Contract Law: Privity of Contracts

Purity of Contracts

• A contract can impose rights and obligations on persons who are parties to the contract, but cannot impose any obligation or right on persons who are not parties to the contract.
• The common law rule on privity of contracts states that only parties to a contract can enforce it, and a third party who is not a party to the contract cannot bring an action to enforce the contract.

Case of Tweddle v Atkinson (1861)

• Facts: John Tweddle and William Guy agreed to pay a sum of money to the plaintiff in consideration of his marrying Guy's daughter. When Guy failed to pay, the plaintiff sued Guy's executor.
• Holding: The court held that the plaintiff, who was not a party to the agreement, could not enforce the contract.

Justifications for the Common Law Rule

• There is no contractual relationship between the third party and the parties to the contract.
• The third party has not provided any form of consideration for the promise.

Criticisms of the Common Law Rule

• It does not reflect the intention of the parties, who may have agreed to confer benefits on a third party.
• It can create unfairness, as the third party may have relied on the contract and organized their affairs accordingly.

Case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)

• Facts: Dunlop Pneumatic Tyre Co Ltd sought to enforce a contract against Selfridge & Co Ltd, but was not a party to the contract.
• Holding: The court reaffirmed the common law rule on privity of contracts, stating that only parties to a contract can enforce it.

Case of Darlington Borough Council v Wiltshire Northern Ltd (1995)

• Facts: Darlington Borough Council sought to deny effectiveness to a contract for the benefit of a third party, despite the express intention of the parties.
• Holding: The court criticized the common law rule on privity of contracts, stating that there is no logical or policy reason to deny effectiveness to a contract for the benefit of a third party where that is the express intention of the parties.### The Enforcement of Third-Party Contractual Rights in Ghana
• The common law rule on privity of contracts has been modified in Ghana by the Contract Act, 1960 (Act 25).
• The modification allows third-party beneficiaries to enforce rights and obligations in contracts.

Privity of Contracts in English Law

• English law has recognized the need to modify the doctrine of privity of contracts in the interest of commercial convenience.
• In the case of Darlington Borough Council vs. Wiltshier Northern Limited (1995), the English court noted that there is no logical basis for not giving effect to the express intention of the parties.

The Position in Ghana

• The Contract Act, 1960 (Act 25) has abolished the common law rule on privity of contracts in Ghana.
• Section 5 of the Act allows third-party beneficiaries to enforce rights and obligations in contracts.
• The section states that any provision in a contract that confers a benefit on a person who is not a party to the contract may be enforced or relied upon by that person as though they were a party to the contract.

Conditions for Enforcement

• The contract must contemplate a particular person either as a designated person or a member of a class of persons.
• The intent to confer a benefit must be evident in the contract, either expressively or by necessary implication.
• The benefit must be conferred on a person who is not a party to the contract, whether as a designated person or a member of a class of persons.

Incidental Beneficiaries

• Incidental beneficiaries are people who stand to benefit from the contract, but are not the designated beneficiaries.
• Examples of incidental beneficiaries include people who may benefit from an insurance contract, such as a third-party victim of an accident.
• Incidental beneficiaries cannot claim rights under Section 5, as they are not the intended beneficiaries of the contract.

Case Law

• In the case of Kua vs. Royal Exchange Assurance (1976), the court held that the Contract Act has changed the law in Ghana, allowing third-party beneficiaries to enforce rights and obligations in contracts.
• In the case of Kingdom vs. L.E.H. (1968), the court held that a third-party beneficiary cannot claim rights under an insurance contract, as they are not a party to the contract.

Key Points

• The Contract Act, 1960 (Act 25) has modified the common law rule on privity of contracts in Ghana.
• Third-party beneficiaries can enforce rights and obligations in contracts if the contract contemplates a particular person or class of persons.
• Incidental beneficiaries are not entitled to claim rights under Section 5, as they are not the intended beneficiaries of the contract.### Privity of Contracts and Third Party Rights
• Under the Contract Act of 1960, a person who is not a party to a contract can enforce or rely on the provision in the contract (Section 5).
• This means that if a contract is made for the benefit of a third party, that third party can enforce the contract, even if they are not a party to it.

Exceptions to the Rule

Resale Price Maintenance

• Section 52 of the Contract Act states that the rule allowing third-party enforcement does not apply to contracts for resale price maintenance.
• Resale price maintenance occurs when a manufacturer sets a minimum price for their product, and wholesalers or retailers are not allowed to sell below that price.
• This practice is prohibited in Ghana, as it can lead to inflation and harm the public.

Exemption Clauses

• Another exception to the rule is exemption clauses, which aim to exempt third parties from liability.
• Section 5 of the Contract Act does not apply to exemption clauses that seek to exempt third parties from liability.
• This means that if an agreement is made between two parties, and they exempt a third party from liability, that third party cannot be held liable, even if they are negligent.

Key Points

• A contract made for the benefit of a third party can be enforced by that third party.
• However, there are exceptions to this rule, such as resale price maintenance and exemption clauses.
• The Contract Act of 1960 prohibits resale price maintenance and does not allow third parties to exempt themselves from liability through exemption clauses.

Purity of Contracts

• A contract can impose rights and obligations on parties to the contract, but not on non-parties.

Privity of Contracts Rule

• Only parties to a contract can enforce it, and a third party who is not a party to the contract cannot bring an action to enforce the contract.

Case of Tweddle v Atkinson (1861)

• The court held that the plaintiff, who was not a party to the agreement, could not enforce the contract.

Justifications for the Common Law Rule

• No contractual relationship exists between the third party and the parties to the contract.
• The third party has not provided any form of consideration for the promise.

Criticisms of the Common Law Rule

• It does not reflect the intention of the parties, who may have agreed to confer benefits on a third party.
• It can create unfairness, as the third party may have relied on the contract and organized their affairs accordingly.

Case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)

• The court reaffirmed the common law rule on privity of contracts, stating that only parties to a contract can enforce it.

Case of Darlington Borough Council v Wiltshire Northern Ltd (1995)

• The court criticized the common law rule on privity of contracts, stating that there is no logical or policy reason to deny effectiveness to a contract for the benefit of a third party where that is the express intention of the parties.

The Enforcement of Third-Party Contractual Rights in Ghana

• The common law rule on privity of contracts has been modified in Ghana by the Contract Act, 1960 (Act 25).
• Third-party beneficiaries can enforce rights and obligations in contracts.

Privity of Contracts in English Law

• English law has recognized the need to modify the doctrine of privity of contracts in the interest of commercial convenience.

The Position in Ghana

• The Contract Act, 1960 (Act 25) has abolished the common law rule on privity of contracts in Ghana.
• Section 5 of the Act allows third-party beneficiaries to enforce rights and obligations in contracts.

Conditions for Enforcement

• The contract must contemplate a particular person either as a designated person or a member of a class of persons.
• The intent to confer a benefit must be evident in the contract, either expressively or by necessary implication.
• The benefit must be conferred on a person who is not a party to the contract, whether as a designated person or a member of a class of persons.

Incidental Beneficiaries

• Incidental beneficiaries are people who stand to benefit from the contract, but are not the designated beneficiaries.
• Examples of incidental beneficiaries include people who may benefit from an insurance contract, such as a third-party victim of an accident.
• Incidental beneficiaries cannot claim rights under Section 5, as they are not the intended beneficiaries of the contract.

Case Law

• In the case of Kua vs. Royal Exchange Assurance (1976), the court held that the Contract Act has changed the law in Ghana, allowing third-party beneficiaries to enforce rights and obligations in contracts.
• In the case of Kingdom vs. L.E.H. (1968), the court held that a third-party beneficiary cannot claim rights under an insurance contract, as they are not a party to the contract.

Key Points

• The Contract Act, 1960 (Act 25) has modified the common law rule on privity of contracts in Ghana.
• Third-party beneficiaries can enforce rights and obligations in contracts if the contract contemplates a particular person or class of persons.
• Incidental beneficiaries are not entitled to claim rights under Section 5, as they are not the intended beneficiaries of the contract.

Privity of Contracts and Third Party Rights

• Under the Contract Act of 1960, a person who is not a party to a contract can enforce or rely on the provision in the contract (Section 5).

Exceptions to the Rule

Resale Price Maintenance

• Section 52 of the Contract Act states that the rule allowing third-party enforcement does not apply to contracts for resale price maintenance.
• Resale price maintenance occurs when a manufacturer sets a minimum price for their product, and wholesalers or retailers are not allowed to sell below that price.

Exemption Clauses

• Another exception to the rule is exemption clauses, which aim to exempt third parties from liability.
• Section 5 of the Contract Act does not apply to exemption clauses that seek to exempt third parties from liability.

Key Points

• A contract made for the benefit of a third party can be enforced by that third party.
• However, there are exceptions to this rule, such as resale price maintenance and exemption clauses.
• The Contract Act of 1960 prohibits resale price maintenance and does not allow third parties to exempt themselves from liability through exemption clauses.

Exceptions to the Doctrine of Privity of Contract

• The doctrine of privity of contract has several exceptions, including statutory exceptions, trust law, restrictive covenants, assignment, leases, agency, and negotiable instruments.

Statutory Exceptions

• The Motor Traffic (Third Party) Insurance Act is an example of a statutory exception, where a motorist is required to take out third-party liability insurance.
• The insurance policy is enforceable by another motorist involved in an accident, despite the fact that they lack privity in the contract.

Trust Law

• Where a trust has been created, the beneficiary can sue the trustees even if they were not a party to the original agreement.
• In Gregory & Parker v. Williams (1817), a trust was created in favour of Gregory, and the court accepted Gregory's argument that the trust was enforceable against Williams.

Assignment

• Assignment is a contract between the promisee (assignor) and the third party (assignee).
• The assignee takes the assignment "subject to" any defences the promisor has and any defects in the assignor's title.
• The effect of assignment is that the promisor is faced with an action brought on the contract by a person they did not intend to benefit.

Leases

• Where an owner of land creates a lease in favour of another person, the terms of the lease are enforceable by both parties due to privity between them.
• The landowner can also enforce the covenants against anybody to whom the lease is transferred.

Agency

• A principal can sue and be sued on contracts made on their behalf by an agent.
• The principal acquires rights and liabilities under contracts made by the agent with third parties.
• Agency can be viewed as an exception to the privity doctrine, as the principal is a third party to the contract.

Negotiable Instruments

• Negotiable instruments, such as cheques, are transferable and can be sued on by the person to whom they are transferred.

Contract Act 1960

• Section 5 of the Contract Act 1960 provides for third-party rights, where a third party can enforce a provision in a contract if they were in the contemplation of the contracting parties to receive or gain a benefit.
• Section 6 of the Contract Act 1960 states that a variation or rescission of a contract shall not prejudice a third party's right to enforce or rely on a provision if they have acted in reliance on the variation or rescission.
• Section 7 of the Contract Act 1960 provides for the assignment of legal rights, where a person may assign a legal right to another person as specified in the Act.