#privity

Privity FZ LLE participates in Verofax pre-seed investment round

Verofax Limited, a start-up building innovative Traceability services with the application of blockchain, closed its recent pre-seed investment round with participation from Privity FZ LLE, based in the UAE, acquiring an equity stake. Privity is an independent venture-focused advisory firm, founded in Dubai in 2004, that has backed and invested in more than a dozen portfolio companies since its…

A product of legislative reform in response to growing criticism about the number, and incoherency of, exceptions to the doctrine of privity. 

Statutory third-party rights

Two main circumstances where contractual provisions can be enforced by a third party:

where the contract expressly provides that he may (section 1(1)(a));

where the contract term purports to confer a benefit upon him (section 1(1)(b));

provided that it appears that the parties did not intend the term not to be enforceable by the third party (section 1(2))

Nisshin Shipping Co Ltd v Cleaves & Co Ltd - if the contract is neutral on the question of whether the contract should be enforceable by a third party, this does not mean that section 1(1)(b) cannot apply.

Dolphin & Maritime & Aviation Services Ltd - Clark J drew a distinction between contracts which have a purpose of conferring a benefit and those which have a benefit as an incidental effect:

“the language used by the parties should show that one of the purposes of their bargain (rather than one of the incidental effects if performed) was to benefit the third party.”

Section 1(3) provides that the party must be  identified by name, as a member of a class or answering a particular description but need not exist when the contract is entered into. 

Great Eastern Shipping Co Ltd v Far East Chartering Ltd - successful reliance on section 1 where a letter of indemnity was held to be capable of being accepted by a ship-owner as the agent of the charterer.

Exceptions

The Act will not apply to:

bills of exchange, promissory notes and negotiable instruments (section 6(1));

contracts of employment (section 6(3));

contracts for the carriage of goods by sea (other than clauses of exclusion or limitation) (section 6(4)).

Variation of the contract = the promised benefit to the third party may NOT be removed by variation of the original contract, where:

the third party has communicated his assent to the term to the promisor

the promisor is aware (or can be reasonably be expected to have been aware) that the third party has relied on the term

Remedies for Third Parties

Section 1(5) = any remedy that would have been available to the third party, were he a party to the contract.

The General Rule

Privity of contract = only parties to a contract can acquire rights and liabilities under that contract. If you are not party to a contract you cannot sue/be sued under it.

Dunlop v Selfridge - Dunlop sold tyres to a wholesaler and made the wholesalers promise not to sell the tyres below a certain price. The wholesaler also sold the tyres on to Selfridge with the same agreement about price. Selfridge broke this agreement and Dunlop tried to sue them. 

Selfridge were not a party to the contract between Dunlop and the wholesaler, and therefore could not be sued under those terms

Exceptions to the rule

Privity can lead to unfairness, especially in cases where parties contracted to confer a benefit to a third party, and that third party cannot sue when the benefit is not forthcoming. Lord Steyn in Darlington Borough Council: “There is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties.”

Therefore there are exceptions:

exceptions provided by statute

collateral contracts

agency

covenants in land law

trusts

1. Exceptions provided by statute

e.g. Section 148(7), Road Traffic Act - requires drivers to have third-party insurance;  Section 56(1) LPA 1925 - allows a person to acquire an interest in land or other property even if that person is not expressly names in the conveyance

2. Collateral Contracts

A contract between two parties may be accompanied by a collateral contract between one of those parties and a third party relating to the same subject matter.

Shanklin Pier v Detel Products Ltd - Claimants entered into a contract with painters to paint their pier, on the assurance that the paint would last for at least 7 years. The paint peeled within 3 months. The claimants could not sue the painters because they upheld their part of the contract by taking all due care in the painting, therefore they sued the paint manufacturers. 

Although the claimants were not party to a contract with the paint manufacturers, there was a collateral contract that had arisen from the promise of the suitability of their paint.

3. Agency

Principal + Agent make the contract, but the contract binds the third party, whom the agent was representing. The third party to the creation can now sue for and against the contract.

4. Covenants in land law

= an agreement between two or more parties made in the form of a deed. A deed does not need to be supported by consideration.

Restrictive covenants = some covenants can run with the land and therefore can be enforced against third parties who were not present for their creation [Tulk v Moxhay]

Covenants in leases = landlord may enforce covenants against third parties to whom the lease is assigned

5. Trusts