Privity of Contract

A contract can only create enforceable rights and obligations on the parties to the contract, and so only parties to such contracts can sue to enforce them. It also follows that only those who have furnished consideration may sue. This rule was stated in Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge Ltd. where the court stated that only a party to a contract can sue on it and a stranger cannot. If A promises B to offer a service to C in exchange for consideration, C cannot sue A upon his default as he is not a party to the contract and the doctrine of privity prevents him from doing so. There are however some exceptions which may allow a stranger to a contract to bring an action under the contract.

The general principle and its application

The rule that a stranger to a contract could not sue on that contract was created relatively recently. In the seventeenth century case of Dutton v. Poole, a stranger to a contract successfully sued for the enforcement of the contract. The doctrine of privity became firmly established in the nineteenth century.

In Price v. Easton, X owed price 13 pounds. Easton promised that if X worked for him, he would discharge X of his debt to Price. Price sued Easton when X did the work but Price failed to discharge the debt. The court held that Price could not recover as he was not a party to the contract. Similarly, in Tweddle v. Atkinson, a son could not enforce a contract between his father and his father-in-law.

Final approval was given to the doctrine in Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge Ltd. Where the plaintiff sold tyres to a certain dealer on the understanding that he would not resell below a certain price and that in the event of a sale to customers the dealer would extract the same promise from them. The dealers sold tyres to Selfridge who agreed to pay Dunlop 5 pounds for each tyre they sold below the restricted price. Selfridge sold some tyres below the restricted price and Dunlop brought an action to enforce the promise to pay 5 pounds for each tyre sold below the restricted price. The court held that while Selfridge had breached the contract with the dealer, the Dunlop company was not a party to the contract and had furnished no consideration.

This doctrine is also applied in Nigeria as it was applied by the Supreme Court in Chuba Ikpeazu v. African Continental Bank. The doctrine was also applied in Union Bank of Nigeria (UBN) PLC. v. Sparkling Breweries Ltd. & Ors. It should be noted that just as a person who is not a party to a contract cannot bring an action under it, a contract cannot be enforced against a person who is not a party that the contract. Only a party to a contract can enforce it or have it enforced against them. In Ilesa Local Planning Authority (LPA) v. Olayide, the respondent tried unsuccessfully to make the appellant liable for a contract between him and the governor of Oyo State. It was also held in Mercantile Bank v. Abusonwan that an action may not be brought against a stranger to a contract.

Exceptions to the doctrine

There are exceptions to the doctrine of privity of contract which will let a stranger to a contract have the ability to have a contract enforced and they shall be discussed.

(1) Covenants running with the land

The doctrine of privity was so inconvenient in the case of contracts with lands that the courts had to create special exceptions. Thus, according to the rule in Tulk v. Moxhay, a restrictive covenant voluntarily accepted by a purchaser of land as part of a contract of sale will in certain circumstances bind persons who subsequently acquire the land. In the case, the plaintiff sold a garden which was in the centre of his several plots of land to one Elms with a condition that it would not be built upon but preserved in its original condition. After a number of conveyances, Moxhay bought the land. Even though he knew of the restriction, he proposed to build on it. Tulk was able to successfully get an injunction even though he had not directly sold the land to Moxhay and was therefore not a party to the contract. The courts have held that such restrictive covenants are only binding when they are created to protect interests in other lands owned by the original seller.

Contracts may also be enforced by a third party if they are made for the benefit of a land which has done into the possession of the third party. Such covenants should run with the land. In Smith v. River Douglas Catchment Board, eleven owners of land through which a river ran made an agreement with a catchment board to prevent floodings of their individual lands. The board was to widen, deepen and make good the banks of the river and thereafter maintain them while the land owners were to contribute towards the cost of such maintenance. The first plaintiff bought the land of one of the land owners and the deed of conveyance expressly extended the benefits of the agreement to him. The river burst its banks and flooded the plaintiff's land, and the plaintiff brought an action for breach of contract. The defendants tried to rely on privity to exclude the plaintiff but the court held that the plaintiff could sue on the contract as it was a contract which ran with land.

(2) Contracts for the hire of a chattel

There has arisen the need to enforce third party rights in agreements for the hire of chattels. This is most common in the form of charterparties. Where A, the owner of a ship charters his ship to B for a period of time, and then sells his ship to C while the contract is running with C possessing knowledge of the contract. It has been held by the courts that if C tries to act contrary to the contract, B may bring an action even though he is not a party to the contract between A and C. This was the case in De Mattos v. Gibson.

(3) Interference with contractual rights

At common law, it is a legal wrong for someone to knowingly interfere with the contractual rights of others. If A knows that B has contracted with C to sell a house to him at a later date, A would be liable in tort for buying the house from B and causing a breach of the contract with C. In Lumley v. Gye, the plaintiff employed one Johanna Wagner as an opera singer. The defendant induced the singer to refuse to perform and was held liable.

(4) Insurance contracts

The law sometimes provides exceptions to the rule of privity. Section 11 of the Married Women’s Property Act 1882 provides that where a man insures his life for the benefit of his wife and children, or vice versa, the policy shall create a trust in favour of the spouse or children. There is a re-enactment of this law in Western Nigeria as the Married Women’s Property Law 1958, although the provision relating to life insurance by the husband was left out. Common law and equity would still apply to make the spouse and children able to sue on the insurance contracts of their dead spouse or parent which they are not party to. In Akene v. British American Insurance Co. (Nig.) Ltd., the court used the principle of trust by stating that the insurance company was a trustee for the plaintiff and so the plaintiff could sue on the contract.

With motor insurance, section 6(3) of the Motor Vehicles (Third Party) Insurance Act provides that any insurance policy shall be liable to indemnify the persons or classes of persons that the insurance purports to protect. In Sule v. Norwich Fire Insurance Society Ltd., the plaintiff was able to successfully sue on a contract he was not a party to since he was a beneficiary of the contract but section 6(3) of the Motor Vehicles (Third Party) Insurance Act granted him the ability to sue to offset his debt in a motor accident.

Where there is no law providing for third parties to sue, the doctrine of privity would still apply in insurance cases as it did in Liberty Insurance Co. v. John.

(5) Privity and the trust concept

In an attempt to get around the restriction of privity, equity developed the trust concept. If A enters a contract with B to render a benefit with C, B would be regarded as a trustee for C and if A is in the future unable or unwilling to sue for the enforcement of the promise, C may sue for the enforcement. This was applied successfully in Gregory and Parker v. Williams and Lloyds v. Haper. In recent times, the principle of trust has been applied less by the courts of the United Kingdom and has become almost extinct, although it is still applied by Nigerian courts as it was applied in Akene v. British American Insurance Co. (Nig.) Ltd.