Doctrine of Privity of Contract & Consideration

Doctrine of Privity of Contract & Consideration

Matters relevant to the doctrine of privity

One part of the traditional approach, that is, that relating to conferring benefits, has recently been significantly changed by legislation, which is discussed below. In addition, there are a number of situations which fall outside the scope of the doctrine.

Matters outside the doctrine

It has been argued that it is only because English law has declared many transactions not to be subject to the doctrine of privity that the doctrine itself has survived so long.

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party from enforcing a contract was much criticised, and has now been reformed by legislation, that is, the Contracts (Rights of Third Parties) Act 1999, based on recommendations from the Law Commission.

Right to vary the contract

Unless they have provided otherwise, the contracting parties will lose the right to vary or cancel the provision benefiting the third party if : the third party has communicated his assent; or the third party has relied on the term, and the promisor is aware of this; or the third party has relied on the term and the promisor could be reasonably expected to have foreseen this.

Attempts to allow the third party to sue

Attempts to extend the use of ‘trusts’.

  • In Watford’s case (1919), under a charter party, the ship owner promised the charterer to pay a broker a commission. Held—the charterer was trustee of this promise for the broker, who could thus enforce it against the ship owner.
  • However, in Re Schebsman (1944), a contract between Schebsman and X Ltd, that, in certain circumstances, his wife and daughter should be paid a lump sum, was held not to create a trust. The trust as a device to outflank privity was limited by the courts, presumably because of concern that the irrevocable nature of the trust may prevent the contracting parties from changing their minds. The courts no longer go out of their way to find that the parties intended to create a trust. Lord Denning launched a campaign against privity, and argued that s of the Law of Property Act 1925 intended to destroy the doctrine altogether.

Attempts to allow the promisee to enforce the contract on behalf of the third party

Specific performance. In Beswick v Beswick (1968), Peter Beswick had transferred his business to his nephew, in return for his nephew’s promise to pay his uncle a pension and, after his death, an annuity to his widow. The nephew paid his uncle the pension, but only one payment of the annuity was made. The widow, as administratrix of her husband’s estate, successfully sued her nephew for specific performance of the contract to pay the annuity, although the House of Lords implied that she would not have succeeded if she had been suing in her own right. Injunction. Similarly, an injunction may be awarded to restrain a breach of a negative promise on a suit brought by the promisee, for example, A promised B not to compete with C, or by a stay of proceedings. In Snelling v Snelling Ltd (1973), three brothers lent money to a family company, and agreed not to reclaim the money for a certain period. A stay of proceedings was granted to one of the brothers to stop another brother from breaking his promise and suing the company for the return of his money.

Attempts to impose obligations on third parties

Restrictive covenants inserted into a contract for the sale of land may bind subsequent purchasers, provided:

  • They are negative in nature;
  • The subsequent purchaser has notice of the covenants;
  • The person claiming the benefit has land capable of benefiting from its enforcement (Tulk v Moxhay (1848)).

The courts extended the rule in Tulk v Moxhay to personal property, for example, a ship. In The Strathcona (1926), the plaintiffs had chartered The Strathcona for certain months each year. The ship was sold to the defendant who refused to allow the plaintiffs to use the ship. The plaintiffs sought an injunction on the ground that the doctrine in Tulk v Moxhay should be extended from land to ships. The court granted an injunction.

Finally comment

However, in Swiss Bank Corpn v Lloyds Bank (1979), Browne-Wilkinson J considered that the decision in The Strathcona was correct. He suggested, however, that the tort of inducing a breach of contract or knowingly interfering with a contract would be a more suitable basis for the decision than Tulk v Moxhay. He stated that in his judgment a person proposing to deal with property in such a way as to cause a breach of a contract affecting that property will be restrained by injunction from doing so if, when he acquired that property, he had actual knowledge of the contract

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