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The Common Law Doctrine of Privity of Contract Seems Unjustifiable Essay

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Updated: May 6th, 2020

Introduction

The privity of contract doctrine states that it is only parties involved in a contract have the legal mandate of taking any action meant to enforce such a contract. Thus, a third party beneficiary has no legal mandate of enforcing the same when the benefits promised are denied. Reflectively, this may not be justifiable. Thus, this analytical treatise attempts to explicitly justify why the common law doctrine of privity of contracts seems unjustifiable.

How the Common Law Doctirne of Privity of Contract is Unjustifiable

In Scruttons Ltd. v Midland Silicones limited, the privity doctrine applied in ruling the case. Other than special consideration of agency, trust, assignment or statute, a person, not a party to a contract cannot enforce, or rely for protection on its provision.

In Dunlop Pneumatic Tyre Co Ltd. v Selfrigde & Co Ltd., the court applied the same doctrine in ruling the case. It was held that since the plaintiffs were undisclosed principals, no consideration moved from them to the defendant and that the contract was unenforceable by them (Stone 2008).

From the ruling on the above cases under English law, it can be deduced that consideration should move from the promise only, and a contract cannot be enforced by a person who is not a party to the contract even if it has made for his benefit. It was held that since the plaintiffs were undisclosed principals (August 2008). Therefore, no consideration moved from them to the defendant, and that the contract was unenforceable by them.

In the United Kingdom Privity of contract forms a benchmark of contractual law which implies that both the third party and the contracting party who makes the condition may demand performance in favor of the third party unless it is not indicated in the contract. From the above article, it is apparent that the common law applies the doctrine of Privity of Contract when making some precedents (Keenan & Riches 2002).

There are a number of remedies available to the promisee for the benefit of the third party. They include specific performance in equity and damages at common law. Under specific performance, “third parties whose benefit a contract has been made may not sue on the contract but the party making the contract may sue for specific performance for the benefit of the third party even where the damages to be obtained are normal” (Legal Service India 2012, par. 6).

However, the remedy of specific performance will not be granted if damages at common law are adequate. In a suit for damages, the plaintiff cannot recover more than the amount required in compensating for his own loss and not that of a third party (Stone 2008).

As mentioned above, the general rule of law of contract is that contractual obligations are created by the parties to the contract. They have the exclusive right of enforcement. Nevertheless, due to the complexity of business relations in the contemporary business world, third parties may have an interest in the execution of a contract. Therefore, the application of this doctrine may be avoided so as to have justice in scenarios where third parties are affected by the execution of the contract.

These are the exceptions to the Doctrine of Privity of Contract. For instance, in an agency relationship, an agent may contract on behalf of his principal by a third party and form a binding contract between the principal and third party. For example, “a third party may be able to take the benefits of an exclusion clause by providing that the party imposing the clause was acting as the agent of the third party” (Privity of Contract 2012, par. 9).

Moreover, “on the basis of trust which is an equitable obligation to hold property on behalf of the beneficiary, equity can develop a general exception to the doctrine of Privity by use of the concept of trust” (Privity of Contract 2012, par. 12). In a scenario where a person acts as a trustee and enters into a contract, the beneficiary of the contract can sue if the promise has not been performed. Another exception to the doctrine of Privity of contract is estoppel.

From the case ruling of Waltons Stores (interstate) Ltd v Maher, “a third party may be able to seek relief against a promissory on the basis of promissory estoppel principle” (Legal Service India 2012, par. 6). Thus, “the third party needs to establish the elements of promissory estoppels in the contract” (Legal Service India 2012, par. 6).

Reflectively, unjust enrichment principle underpins any remedy that denies the third party his or her benefits. This is brought out in the case of Pavey & Mathews Pty Ltd v Paul. The principle “forms the basis for which a third party can seek relief” (Turner 2005, p. 38). However, action based upon unjust enrichment is not based on the contract but independent of it.

The general rule of a contract is that a stranger cannot execute a contract or enforce action for execution of a contract. However, this rule may not be applicable in all cases. There are exceptions to the general rule. From the above discussion, it is apparent that the principle of Privity of contract can be circumvented. This is done so as to provide justice to the third party beneficiary in a contract.

References

August, R. (2008). International Business Law: Text Cases and Readings. New York: Routledge Keenan, D, & Riches, S. (2002). Business Law. New York: Pearson/Longman.

Legal service India: . (2012). Web.

Privity of Contract: The doctrine of privity. (2012). Web.

Stone, R. (2008). The Modern Law of Contract. New York: Routledge.

Turner, C. (2005). The Comprehensive Guide to all the facts Contract Law. Hodder: Oxon.

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IvyPanda. "The Common Law Doctrine of Privity of Contract Seems Unjustifiable." May 6, 2020. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

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IvyPanda. 2020. "The Common Law Doctrine of Privity of Contract Seems Unjustifiable." May 6, 2020. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

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IvyPanda. (2020) 'The Common Law Doctrine of Privity of Contract Seems Unjustifiable'. 6 May.

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