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Privity reform and the nature of contractual obligations*

Published online by Cambridge University Press:  02 January 2018

Catherine Mitchell
Catherine Mitchell*
Affiliation:
Law School, University of Hull
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Abstract

This paper examines the justificatory arguments that the UK Law Commission advances in support of privity reform (Law Com no 242) (1996). The Commission believes that its proposed reforms will not cut across the ‘underpinning principles’ of the common law. This is borne out by the Commission's primary justificatory argument - that the privity rule undermines the intentions of the contracting parties - and by its proposal that consideration remain as the test of enforceability of contracts. But given the substantive change to privity that is proposed, and the prospect of the crystallisation of the third party right, it is argued that the Commission in fact favours the more modern reliance-based account of contractual obligation. The effect of this is to create an independent third party right to sue for the performance of the promise, ie a right that does not arise out of the contractual relationship between the parties, but from the third party's own reliance on the promise. This may have implications for enforcement of promises by gratuitous promisees.

Type
Research Article
Information
Legal Studies , Volume 19 , Issue 2 , June 1999 , pp. 229 - 244
Copyright
Copyright © Society of Legal Scholars 1999

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Footnotes

*

I would like to thank my colleague William Lucy for reading and providing valuable comments on earlier drafts of this paper. All errors remain my responsibility.

References

1. Privity of Contract: Contracts for the Benefit of Third Parties (Law Com no 242) (Cm 3329) (London: HMSO, 1996). Hereafter referred to as ‘the report . See also A Burrows ’Reforming Privity of Contract: Law Commission Report No 242 (1996) LMCLQ 467. The proposals look set to become law: the Contracts (Rights of Third Parties) Bill was introduced into the House of Lords on 3 December 1998. The report follows from a consultation paper published in 1991: Privity of Contracts: Contracts for the Benefit of Third Parties (LCCP No 121) (London: HMSO, 1991). Hereafter referred to as ‘the consultation paper . Articles and comments on the report include J Adams, D Beyleveld and R Brownsword ’Privity of Contracts - The Benefits and Burdens of Law Reform (1997) 60 MLR 238; P Kincaid ‘Privity and Private Justice in Contract (1997) 12 JCL 47; F Reynolds ’Privity of Contract (1997) 113 LQR 53; S Smith ‘Contracts for the Benefit of Third Parties: in Defence of the Third-Party Rule (1997) 17 OJLS 643; A Tettenborn ’Third Party Rights: Pragmatism from the Law Commission (1996) JBL 602. For comment on the consultation paper see J Beatson ‘Reforming the Law of Contracts For The Benefit of Third Parties: A Second Bite At The Cherry (1992)45CLP 1; P Kincaid ’The UK Law Commission's Privity Proposals and Contract Theory (1994) 8 JCL 51.

2. See paras 2.63-2.69 of the report, where opposition to the privity rule is set out.

3. The lack of an underpinning principle to the reform of the third party rule was criticised in relation to the consultation paper by Kincaid The UK Law Commission's Privity Proposals and Contract Theory above n 1.

4. Para 1.10.

5. This is one of the expressed intentions of the Commission and hence it has tried to make its proposals moderate: para 1.9 of the report.

6. On the importance of coherence to a legal system and the role played by arguments of principle in bringing about this coherence see N MacCormick Legal Reasoning and Legal Theory) (Oxford: Clarendon Press, 1978) esp chs 5 and 7.

7. MacCormick above n 6.

8. Above n 6 at 106–107.

9. Matters touching upon the third party problem that are left to the determination of the courts include: the position of joint promisees (para 6.11 of the report); remedies available to the promisee on a breach of contract involving third parties (para 5.17 of the report); the position of a beneficiary under a negligently drafted will (para 7.25 of the report).

10. For brief narratives on the main features of the orthodox model of contract see P Atiyah ‘Contracts Promises and the Law of Obligations in Essays on Contract (Oxford: Clarendon Press, 1986) pp 10-16 and An Introduction to the Law of Contract (Oxford: Clarendon Press, 5th edn, 1995) pp 7-15; H Collins The Law of Contract (London: Butterworths, 3rd edn, 1997) pp 3-7. Chapter 2 of J Adam and R Brownsword's Key Issues in Contract (London: Butterworths, 1995) contains a brief review of the basic doctrines of contract law.

11. For a modern restatement see C Fried Contract as Promise (Cambridge, Mass: Harvard University Press, 1981).

12. See Smith above n 1 at 645–646.

13. Cases such as Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 and Blackpool & Fylde Aero Club Ltd v Blackpool BC (1990) 3 All ER 25 are significant in demonstrating that some members of the judiciary recognise the necessity for a more flexible approach to contractual variation and formation in some cases. This development is explored by Adams and Brownsword in their casenotes on the two cases at, respectively, (1990) 53 MLR 536 and (1991) 54 MLR 281.

14. See Adams and Brownsword, above n 10, ch 1.

15. Adams and Brownsword above n 10, esp chs 4, 5 and 10.

16. Atiyah ‘Contracts, Promises and the Law of Obligations above n 10, p 22 and ’The Movement from Agreement to Reliance in English Law in D Harris and D Tallon (eds) Contract Law Today (Oxford: Clarendon Press, 1989) pp 21–38.

17. Above n 13.

18. (1995) 2 All ER 531.

19. J Adam and R Brownsword ‘Contract, Consideration and the Critical Path (1990) 53 MLR 536 at 536.

20. Stilk v Myrick (1809) 2 Camp 317.

21. See Adams and Brownsword above n 19 at 540–541.

22. (1884) 9 App Cas 605.

23. Tweddle v Atkinson (1861) I B & S 393. More recent judicial statements of the doctrine (together with criticism) have emanated from Steyn LJ in Darlington BC v Wiltshier Northern Ltd (1995) 1 WLR 68 at 76–78 and Lord Goff in The Mahkutai (1996) 3 All ER 502 at 512.

24. Painstakingly reproduced in Pt II of the report.

25. See paras 2.1 and 10.24 ff of the report.

26. Clause 1(1) and l(2) draft Bill, para 7.6 and Pt VII of the report.

27. Clause 1(4) and l(5) draft Bill and paras 3.30-3.33 of the report.

28. Clause 2(1) draft Bill and Pt IX of the report generally. The contracting parties may expressly reserve the right to vary or cancel the third party right irrespective of the third party's reliance or acceptance: cl 2(3)(b) draft Bill and para 9.40 of the report. The parties may also expressly stipulate a different test for the crystallisation of the third party right: cl 2(3)(b) draft Bill and para 9.42 of the report.

29. Clause 3(2) and 7(2)(b) draft Bill and para 10.12 of the report.

30. Clause 4 draft Bill and para 11.4 of the report.

31. Clause 6(1) draft Bill and para 5.11 of the report.

32. A joint promisee who does not provide consideration is not to be treated as a third party for the purposes of the Act: Clause 8 draft Bill and paras 6.9-6.12 of the report.

33. Clause 4 draft Bill and para 5.17 of the report. See the recent cases of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994) 1 AC 85; Darlington BC v Wiltshier Northern Ltd (1995) 1 WLR 68 and Alfred Mc Alpine Construction Ltd v Panatown Ltd (1998) Times, 11 February. On the necessity of reform after the Linden Garden and Darlington decisions, see Kincaid ‘The UK Law Commission's Proposals and Contract Theory above n 1 at 53-54.

34. Paras 7.19-7.27 of the report and White v Jones (1995) 1 All ER 691.

35. Para 6.8 and Pt VI of the report generally.

36. Para 13.2 of the report. The exceptions relate to the remedies available to the third party, defences and set-offs available to the promisor, and the operation of exclusion clauses. The report states that, for the purposes of these provisions, the third party is to be treated as if he were a party to the contract, not that he becomes a party to the contract: para 13.4 of the report.

37. Para 1.8 of the report, emphasis added.

38. Para 3.28 of the report, emphasis added.

39. For a general statement of this idea, see para 1.8 of the report … our recommendations are not concerned to override the allocation of liability within contracts but rather rest on an underlying policy of effectuating the contracting parties intentions (emphasis added).

40. Para 3.1 of the report.

41. This also reflects the judicial attitude to the privity rule: ‘The autonomy of the will of the parties should be respected: per Steyn LJ Darlington BC v Wiltshier Northern Ltd (1995) 1 WLR 68 at 76.

42. See para 6.17 of the report: ‘while formally, our reform does not affect the requirement of consideration, at a deeper policy level, and within the area of third party rights, it may represent a relaxation of the importance attached to consideration (emphasis added).

43. Para 6.15 of the report: ‘the overall coherent policy may be presented as the enforcement of bargains, the upholding of the intentions of those who have provided consideration, not the enforcement of gratuitous promises.

44. Above n 43.

45. (1967) 119 CLR 461. For criticism see B Coote ‘Consideration and the Joint Promisee (l978) 37 CLJ 301 at 309-310.

46. Para 6.10 of the report.

47. Para 6.11 of the report.

48. Here I am taking joint promisees to mean persons to whom a promise has been made jointly with another. This seems to be the interpretation taken by Lord Atkin in the case of McEvoy v Belfast Banking Co Ltd (1935) AC 24. In other words, a ‘party to a contract is not limited to a person who provides consideration. Contra see Coote, above n 45 at 309–310.

49. Thus, Coote argues that a distinction must be drawn between consideration, which is the acceptance of an obligation to the promisor, and performance, which is the actual provision of the promised benefit to the promisor. To have the right of enforcement a joint promisee need not actually provide the promised benefit to the promisor, but he must have at least undertaken an obligation to the promisor to provide it, otherwise he takes no part in a bargain: above n 45 at 305–309.

50. Clause 2(3)(b) draft Bill and paras 9.37-9.42 of the report.

51. Para 9.1 of the report.

52. Para 9.18 of the report.

53. Para 9.16 of the report.

54. Para 9.21 of the report (emphasis added).

55. Para 9.20 of the report.

56. Para 9.14 of the report.

57. See generally G Rouhette ‘The Obligatory Force of Contract in French Law in Harris and Tallon, above n 16, p 38.

58. The Commission hints at this kind of argument in para 6.16 of the report, but it is not examined in any detail.

59. Para 13.2 of the report.

60. Described by Friedmann as the ‘one genuine contractual interest: D Friedmann ’The Performance Interest in Contract Damages (1995) 111 LQR 628 at 632.

61. The Commission recognises that this question involves a conflict between freedom of contract and creating effective third party rights that the third party can arrange his affairs upon with certainty, but asserts that the former policy is outweighed by the latter: para 9.8 of the report.

62. Adams and Brownsword, above n 1 at 248, remark that ‘the Commission's proposals broaden the range of eligible plaintiffs who may enforce a contract; they do not redefine what counts as a contract . Thus they express some puzzlement at why the Commission seems to regard the proposals as having effects for gratuitous promisees.

63. For example, the Commission quotes the New Zealand Contracts and Commercial Law Reform Committee Privity of Contract (1981) at para 8.2.4: … the consideration necessary to support the contract ought not to have to be provided by the third party; it should be sufficient, we think, that the consideration for the promise be supplied by a party to the contract: para 6.17 of the report.

64. For an argument along these lines see J Adams and R Brownsword ‘Privity and the Concept of a Network Contract (1990) 10 LS 12 at 24–25.

65. Para 6.15 of the report.

66. See the opinion of Lord Griffiths in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994) 1 AC 85 and the opinion of Lord Justice Steyn in Darlington BC v Wiltshier Northern Ltd (1995) 1 WLR 68. The argument of Coote is also instructive here: ‘Contract Damages, Ruxley and the Performance Interest (1997) CLJ 537 at 550.

67. Coote above n 66.

68. The relationship between the remedies available to the promisee and the third party on a breach is left to the courts to determine: paras 5.12-5.18 of the report.

69. Interestingly, the Commission seems to accept this point: paras 6.13 and 6.15 of the report.

70. Para 6.15 of report.

71. Respectively, cll 1(2) and 2(3) draft Bill.