General principle?
a person who is not a party to the contract cannot enforce the contract and cannot incur any obligations under the contract
Who is a party to the contract?
- A person who entered into an agreement AND
- Who gave consideration in support of the agreement
Is a third party who gain benefit from the contract seek to enforce the contract?
No - they are not a party to the contract Coulls v Bagot’s
Coulls v Bagot’s Executor & Trustee Co Ltd
Issue
- Was Doris a party to the agreement? Could she claim against O’Neil Construction Pty Ltd? Even if she was a party to the agreement, could she enforce it given that she had not provided consideration
Couls v Bagot’s Executor & Trustee Co Ltd judgement (majority and dissent)
Majority: Mrs Coulls is not a party to the contract and therefore cannot take action
○ Her name was not in the heading
○ Language in the contract was singular first person, “I authorise”
○ Appearance of her signature does not make her a party; the agreement must be considered as a whole
- While Mrs Coulls may be legally entitled to payment of the royalties under the terms of the contract as a beneficiary, because she was not a party to the contract, she could not sue to enforce it
Dissent:
agreement is joint between both Mr and Mrs Coulls
- Mr Coulls provided consideration for both parties
- Payment clause and signature make it clear she is privy to the contract
Mrs Coulls could seek to enforce the contract
Ways of circumventing/ Non Application of the privity rule (9)
Enforcement by a party Agency Assignment or novation of rights Special exception for insurance contracts Trust Unjust enrichment Estoppel Tort Misleading and deceptive conduct
Enforcement by the promisee (party)
Promisee can sue a promisor to enforce a contractual promise to confer a benefit on a third party
Remedies available may not be sufficient to ensure the third party obtains the promised benefit
Damages- based on loss suffered by party to the contract (nominal damages available where loss is suffered by a third party beneficiary)
Specific performance- many limits on when it is available
This avenue requires a promisee that is willing to enforce on behalf of the third party. Extremely rare.
Agency
- who is an agent
- who are the parties to a contract entered by an agent
- requirements
- Who is an agent?
A person who has power to enter into a contract on behalf of another person (the principal) - Who are the parties to a contract entered into by an agent?
If A, acting as agent of P, enters into a contract with B, then the parties to the contract are P and B
Therefore a party not involved in the acts on contract formation (the principal) is nevertheless a party to the contract
An exception to the privity rule - Requirements:
An agency relationship exists
With respect to the particular transaction under consideration, the agent was purporting to act on behalf of the principal and not soley on his or her own behalf, unless the contract is ratified
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The ‘New York Star’) (1978) 139 CLR 231 - issue
- Is PJS a party to the contract (i.e. can the Himalayan clause be used by them)?
- Was Blue Star Line acting as an agent for PJS?
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The ‘New York Star’) (1978) 139 CLR 231
- principles
Test established:
- A contractual promise to confer a benefit on a party who is not directly involved in the making of an agreement will be enforceable by the beneficiary if:
○ The contract makes it clear that a benefit is to be conferred on a beneficiary;
○ The contract makes it clear that the promisee is acting as agent of the beneficiary;
○ The promisee was authorised to enter into the contract on the beneficiary’s behalf (or the contract was subsequently ratified);
○ The beneficiary provided consideration for the promise.
Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (The ‘New York Star’) (1978) 139 CLR 231 - judgement
BARWICK CJ: PJS could rely on the clause if:
1. The Bill of Lading made clear PJS was intended to be protected (conceded at trial)
2. The bill of lading makes it clear that the carrier was contracting as agent for the stevedore as well as on its own behalf (conceded at trial - made clear in clause two)
3. Either the carrier was authorised to make the contract on behalf of the stevedore or the stevedore subsequently ratified the carrier’s actions
○ PJS knew about the bill of lading and it’s exception clauses
○ Blue Star acted, as agent, to protect individual contractors liability
○ Blue Star entered on behalf of PJS
4. PJS provided consideration to the S&S (consignee)
○ Unloading cargo was sufficient consideration
- Assignment:
the transfer of some or all of the contractual rights owed to one contractual party to a third party
- Novation:
termination of the original contract and the formation of a new contract between one of the original contracting parties and a substituted (third) party
Creating a special exception for insurance contracts
TRIDENT:
Mason CJ, Wilson and Toohey JJ: a special exception for insurance contracts
• Allowing contractors like McNiece to sue Trident gives effect to the presumed intention of Trident at the time it issued the insurance policy
• Prepared to create an exception to the privity rule relating to insurance contracts
Unjust enrichment
per Gaudron in Trident
Trust
where A promises B to confer a benefit on C, B can be said to hold the benefit of the promise on trust for C; Trident, per Deane J
Tort
Hill v Van Erp
The promisor owes a duty of care to the third party
If the promisor owes a duty of care to the third party under the law of negligence the third party can obtain relief by the law of tort
Hill v Van Erp (1997) 188 CLR 159 - decision
- Although Van Erp was not a party to the contract she would have benefited from it had it been properly formed. She sued in tort for negligence in preparing the will.
- In some circumstances, a beneficiary who has no contractual rights will be able to enforce an equivalent obligation imposed on the promisor by the law of tort
- If the promisor owes a duty of care to the third party under the law of negligence, the third party can obtain relief by the law of tort
**Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourmet Holding AG [2004] NSWSC 149
the principle established in trident ( special exception for insurance contracts) could be extended to letters of guarantee because of similarities between contracts of insurance, guarantees and indemnities – there is a common intention that a third party would get the benefit of the contract and had arranged its affairs accordingly
Remedies if privity applies
damages
specific performance
Even if the third party, for whom the contract confers a benefit, persuades the promisee to sue the promisor for breach of contract, it may not result in a desirable outcome for the third party
DAMAGES - if the privity rule applies
The usual remedy for a breach of contract is to award the plaintiff damages (not the third party)
General rule: if non-performance of the promise causes no particular harm to the promisee, then the promisee will only be entitled to nominal damages (Beswick v Beswick). If the third party suffers a detriment but the promisee does not the damages will be insignificant.
SPECIFIC PERFORMANCE - if the privity rule applies
Where damages are shown to be an inadequate remedy, a plaintiff can seek from the court an order for specific performance. Only available where the promisee is willing, or obliged by a trust, to sue on behalf of the third party
An award of specific performance is not appropriate in all cases - the court doesn’t want to have to supervise the performance.
REFORM of privity
Legislation has intervened in certain contexts and jurisdictions to override the doctrine in the case of third party beneficiaries
Insurance Contracts Act 1984 (Cth)
Property Law Acts in Qld,NT & WA
UK’s Contracts (Rights of Third Parties) Act 1999
Contracts (Privity) Act 1092 (NZ)
