ALR 363 at 368:
 Judges in Trident carefully restricted their comments to the particular facts and to the law of
insurance and so could not be used to get around the problem of privity in other cases.
Hickey v Australian Rope Works Pty Ltd, unreported, Supreme Court of Victoria per Beach J (12 May
1998):
 P sued former employee for unsafe work practices, leading to contracting lung cancer. Former
employer no longer existed, so sued employer’s insurers.
 The relevant provisions of the indemnity policy provided that the insurer would indemnify the
employer against sums that the employer became liable for as a result of a successful personal
injuries claim against that employer.
 Court held that the employee was not a party to that indemnity policy unless Trident could be
directly applied. Present case clearly distinguishable from the facts of Trident. No common intention
of both insurer and insured to cover third parties can be seen. Privity prevailed.
Suggested Reforms
Contracts (Rights of Third Parties) Act 1999, U.K:
 A third party should be able to enforce a contract if there was a dual intention by the parties that they
intended to benefit that third party and that it should be able to sue on the contract
 A third party should obtain the benefit of any exclusion clauses if the parties had intended the clause
to cover that third party
 A third party should only be able to sue a promisor if the promisee had performed its end of the
bargain
 A promisor should have available against the third party any defence it could have used against the
promisee.
New Zealand’s Privity of Contracts Act 1982.
American solution:
 Right to sue only to intended beneficiaries and not to incidental beneficiaries.
 Parties can vary their contract at any time before the beneficiary has relied on the promise.