Contractual Obligations Sample

Task A

Privity of Contract is the relation that exists between contracting parties. Privity of contract applies mainly to contracts of sale of goods or services and is restricted to the parties to a contract. Thus, a third party is precluded from initiating legal action against the parties to the contract for entitlement in excess of its benefits as provided in the contract. Moreover, a third party cannot claim or sue for damages resulting from a contract to which it is not a party. This constitutes a hindrance, where the contract was made to the benefit of the third party. Collateral warranties support the viability of this rule[1].

The doctrine of privity emerged together with the doctrine of consideration, which states that consideration must move from the promisee. That is if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed[2].

Hence, in Price v Easton[3], a contract was made for work to be done in exchange for payment to a third party. This third party’s legal action to obtain payment was dismissed as it was held to be not privy to the contract[4].

In Tweddle v Atkinson[5], the plaintiff was unable to sue the executor of his father-in-law, who had promised to the plaintiff’s father to make payment to the plaintiff, because he had not provided any consideration to the contract[6].

 This was further developed in Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd[7] through the judgement of Lord Haldane, “An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable[8].”

Strict adherence to the privity doctrine proves to be artificial and contrary to the parties’ intention leading to injustice and inconvenience.  Sometimes, the doctrine does not apply, either because of supervening principles of law or because of specific statutory provisions, which allow a third party to enforce a right conferred on it by the contracting parties[9].

However, in Beswick v Beswick[10], a nephew bought his uncle’s coal business on the condition that he would support his aunt on his uncle’s death. Since, the nephew refused to support his widowed aunt, she was permitted to sue as executor of her husband’s estate and obtain compensation[11].

In Vandepitte v Preferred Accident Insurance co[12], it was held that a party to a contract can act as a trustee for a third party in respect of a right under the contract and thus bestow such rights on to a  third party. Subsequently, the trustee can commence steps to enforce performance as in the case of other equitable rights[13].

Under Common Law, a promisee can implement the promise. As such, a third party who is not a promisee is not privy to the contract. In Dunlop Tyre Co v Selfridge[14], the plaintiffs sold tyres to Dew & Co, on the condition that Dew would ensure that the retailers would not sell the tyres at a lesser price than what the plaintiff’s would. However, the defendants sold them at a lower price than the list price of the plaintiffs. The plaintiffs then sought an injunction and damages. The court denied such action because the plaintiffs were not a third party to it and “only a person who is a party to a contract can sue on it[15].”

A collateral contract, with the same subject matter, may exist between one of the parties to a contract and a third party. The doctrine of Privity can result in injustice and inconvenience if applied strictly. Therefore, exceptions have been developed to avoid the complications and problems resulting from the application of the doctrine of Privity.

 In Shanklin Pier v. Detel Products[16], the plaintiffs employed contractors to paint a pier and asked them to buy paint made by the defendants. The defendants had stated that the paint would last for seven years but it lasted for only three months. The court held that the plaintiffs could sue the defendants on a collateral contract[17].

Another exception to the doctrine of Privity is the concept of agency. An agent may enter into contract with a third party on behalf of the principal and thereby form a binding contract between the principal and the third party. Such a party can obtain the benefit of an exclusion clause by proving that the party imposing the clause was acting as the agent of the third party, thereby bringing the third party into a direct contractual relationship with the plaintiff.

In Scruttons Ltd v. Midland Silicones Ltd[18], a bill of lading limited the liability of a shipping company. The defendant stevedores had contracted with the shipping company to unload the plaintiff’s goods on the basis that they were to be covered by the exclusion clause in the bill of lading. The plaintiffs were ignorant of the contract between the shipping company and the stevedores. Owing to the stevedores’ negligence, the cargo was damaged and, when sued, they pleaded the limitation clause in the bill of lading. The House of Lords held that the stevedores could not rely on that clause, as there was no Privity of contract between the plaintiffs and defendants[19].

A general exception to the doctrine of Privity is Equity utilizing the concept of trust. A trust is an equitable obligation to hold property on behalf of another. This device was approved of by the House of Lords in Les Affreteurs Reunis v. Leopold Walford[20], where a broker negotiated a charter party by which the ship owner promised the charterer to pay the broker a commission. It was held that the charterer was a trustee of this promise for the broker who could enforce it against the shop owner[21].

Certain exceptions to the doctrine of Privity have been created by statute, including price management agreements, and some insurance contracts enforceable in favour of third parties. For example, as per the provisions of the Road Traffic Act, an injured party may recover compensation from the insurance company after having obtained judgment against the insured person[22].

The privity rule has much in common with the concept that consideration has to pass from the promisee. This rule concisely states that a contract can be enforced only by the parties to it and that a third party can be bestowed with neither a burden nor an enforceable benefit due to a contract between two parties[23].

Section 1 of the Contracts (Rights of Third Parties) Act 1999, confers on third parties several rights, some of these are the  right to benefit from exclusion or limitation clauses in the contract and to enforce positive rights. These benefits are effective in respect of contracts executed after the 10th of May, 2000. This permits third parties to enforce a contractual term if such a provision is expressly incorporated in the contract or if the terms confer a benefit on the third party[24].

A stranger to a contract cannot benefit from its terms, as he has not provided any consideration. This is because a promisee that has to provide consideration should have a better position than a third party that has not provided consideration[25].

The Law Commission opined that though the privity doctrine specifies as to who can enforce a contract, the doctrine of consideration decides which of the promises may be enforced[26]. The fact that there has been consideration connotes that the third party can acquire rights under the contract. As such, the law of privity of contract is not justified in stating that a third party is ineligible to acquire any rights of the contract, merely because consideration does not move from him. Hence, common law and legislation have accorded importance to third party rights while ousting the doctrine of privity of contract.

Part B

The offer has to be accepted in order to constitute a contract. Such acceptance should be in the manner prescribed or indicated by the offeror and it can be an expression by words or conduct assenting to the terms of the offer. Acceptance must correlate to the offer and any attempt to include new terms will convert it into a counter offer. When the communication is instantaneous like in person, fax, phone or e-mail the communication of offer and revocation of offer is effective from the moment of receipt by the offeree.

Acceptance or rejection of the offer is effective when received by the offeror. In non-instantaneous communication, like by post or mail the rules change in respect of acceptance, which becomes effective only when sent or posted by the offeree. According it was held in R v. Clarke[27] that acceptance must be made with knowledge of the offer. In Household Fire & Carriage Accident Insurance Co. v. Grant,[28] the postal acceptance rule was established.

This rule states that if acceptance is to be indicated by post then it is deemed complete as soon as the letter of acceptance is posted, even in the event of its delay, destruction or loss. This was the decision of the court in Adams v Lindsell [29] and Household Fire Insurance Co. v Grant[30].

A counter offer invalidates an offer unless the original offer is renewed, however if there exists a “battle of the forms” situation, then the courts will examine all the successive statements of the parties and establish a contract. Livingstone v. Evans[31], Butler Machine Tool v. Ex-Cell-O Corp[32]., Tywood Industries v. St. Anne-Nackawic Pulp & Paper[33].

It is essential for revocation of an offer to be communicated to the offeree; this was the court’s opinion in Byrne v. Van Tienhoven[34].

Further, in Birkibon Ltd. v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH[35] it was opined by the court that the postal acceptance rule is inapplicable to telex messages, as they constitute an instantaneous form of communication.

In Holwell Securities v Hughes[36]  it was held that the offer could specify that acceptance must reach the offeror. If this be the situation then the actual communication is required. In Tinn v Hoffman[37]  and Yates Building Co. v Pulleyn Ltd[38]  it was opined by the court that if a method had been specified, without any insistence that this should be the only method then any other equally advantageous method would also be acceptable.

Dough had offered to sell his laptop computer by placing a message on the notice board. He had stated the price as £ 450/- or any amount nearest to this amount. This constitutes an invitation to treat, which does not constitute an offer. In Harvey v. Facey,[39] the announcement by an owner of a property that he might sell the property at a certain price was considered to be an invitation to treat[40].

In the oft-quoted case of Carlill v. Carbolic Smoke Ball Co,[41] the court held that the performance of the condition specified in the offer of a unilateral contract constitutes acceptance. Moreover, in Errington v. Errington & Woods[42] a father had bought a house in his name and had promised to give it to his son if he would make the mortgage payments. This promise was a unilateral contract and its performance had commenced as the son had started to pay the mortgage amounts. Thus, revocation was not possible[43].

In Hyde v. Wrench[44] the defendant made an offer on the 6th of June in respect of the sale of an estate to the plaintiff for £ 1, 000/-. On the 8th of June, the plaintiff made an offer to purchase this estate for £ 950/-. This offer was refused by the defendant on the 27th of June. On the 29th of June, the defendant wrote a letter accepting the original offer. In this case, the court held that there was no contract in existence and that the counter offer of £ 950/- cancelled the original offer. Hence, the original offer could not be revived by fresh acceptance on the 29th of June. It was held that a counter offer invalidates the original offer[45].

On Tuesday, Roland sent an email to Dough that he would pay £ 400/- by cheque. This represents an offer made in response to Dough’s invitation to treat. On Tuesday, Dough responded to Roland’s email wherein he stated that he would consider Roland’s offer. This does not constitute acceptance of Roland’s offer but only serves to keep the contract intact, but at this point of time, no binding contract had been made. On the very same day, Sian sent a facsimile message to Dough, that she had deposited a cheque for £ 450/- with the accounts department, from where Dough could collect it, as payment for the laptop computer. Hence, Sian had not only accepted the offer but had also completed the transaction. Therefore, it is a binding contract and as such, it cannot be revoked by Dough.

Dough, while making his offer, had specified that the mode of acceptance had to be either by facsimile or over the phone. Since, Sian had indicated her acceptance by facsimile the transaction had become a binding contract between Dough and her. Dough did not see this message due to lack of paper in the facsimile machine. In Yates Building Co v. R.J. Pulleyn and Sons (York) Ltd[46] it was held that if an offer comprises of a specific acceptance method that is to be observed, then such a method has to be adopted in order to make the contract conclusive. Since, Dough had made an offer it is reasonable to expect him to take all such measures as will allow him to receive the reply to his offer.

In Entores Ltd v. Miles Far East Corporation,[47] it was held that once the message has been received, it is to be construed to have been delivered, because it is the responsibility of the offeror to ensure the proper receipt of messages within his workplace. Hence, the giving of notice by the offeree constitutes the binding acceptance. The time of the contract is the time of giving this notice. The contract becomes binding on communicating acceptance. Sian had transmitted her acceptance of the Dough’s offer by means of a facsimile. Moreover, she had issued a cheque to Dough for the amount specified by him. Therefore, these two acts constitute a binding contract between Sian and Dough on Tuesday itself.

 On Wednesday, Dough sent a facsimile message to Roland accepting his offer and at the same time requesting for clarification regarding the mode of payment. Moreover, he also posted this same message to Roland on Wednesday. However, this does not constitute an acceptance of an offer because clarification had been sought. Hence, it does not constitute a valid acceptance.

The postal rule though applicable to cable and telegram is inapplicable to telephone, telex and fax. Moreover, it is does not apply in instances where the letter of acceptance was not posted properly, this was the opinion of the court in Re London and Northern Bank[48].

The question arises as to whether an offeree is permitted to withdraw his acceptance, after it has been posted, by a later communication, which reaches the offeror before the acceptance. In Dunmore v. Alexander[49] this seems to be permitted but the decision is unclear. The fact remains that if the postal rule is applied exactly, then such withdrawal is not permitted. The decisions in Wenkheim v Arndt[50] and South Africa in A-Z Bazaars v Ministry of Agriculture clearly indicate this position.

On Wednesday afternoon, Dough saw Sian’s message and left a message on Roland’s answering machine that “ignore my previous fax and / or postcard. Sorry – have accepted another offer.” However, by Tuesday itself, a binding contract had been made with Sian because she had not only communicated her acceptance on Tuesday by facsimile, which is an instantaneous messaging system, but had also issued a cheque as consideration for the contract. This shows that a binding contract had been formed between Sian and Dough, therefore, no further contract can be made by Dough with Roland on Wednesday for the laptop computer.

Reference List

1.                   Adams v Lindsell (1818) 1 B & Ald 681.

2.                   Beswick v Beswick (1966) Eng.CA, (1968) AC 58.

3.                   Birkibon Ltd. v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH (1982) 1 All ER 293.

4.                   Butler Machine Tool v. Ex-Cell-O Corporation (1979) 1 WLR 401.

5.                   Byrne v. Van Tienhoven (1880) 5 CPD 344.

6.                   Carlill v. Carbolic Smoke Ball Co (1893) 1 QB 256.

7.                   Cartwright, Peter. 2001. Consumer Protection and the Criminal Law: Law, Theory, and Policy in the UK. Cambridge University Press. ISBN: 0521590809. P.14.

8.                   Davies, Iwan. 2005. Issues in International Commercial Law. Ashgate Publishing Ltd. ISBN: 0754624625. P. 133 – 134.

9.                   Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co. Ltd (1915) AC 847.

10.               Dunmore v Alexander (1830) 9 Sh.

11.               Errington v Errington & Woods (1952) 1 K.B. 290.

12.               Entores Ltd v. Miles Far East Corporation. (1955). 2 QB. 327.

13.               Harvey v. Facey. (1893) AC 552.

14.               Holwell Securities v Hughes (1974) 1 W.L.R. 155.

15.               Household Fire & Carriage Accident Insurance Co. v. Grant (1879) LR Ex D 216.16.               Hyde v. Wrench (1840) 49 ER 132.

17.               Law Commission of England and Wales, Consultation Paper on Privity of contract: Contracts for the Benefits of Third Parties, (1991), WP No 121.

18.               Les Affreteurs Reunis v. Leopold Walford (1919) AC 801.

19.               Livingstone v. Evans (1925) WL 25377.

20.               Price v Easton (1833) 4 B & Ad 433.

21.               Re London and Northern Bank (1900) 1 Ch 220.

22.               R v Clarke (1927) 40 CLR 227.

23.               Scruttons Ltd v. Midland Silicones Ltd (1962) AC 446.

24.               Section 148(4). Road Traffic Act 1972.

25.               Shanklin Pier v. Detel Products (1951) 2 KB 854.

26.               Tinn v Hoffman (1873) 29 LT 271.

27.               The Law Commission (England & Wales). Privity of Contract: Contracts for the Benefit of Third Parties. (1996).  London: HMSO. P. 10-11.

28.               Tweddle v Atkinson (1861) 1 B&S 393.

29.               Tywood Industries Ltd. v. St. Anne-Nackawic Pulp & Paper Co. Ltd (1979), 100 D.L.R. (3d) 374

30.               Vandepitte v Preferred Accident Insurance co (1933) AC 70.

31.               Wenkheim v Arndt (1873) 1 JR 73.

32.               Waddams, S.M. (1999). The Law of Contracts, 4th ed. Toronto: Canada Law Book.       P. 194.

33.               Yates Building Co. v Pulleyn Ltd (1975) 119 SJ 370.

[1] Cartwright, Peter. 2001. Consumer Protection and the Criminal Law: Law, Theory, and Policy in the UK. ISBN: 0521590809. P. 14.[2] Stone, Richard. Modern Law of Contract. 2005. Routledge Cavendish. ISBN: 1859418821. P. 127[3] (1833). 4 B & Ad 433.[4] Ibid.[5] (1861) 1 B&S 393.[6] Ibid.[7] (1915) AC 847.[8] Ibid.[9]  Davies, Iwan. 2005. Issues in International Commercial Law. Ashgate Publishing Ltd. ISBN: 0754624625. P. 133[10] (1966), Eng.CA, [1968] AC 58.[11] Ibid.[12] (1933) AC 70.[13] Ibid.[14] (1915) AC 847.[15] Ibid.[16] (1951) 2 KB 854.[17] Ibid.[18] (1962) AC 446.[19] Ibid.[20] (1919) AC 801.[21] Ibid.[22] Section 148(4) of the Road Traffic Act 1972.[23] Stone, Richard. Modern Law of Contract. 2005. Routledge Cavendish. ISBN: 1859418821. P. 128.[24] Davies, Iwan. 2005. Issues in International Commercial Law. Ashgate Publishing Ltd. ISBN: 0754624625 P. 134.[25] Law Commission of England and Wales, Consultation Paper on Privity of contract: Contracts for the Benefits of Third Parties, (1991), WP No 121. At para 4.3(v).[26] Law Commission of England and Wales, Consultation Paper on Privity of contract: Contracts for the Benefits of Third Parties, (1991), WP No 121. At pare 4.4(v).

[27] (1927). 40 CLR 227.[28] (1879). LR Ex D 216.[29] (1818) 1 B & Ald 681.[30] (1879) 4 Ex D 216.[31] (1925). WL 25377.[32] (1979). 1 WLR 401.[33] (1979). 100 D.L.R (3d) 374.[34] (1880). 5 CPD 344.[35] (1982). 1 All ER 293.[36] (1974) 1 All ER 161.[37] (1873) 29 LT 271.[38] (1975) 119 SJ 370.[39] (1893). AC 552.[40] Ibid.[41] (1893). 1QB 256.[42] (1952). 1KB 290.[43] Ibid.[44] (1840) 49 ER 132.[45] Ibid.[46] (1975). 119 SJ 370.[47] (1955). 2 QB. 327.[48] (1900). 1 Ch 220.[49] (1830). 9 Sh.[50] (1873). 1 JR 73.