Topic 10 Privity Contracts for the Benefit of a by vow15418


									                   Topic 10 - Privity: Contracts for the Benefit of a Third Party

1. The Two Limbs of Privity
2. Contracts Imposing Burdens on Third Parties
3. Contracts for the Benefit of Third Parties

Tweddle v Atkinson – Per Crompton J: ‘The modern cases have, in effect, overruled the old
decisions; they shew that the consideration must move from the party entitled to sue upon the
contract. It would be a monstrous proposition to say that a person was a party to the contract for
the purpose of suing upon it for his own advantage, and not a party to it for the purpose of being
sued. It is said that the father in the present case was agent for the son in making the contract, but
that argument ought also to make the son liable upon it. I am prepared to overrule the old
decisions, and to hold that, by reason of the principles which now govern the action of assumpsit,
the present action is not maintainable.’

4. Privity and Consideration

Dunlop v Selfridge – Per Viscount Haldane – ‘[I]n the law of England certain principles are fundamental.
One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus
quaesitum tertio [right of a third party to recover] arising by way of contract...A second principle is that if a
person with whom a contract has been made is to be able to enforce it consideration must have been given
to the promisor or to some other person at the promisor’s request.’

                                A              B                    C                     D
P is Privy to Contract          Yes            No                   Yes                   No
P Gave Consideration            Yes            No                   No                    Yes
Privity Rule                    Can sue        Cannot sue           Can sue               Cannot sue
Consideration Rule              Can sue        Cannot sue           Cannot sue            Can sue

5. The Basis of the Rule: Arguments for and Against

Contracts (Rights of Third Parties) Act 1999 (UK) – 1. (1) Subject to the provisions of this Act, a
person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the
contract if- (a) the contract expressly provides that he may, or (b) subject to subsection (2), the
term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the
parties did not intend the term to be enforceable by the third party.

6. Exceptions and Circumventions

        (a) Statute
        (b) Enforcement by the Promisee
        (c) Trust
        (d) Agency

7. Exclusion Clauses for a Third Party’s Benefit

8. Judicial Narrowing of the Scope of Privity in Canada
(a) Exclusion Clauses for the Benefit of Employees

London Drugs v Keuhne & Nagel –

Sec. 11(a) The responsibility of a warehouseman in the absence of written provisions is the reasonable care
and diligence required by the law.

(b) The warehouseman’s liability on any one package is limited to $40 unless the holder has declared in
writing a valuation in excess of $40 and paid the additional charge specified to cover warehouse liability.

‘When a person contracts with an employer for certain services, there can be little doubt in most cases that
employees will have the prime responsibilities related to the performance of the obligations which arise
under the contract…When the loss occurred, the [employees] were acting in the course of their
employment and performing the very services, albeit negligently, for which the appellant had contracted
with Kuehne & Nagel. The appellant cannot obtain more than $40 from Kuehne & Nagel…However…it is
trying to obtain the full amount from the individuals (‘warehousemen’) who were directly responsible for
the storing of its goods in accordance with the contract…[T]here is an identity of interest between the
[employees] and Kuehne & Nagel as far as performance of the latter’s contractual obligations is concerned.
When these facts are taken into account, and it is recalled that the appellant knew the role to be played by
employees pursuant to the contract, it is clear to me that this court is witnessing an attempt in effect to
circumvent or escape a contractual exclusion [clause]. In my view, we should not sanction such an
endeavour in the name of privity of contract.’

‘If the owner declares the value of the goods, which he or she alone knows, and pays the additional
premium, the bargain will have placed the entire risk on the shoulders of the warehouseman. On the other
hand, if [as here] the owner refuses the offer of additional coverage, the bargain will have placed only a
limited risk on the warehouseman and the owner will be left with the burden of procuring private insurance
if he or she decides to diminish its own risk. In either scenario, the parties to the contract agree to a certain
allocation and then proceed, based on this agreement, to make additional insurance arrangements if
required. It stretches commercial credulity to suggest that a customer, acting prudently, will not obtain
insurance because he or she is looking to the employees for recovery when generally little or nothing is
known about the financial capacity and professional skills of the employees involved. That does not make
sense in the modern world.’

‘I am of the view that employees may obtain [the benefit of a limitation clause found in a contract between
their employer and the plaintiff] if the following requirements are satisfied:

1) The limitation of liability clause must, either expressly or impliedly, extend its benefit to the employees
(or employee) seeking to rely on it; and

2) the employees (or employee) seeking the benefit of the limitation of liability clause must have been
acting in the course of their employment and must have been performing the very services provided for in
the contract between their employer and the plaintiff (customer) when the loss occurred.’
(b) Waiver of Rights Against Third Parties

Fraser River Pile & Dredge – ‘In the event of any payment under this Policy, the Insurers shall be
subrogated to all the Insured's rights of recovery therefor, and the Insured shall execute all papers
required and shall do everything that may be necessary to secure such rights, but it is agreed that
the Insurers waive any right of subrogation against: ... (b) any charterer(s) and/or operator(s)
and/or lessee(s)...’

‘[E]xtrapolating from the specific requirements as set out in London Drugs, the determination in
general terms is made on the basis of two critical and cumulative factors: (a) Did the parties to the
contract intend to extend the benefit in question to the third party seeking to rely on the contractual
provision? and (b) Are the activities performed by the third party seeking to rely on the contractual
provision the very activities contemplated as coming within the scope of the contract in general, or
the provision in particular, again as determined by reference to the intentions of the parties?’

‘It is important to note, however, that the agreement in question was concluded subsequent to the
point at which what might be termed Can-Dive’s inchoate right under the contract crystallized into
an actual benefit in the form of a defence against an action in negligence by Fraser River’s
insurers. Having contracted in favour of Can-Dive as within the class of potential third-party
beneficiaries, Fraser River and the insurers cannot revoke unilaterally Can-Dive’s rights once they
have developed into an actual benefit. At the point at which Can-Dive’s rights crystallized, it
became for all intents and purposes a party to the initial contract for the limited purposes of relying
on the waiver of subrogation clause.’

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