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1 Agency and Privity Law of Contract LW1154 BCL 2005-2006.

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1 1 Agency and Privity Law of Contract LW1154 BCL

2 2 Reading  Text Clark chapter 17  Reference McDermott chapter 18

3 3 Multiple parties  We have assumed up to this point that there are only two parties to the contract …  … each of whom can enforce it against the other  We now consider various ways in which the net can be cast wider

4 4 Agency  One person (the “agent”) may negotiate a contract on behalf of another (the “principal”)  If the contract is agreed, then a valid contract is formed  The principal is party to the contract, but the agent is not

5 5 Privity  In general, a contract affects only the parties who actually agreed it  However, in certain cases a contract may create rights to benefit others …  … or even (very, very rarely) to bind others

6 6 Agency A brief introduction

7 7 Agency - definition  When someone (the agent) makes a contract on behalf of someone else (the principal) …  … then the contract is made with the principal, not the agent  The agent can neither sue nor be sued on the contract

8 8 Limits on agency  However, an agent is usually only able to act as such in a limited respect or on limited matters  Outside that limited area, the agent cannot bind the principal  But how is the scope of the agency determined?

9 9 The scope of the agency  Agency usually arises through express appointment by the principal  This may be written or oral  The limits of the agency will be as specified by the principal on appointment or later

10 10 The scope of the agency  Agency may also arise:- 1. by subsequent ratification 2. by necessity 3. by estoppel  But these cases are relatively rare

11 11 Termination of agency  Agency comes to an end on:- cancellation by the principal agreement of principal and agent supervening illegality death of either principal or agent

12 12 Rights created by agent  Suppose an agent makes a contract with a third party  What rights are created? We must consider:- 1. Principal v. Agent 2. Third party v. Principal 3. Agent v. Third party

13 13 Principal v. Agent?  The mutual rights of principal and agent depend on an agreement between them  Agency does not necessarily involve a contract between principal and agent  Agency does not necessarily imply that the agent is to be paid

14 14 Principal v. Agent?  Possible legal relations are:- The agency is gratuitous The principal employs the agent The agent is self-employed but paid by the principal (see EC (Commercial Agents) Regulations SI 1997/31)

15 15 Third party v. Principal  The principal is bound by any contract falling within the scope of the agent's authority  The principal is not bound by contracts outside the agent’s authority, unless:- Principal later ratifies, or Principal is estopped

16 16 Agent v. Third party  Where the agent makes the contract strictly within the terms of their authority, the contract does not bind the agent  The agent drops out of the picture, and the resulting contract does not involve them

17 17 Agent v. Third party  However, the agent is bound if s/he gives a personal promise  Agents may simultaneously act for themselves and for others eg a trade union, negotiating both for themselves and as agent for their members (Pattison v. IIRS (HC, 31/5/79))

18 18 Agent v. Third party  An agent who acts beyond their authority may be personally liable  Someone who claims to act as agent is taken to guarantee that they are fully authorised …  … and if they are not, they are liable to compensate the 3 rd party (Collen v. Wright (1857) 120 ER 241)

19 19 Undisclosed agency  Suppose two people negotiate a contract and agree terms... ... then one reveals that s/he was in fact only negotiating as agent for another  What rights are created by this agreement?

20 20 1. Personal contracts  Some contracts have a strong personal element, and so it is impossible to substitute the principal for the agent  Whether this is so depends on the terms of the contract itself  If it is, the agent is bound, and the principal has no rights

21 21 2. Non-personal contacts  Otherwise, the third party is free to hold either the agent or the principal to the contract …  … but must make an election as to which …  … and is bound by that election

22 22 Rights of the principal  If no election has been made, the principal may insist that the contract is with them …  … and so sue the third party, the agent dropping out of the picture  However, this can only be done where the agent stayed strictly within the scope of their authority

23 23 Privity of contract Law of Contract BCL LW1154

24 24 The general rule  In general, only those who are party to a contract can sue on it  Equally, those who are not party to contracts are not bound by their terms, and can go against them with impunity  There are relatively few exceptions

25 25 Example 1 Murphy v. Bower (1868) IR 2 CL 506  Railway contractors took on work for a railway operator  As each stage of the work was complete, a certificate of completion was to be issued by Bower, the engineer  But Bower wrongly refused to issue certificates

26 26 Example 1 Murphy v. Bower (1868) IR 2 CL 506  The contractors sue Bower  Even though Bower’s refusal was wrong, he was not party to any contract with the contractors  The contractors should have sued the railway operators instead

27 27 Example 2 MacKey v. Jones (1958) 93 ILTR 177  P was a 14-year-old boy  P’s uncle promised P’s mother that if P came to look after his farm, he would leave it to P in his will  P did as requested, but the uncle left it to someone else  Could P enforce the promise?

28 28 Example 2 MacKey v. Jones (1958) 93 ILTR 177  Judge Deale was not convinced that the uncle intended a legally binding arrangement  Even if he did, it was not an arrangement to which P was a party  P was not making a contract, but following his mother’s orders

29 29 Scheme of these lectures 1.Definition of “parties to the contract” 2.Passage of benefit despite the privity rule 3.Passage of burden despite the privity rule

30 30 ‘Parties to the contract’  Most contracts have only two parties to them  So the contract can only be enforced by the parties to it  Equally, it can only be enforced by one who has given consideration  Some say that this is just the same rule in different language

31 31 Joint contractors However, in one situation at least, ‘consideration’ is not the criterion:  Where two people jointly make a promise to a third, then all three are parties and all three can sue …  … whether or not the two joint parties both provided consideration

32 32 Example 1 McEvoy v. Belfast Banking [1935] AC 24  Suppose A and B jointly open an account with the C Bank  A pays money in, but B does not  Nonetheless, B is party to the contract with the bank …  … and can sue the C Bank if it does not comply with the terms of the account

33 33 Example 2 Lockett v. Charles [1938] 4 All ER 170  H and W stop at a hotel for lunch  At the end of the meal, H pays  W suffers an attack of food poisoning  Can W sue the hotel in contract …  … or can the hotel say that the contract was between them and H?

34 34 Example 2 Lockett v. Charles [1938] 4 All ER 170  Hilbery J holds that W is party to a contract with the hotel …  … either because she contracted individually for her meal, or because H and W were contracting jointly  It was irrelevant who actually provided the payment

35 35 Multi-party situations  Who are the parties to a contract can be a difficult question  We must bear in mind what was expressly agreed …  … and the possibility that a party was acting as agent for others  Ultimately, it is a question of what the parties intended

36 36 Example 1 Hearn v. Collins HC 3/2/98  A boxer entered into a bout agreement with a boxing promotion company  One term of the agreement was that if the boxer won the bout, he would extend his own manager’s contract for another year  Could the manager enforce this?

37 37 Example 1 Hearn v. Collins HC 3/2/98  O’Sullivan J held that the manager could enforce it  The boxing promoters were acting as agents for the manager  If this were not so, the term was effectively unenforceable …  … especially since a company could not act as manager

38 38 Example 2 Henley Forklift v. Lansing Bagnall SC 13/12/79  English manufacturers distributed their products in NI by granting a sole agency to a NI firm  An Irish firm was established to distribute the products in Ireland, obtaining them from the NI firm  Was there a contract between the Irish and English firms?

39 39 Example 2 Henley Forklift v. Lansing Bagnall SC 13/12/79  It is possible to have a 3-party agreement, which any of the three could enforce against the other  But here, judging from the documents, the English firm dealt only with the NI firm  So the English firm could not sue the Irish firm

40 40 Example 3 Shanklin Pier v. Detel Products [1951] 2 KB 854  The owners of a pier hire contractors to re-paint it  DP recommend DMU paint for the job  Owners instruct contractors to use DMU paint  It proves to be completely unsuitable

41 41 Example 3 Shanklin Pier v. Detel Products [1951] 2 KB 854 Can the owners sue DP?  The paint was bought by the contractors, and the owners were not party to that contract  However, DP’s assurance that the paint was suitable was held to create a collateral contract between DP and the owners

42 42 Exceptions - benefit 1.Enforcement by the promisee 2.Promises expressly for the benefit of others 3.Miscellaneous commercial exceptions

43 43 Exceptions - benefit 1. Enforcement by the promisee

44 44 Definition  Suppose A contracts with B that s/he will confer a benefit on C  Then B can enforce the contract, claiming a remedy of:- 1. Specific performance 2. A stay of proceedings 3. Damages reflecting C’s loss

45 45 1. Specific performance  Where A contracts with B to confer a benefit on C …  … then B may obtain an order forcing A to comply with the contract  If A refuses to comply, in principle A could be prosecuted for contempt

46 46 1. Specific performance  This is an exceptional remedy  Whether it is granted lies in the discretion of the court  The threshold requirement is that the ordinary contract remedy – damages – would not be adequate to do justice

47 47 Example Beswick v. Beswick [1968] AC 58  A man transferred his business to his nephew  In return, he was to get £6 10s a week while he was alive …  … and his widow was to get £5 a week thereafter  On the man’s death, the nephew refused to pay the widow

48 48 Example Beswick v. Beswick [1968] AC 58  The widow was appointed as administratrix of her husband’s estate  She sued the nephew personally and as administratrix  She succeeded, but only on the second ground

49 49 2. Stay of proceedings  Where A promises B that A will not sue C …  … then A sues C in breach of that promise …  … then B may apply to the court to stay A’s action against C

50 50 3. Action for damages  In general, damages in contract are meant to make good the loss of the person suing  Therefore it is not usually possible to sue for another’s loss (see eg Woodar v. Wimpey [1980] 1 AER 571)

51 51 3. Action for damages In 3 situations, exceptions have been made: a.Actual performance by promisee b.Loss of enjoyment c.The ‘legal black hole’ doctrine

52 52 a. Actual performance by promisee  Suppose A and B agree that A should confer a benefit on C  A does not do so  B thereupon confers the benefit on C, and sues A for the cost doing so  This action should succeed, unless B’s behaviour seems unreasonable

53 53 b. Loss of enjoyment  Where A contracts with B for leisure services (eg package holiday) …  … then damages for failure to perform may include damages for disappointment …  … including the disappointment of non-parties (Jackson v. Horizon Holidays [1975] 1 WLR 1468)

54 54 c. The ‘legal black hole’  Suppose A agrees to do work to B’s property... ... but B then sells the property to C  B is allowed to sue for the loss if A does not perform as agreed... ... even where it is C who loses

55 55 Example Darlington BC v. Wiltshier Northern [1995] 3 AER 895  A agreed to complete a building project for B  B agreed with C to transfer their rights to C  C acquired the building site too  When A defaulted, it was held that B had a right to sue …  … which was then transferred to C

56 56 c. The ‘legal black hole’  However, this doctrine is rarely invoked  It does not seem to apply except where work is to be done on property  It certainly cannot be invoked merely because there is a ‘legal black hole’

57 57 Exceptions - benefit 2. Promises made to benefit others

58 58 Definition  Suppose a contract is made which, if performed, would benefit a third party …  … and it was the intention of the contractors that the third party should get a right of action  Does the third party have the right to sue?

59 59 Different approaches  Some common law jurisdictions allow a right of action there (eg London Drugs v. Kuehne (1992) 97 DLR (4 th ) 261 (Canada))  Others have achieved the same result by legislation (eg Contracts (Rights of Third Parties) Act 1999 (UK))

60 60 The Irish approach  Ireland does not yet permit a right to third parties generally …  … but there are various special cases that can be seen as examples of a wider principle  These cases are a mixture of common law and statute

61 61 Contracts to benefit others 1.Rights held on trust 2.Special provisions on family insurance 3.Special provisions on protecting families generally

62 62 Rights held on trust  If A promises B that s/he will confer a benefit on C …  … and B can be regarded as acting as a trustee for C …  … then B can sue A to recover damages on C’s behalf  Indeed, C can compel B to sue

63 63 Example Drimmie v. Davies [1899] 1 IR 176  A father and son established a dental practice together  In the partnership deed, the son promised to pay certain sums to his brothers and sisters after the father’s death  However, he refused to do so  Could his father’s executor sue?

64 64  The executor had suffered no loss  However, it was held that the father had extracted the promise as trustee for his other children …  … and so he (and his executor) could sue in that capacity  The measure of damages was the children’s loss, not the father’s Example Drimmie v. Davies [1899] 1 IR 176

65 65 Decline of the doctrine  Cases such as Drimmie are still good law today  However, judges today tend to be somewhat suspicious of the idea of a trust here …  … and demand strong evidence before they will accept that one was intended

66 66 Reasons for the decline? 1.A trust of a contract is a rather subtle notion, and anyone who means to create one should perhaps say so expressly 2.If such a trust is created, the contract cannot be varied or cancelled without the beneficiary's consent

67 67 Example McManus v. Cable Management HC 8/7/94  Employers took out an insurance policy to cover them if their employees sued for work injuries  Such a policy plainly benefited employees in fact  But Morris J refused to infer a trust  The purpose of the policy was to protect the employer

68 68 Family Insurance Married Women's Status Act — (1) This section applies to a policy of life assurance or endowment expressed to be for the benefit of, or by its express terms purporting to confer a benefit upon, the wife, husband or child of the insured. (2) The policy shall create a trust in favour of the objects therein named.

69 69 (3) The moneys payable under the policy shall not, so long as any part of the trust remains unperformed, form part of the estate of the insured or be subject to his or her debts. (8) In this section "child" includes stepchild, illegitimate child, adopted person (within the meaning of the Adoption Act, 1952) and a person to whom the insured is in loco parentis. Family Insurance Married Women's Status Act 1957

70 70 Families generally Married Women's Status Act — (1) Where a contract (other than a contract to which section 7 applies) is expressed to be for the benefit of, or by its express terms purports to confer a benefit upon, a third person being the wife, husband or child of one of the contracting parties, it shall be enforceable by the third person in his or her own name as if he or she were a party to it.

71 71 ‘ purports to confer a benefit upon ’  Does a lease ‘purport to confer a benefit upon’ the tenant’s family?  The Supreme Court held that it did not …  … even if the rent depended on the number of children (Burke v. Dublin Corporation [1990] 1 IR 341)

72 72 Families generally Married Women's Status Act — (2) The right conferred on a third person by this section shall be subject to any defence that would have been valid between the parties to the contract. (3) Unless the contract otherwise provides, it may be rescinded by agreement of the contracting parties at any time before the third person has adopted it either expressly or by conduct.

73 73 Exceptions - benefit 3. Miscellaneous exceptions affecting commercial contracts

74 74 Exemption clauses covering goods Suppose A hands over goods to B for international transport A agrees that s/he will purchase insurance, and will rely on that if the goods are damaged C, an intermediary, negligently damages the goods Can A sue C?

75 75 Example The Eurymedon [1975] AC 154  Goods were to be sent from Liverpool to Wellington  The owners agreed with the shipping company that damages for injury would be limited  On unloading, the stevedores damaged the goods  Could the owners sue the stevedores?

76 76  It made commercial sense to let the stevedores rely on the limitation  The price for carrying the goods assumed that they could rely  But it was hard to find a legal justification for allowing them to rely on a contract they were not parties to Example The Eurymedon [1975] AC 154

77 77 The Privy Council held that:-  The owners knew that liability was to be limited  They had authorised the shipping company to make incidental contracts as appropriate  So the shipping company could limit the stevedores’ liability Example The Eurymedon [1975] AC 154

78 78 An artificial doctrine?  However, this seems to be a very artificial solution  It assumes that the stevedores and owner made an agreement to limit any damages …  … which is almost certainly not how they saw the situation themselves

79 79 A less artificial doctrine?  A more realistic approach is to say that if the owner of goods hands them over to another for safe keeping …  … then they are bound by whatever terms they agreed …  … whoever may be the precise parties to any future litigation

80 80 Example The Pioneer Container [1994] 2 All ER 250  A shipping company agreed to carry goods on an ocean voyage  The contract permitted the shipping company to sub-contract part of the voyage, which they did  The sub-contracting carrier could rely on any limitation protecting the first shipping company

81 81 Privity of contract Exceptions – passage of burden

82 82 Privity of contract - burden  While there are many ways in which the benefit of a contract may pass to someone not originally party …  … it is almost impossible to pass on the burden of a contract  Only the person who originally undertook it is liable

83 83 The single exception  Where A promises B that s/he will use some of her property in a particular way …  … then it is possible to attach the obligation to the property  The obligation is therefore enforceable even if the property comes into someone else’s hands

84 84 Example 1 De Mattos v. Gibson (1859) 45 ER 108  If two neighbours agree to mutual restrictions (eg neither to block the other’s view) …  … then perhaps these restrictions will survive sale of the properties …  … and be enforceable against successors in title

85 85 Example 2 Lord Strathcona SS v. Dominion Coal [1926] AC 108  If the owners of a steamship hire it to a company …  … but then sell the steamship …  … the new owners will be bound to honour the contract of hire (even though they never agreed to it)

86 86 A good doctrine today?  However, the leading cases are quite old  They have been doubted (and it is not clear whether Lord Strathcona is still good law)  If there is a doctrine of this sort today, it is limited

87 87 Limits on the doctrine  Such a doctrine will only apply to negative restrictions (ie terms not to use property in certain ways)  It cannot be used to support resale price maintenance schemes (Taddy v. Sterious [1904] 1 Ch 354)

88 88 Tort as a way around privity An unexplored route?

89 89 Negligence law Under the general law of negligence, a plaintiff can sue for harm caused by a defendant, provided that:- 1.The defendant owed plaintiff a duty of care 2.The defendant broke it by careless behaviour

90 90 Breach of contract as negligence?  Sometimes, the careless behaviour is a breach of a contract  So in effect, the plaintiff can complain of a breach of contract which harms him/her …  … even though the contract was not with the plaintiff

91 91 An exception to privity  So effectively there is an exception to privity …  … so long as the requirements of the tort of negligence are satisfied  This exception has so far been very little explored in Irish law

92 92 Example 1 Smith v. Bush [1990] 1 AC 831  P sought to buy a house, and applied for a mortgage on it  D, a valuer, was appointed by the mortgage company to value it  D carelessly gave the house a good report  P bought the house, relying in part on the report

93 93 The HL held that P could sue:  D knew that P would see the report, and would probably rely on it  It was obviously foreseeable that P would therefore suffer loss if the report was not done well  Therefore D owed a duty to P Example 1 Smith v. Bush [1990] 1 AC 831

94 94 However, this does not always give P the same rights as if P had paid D:  Not everyone in P’s position will be thought reasonable for relying on that report  D only had to prepare a valuation report, not a full survey Example 1 Smith v. Bush [1990] 1 AC 831

95 95 Example 2 Wall v. Hegarty [1980] IRLM 124  Solicitors agree to draw up a will for a client  However, they delay unreasonably, and the man dies before the will is ready  Can the relatives who would have benefited from the will sue the solicitors?

96 96  This case is almost within Married Women's Status Act 1957 s 8 …  … but the Irish courts have tended to interpret that provision narrowly  The court found a remedy under the tort of negligence Example 2 Wall v. Hegarty [1980] IRLM 124

97 97 That’s all on privity


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