Privity of Contract: The Impact of the Contracts (Right of Third Parties) Act 1999

Robert Merkin, Robert Merkin

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781317912378
• Edition: 1
• Topic: Law
• Subtopic: Arbitration, Negotiation & Mediation in Law
• Index: Law

Privity of Contract offers a unique perspective of how the Contracts (Rights of Third Parties) Act 1999 works in practice. Issues covered include: the operation of the doctrine of privity prior to its repeal; the scope and impact of the 1999 Act; and the operation of the 1999 Act in the most important commercial contexts to which it is applicable. It also incorporates discussion and the text of the Law Commission reports, whose proposals produced the bill that ultimately passed into law.

Chapter 1

Historical Introduction to the Law of Privity

The Abolished Doctrine

1.1 Section 1(1) of the Contracts (Rights of Third Parties) Act 1999 provides:

“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) … the term purports to confer a benefit on him.”

By this provision, as qualified by the remainder of the 1999 Act, Parliament has removed a rule which had been most clearly laid down by Viscount Haldane LC in Dunlop v Selfridge:¹

“My Lords, in 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 arising by way of contract. Such a right may be conferred by way of property as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request. These two principles are not recognised in the same fashion by the jurisprudence of certain Continental countries or of Scotland, but they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it.”

By the time of its repeal, the privity rule had become discredited. It operated to undermine commercial contracts where expediency and efficiency demanded that the rights of third parties be recognised, and it frustrated private contracts where a benefit was sought to be conferred upon a non-contracting party. Parliament had been forced to legislate on numerous occasions to remove the privity rule in specific situations, and the courts had developed a series of exceptions the cumulative effect of which was to leave the doctrine of privity more honoured in its breach. Plainly a law which has reached this state cannot survive, and indeed one of the few arguments put forward in favour of its retention— reflected in Viscount Haldane LC’s own words—was that the privity rule was a long-standing and fundamental rule of law which had to be retained in the interests of commercial certainty. Studies of the history of privity have nevertheless established that the rule against third party enforcement was far from long-standing and, in common with many of the “doctrines” which underpin modern English contract law, was largely a creation of Victorian judges which was readily adopted by the more conservative judges on the bench in the first half of the twentieth century.

1.2 The purpose of this chapter is to trace the historical development of privity as a free-standing doctrine. The following chapters will discuss the operation of the doctrine of privity prior to its repeal, the judicial approaches to circumvention of the rule, the demand for repeal, the scope and impact of the 1999 Act, and the operation of the 1999 Act in the most important commercial contexts to which it is applicable.

Privity and Consideration in the Early Law: Covenant and Debt²

1.3 Tracing the history of privity of contract from the medieval period to the present day is a process complex in the extreme. The principles of contract law which have been inherited by modern lawyers grew out of the rigid formality of the early forms of action, the intense jurisdictional battle between the courts of King’s Bench, Exchequer and Common Pleas, the intervention of the Court of Chancery and the eventual victory of substance over procedure encouraged by eighteenth century judicial pragmatism and nineteenth century legislative reform. The nature of the earliest actions developed by the common law and in which the seeds of a law of contract can be identified³—covenant and debt—precluded any doctrinal discussion of the rights and obligations of third parties. There was indeed at first no real notion of contract at all, although with hindsight the contractual nature of the actions can clearly be perceived. Provided that the elements of the actions were made out, the writ necessary to commence the action could be issued, and the identities of the parties was largely immaterial. The action of covenant, which has been dated as emerging in the thirteenth century, lay to enforce a promise—other than a promise to pay money—made under seal. The action of debt lay for money claims, whether or not the promise to pay to be enforced was under seal. As has been well documented, each of these forms of action was riddled with complexity which flowed mainly from procedural requirements. Covenant required a sealed document, and it finally came to be established that nothing else would suffice. The most important drawbacks of the writ of debt were the rule that the claim had to be for a “sum certain” and if judgment could not be given for the sum actually claimed then nothing was due at all, the death of the debtor discharged the debt so that no action could be brought against executors, and the method of trial was by means of compurgation whereby the defendant could avoid liability simply by producing 11 individuals to swear on oath that the debt did not exist or had been discharged.

1.4 The action of covenant⁴ did not raise any issue of what modern lawyers would today call “consideration”, as the mere fact that the promise had been made under seal was enough to demonstrate the existence of a binding obligation. The action was in its origins tortious in nature, based on failure to adhere to the promise contained in the sealed document, and the action could be brought by any person who was named in the covenant as a party to it even if he had not himself sealed the covenant. However, the origins of a privity rule may here be discerned, as it was not enough to permit enforcement for a person simply to be referred to in the covenant as the beneficiary: he had to be named as a party.⁵

1.5 The writ of debt,⁶ by contrast, related to promises which were not necessarily evidenced in writing. To the modern lawyer, debt is perhaps more obviously contractual than tortious in nature, and indeed proved to be of some significance for the enforcement of repayments due under contracts of loan and for contracts under which goods and services had been supplied. There was, however, no general acceptance of the notion of the wholly executory agreement, as the courts worked on the basis that there had to be some external justification for allowing an action in debt to lie. Drawing on the Roman law principle which rejected the enforceability of a nudum pactum, the common law courts looked for some act by the claimant which conferred a benefit on the promisor. At first this became manifested in the principle of quid pro quo, whereby the claimant had to demonstrate that he had performed some act which conferred a benefit upon the promisor and which thereby justified the claimant’s action for a sum certain. It has been suggested that in later years, the language altered and that there had to be some reason, or “consideration” motivating the promisor’s promise to pay money to the claimant,⁷ although the modern view of the matter is that quid pro quo did not rest upon the promisor’s motives but rather the basic point that the promisor had received a benefit from the claimant and that receipt in turn required him to perform his side of the bargain.⁸ Detriment to the promisee which did not itself confer a benefit on the promisee was not adequate to give rise to a quid pro quo.⁹

1.6 The quid pro quo principle raised an immediate privity issue. If A promised to pay a sum to B if B performed a service for, or supplied goods to C, B’s performance might not justify an action in debt against A if quid pro quo was taken to require that A had himself received a benefit from B’s performance. Professor Simpson’s researches have shown that quid pro quo did indeed operate to prevent recovery by A in these circumstances, the courts generally taking the view that B’s claim against A was in covenant, but in the absence of a sealed deed B would have no remedy.¹⁰ However, the matter was far from clear cut and there was at least a view that in such circumstances there was a quid pro quo if some indirect benefit could be shown to have accrued to A: some judges were indeed prepared to treat a benefit conferred upon a third party as a quid pro quo.¹¹

The Rise of Assumpsit¹²

The nature of assumpsit

1.7 Leaving aside the numerous procedural difficulties which bedevilled the writs of covenant and debt, perhaps the most obvious lacuna in the law as developed in the form of covenant and debt was the absence of any form of action for informal promises not expressed as obligations to pay money. Although equitable remedies provided assistance in some circumstances there was a clear need for a general doctrine under which promises could be enforced. That general need was ultimately met by the growth and adaptation of a tortious form of action, the writ of assumpsit, which sprung from actions in trespass. It is enough to say of the early history of trespass here that in the fourteenth century the courts began to extend the writ of trespass, which had originally been used to control wrongs which in some way affected the interests of the public or the state,¹³ to purely private disputes.¹⁴ The action on the case, so-called to reflect the fact that the writ of trespass could be adapted to meet the particular complaint made in any one case, was within a short period pressed into use to resolve disputes that today would be classified as contractual. A series of cases at the end of the fourteenth century saw claimants bringing actions on the case against persons who had undertaken to perform a service but had done so negligently and thereby had cau...