WHAT IS PRIVITY OF CONTRACT?
In considering the enforcement of contracts, a preliminary issue which arises is whether a person who is not a party to a contract can enforce it under any circumstances. This raises the issue of privity of contract.
Under common law, a person cannot be entitled to enforce or be bound by the terms of a contract to which he is not a party. Thus, only persons who are parties to a contract are entitled to take action to enforce it.
The rule on privity is based not only on the fact that there is no contractual relationship or privity between the third party plaintiff and the defendant, but also on the fact that the third party plaintiff has not provided any consideration for the promise which he seeks to enforce.
WHAT IS THE RULE ON PRIVITY OF CONTRACTS?
The common law rule on privity of contract is a derivative of several cases. In Tweddle v. Atkinson, the plaintiff was the son of the late John Tweddle. Tweddle had arranged with the late William Guy that a marriage portion would be given to the plaintiff as part of the marriage and the plaintiff sued to enforce it. The court ruled that he could not, the rule being that a promise cannot bring an action unless the consideration for the promise moved from him. Wightman J. opined : “ It is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit.”
See also Dunlop Pneumatic Tyre Co. Ltd v. Selfrdige & co. Ltd.
LEGISLATIVE CHANGES TO THE DOCTRINE OF PRIVITY –CONTRACTS ACT, 1960 (ACT 25)
In Ghana, the contracts Act, 1960 (Act 25) has abolished the common law rule on privity of contracts and abolished the rule subject to certain exceptions. The statutory provisions which changed the received law on privity of contract are found in sections 5, 6 and 10 of the contracts Act, 190 (Act 25).
Section 5(1) of Act 25-Conferment of Benefit on Third Party.
5(1) Any provision in a contract… which purports to confer a benefit on a person who is not a party to the contract, whether as a designated person or as a member of a class of persons, may subject to the provisions of this Part, be enforced or relied upon by that person as though he were a party to the contract.
Section 5(1) makes a person who seeks to enforce some rights under a contract of which he is not a party (third party) to only do so if the contract purports to confer some benefit on him, either as a designated person or as a member of a class of persons. On the face of it, this means that the parties to the contract must have had the third party within their contemplation as someone or a member of a group on whom they purport to confer some right or benefit arising from the contract, and such intention or contemplation must be evident in the contract itself.
In Koah v. Royal Exchange Assurance, Acher J. (as he then was) stated inter alia, that: “ Here in Ghana, the Contracts Act has changed the law with a fanfare of trumpets and ahs made it clear that third parties not parties to a contract can sue but if and only if and when the contract purports to confer a benefit on that third person”.
The courts in implementing section 5(1) of Act 25, have consistently emphasized that for the third party rights to be enforceable, the benefit of the third party must have been within the contemplation of the parties to the contract.
In Ejura Farms(Ghana) Ltd. and Anor. v. Harlley, E.F.G. Ltd, the first defendants , entered into a contract with A.F.S. Ltd. The plaintiff, a stranger to the contract, guaranteed 30,000 cedis to E.F.G.Ltd. in respect of the contract, and requested his bank, the second defendants , to act as his agent in respect of the guarantee offering the bank government stock as security. Later without the plaintiff’s knowledge, the terms of the contract between the two firms were varied. E.F.G. Ltd. subsequently called for the payment of the guarantee, which the bank paid, reimbursing itself from the plaintiff’s stock. The plaintiff alleged that since he was not aware of the variation of the contract, E.F.G. Ltd. had wrongfully called for the payment of the guarantee, and he wrote demanding a refund from E.F.G. Ltd. E.F.G.Ltd., refused to pay on the ground that the plaintiff was a total stranger to them in respect of the agreements between themselves, A.F.S. Ltd. and the bank. The plaintiff therefore sued E.F.G.Ltd. and the bank basing his action on conversion , or alternatively on the ground of money had and receive. E.F.G.Ltd. sought to have the action against them struck out on the ground that it was frivolous and vexatious and disclosed no cause of action against them.
The High court dismissed the motion and E.F.G. Ltd. appealed. During the hearing counsel for the plaintiff conceded that it was impossible to identify any specific sum of money or chattel of the plaintiff which could form the subject-matter of conversion. He therefore rested his argument on the alternative ground of money had and received.
The court, allowing the appeal, that there was not privity of contract between the plaintiff and the first defendants. Moreover, the plaintiff could not on the facts disclosed in the pleadings and in the said contracts seek third party benefits from the contract under the statutory exceptions contained in Part II of the Contracts Act, 190(Act 25), since the plaintiff was clearly not within the contemplation of the parties to the said contracts and no provision thereof conferred or purported to confer any benefits on him as a non-party whether as a designated person or as a member of a class of persons stated in section 5(1) of Act 25.
Incidental beneficiaries
Section 5(1) of the contracts act does not allow incidental beneficiaries of the contracts to sue on them. It should be expressly or by necessary implication evident in the contract that the parties. To the contract in fact contemplated benefits to the third party.
YEBOAH V KRAH: The plf sought to enforce against the alleged insurers of the first def, whose vehicle had negligently caused damage to the plf’s vehicle, a judgment obtained against the first def. one of the argument put forward by the plf was that the motor insurance policy conferred an enforceable benefit on persons injured by the assures. It was contended on his behalf that a third person whose claim against an assured is to be met by insurers was a person whose benefit the contract of insurance was made. Consequently, he was entitles to enforce the contract against the insurer under section 5(1 of the Contract Act. Held- a contract of insurance of the kind under consideration was not a contract for the benefit of a third party but was a contract to indemnify the insured. The injured party’s right to be compensated for his injury was against the negligent person and was wholly independent of a contract of insurance between the insured and an insurer. While the insurance company might repudiate the policy or any payment arising thereunder, the third party would be entitled to his damages as against the insured if that third party had suffered injury as a result of the negligence of the insured.
According to Date-Bah , the learned judge does not probably mean to say that an injured third party would not in fact be benefited by the insurers’ due performance of their obligation of indemnifying their assures. But such benefit in fact makes the third party a mere incidental beneficiary who cannot sue because there is no intent to confer a benefit to him.
BAIDOO V SAM, The plf, a front man prayed the court to set aside a transfer of salt whining business by the principal to the def. The appeal was dismissed stating that ‘ a fortiori in this case where there is no provision whatsoever reserved in the contract for the benefit of the plf, his action in suing to have the contract to which he is a perfect stranger set aside in quite wrong.
KOAH V ROYAL EXCHANGE ASSURANCE: The plaintiff brought the action herein against the defendants to satisfy a judgment awarded against the defendants’ insured for damages for personal injuries sustained by the plaintiff as a result of the negligent driving of the insured’s driver. The defendants denied liability on the ground that the third party insurance in force at the material time restricted driving to the insured, i.e. the owner only. Held- The driver of the vehicle at the time of the accident could not take advantage of the provisions of the Contracts Act, 1960 s. 5 because he was not a party to the policy and the terms did not confer a benefit upon him.
Section 10 of the contracts act
Under traditional English contract doctrine, a promisee cannot sue on a promisee for which he has supplied no consideration. TWEEDLE V ATKINSON
Section 10 of the contracts act- Consideration need not move from promisee. A promise is not invalid as a contract by reason only that the consideration for the promisee is supplied by a person other than the promisee. Promisee here refers to the person for whose benefit a promise is made and not the person to whom the promise is made.
What are the Exceptions to the rule on third party rights?
Section 5(2) lays down two important exceptions to the rule on third party rights. It has to be noted that the exceptions outlined in the act were acknowledged by Lord Denning in BESWICK V BESWICK
(Subsection (1) ( a ) does not apply to and 7 , be enforced or relied on by that person a provision in a contract designed for the purpose of resale price maintenance (This refers to a provision whereby a party agrees to pay money to a person who is not a party to the contract in the event that the first-mentioned party sells any goods which are the subject matter of the contract, at prices lower than those determined prefixed in the contract. ), that is to say, a provision whereby a party agrees to pay money or otherwise render some valuable consideration to a person who is not a party to the contract in the event of the first-mentioned party selling or otherwise disposing of the goods, the subject matter of the contract, at prices lower than those determined by or under the contract; or
(6 b) a provision in a contract purporting to exclude or restrict a liability of a person who is not a party to the contract.
Enforcement of resale price maintenance agreements
The contracts act for policy reasons, disallows the application of the rule in section 5(1) to resale price maintenance clauses in sale contracts. Thus according to section 5(2), where a contract of sale, often entered into between a manufacturer and wholesaler, contains a provision which binds the wholesaler as well as retailers who buy from the wholesaler not to sell the product below a certain fixed price, the manufacturer will not be entitled to sue any third party retailer who sells the goods in breach of that resale price maintenance clause in the contract of which he is not a party. This exception is based on economic policy which frowns on price fixing and other activities which tend to be restrictive of competition. DUNLOP PNEUMATIC TYRE CO V SELFRIDGE & CO
Third party rights and exemption clauses- section 5(2) (b)
A person who is not a party to a contract cannot invoke section 5(1) to rely on an exemption clause in that contract to escape liability
Related provisions- section 6
6 b) a provision in a contract purporting to exclude or restrict a liability of a person who is not a party to the contract.
What are the Rights of a third party?
Where under section 5 provision in the contract,
( a ) a person who is not a party to a contract is entitled to enforce or rely on a variation or rescission of the contract shall not prejudice that person’s right to enforce or rely on the provision if that party has acted to the prejudice of that party in reliance on the variation or rescission, unless that party consents to the variation or rescission; and
( 7 b ) subject to paragraph ( a ) , a party against whom the provision is sought to be enforced or relied on is entitled to rely on or to plead by way of defence, set-off, counterclaim or otherwise a matter relating to the contract which that party could have so relied on or pleaded if the provision were sought to be enforced or relied on by the other party to the contract.
The import of section 6 is that where a third party has an enforceable right under a contract by virtue of section 5(1), such right cannot be taken away by the two parties to the contract agreeing to vary or rescind the contract, once the third party has acted to his detriment in reliance of the contract, unless the third party consents to such variation or rescission.
In section 6(b), the rights of the third party beneficiaries cannot be better that that of the promisee under the contract since the third party derives his legal rights from the promise made to the promisee. Consequently, all defenses, set-offs and counterclaims that are available against the promisee may be set up by the promisor in a suit against him by the third party beneficiary of his promise.