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.
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).
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.
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 person’s 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.
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.”
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.
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
1. 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.
2. 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.
3. 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.
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.