THE DOCTRINE OF PRIVITY TO CONTRACT BY MWAKISIKI MWAKISIKI EDWARDS

INTRODUCTION

The assertion that only parties to contract can sue or being sued under it is commonly known as doctrine of privity of contract and largely is a common law principle or mechanism by which contractual rights and liabilities are limited to the contracting parties. The logic behind this is that only contracting parties have accepted the terms and responsibilities stipulated in the agreement.  Basic rule is that if there is no privity to contract, there is no right to sue and cannot be sued .

This doctrine is to the effect that only a person who is party to a contract can sue or be sued on it. It means that only a person who has provided consideration to a promise can sue or be sued on it and it also means that a stranger to consideration cannot sue or be sued even if the contract was intended to benefit him .

Privity of contract is the relation which exists between the parties to a contract which enable one person to sue another on it. The privity of contract principle is to the effect that only parties to a contract acquires T and incur liability under it. As such a stranger to a contract cannot sue or be sued on it .  

DEVELOPMENT OF DOCTRINE OF PRIVITY TO CONTRACT IN ENGLAND

The doctrine of privity to contract that is only parties to contract can sue or be sued under the contract and not the third party, in England developed through a number of courts decisions as it shown below:-

In Tweddle v Atkinson , In this case two couples intended to get marriage; before the marriage the parents that are father of the husband and father of the wife agreed that the father of the wife should pay £290 to the husband and the real father will only pay £ 100. This promise was not fulfilled by the father of a wife since he paid only £ 90. Therefore the husband instituted a case against the father of the wife. The issue before the court was whether the husband of a wife who is not the party to the contract could sue on it. 

It was held that the husband has no right to sue because he is not a party to a contract. This is because there is existence of relationship between two fathers that is the father of the husband and the father of the wife. The husband is regarded as a beneficiary or a stranger. No act could be brought to the court by the party who is stranger to the contract. Also it is established principle that no stranger to the consideration can take advantage of the contract although made for his benefits. It is important to note that in this case the plaintiff was both stranger to contract and consideration.

Similarly, the above position was affirmed in the case of Dunlop Pneumatic Tyre Co., Ltd v Selfridge & Co., Ltd , where the appellants in this case (Dunlop) who was manufacturers of motorcar tyres sold some of the Tyres to on Dew and Co, with an agreement that these tyres will not be sold below the list price. Dew & Co on their side sold some of the tyres to the respondents (Selfridge& Co.) with an agreement that the respondents shall observe conditions as to price and the respondents also promised that they would pay the appellants a sum of $5 for every tyre sold below the list price. The respondents sold some of tyres below the list price and the appellants brought an action against them (respondents) to recover damages for the breach. 

The House of Lords held that: The plaintiff could not maintain an action against the respondents because there was no contract between the two parties. It was further observed that even if it is taken that Dew & co. were action as there was no consideration between the two and the respondents since the whole of purchase price was paid by Selfridge & Co. to Dew & Co.  Their Lordship reasoned thus: 

“…In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue or be sued on it. Our law knows nothing of a Jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property as for example under a trust but cannot be conferred on a stranger to a contract as a right to enforce the contract in personam”.

The above quotation is to the effect that in England only people who are part to the contract can sue under it and obtain some rights there to and not a third party who haven’t furnished consideration or being the party to contract, though sometimes by a way of trust or any other means a stranger to contract can sue under the contract and obtain some rights thereto. The term Jus quaesitum tertio therefore means the right of a third party to enforce a contract to which he is not a party. However such stranger to a contract cannot sue on it in his own name ever though he is the beneficiary of the arrangement that is he cannot enforce the contract in personam.

Yet again in the case of Beswick v Beswick , where the deceased agreed with the company that that the company should employ him as a consultant and also the company should pay his wife E5 per week if he dies, so when he dies the wife claim for it in two grounds, firstly she is a beneficiary of E5 and secondly she was administrator of her husband estate. It was held that as administrator the widow could obtain an order of specific performance which would enforce the provision in the contract for benefit but that in her personal capacity for arrears she had no cause of action. 

THE POSITION OF TANZANIA AS TO DOCTRINE OF PRIVITY OF CONTRACT

The aforesaid position in England is the same as that of Tanzania; however In the Law of Contract Act is silent on the principle of privity of contract. Though section 2(1) (d) of the Law of Contract Act , permits a third person to furnish consideration for the promisee but doesn’t allow him to sue on the contract on the ground that he furnished consideration .

The applicability of the doctrine of privity to contract that is only parties to contract can sue or be sued under it, is evidenced by looking on different court’s decision regarding privity to contract as follows:-

In the case of Burns & Blane Limited v. United Construction Company Limited , Plaintiff sued for goods sold and delivered and services rendered. Plaintiff had acted as a subcontractor to defendant, the main contractor, on a construction project. Defendant did not deny that it was liable under the contract. However, defendant alleged that plaintiff’s recovery should be reduced by the amount of expenses which defendant had incurred in correcting certain defects and also by the amount of a settlement which defendant had made with a third party, the company for which the building was being constructed, because of other defects in materials which plaintiff had supplied. It was held there was no privity of contract between plaintiff and the third party with which defendant made the settlement, nor did defendant expend funds to correct those defects in respect of which the settlement was made. Therefore, the amount of the settlement should not be deducted from plaintiffs.  

In Juma Garage v Co-Operative and Rural Development Bank , This case is about Privity of Contract, and issue was whether Respondent instructed to act for an insurance corporation, whether such instruction makes the respondent an agent of Agency-Agent acting for Principal and whether the agent may sue in his own name. The fact of this case is that, the respondent owned a motor vehicle with Registration Number SU 770 which was insured with the National Insurance Corporation (NIC). The vehicle was involved in an accident, which made NIC liable for its repair. NIC took the motor vehicle to the appellant for repairs and later on, when the appellant delayed to complete the work, NIC instructed the respondent to follow up the matter with the appellant. After completion the respondent sued the appellant for general and exemplary damages amounting to TZS 5 640 000 for loss of use of the motor vehicle, and a further sum of TZS.78200 being the cost of replacing some parts missing from the vehicle at the time the respondent took delivery of the motor vehicle. The High Court allowed the claim of exemplary damages, hence this appeal.

The court held that, the fact that NIC instructed the respondent to follow up the matter with the appellant and that it, NIC, would be responsible for expenses did not mean termination of the contract between NIC and the appellant; the respondent was not party to the contract with the appellant but merely an agent of NIC.

However, the doctrine of privity to contract in Tanzania is used with certain limitations, as the doctrine is normally not imposed in agreements or contracts that falls under customary laws and this is evidenced by the following courts decisions:-

In Ephraim Obongo v. Naftael Okeyo , where by the defendant, a lorry owner, used to collect cassava from plaintiff for selling. On one occasion, his lorry driver and turn boy went to plaintiff to collect some bags of cassava. Plaintiff refused to deliver the goods, demanding that they first produce some empty cassava bags which they had evidently taken another day, or some money.

They returned to defendant’s wife, who gave them 24 bags and T.shs. 190/-, and sent a not promising that everything would be taken care of when her husband returned from a journey. Plaintiff received no more money, and sued in Primary Court for the value of the cassava he had given them, and for some other empty bags not returned, less the money and bags received. The Primary Court held that since the transaction leading to the disputes was between plaintiff and the defendant’s wife the proper party to the suit was the defendant’s wife and not the defendant. On that ground he dismissed the suit. The case went on appeal to the District court and then to the High Court. Seaton J observed that the case involved an issue of privity of contract, a contract rather subtle and technical point which, perhaps Primary Court couldn’t deal with. He said.

“…In suits between Africans living within a local community and doing business amongst themselves on a basis of trust, I consider it would not be in the interests of justice to import technical notions of privity of contract and other such notions, unless clearly required by the law to do so…”

The same position was reflected in the case of Burns & Blane Limited v. United Construction Company Limited , Plaintiff sued for goods sold and delivered and services rendered. Plaintiff had acted as a subcontractor to defendant, the main contractor, on a construction project. Defendant did not deny that it was liable under the contract. However, defendant alleged that plaintiff’s recovery should be reduced by the amount of expenses which defendant had incurred in correcting certain defects and also by the amount of a settlement which defendant had made with a third party, the company for which the building was being constructed, because of other defects in materials which plaintiff had supplied. It was held that there was no privity of contract between plaintiff and the third party with which defendant made the settlement, nor did defendant expend funds to correct those defects in respect of which the settlement was made. Therefore, the amount of the settlement should not be deducted from plaintiff’s Claim.

From the above cases it is reasonable to propose that in Tanzania although a stranger to a consideration may sue and recover on the basis of section 2(1) d of the Law of Contract Act so long as he is a party to the contract. A stranger to a contract cannot sue on it in his own name ever though he is the beneficiary of the arrangement or that he furnished consideration .

EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT 

Like the position of England which allows a third party who is not a party to contract to sue under it, the position is the same also in Tanzania as there certain branches of the law in Tanzania allow a third party beneficiary to sue on the contract in his own name. Those contracts which allow a third party to sue on his mane include the following: 

Contract relating to trust 

Where a trust has been created and proved then the beneficiary (third party) may sue on the contract in his own name. It must be proved to the satisfaction of the court that trust was created. Once trust has been proved then the third party can sue the promissory to enforce the contract and becomes, as general rule entitled to the benefits under the contract.

A third party can enforce a contract, if it can be established that the promise intended to create a trust. “A trust is an obligation, enforceable in equity, by which a person, the trustee, holds property on behalf of another, the beneficiary ”. The law of trusts gives third party beneficiary the right to action against promisors non-performance.  

In a practical context, the promise (trustee) on the insistence by the third party (beneficiary) takes action against the promisor in case of breach.  There can be no trust in case there is no promise or property that the trustee holds for the beneficiary. Establishment of intention of trust is very important in the law of trust. 

In Tanzania Union of Industrial and Commercial Workers [TUCO] at Mbeya Cement Company Ltd v Mbeya Cement Company Ltd and National Insurances Corporation , in this case the action based on trust deed and the issue was whether plaintiff can sue on trust deed to which he is not party and whether the trust rules applicable.

The fact of the case is that, the plaintiff filed a suit against the defendants jointly, for among other relief, a specific performance of a trust deed. The basic of the suit was the trust deed rules and regulation for Mbeya Cement Company group staff endowment assurance scheme which was annexed to plaint. The counsels for defendants raised a preliminary objection for plaintiff had no locus stand to institute the suit either for lack of legal status or based on trust deed.

It was held that although the plaintiff union is capable of suing and being sued, it can only do so if the alleged wrongful acts were committed against it. It’s for each for each individual employee to sue the defendants for their rights under the trust deed and group endowment scheme.

Negotiable instrument 

The Bill of Exchange Act  under section 38 (a) empowers a holder of a bill to sue on it in his own name. A holder is defined under section 2 of the Bill of Exchange Act that "holder" means the payee or endorsee of a bill or note that is in possession of it, or the bearer thereof. A holder may sue any person whose signature appears on the bill not necessarily the immediate party. Therefore by closely observing the above provision it’s clear that such provision provides an exception to the general rule of privity of contract.

Transfer of landed property 

A person who buys property with notice that the seller or owner of the land is bound by certain obligations created by a covenant affecting the land shall be bound by them even though he was not a party to the covenant . 

Contract relating to the law of agency

An agent can take a legal action and recover damages for the loss endured by his principal. The doctrine of agency gives such rights in a business setting.  “Agency is the fiduciary relationship … the principal's control, and the agent manifests assent or otherwise consents so to act .

Under part X of the Law of Contract Act  deals with contract relating to an agency. There are provisions dealing with the effect of agency on contracts with third persons. 

Under section 178 of the Law of Contract Act  expressly provides that: Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person.  

Agency can arise in a number of ways but one that gives problems with the concept of privity of contract is the case of the undisclosed principal. This arises where the agent doesn’t disclose that he is acting on behalf of the principle when he enters into the contract with the third party, but simply contracts in his name. In this situation it has been held that when the agency is disclosed, the third party may elect to sue either the agent or principal and either agency or principal also may sue the third party.

Contract based on insurance 

This type of contract normally found under the Road Traffic Act , where by the third party acquire right to sue. Therefore for those owners of motor vehicle must have compulsory third party insurance in the sense that a person who is not known and foreseeable to the contract may acquire rights and that is the third party . Therefore a third party may sue the parties to the contract of insurance that is either the owner of the motor vehicle or the company of insurance or both.

CRITICISMS OF THE DOCTRINE OF PRIVITY OF CONTRACT

Despite the rule relates to the benefit of the contract and states that a contract can only be enforced by a person who is a party to the contract, or, alternatively, a person who is not a party to a contract cannot claim any benefit under it even if the contracting parties had themselves agreed that the third party should be able to enforce it . The doctrine of privity to contract is faced with some criticism among different authors and educators, such criticism leveled against the doctrine include the followings:-

Firstly, the doctrine of privity of contract it infringes the right of beneficiaries. Some contract may be made purposely for the benefits of the third party. But the doctrine limits liabilities and rights to the parties only. Hence the third part’s right is infringed. Since he/she was not a party to a contract but it was made for his or her interest. Secondly, Privity of contract defeats the intention of the parties to the contract.

CONCLUTION

Third party rights would be effective only when the contract expressly states it or if the terms in contract expressly purported to confer a benefit on the third party and it can be interpreted that the third party can be permitted to have a remedy in pursuing such benefit against them. So, all these exceptions and statutes explained above are considered important and highly beneficial in circumventing the rule when third party rights need to be established.

REFERENCE

BOOKS

Mckendrick., E (2009). Contract Law (8th Ed). Basingstoke: Palgrave Macmillan.

Beatson, J, Burrows, A & Cartwright, J. (2010). Anson’s Law of Contract (29th ed). Oxford University Press: New York

Nditi, N (2004). General Principles of Contracts in East Africa. Dar es Salaam: Dar es Salaam University Press

STATUTE

Law of Contract Act [Cap 345 R.E. 2002]

The Bill of Exchange Act [CAP 215 R.E. 2002]

Road Traffic Act, [CAP 168 R.E. 2002]

ELECTRONIC SOURCES

http://books.google.ae/books?id=l423LTgRnJoC&dq=basic+contract+law+for+paralegals&source=gbs_navlinks accessed on 23rd January 2017 at 16:30HRS

http://www.duhaime.org/LegalDictionary/A/Agency.aspx, accessed on 19th January 2017  at 17:30HRS

CASES REFERED

Tweddle v Atkinson [1861] 123 E.R 762

Dunlop Pneumatic Tyre Co., Ltd v Selfridge & Co., Ltd [1915] A.C 847

Beswick v Beswick [1966] 3ALL E.R. 1 (C.A)

Burns & Blane Limited v. United Construction Company Limited [1967] H.C.D No 156

Juma Garage v Co-Operative and Rural Development Bank [Civil Appeal No 58 of 1996]

Tanzania Union of Industrial and Commercial Workers [TUCO] at Mbeya Cement Company Ltd v Mbeya Cement Company Ltd and National Insurances Corporation [Civil Case No. 135 of 2000]