Third-Parties

The question of whether third parties sustain contractual obligations and are conferred rights under certain agreements is a difficult one. This area of law is substantially easier to interpret following the introduction of the Contracts (Rights of Third Parties) Act 1999. Prior to this, the law was sporadic in its application and ultimately confusing, which served to distort the legitimate expectations held by third parties and lead to judgements which undermined commercial and social interests, a view stipulated by Stephen Guest. 

The historical doctrine which regulated the relationship between the promisor, the promisee and third parties was that of privity. The basic, or original, doctrine can be identified by two rules. Firstly, that a third party may not have obligations imposed by the terms of a contract. Secondly, that a third party is unable to enforce a contract for which he has demonstrated no consideration. This position is illustrated in the precedent of Tweddle v Atkinson (1861). Before the case of Tweddle, the judiciary held an erratic position on when third parties could enforce contracts which benefitted them. Tweddle terminated this absence of clarity, albeit to unveil a clearly inequitable position in law, by outlining that a third party cannot enforce a contract even if it is explicitly designed to benefit them. This seems extremely unfair, perhaps why the doctrine earned a title as ‘one of the most universally disliked and criticised blots on the legal landscape’ (Dean, 2000). 

Tweddle v Atkinson (1981) 

The claimant’s father and his bride’s father had come to an agreement that they would pay the couple a sum of money. The bride’s father passed away before he could provide the payment and the claimant’s father died before being able to sue. It was held that the claimant could not sue on the agreement, despite the fact that it was clearly designed to confer a benefit upon himself and his wife. Haldane specified that only a party to a contract can sue on it.

This position in the law is blatantly unfair as it deprives the third party a benefit from a contract intended only to provide a benefit to them. If the case were to arise in modern terms it would be decided through application the 1999 Act. Section 1(1)(b) would be engaged, where it is stated that ‘(a “third party”) may in his own right enforce a term in the contract if… the term purports to confer a benefit on him’. Section 1(2) does not create an exception to the third party’s entitlement as it is evident, on the facts, that the two parties would have intended the agreement to be enforceable by the third party. Therefore, the claimant would be able to claim the sum of money that he was initially promised.

Another case which serves to identify the problems littering the historical doctrine is that of Beswick v Beswick (1968). In this case the claimant’s husband had contracted with his nephew to sell his business. It was agreed that the nephew, the defendant, would make weekly payments of £5 to the husband, and that if he passed away the defendant would make these payments to his wife. The husband died and the defendant failed to make the payments. The wife attempted to sue in order to secure specific performance. She was unable to sue under the original rule, due to the fact that she was not a party to the contract. However, she was entitled to make a claim as her husband’s administratrix. 

This case is especially interesting as within the Court of Appeal Denning set out the principle that an individual who is supposed to receive a benefit from a contract should be allowed to sue to enforce it. This view was later rejected by the House of Lords. The outcome would not be altered by application of the modern law in this area, as the wife was able to claim. However, if decided today then she would be able to sue as a third-party under s1(1)(b). 

Academics have also scrutinised the doctrine of privity due to its complex nature. Multiple exceptions to the typical application of privity were generated by Parliament. Flannigan believes that this substantiates the argument that they had little faith in the doctrine, as it was continually altered and undermined by variations. If an excess of variations are necessary in order for a law to function then it must be questioned whether it is indeed ‘good law’ at all. Other jurisdictions have found limited to no use for privity, whereas typically gems from the English Legal System are adopted elsewhere- this also serves to highlight its inadequacy in protecting third-parties. 

Contracts (Rights of Third Parties) Act 1999

This Act reformed the common law doctrine of privity and ensured that third-parties were able to implement contracts which benefit them. The legislation also grants access to a range of remedies if the terms within contracts are breached which are accessible to third-parties. Previously, third-parties were arguably in a compromised position as promises which concerned them were afforded limited protection under law. This new position, to an extent, helps to bestow value to the legitimate commercial expectations and the general expectations of parties. The Act limits the way in which contracts which affect third-parties can be altered without their permission, providing an important source of protection, whilst simultaneously giving protection to the promisor and promisee by allowing exclusion of third party involvement when it is required. 

Section 1: Right of third party to enforce contractual term.

1 Right of third party to enforce contractual term.

(1)Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if— 

(a)the contract expressly provides that he may, or 

(b)subject to subsection (2), the term purports to confer a benefit on him. 

(2)Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. 

(3)The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into. 

(4)This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract. 

(5)For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly). 

(6)Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation. 

(7)In this Act, in relation to a term of a contract which is enforceable by a third party— 

• “the promisor” means the party to the contract against whom the term is enforceable by the third party, and 
• “the promisee” means the party to the contract by whom the term is enforceable against the promisor. 

Section 1: Analysis

• Predominates old common law that a third-party cannot enforce the terms of a contract.
• Overrides the principle that a third party cannot act against the promisor.
• Allows a party to benefit if they are specifically mentioned in the contract and or if it ‘purports to confer a benefit on them’. 
• Creates exceptions in the sense that parties are allowed to include language which bars third-parties from enforcing contracts. This means that concerns about third-party interference are neutralised, they can be left out when it makes more commercial sense or when there are public policy concerns.
• If the promisor feels that a third-party is attempting to enforce a contract under s1(1)(b) when the contract is not actually designed to confer a right upon them then the onus is on them to demonstrate this. This view is held by Treitel and supported by the decision of the courts in Nisshin Shipping Co Ltd v Cleaves & Co (2003).
• Argued by Dean to be too broad in scope as it creates difficult situations with regards to the construction industry. Contracts concerning buildings typically involve a number of sub-contractors which could lead to a flood of claims from third-parties and generate confusion. It is on these grounds that Dean argued that the Act should not apply to the construction industry at all. These criticisms were dismissed. I would agree with this on the grounds that there is similar legislation in New Zealand which seems to function effectively and efficiently. Either way, the new legislation indisputably represents an improvement on the traditional common law position. 
• McKendrick points out that there are further problems with the Act. He describes this through use of the following situation. If a contractor is hired by a company to construct a building there is a clear legal relationship between the two. If the building is sold on at a later date then structural damage is identified by the new owner they cannot make a claim under the contract as they were not supposed to acquire a benefit from it initially. This could create an inequitable situation. It could be asserted that additions to the Act which bestow the judiciary with greater discretion under such circumstances could provide a helpful aid, yet this would invariably be at the expense of legal certainly and predictability. 
• Within s1(5) the Act establishes the remedies which are available to third-parties engaging the Act. They are entitled to the same remedies that would be available were they actually a party to the contract, meaning that third-parties are imparted a sense of equality when previously they were afforded limited support and were secondary in value to the promisor and promisee. 
• Nevertheless, the promise is still given greater importance which is reflected in the fact that third-parties cannot terminate contracts or render them void.

Section 2: Variation and Rescission of Contract

2 Variation and rescission of contract.

(1)Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if— 

(a)the third party has communicated his assent to the term to the promisor, 

(b)the promisor is aware that the third party has relied on the term, or 

(c)the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it. 

(2)The assent referred to in subsection (1)(a)— 

(a)may be by words or conduct, and 

(b)if sent to the promisor by post or other means, shall not be regarded as communicated to the promisor until received by him. 

(3)Subsection (1) is subject to any express term of the contract under which— 

(a)the parties to the contract may by agreement rescind or vary the contract without the consent of the third party, or 

(b)the consent of the third party is required in circumstances specified in the contract instead of those set out in subsection (1)(a) to (c). 

(4)Where the consent of a third party is required under subsection (1) or (3), the court or arbitral tribunal may, on the application of the parties to the contract, dispense with his consent if satisfied— 

(a)that his consent cannot be obtained because his whereabouts cannot reasonably be ascertained, or 

(b)that he is mentally incapable of giving his consent. 

(5)The court or arbitral tribunal may, on the application of the parties to a contract, dispense with any consent that may be required under subsection (1)(c) if satisfied that it cannot reasonably be ascertained whether or not the third party has in fact relied on the term. 

(6)If the court or arbitral tribunal dispenses with a third party’s consent, it may impose such conditions as it thinks fit, including a condition requiring the payment of compensation to the third party. 

(7)The jurisdiction conferred on the court by subsections (4) to (6) is exercisable[F1in England and Wales by both the High Court and the county court and in Northern Ireland ] by both the High Court and a county court.

Section 2: Analysis

• This section governs alterations to contracts and rescission. It makes sure that parties are prevented from altering or modifying the terms which influence the third-party if he has already informed the promisor that he assents to the specific term or that he has relied upon it. Detrimental reliance need not be demonstrated as in doctrines such as proprietary estoppel. However, parties are able to insert terms into contracts which can allow them to rescind or alter the contract without express permission from the third-party, which means that although this is a welcome improvement it does not afford third-parties full protection. Yet preventing parties from inserting such terms would mean that the protection of the promisor undermined, and this party is clearly more valuable due to involvement in the conception of the contract. There is also flexibility to this rule as courts are able to allow changes to the original contract if the third-party is demonstrated to be mentally incapable, unfindable or if it cannot be proven that they even assented in the first place (meaning that the term could be changed legitimately). If the courts do allow a change to the contract under such circumstances then they are allowed to afford the third-party compensation. 
• A party has ‘assented’ when it has been communicated to the promisor, in this sense it is similar to ‘acceptance’. If the promisor outlines that the assent must be demonstrated in a specific way, such as by email, then only this communication format will be constituted as an act of assent by the third-party. 

Mistakes in Contract Formation

Denny v Hancock (1870)

The plaintiffs had put the property in question up for sale via auction. The defendant had inspected the property before purchasing it and had discovered a fence which contained ‘three magnificent trees’ at its periphery. He had assumed that they were part of the property and therefore bid on it. The trees were actually part of an adjoining property, which was not adequately illustrated in the plan provided by the plaintiffs which was described as ‘conspicuous’ in its nature. The defendant did not wish to purchase the property if it did not include the aforementioned trees, therefore the plaintiffs sought a specific performance order.

In court, it was held that the trees constituted a material element in the value of the property. It was noted that, although the defendant had made a mistake by failing to notice that the trees were not featured in the plans provided by the plaintiffs, that the vendors were not entitled to a specific performance order. This was due to the fact that their conduct had misled the defendant. Ultimately, there is no consensus ad idem, as there is a clear misalignment as to what the parties thought the contract actually includes. It was determined that a reasonable individual in the position of the defendant would have most likely noticed the physical boundary on the ground, represented by the iron fence, and would have assumed that this was the edge of the property for sale. Sir W.M. James LJ also noted that there was ‘crassa negligentia’ by the vendors, due to the nature of the information that they had provided around the sale. Therefore, it would not be possible to enforce a specific performance order.

Tamplin v James (1880)

This is an example of unilateral mistake. The defendant attended an auction in which The Ship Inn was for sale. The particulars of the sale were set out in the auction particulars, which the defendant had failed to examine. The property was not sold at the auction but afterwards the defendant and plaintiff came to an agreement. Before exchanging money the defendant becomes aware of his mistake, he had assumed that the property included two additional plots of land when this was not actually the case. The auctioneers had previously made the boundaries of the property clear at auction. The plaintiffs subsequently sought a specific performance order.

It was held that the defendant would have to go through with purchasing the property despite the fact that there was no consensus ad idem. This illustrates the ‘general rule’ that a party responsible for making an unreasonable mistake will be held to their contractual obligations. Both in first instance and at the Court of Appeal it was held that the vendors were entitled to a specific performance order, as unlike in the case of Denny v Hancock, they were not responsible for inducing the defendant’s mistake in any form. 

Scriven Brothers & Co v Hindley & Co (1913) 

An auctioneers had put a lot up for sale, which comprised of an item called tow. Hindley, the defendant, had bid on the product believing mistakenly that it was hemp. Hemp has a significantly higher value than the actual tow product. As his bid was not matched by anyone else the defendant won at auction. Hindley then refused to go through with the contract due to his mistake. The plaintiffs brought an action to recover the price of the tow.

As the tow had the same shipping marks as another lot which contained hemp, the courts held that this would mislead a reasonable man in the position of the defendant as to what was actually being sold. Furthermore, as the jury found that the auctioned had realised that the purchaser believed that the product was hemp he had actively contributed to his mistake. Due to these factors, the plaintiffs were not entitled to recover the cost of the tow. 

How are these cases associated and how do they differ?

Denny and Scriven: both illustrate mistake on the part of the seller.

Tamplin: evidences general rules where the buyer it at fault.

Denny and Tamplin: sought specific performance orders.

Scriven: sought damages to recover the cost of the product.

Specific performance order: discretionary remedy, just because a SPO is not granted it does not mean that a contract has not been concluded. Whereas, in order to award damages the courts must first determine whether a contract has come into existence.

Crassa negligentia: ‘gross mistake implying negligence’ (http://www.oxfordreference.com/view/10.1093/oi/authority.20110803095646863).

Unilateral mistake: where one party is mistaken as to the contract matter.

Invitations to Treat

   An invitation to treat is a 'mere declaration of willingness to enter into negotiations', it does not represent an 'offer' therefore does not amount to the creation of a binding contract. We will typically be faced with invitations to treat in the negotiation stage of contract development, as often such invitations are a prerequisite to a formalised contract. The reason that invitations to treat do not give rise to contracts is simply due to the fact that there is no intent to establish a legal relationship. Often we will be required to identify where the negotiations process terminates and where a definitive offer is made, the most effective way to do this is to examine the correspondence between the parties.

The best exemplar of case law for this is Gibson v Manchester City Council (1979). Gibson had been invited to make a 'formal application' to purchase his council house after the administration had changed over and adopted a policy of privatisation. The claimant, Gibson, had received a form stipulating that the council 'may be prepared to sell' and requesting that he fill out a form if he wished to apply to buy the house. He did so and believed that he had accepted the council's 'offer'. However, the Labour party came back to power and ceased the selling of council houses before he was able to buy his own. Gibson brought a claim against the council, asserting that a binding contract had been created and that their refusal to sell would amount to a breach.

It was held that the language used by the council, specifically that they 'may be prepared to sell' was not clear enough to constitute an offer. There was also no indication that they intended to be bound to the agreement legally due to the ambiguity in language. Subsequently, the House of Lords found that there was no offer in the first place- meaning that there was nothing for the claimant to accept to give rise to a binding contract. If the council had responded accepting Gibson's 'formal application' then it could be the case that there was indeed a contract. More on this case can be found here: http://www.lawschoolcasebriefs.net/2012/12/gibson-v-manchester-city-council-case.html.

The Origins of Contract Law

   One of the main definitions of a 'contract' engaged with by law students in the United Kingdom is indisputably Treitel's interpretation. This can be found in his book 'The Law of Contract'. He states that a contract is 'An agreement giving rise to obligations which are enforced by law'. However, this statement is met with a series of important qualifications, which serve to highlight why it is so difficult to provide your typified, one sentence long, definition to the word. In English law, there is no set definition of what a contract actually is, perhaps because the law is continually evolving and more heavily based upon the precedent gathered from cases in the past and various works by jurists.

Qualifications to Treitel's definition: 

1. The law focuses strongly on objectivity, as opposed to drawing attention to the actual agreement. 

2. Parties to contracts are expected to conform to certain standards of behaviour, terms can be implied as a matter of law.

3. There must be a qualification based on the principles of the freedom of contract. McKendrick in 'Contract Law' provides an example of this in Parliament's attempts to protect the weaker parties within contracts. The party that can better tolerate the loss should always be the one that procures the greater inconvenience, as this will provide a more efficient and quickly produced resolution.

Why don't we need a clear definition of a contract?

Contract law in the United Kingdom developed from the 'action of the assumpsit', a form of action at common law. This focused on procedural considerations rather than substantive ones. Forms of action were then abolished in 1852 via the Common Law Procedure Act 1854 (http://www.legislation.gov.uk/ukpga/Vict/17-18/125/introduction/enacted). This change in the law coincides with an increase in academic thought around the area of contract, as scholars sought to provide clear principles for existing contract cases. This meant that the procedural components of contract law began to take a backseat as focus turned to the substance of claims.

How can we identify a contract without one?

1. Agreement

The typical approach to contract identification is determining whether there has been an acceptance. The orthodox approach to agreement is noting when an offer has been made and when it has been accepted. This can be considered via assessing whether there are set terms and finality within the supposed contract. There must also be an 'expression of willingness to contract on specified terms' (Treitel). Both parties must also assent to the same terms, otherwise there will not be a contract due to the absence of 'consensus ad idem' (or a 'meeting of the minds'). It would be unfair and inequitable to enforce a contractual relationship without consensus ad idem, as an agreement would be enforced whereby one party may not have even realised what they were consenting to.

2. Consideration

Consideration is 'anything given or exchanged or forborne in return for the promise or undertaking of another'. Ultimately, it serves to protect parties to contracts by ensuring that there is an element of mutual exchange as a guiding principle of contract law is that individuals should not be able to 'get something for nothing'. Contracts can also be identified by determining whether the consideration requirement has been fulfilled. In bilateral contracts, ie. agreements in which both parties exchange mutual promises, each promise is regarded as valid consideration for the other. In unilateral contracts, where an agreement is entered into by one party in exchange for the other party's promise to act, the promise is consideration for the performance and the performance provides consideration for the promise. However, it is key to remember that the need for consideration can be removed when promissory estoppel can be applied, therefore may not be an intrinsic or core counterpart of ALL contracts.

3. Intent to create legal relations

The law takes the stance that people should only be forced to adhere to the contracts that they may have generated when they actually intended to be held to the terms under the law. It would be unfair to force someone who had joked about making a payment of a million pounds when they had not made the statement seriously. This need for intent also serves to maintain efficiency in the courts by ensuring that only serious claims are brought forward.

Induced Mistake- Denny v Hancock

   Often sellers can induce mistake on the part of buyers, this is precisely what happened in the case of Denny v Hancock (1870). The buyer had assumed that three trees were part of the property when in fact there was an iron fence which separated them- but this was concealed by shrubbery. The plans provided by the vendor were unclear as to whether the trees were part of the property, but any reasonable person would have assumed that they were part of the land. The buyer, who had a particular interest in the trees, went on to bid on the property at auction and was successful. He then discovered that the trees were not part of the land he had purchased and refused to continue with the transaction. The plaintiffs sued for breach of contract, and were issued with a specific order of performance. The buyer appealed, stating that his decision to purchase the property was based upon being misled by the plans provided by the seller. It was held that a specific performance order could not be issued on the grounds that the mistake made by the buyer had been undoubtedly induced by the seller, therefore they were not entitled to it as a remedy as it was their own fault that the buyer had made the assumption regarding the trees. This is an instance of crassa negligentia on the part of a vendor.

Smith v Hughes- The Standard Example of Objectivity

   Smith v Hughes (1871) is frequently alluded to as the best exemplar of the objective test in practice. In a dispute over the sale of oats, it was decided that the defendant's state of mind (ie. thinking that he was purchasing old oats) was irrelevant to the case. An objective approach was applied where the fact that the parties were 'ad idem' and at cross purposes to the terms of the case were considered to be of the most importance, regardless of subjective considerations.

This case also illustrated the fact that silence cannot be considered to be a misrepresentation, which the claimant also attempted to bring an action forth for.

Snapping Up- The Case of Hartog's Hare Skins and Subjectivity

   The case of Hartog v Colin & Shields focuses on the problems arising when a unilateral mistake is made. When it is clear that someone has made a mistake in the terms of a contract, as a general rule, the other party cannot 'snap up' the offer and be able to enforce the contract. In this case, it was decided that the offeree had indeed recognised the mistake made by the plaintiff, Colin & Shields and had deliberately accepted the offer quickly and attempted to enforce it whilst being fully aware that the terms were based in a mistake. This case is similar to that of Centrovincial (1983), however, as in that instance it was unlikely that the plaintiffs could have reasonably been aware of the mistake it was ruled in the favour of the promisee.

In this case, the plaintiff has mistakenly written a price on an offer which was a third of the intended price for the product. The defendant recognised this yet still went on to accept the offer. The price which had been communicated orally prior to this was a better representation of the intended offer, so it was clear that the promisee was aware of the price which the offeror initially intended to offer, which was significantly higher than the price communicated in written form. It was held that the plaintiffs had made a mistake and that on the grounds that the defendant, Mr Hartog, could have been reasonably expected to recognise this should not be allowed to enforce the contract.

This case is demonstrative of the manner in which the courts can apply a subjective approach in certain instances. These considerations can be noted in the fact that the parties were not agreed in a subjective sense, their states of mind as to what the contract was communicating clearly did not coincide in any way. However, an objective interpretation might have taken the route that the agreement had been reached- thus should be enforced, as was done in Centrovincial. This illustrates that the courts are willing to extend beyond the scope of the objective approach in the interest of fairness to parties within a contract.