Privity of contact rule

Obviously, it is right to say that this doctrine presents some loopholes, and because of this, some formal exceptions has been drawn out from this traditional approach and judges have sanctioned a variety of procedures for avoiding its effect. In addition, Parliament has recently given parties the opportunity of avoiding a significant part of the doctrine, by virtue of the ‘Contracts (Rights of Third Parties) Act 1999.’ One of the exceptions is related to contracts involving agents. When an agent, or an employee accepts or offers a contract not in his own name but on another person's or a corporation's behalf, that contract is said to be signed by an "agent". The person employing the agent is called the "principal" and the principal could sue or be sued under contracts entered into by his or her agent even though the principal did not sign the contract directly. This has been applied in the case of New Zealand Shipping Co. Ltd v A. M. Satterthwaite, The Eurymedon [1975] AC 154 (PC), where an owner entered into a contract of carriage with the carrier for the carriage of a drilling machine from Liverpool to Wellington. The carrier was acting as an agent of the stevedores who were physically responsible for unloading the owner’s machine. Since the machine was damaged while it was being unloaded, the owner sued the stevedores. Although the stevedores were only the third party to the contract, they were recognised the right to rely on some clause set out in the contract between the owner and the carrier. Another exception allowed under third party contracts is cheques and promissory notes. In these cases, enforcement rights are created between non-signatories as the cheque exchanges hands, from one person to another or from one bank to another. The last exception considered in this coursework is related to contracts that restrict or impact upon the use of land. This kind of contracts may be enforceable upon the next land-owner, even though the next land-owner was not party to the original contract. This is an old exception to the rule of "privity of contract" that is still applicable today. As this coursework is subjected to word-count commitment, cases have been deliberately omitted to support these two last exceptions, but can be found in the reference given in the footnote from the paragraph starting with “Damages.”

Refusing to someone the right to enforce a contract in which he feels himself deeply involved would be regarded as unjust, especially when the third parties organise their affairs on the faith of that contract, relying on it and hence expecting to benefit from it. This led to the ratification of ‘Contracts (Rights of Third Parties) Act 1999’ which states: ‘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 the contract expressly provides that he may, or the term purports to confer a benefit on him.’ To qualify under the ‘third party rights’ provisions, some requirements need to be met. The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description, but need not to be in existence when the contract is entered into. Further more, a third party cannot receive a greater right than that intended by the contracting parties. All these provisions are clearly laid down in section one, subsections one to five of the Act. The incentive of this legislation was not to completely abolish the doctrine of privity but to soften it, to confer enforceability rights on the third parties to recover some damages occurring in complex contracts involving more than two parties. This had been applied in the case of St Martin’s Property v Sir Robert MCAlpine [1993] 3 WLR 408, where a lessee of part of a building entered into a contract with the defendants to remove blue asbestos from the premises. The defendants subcontracted the work to another person. After the work was completed more asbestos, which could have been removed, were found in the building. The lessee issued an injunction seeking damages for negligence and breach of contract, because more asbestos were found in the premises and further work was undertaken at the plaintiff's expense. The Court of Appeal’s decision was that the plaintiff could recover damages from the subcontractors.

Although this legislation has introduced a new change allowing third parties to enforce the contract, it can also be argued that this new legislation is not totally effective. In section1(1) the Act says that ‘a person who is not a party to a contract may in his own right enforce a term of the contract if the term of the contract expressly provides that he may, or purports to confer a benefit on him.’ This italicised sentence implies that everything is determined by the contractual parties, not by the third party. Hence this expression may be taken as an "intention test" because the scope is determined by the intention of the contracting parties themselves. The third party is given a right of action in two circumstances, the first is where the contract itself expressly so provides. The second is where the term purports to confer a benefit on the third party. The lack of certainty over an implied intention is a source or concern to contracting parties. Hence this legislation has been criticised as a ‘legal nightmare,’ because generally the contracting parties don’t intend to give contractual enforceable rights to the third party, as they all primarily look for their own benefit as it has been in the case involving Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd [1915] AC 847 (HL). It seems therefore that the effectiveness of the doctrine of privity and the Contracts (Third Parties Rights) Act 1999 is by no means clear and definite. This is not the only problem with the law of contract, it is complex in itself. The following problem question involving Doug, Roland and Sue is a clear illustration of the intricacy of the law of contract.

The rights and obligations of Doug depend on the first person with whom he has entered into a binding contract. It is also important to know the specific time when the offer and the acceptance were made. In this problem question Doug is confused; he doesn’t know if his fax and postcard which he sent to Roland on Wednesday meant his acceptance to Roland’s offer; if this was the case, did he have right to retract it and accept Sian’s offer as he did?

To begin with, it is important to determine if Doug’s message on the university notice board was an offer or an invitation to treat. Generally speaking, an advertisement on a hoarding, a newspaper display or a television commercial, will not be regarded as an offer; it is simply an attempt to make the public aware of what is available, attracting them to make an offer to buy. A clear example of where an advertisement was regarded as an invitation to treat is the case of Patridge v Crittenden [1968] 1 WLR 1204 (QB). In this case the plaintiff had inserted an advertisement in a periodical which read ‘Bramble-finch cocks, Bramble-finch hens, 25s each.’ The plaintiff was charged with unlawfully offering for sale a wild live bird contrary to the Protection of Birds Act 1954. It was held that the advertisement was an invitation to treat, not an offer. The rationale of this concept was given in the case of Grainger & Son v Gough [1896] AC 325 by Lord Herschell, saying that ‘if an advertisement were an offer, then the trader would have to supply the quantity ordered when the stock available to do so was limited.’ Another feature which should be considered is the wording; the message needs to be clear. These reasons may be applied in the case of Doug; his message on the notice board was an advertisement of one item, a laptop, exhibited to an unlimited number of potential customers. The wording was clear, inviting people to make an offer to buy, because it says: “ADI 545 Laptop computer for sale. One year old. £450 or nearest offer.” The last part of this quote implies that Doug was inviting people to make an offer of £450 or a nearest amount.  Therefore, with reference to Lord Herschell’s comment, it may be said that it is reasonable to regard Doug’s advertisement as an invitation to treat, because it was one item exhibited to an unlimited number of persons.

The next step concerns Roland’s e-mail message. By stating that I “would like the laptop. Will pay £400, is a cheque OK? Please leave a message on the answering machine,” was this an offer or a mere inquiry? To provide an answer to this question it is important to consider the structure used by Roland in his e-mail message to Doug. Roland uses here an affirmative form at the beginning of his message stating that I “will pay £400.” This calls to mind the comments made by Judge Lush in the case of Stevenson, Jacques & Co. v Mclean (1880) 5 QBD 346 (QB). Referring to the form used in the telegram, he said that “it is not ‘I offer forty over two months,’ which would have likened the case to Hyde v Wrench (1840) 3 Beav 334, where one party offered his estate for 1,000 and the other answered by offering 950. Lord Langdale, in that case held that after the 950 had been refused, the party offering it could not by then agreeing on the original proposal.”  Although in Hyde v Wrench (1840) 3 Beav 334 the test about the form used was applied to establish if it was a count-offer or just an inquiry, here Roland message cannot be regarded as a count-offer. It is reasonable to take it as an offer, because a count-offer always comes after an offer. Although Roland asked if the cheque was OK, this question is not suggesting alternative terms to this business. It is reasonable to take it ‘as an approach of looking for ways to clarify the method in which the consideration would be performed.’ By saying “will pay,” Roland was making an offer to buy the laptop for £400 in the range of Doug’s price: ‘£450 or nearest;’ he even specified the way in which the acceptance would be communicated to him: by leaving a message on the answering machine. But was Doug’s e-mail reply to Roland’s message an acceptance to the offer? It would be premature to say yes at this stage; because the expression used by Doug in his e-mail to Roland means that he would think about it, to accept it or to refuse it.

It is reasonable to regard Sian’s fax to Doug as an offer to buy, which would require an acceptance from Doug. There is no consideration given yet, although she has already prepared a cheque, as Doug has not yet communicated his acceptance. At this stage so far, Doug is not yet entered into a binding contract, because the case of Felthouse v Bindley shows that ‘acceptance must be clearly communicated to the offeror.’ The problem starts on Wednesday when Doug faxed Roland saying “I accept your offer.” Was this a valid acceptance as Doug didn’t follow the method of communication prescribed by Roland? Roland stated in his e-mail message to Doug: “Please leave the message on the Delivery Department’s answering machine.” It may be said that Doug didn’t follow the method of communication; therefore his acceptance was not valid at this stage. But following the principle in the case of Yates Building Co. Ltd v Pulleyn & Sons (York) Ltd (9175 237 EG 183; (1975) 119 SJ 370 (CA), where the plaintiff stated that “to be sent by registered or recorded delivery post” to the defendants, it can also be said in this case that Doug’s reply was an acceptance because Roland didn’t clearly say that this was the sole permitted method which could be regarded as mandatory. If taken as an acceptance, since it is a fax message, it is then expected to be received before it becomes an effective acceptance. This is in harmony with Lord Denning’s conclusion in the case of Entores Ltd v Miles Far East Corporation about telex communication, he said: “the contract is only complete when the acceptance is received by the offeror.” The fax was sent on Wednesday but only received on Thursday. So before Thursday there was no contract. Now what about Doug’s question “can you pay cash?” does this amount to a counter-offer? As it has been explained in the case of Stevenson, Jacques & Co. v Mclean (1880) 5 QBD 346 (QB), this cannot be regarded as a count-offer. It is reasonable to take it as a simple inquiry, an approach of looking for ways to clarify the method in which the consideration would be performed.

Even if some may argue that Doug’s fax was not an acceptance as it was not delivered according to the prescribed method, this argument may be undermined by Doug’s further actions. He also sent a postcard on the same day, to which the postal rule could apply, making it somehow difficult for Doug to retract his acceptance: “if the post is the proper method to communicate acceptance, then the acceptance is deemed complete as soon as the letter of acceptance is posted.” This principle comes from the case involving Adams and Lindsell.

Now the very important question is ‘did Doug have right to retract his acceptance and go for Sian’s offer?’ There are two different views leading to different results here. Commenting on the ‘formalist approach’ about the retraction of an acceptance, Richard Stone states on page 65 in his book The Modern Law of Contract, it reads: “The general rule that a contact is complete on acceptance should be applied. So, even if the acceptor is able, for example, by telephoning the offeror, to indicate that an acceptance which is in the post should be ignored, the offeror should be entitled to say ‘Too bad! Your acceptance took effect on posting, and we have a contract. If you fail to go through with it, you will be in breach.’”  If the general rule related to acceptance is applied here, it may be reasonable to say that Doug is bound by his acceptance communicated to Roland by post; and here the postal rule would be applied. But it may also be argued that the post was not the method of communication indicated by Roland, and therefore there is no contract. This would also be reasonable on the basis of a Scottish case involving Countess of Dunmore v Alexander which supports that a postal acceptance can be retracted by speedier means if the post was not the communication method indicated by the offeror. However, it sounds realistic to say that if retraction of acceptance is allowed, it gives the acceptor the best of both worlds: postal rule applying to communication of the acceptance and also its retraction.

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