The basic rule of Privity of Contract is that a third party cannot sue for breach of K irrespective of whether they are a beneficiary under the K. Only those who have given consideration personally can sue - “privity of K”(exception is if party to K is under seal, then no need for consideration).
EXCEPTION: An executor can sue on behalf of the beneficiary for SP.
Ways around privity rule:
Assignment: party assigns/transfers benefit to 3rd party allowing them to sue - need clear intention or assignment by deed and consideration.
Trust: must be clear wording and cannot be assumed.
Agency: 3rd party acts as agent for contracting party-need to show intention to create agency-device to avoid privity: if A & B enter K, C is agent for B, C can sue A.
Representative: one who stands for or acts on behalf of another.
Employment: (e.g. London Drugs).
Beswick v. Beswick [Agency]
Uncle arranged for his coal business to be transferred to his nephew under conditions; one being that the nephew would pay the aunt weekly annuity when the uncle died. Uncle died but nephew only paid first installment and then stopped paying. The aunt, as executrix of her husband’s estate sued as his agent - she had dual role because also is a 3rd party beneficiary.
General Privity Rule: 3rd party cannot sue in his/her own right b/c not a party to the K (there was no consideration).
Can NOT be trust because parties did not intend it to be one.
Can NOT be agency because no authority for uncle to act as agent for aunt.
Can NOT find assignment because uncle did not transfer benefit to aunt allowing her to sue.
Here, 3 options available to P (see tutorial notes) She was able to enforce the K as her husband’s personal representative. Widow CAN sue as administrator (right to sue) AND in her own right (harm suffered). If she sued only as administrator she’d get nominal damages (no harm), if she sued only in her own right, she’d get nothing (no consideration).
Court found because the aunt was executrix of her husband’s estate she had all the rights that he would have under the K and therefore she could sue for breach of K.
Doctrine of Privity applies except when estate can sue for SP. Estate has to be prepared to bring an action. Promisee or executor could not be forced to sue breacher unless trust was created.
Although SP is not usually given with regard to actual sums of money (damages are usually given, Sky Petroleum), in this case it is only appropriate remedy to avoid gross injustice.
Case moved 3rd party rights forward by allowing estate to sue party that breached K for SP.
New Zealand Shipping v. Satterthwaite [Agent]
Drill being shipped; Ajax Co. sold drill to Satterthwaite. Ajax entered into K with Federal Steam Navigation to transport drill and K included clause limiting liability; Federal hired New Zealand Shipping to unload (stevedores); drill dropped and was damaged; Satterthwaite sued New Zealand; New Zealand claims benefit under Federal exclusionary clause (Federal is a subsidiary of New Zealand).
Issue: can the independent contractor claim the benefit of the exemption clause in a contract that he was not a party to? Did the stevedore provide consideration?
Nothing prevents a 3rd party from enforcing the K if one of the parties to it acts as agent for the 3rd party. Court said stevedore entitled to benefit because acting for benefit of owner’s promise to limit liability; Agent can obtain benefit of exclusionary clause when:
Intention to create agency relationship.
Carrier is actually agent for New Zealand.
Is authority to act as agent (or subsequent ratification).
Consideration flows from agent to contracting party.
First 3 elements are present, difficult one is consideration. Performance of services by New Zealand is consideration and therefore benefit for Satterthwaite (unilateral contract – offer accepted by action).
New Zealand is entitled to exemption.
London Drugs v. Kuehne & Nagle [Principle Exception to Privity Rule]
Tort action against employees for negligence.Issue: was whether employees could claim benefit of employer’s exclusion of liability clause. Was K to store equipment, included clause limiting liability. London had full knowledge of this clause but chose not to obtain additional insurance from Kuehne; when some employees attempted to move the equipment it was damaged as a result of their negligence.
Court found: (I) the employees did owe a duty of care and this duty was breached by the employees carrying out their work negligently; (ii) there is an identity of interest between employers and employees which would create an agency relationship-as such they should obtain the benefit of the limit of liability clause.
Where there is an identity of interest between employees and employers-former can obtain the benefit of employers contractual liability clauses with customers. Here, identity of interest exists b/c employees have obligation to move transformer.
This interest is determined by three-part test:
Limitation of liability clause must, expressly or impliedly, extend its benefit to employees seeking to rely on it; and
Employees seeking benefit of liability clause must have been acting in the course of their employment (even if done negligently) AND
Must have been performing the very service provided for in the contract between the employer and the customer when the loss occurred.
If above three clauses applied – employees entitled to protection of liability clause.
Professor McRae: two examples of the courts changing the law quite fundamentally:
New Zealand (traditional approach) made sure in the process that all the legal requirements were met.
London Drugs-Iacobucci simply says that the law is wrong and proceeds to change it.
Frasier River v. Can-Dive
Principled exception can be applied beyond employer/employee relationship. D charterers covered under exclusion clause. Insurer should not be able to step into P shoes. Frasier virtually eliminates privity of K. Insurance did apply to Charterers – it was expressly stated. London Drugs applied to Frasier River; was employee expressly included as beneficiary of insurance?
