Privity (Privacy) of Contract

1
Privity (Privacy) of Contract

• Privity of contract can be defined as follows
• As a general rule, only a person who is a party
  to a contract has enforceable rights or
  obligations under it.
• Third parties have no right of action save in
  certain exceptional instances.
• The common law doctrine of privity of contract
  states that a person cannot be bound by, or take
  advantage of, a contract to which he is not a
  party.
• See Dunlop v Selfridge 1915.
• The facts The claimant supplied tyres to Dew
  Co, a distributor, on terms that they would not
  re-sell the tyres at less than the prescribed
  retail price. If Dew Co sold the tyres
  wholesale to trade customers, they must impose a
  similar condition on those buyers to observe
  minimum retail prices. Dew Co resold tyres on
  these conditions to the defendant. Under the
  terms of the contract between Dew Co and
  Selfridge, Selfridge was to pay to the claimant a
  sum of 5 per tyre if it sold tyres to customers
  below the minimum retail price. They sold tyres
  to two customers at less than the minimum price.
  The claimant sued to recover 5 per tyre as
  liquidated damages.
• Decision The claimant could not recover damages
  under a contract (between Dew Co and Selfridge)
  to which it was not a party.

2
Contd..

• The party to the contract who imposes the
  condition or obtains a promise of a benefit for a
  third party can usually enforce it, but damages
  cannot be recovered on the third party's behalf,
  since a claimant can only recover damages for a
  loss he has suffered. Other remedies may be
  sought however.
• A third party may enforce a contract term, if
• The contract itself expressly so provides.
• The term confers a benefit on the third party,
  unless it appears that the contracting parties
  did not intend him to have the right to enforce
  it.
• The third party must be expressly identified in
  the contract by name, class or description, but
  need not be in existence when the contract is
  made (for example, an unborn child or a future
  spouse).

3
Exceptions to the rule of privity

• To prevent injustice, a number of exceptions to
  the rule have been acknowledged to enable
  beneficiaries to enforce their rights.
• 1 Agency. Where agents make contracts on behalf
  of their principals with third parties, the
  principals may sue or be sued on those contracts
  as if they had made them themselves.
• 2 Third-party insurance. A third party may claim
  under an insurance policy made for their benefit,
  even though that party did not pay the premiums
  (for example life assurance and third-party
  motor insurance).
• 3 Assignment of contractual rights. The benefits
  (but not the burdens) of a contract may be
  assigned to a third party, who may then sue on
  the contract (for example selling debts).
• The original debtor may be sued by the new
  creditor to whom the rights to collect the debt
  have been assigned. The duty to perform a
  contract cannot be assigned.

4
Contd..

• 4 Trusts. This is an equitable concept by which
  one person transfers property to a second person
  (the trustee), who holds it for the benefit of
  others (beneficiaries). The party who created the
  trust, which is often done by a will, lays down
  the rules under which it is to be administered.
  If these are not complied with, the beneficiaries
  have the right to ask the court to enforce the
  trust for their benefit.
• 5 Collateral contracts. The performance of one
  contract between A and B may indirectly bring
  another into being between A and C.
• 6 Contracts for the benefit of a group. Where a
  contract to supply a service is made in one
  persons name but is intended to benefit a group
  of people, the members of the group have no
  rights to sue at common law if the contract is
  breached there is no privity of contract between
  them and the supplier of the service. The court,
  however, may take some of their losses into
  account when awarding damages to the buyer.

5
Contingent Contract

• Contract Act of Nepal does not define contingent
  contract.
• Section 31 of the Indian Contract Act defines a
  contingent contract as follows
• A contingent contract is a contract to do or not
  to do something, if some event, collateral to
  such contract does or does not happen.
• Thus it is a contract, the performance of which
  is dependent upon, the happening or non-happening
  of an uncertain event, collateral to such
  contract.
• The collateral event is one, which does not form
  part of consideration of the contract, and is
  independent of it.
• According to Pollock and Mulla, a collateral
  event, means an event which is neither a
  performance directly promised as part of the
  contract, nor the whole of the consideration for
  a promise.

6
Contd..

• Contracts of insurance and contracts of indemnity
  and guarantee are popular instances of contingent
  contracts.
• As the performance of a contract is made
  dependent upon a contingency, contingent
  contracts are also known as conditional
  contracts. But in certain cases a contract may
  look like a conditional contract, whereas in
  fact it may be simply an ordinary absolute
  contract where the promisor undertakes to perform
  the contract in all events.
• For example, where A promises to pay Rs.500 to B,
  a property broker, if B manages to get a two
  rooms accommodation for him at a rental of
  Rs2,500 per months, it is not a contingent
  contract, though on the face of it, it appears
  like a conditional contract. It is an ordinary
  absolute contract because the uncertain event
  (namely, managing to get an accommodation) itself
  forms the consideration of the contract and is
  not a collateral event.

7
Contd..

• The following two elements are the essential
  elements of a contingent contract
• 1. The performance of such a contract depends
  upon the happening or non-happening of some
  future uncertain event.
• 2. The future uncertain event is collateral
  i.e., incidental to the contract.
• Rules Regarding the Contingent Contracts
• Contingent contracts to do or not to do anything
  if an uncertain future event happens, it cannot
  be enforced by law unless and until that event
  has happened. If the event becomes impossible,
  such contracts become void.
• Contingent contracts to do or not to do anything
  if an uncertain future event does not happen, it
  can be enforced when the happening of that event
  becomes impossible, and not before.
• Contingent contracts to do or not to do anything,
  if a specified uncertain event happens within a
  fixed time, becomes void, if, at the expiration
  of the time fixed, such event has not happened,
  or if, before the time fixed, such event becomes
  impossible.

8
Contd.

• 4. Contingent contracts to do or not to do
  anything, if a specified uncertain event does not
  happen within a fixed time, may be enforced by
  law when the time fixed has expired and such
  event has not happened, or, before the time fixed
  has expired, if it becomes certain that such
  event will not happen.
• 5. Contingent agreements to do or not to do
  anything, if an impossible event happens, are
  void, whether the impossibility of the event is
  known or not to the parties to the agreement at
  the time when it is made.