Monday, 7 November 2011

Privity of Contract

A well-established principle of contract law is that only the parties to the contract can make claims against it. 

Dunlop sold tyres to Dew & Co., with a term in the agreement that Dew would not sell more cheaply to anyone else, and that Dew would not enter into a contract with anyone else except on the same terms.  Dew sold tyres to Selfridge at the stipulated terms, but Selfridge sold them more cheaply.  Dunlop brought an action against Selfridge, which failed on the basis that Dunlop had no contract with Selfridge, and was not a party to the contract which had allegedly been breached.
Presumably Dunlop could have taken an action against Dew, who in turn could have taken action against Selfridge.[1]

Clearly, it is fair that people should not incur obligations in respect of contracts to which they are not party and which offer them no benefits.  However the principle of ‘privity’ does mean that it is difficult to enter a contract that benefits a third party without taking out a separate contract with the third party. 

Woodar contracted to sell some land to Wimpey for £850,000 on the understanding that £150,000 would be paid to a third party on completion.  Wimpey backed out of the deal without paying any money, leaving Woodar to make a claim under the contract.  This they could not do, because Wimpey pointed out that Woodar would have no claim on the £150,000 (privity), and the beneficiary of this money would have no claim as there was no contract in place to support it.[2]

[1] Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847.
[2] Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277, [1980] 1 All ER 571.

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