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Contract past paper quest - Postal Rule and Privity

The postal rule and the rule of privity, although very different in nature share a
commonality in that their application can cause disadvantages and hardship.
However, such problems can be easily avoided. Critically discuss.
Acceptance of an offer to form a contract may be transmitted by post, either when
this is the prescribed mode of communication or when it is reasonable based on
the circumstances, to communicate acceptance by post. According to the ‘postal
rule’, acceptance by post becomes effective as soon as the letter of acceptance is
inserted into the post-box or when it is put in the control of the post office, for
instance by handing in the letter at a post office counter. There have been various
cases in which the rule has resulted in unfair disadvantages to a party to a contract.
A general rule of contract law known as privity postulates that only parties to a
contract can sue or be sued upon that contract. In other words, rights and duties
that arise from a contract only bind the parties to that contract. As a consequence,
a contract cannot impose obligations or confer rights on anyone who is not a party
to that contract. Contention arises from this rule when considering whether a third
party for which a contract has been concluded has the right to sue. It is evident
that problems posed by the rule of privity as well the postal rule can easily be
overcome by appropriate drafting of contracts.
In Adams v Lindsell (1818) the defendants sent an offer, by post, concerning the
sale of certain goods to the plaintiffs. The plaintiffs received the letter on 5
September and posted their acceptance on the same day. The acceptance letter
reached the defendants on 9 September. However, the defendants had already
sold the goods to someone else on 8 September. The question faced by the court
was whether the acceptance becomes effective when it was received, or at an
earlier point in time. The court held that acceptance becomes effective at the
moment a letter of acceptance is posted. This conceptualized what became known
as the postal rule.
Similarly, in Household Fire and Carriage Accident Insurance Co Ltd v Grant
(1879) Mr Grant had applied for shares in the plaintiffs. His offer to buy shares
was accepted by post. However, the acceptance letter was lost in the post and Mr
Grant never received it. By the time Mr Grant was asked to pay for the shares,
the plaintiff had gone bankrupt and Mr Grant refused to pay, claiming that there
had never been a contract. The court disagreed, holding that the acceptance
became valid the moment the plaintiff inserted the letter of acceptance into the
Generally, the postal rule is thought to promote certainty and expediency in
commercial transactions. However, as seen in the aforementioned cases, it can
sometimes lead to verdicts which are clearly unfair when taking into
consideration all the facts of the case. In fact, one of the judges in Household Fire
and Carriage Accident Insurance Co Ltd v Grant dissented, stating that the postal
rule should be dispensed with. To this effect, the postal rule is unreasonable as it
holds a person accountable for a sequence of events completely beyond their
control. The post office is undeniably a main external influencing factor in such
a transaction via post. The party to a contract relinquishes control of a letter of
acceptance when they post it or hand it in at the post office.
For example, in Household Fire and Carriage Accident Insurance Co v Grant, the
letter conveying acceptance of Mr Grant’s offer was lost in the post. This was
beyond Mr Grant’s control however he still had to face the repercussions of the
post office’s negligent actions in losing the letter. Likewise in Adam v Lindsell,
the letter conveying acceptance of the defendant’s offer did not reach for some
days within which they went ahead and sold the goods to someone else. The
defendant would have been oblivious to the fact that the plaintiff had accepted
his offer therefore. These unfair disadvantages can be avoided in the first place
by opting out of the postal rule. As established in Holwell Securities v Hughes
(1974), the offeror can stipulate an alternate mode of acceptance or they can
stipulate that the acceptance must reach the offeror to be considered effective.
This highlights that problems posed by the postal rule can be easily overcome by
smart drafting of contracts. Parties to a contract should be more cognisant of the
issues that can potentially arise based on their chosen mode of acceptance and
should take such factors into consideration when drafting their contracts.
Within the rule of privity, it is widely accepted that a contract cannot impose
obligations on a third party. Further, it has been established that a third party does
not have a right to sue upon a contract. This is particularly contentious where that
contract had been concluded for the benefit of the third party. The operation of a
strict view of privity, where rights and obligations may only be conferred to
parties to a contract can be traced back to the case of Winterbottom v Wright
(1842). This case signalled that neither rights nor obligations could be passed to
third parties. In that case, a third party was prevented from suing on a contract
which he was not part of, although he may be said to have derived a benefit from
it. Specifically, a driver of a carriage was injured as a result of shoddy
maintenance of the carriage. However, as it was the driver’s employer rather than
the driver himself who had a contract with the maintenance worker, the injured
driver was unable to sue upon the contract.
Subsequent to Winterbottom v Wright, the fact that privity prevented third parties
both from being sued as well as from suing upon a contract was firmly established
in Tweddle v Atkinson (1861), a decision from the High Court. It was further
fully endorsed by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v
Selfridge & Co Ltd [1915]. In the Grenada case of Issa Nicholas (Grenada Ltd) v
Electrotec Services Ltd GD (1996) the Court of Appeal examined whether a subcontractor who had an agreement with the main contractor could sue a third party
(the building owner) for monies owed by the main contractor. It was held that
there was no privity of contract between the sub-contractor and the building
In spite of these decisions, doubts about the usefulness of the doctrine have
persisted ever since it was first established. As far back as 1937, the Law Revision
Committee in the United Kingdom proposed to reform the doctrine to allow third
party beneficiaries to sue upon a contract. These efforts did not come to fruition,
but many judges continued to cast doubt on the doctrine, including Lord Denning
in Beswick v Beswick [1968] and also in Jackson v Horizon Holidays Ltd [1975];
and Lord Scarman in Woodar Investment Development Ltd v Wimpey
Construction (UK) Ltd [1980]. In Australia, the judiciary went one step further
when, in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988), it
effectively abandoned the doctrine of privity where third party beneficiaries are
Peter Beswick was a merchant who ran a coal business. He had had his leg
amputated and therefore wanted to transfer his business to his nephew, John
Beswick. John worked for Peter in running the business. Peter and John agreed
that John would be given the business, and that, in return, John would employ
Peter for the rest of his life, as well as pay Peter’s widow a weekly annuity if
Peter passed away. After Peter’s death, the nephew refused to make any payments
to Peter’s widow, arguing that she was not a party to the agreement. On this point,
the House of Lords agreed with John Beswick, dismissing Lord Denning’s
opinion, given in the Court of Appeal, that third party beneficiaries should be able
to enforce what they had been promised under a contract. In reflecting on the
situation found in Beswick v Beswick, it would have been a simple task for Peter
Beswick to first transfer a share of his company to his wife, and then make the
agreement with John Beswick. That way the problems posed by privity could
have been avoided altogether. This emphasizes that in practice, it is often fairly
easy for parties to avoid the impact of the doctrine of privity by drafting their
contracts appropriately.
To some extent, the debate concerning the problems that arise in relation to the
doctrine of privity can be compared with the debate concerning the postal rule. It
should be noted that those who oppose the doctrine of privity can avoid its effect
by drafting their contracts in such a way so as to avoid it. In analogy, if parties do
not agree with the postal rule, they can avoid it by stipulating the mode of
acceptance when drafting their contract. By so doing, they can overcome the
issues which can arise due to the postal rule.