PRIVITY OF CONTRACT

There has been a long-established rule that only the parties to a contract could
incur rights and obligations under it. Described as the doctrine of privity, this
principle means that third parties could neither sue nor be sued under a contract.

An example may be a contract between two parties- A and B, where A promises

to pay B k50000 to B against the construction of a water tank. B sub-contracts a
part of the task to C for k10000, which C completes. Upon non-receipt of k10000
from B, C seeks to recover the amount from A. A denies the payment as there was
no contract ever executed between A and C.

Price v. Easton [1833] 110 ER 518

This is a case where a contract was made for work to be done in exchange for
payment to a third party. When the third party attempted to sue for the payment,
he was held to be not privy to the contract, and so his claim failed.

Even where a contract was made for the benefit of a third party, that party
still has no rights under it.

Beswick v Beswick (1968). The plaintiff’s husband sold his business to his
nephew in return for an annual allowance to be paid to himself and, after his
death, to his widow. Once the husband died, the nephew refused to make
payments to the widow. Despite the fact that the husband had clearly intended
her to benefit from the contract, it was held that the widow could not sue the
nephew on her own behalf, because she was not a party to the contract. However,
in this case the court was able to get round the doctrine, because the widow was
also the executor of her husband’s estate and could, therefore, sue on behalf of
the estate.

Justification for the Rule

Since contract law concerns bargains it is said that it would be unfair to allow a
person to gain under a bargain when he has actually provided nothing in return
for the benefit gained from the arrangement. It would be unfair to impose an
obligation on a party who has played no part in the agreement, e.g. If A and B
agree on a certain price if C performs some service for A then why should C be
bound when he has not been a party to the agreement in the first place? It is
unfair to allow somebody the right to sue on a contract when he cannot be sued.

Exceptions to the Doctrine

The rule that a third person has no right to enforce a contract to which he is not a
party is not absolute, as it is qualified by a number of exceptions, arising in
common law and statutes:

1. Statutory Exceptions: The Road Traffic Act obliges a motorist to take out
third party liability insurance. Another motorist who is involved in an accident
with this motorist can then rely upon the statutory provision for recovery of
compensation for damage or any loss. The insurance is enforceable despite the
fact that the other motorist lacks any privity in the insurance contract.

2. Trust Law: Where a trust has been created, the beneficiary under the trust
can sue the trustees even if he was not a party to the original agreement.

Dunlop Pneumatic Tyre Company Ltd v Selfridge and Company Ltd [1915] AC 847,
959, where it was held that although privity of contract does not allow third
person action, such a “right may be conferred by way of property, as for example,
under a trust”.

• Gregory & Parker v. Williams (1817) 3 Mer 582

Parker owed money to both Gregory and Williams. Since he could see no way of
organizing settlement of his debts himself, he assigned all of his property to
Williams on the understanding that Williams would then pay off the debt to
Gregory. Williams failed to pay over the money to Gregory. Gregory, of course,
was not a party to the agreement between Parker and Williams and as a result
was unable to sue on it in contract law.
However, the court was nevertheless prepared to accept Gregory’s argument that
a trust of the money had been created in Gregory’s favour, which was then
enforceable against Williams. There was never any intention that Williams
should keep all of the money, a beneficial interest was created in Gregory’s
favour and Williams held the sum of the debt owed to Gregory by Parker only as
a trustee. Williams was therefore bound to return this money to Gregory.

3. Assignment: Assignment is specific system devised for the transfer of property

right such as real property (e.g. land) or ‘choses in action’ (e.g. shares). The rights
can be assigned and the party to whom the rights have been assigned can sue
despite lack of privity to the contract. There are two methods of enforcing these
rights are through statutory provisions and equity.

4.Restrictive Covenants: This is device or tool used by equity by which a party

selling land retains certain rights over the use of land, such as preventing the use
of the land for business or preventing building on the land. The covenant is said
to run with the land, so if properly created will bind subsequent purchasers of
the land even though there is no privity between them and the original seller.
Tulk v. Moxhay [1848] 41 ER 1143
Tulk owned certain land in London that he sold with an express undertaking that
it would never be used to build property on. The land was then resold on a
number of occasions, each time subject to the same undertaking, until Moxhay
eventually bought it. Moxhay bought it knowing of the limitation but
nevertheless intended to build on it.
Tulk sought an injunction to prevent this building from taking place and was
successful. The court accepted that it would be against conscience for Moxhay to
buy, knowing of the restriction, and it was prepared to grant the injunction and
enforce the original agreement even though Moxhay had never been a party to
it.

5. Leases: Where an owner of land creates a lease in favour of another person

the terms of the lease are in effect contractual obligations, and these terms
(known as covenants) of the lease and are enforceable by both parties because
there is privity between them. However, the landowner will able to enforce the
covenants also against anybody to whom the holder of the lease then assigns
their lease.
6. Agency: A principal can sue and be sued on contracts made on his behalf.

7. Negotiable Instruments: Negotiable instruments namely a cheque is

transferable and the person to whom it has been transferred can use on it.

Privity of Contract under the Law of Agency Relationship

An agent is a person who negotiates and concludes a commercial or business

transaction on behalf of someone called the Principal.

Examples include:

• travel agents, estate agents, insurance brokers and auctioneers and lawyers.

It is an established principle of law that a person cannot acquire rights under a

contract unless he is a party to that contract. However, where a contract is
concluded by an agent on behalf of a principal, the acts of the agent are treated as
if they are for the principal. Agents are recognized by the law as having power to
affect the legal rights, liabilities and relationships of the principal.
The common law position that he who can act for himself may act through an
agent is summed up in the Latin maxim qui facit per alium facit per se. There are
however, two exceptions to the said Latin maxim namely:
• Where personal performance is required; and
• Where the parties involved expressly or by necessary implication prohibit
delegation.
Definition of Agency
An agency involves three very specific parties namely:
1. Principal: The Principal is the person on whose behalf the contract is
made. It is a person on whose behalf the agent acts.
2. Agent
3. Third Party: The Third Party is the party with whom the agent contracts
on behalf of the principal and who as a result of the very special rules enjoys a
series of mutual rights and obligations with the principal, but there is no
contractual relationship with the agent.
In law the word ‘agent’ is used to refer to a person who has legal authority to
bind another by entering into contract with a third person on that other’s behalf.
An agent is a person employed to do any act for another, or to represent another
in dealing with third parties or persons. The important feature of the relationship
is that the agent has power to bind his principal to a contractual relationship
with a third party without the agent himself becoming a party to the contract. In
other words the agent is the party who is actually a party to the formation of the
contract with a third party with whom he has a direct relationship, but the agent
merely makes the contract on behalf of the principal and not on his own
behalf. The relationship between the principal and agent is called agency, and
may be created by an express or implied agreement.

Creation of Agency

An agency relationship may arise or be created in any of the following ways

namely:
1. Express Agreement: The agreement between a principal and an agent
may be express or implied. An express agreement may be made orally or in
writing or by deed.

1. IMPLIED AUTHORITY
This arises in a situation where although a particular action is not sanctioned by
any express agreement between a principal and an agent, the principal is
nevertheless taken to have impliedly consented to the action or transaction in
question.

GARNAC GRAIN COMPANY V HMF FAURE AND FARICLOUGH

FARICLOUGH (1967) 2 ALL ER 353 – HL @ 358

“the relationship of principal and agent can only be

established by the consent of the principal and the agent. They will be taken to
have consented if they have agreed to what amounts in law to such a relationship
even if they do not recognize it themselves and even if they have professed to
disclaim it. An agent who has express authority to carry out a particular task
may also have additional authority to do certain acts which are incidental to
his authorized task. For example, an agent who is expressly authorized to
sale the principal’s property has implied incidental authority to sign a
contract of sale. On the other hand, if his express authority is to find a
purchaser, he has no authority to execute a contract of sale”.

3. Operation of Law: In certain instances agency will arise without the

parties expressly stating that such a relationship has come into existence
between them or indeed that they desire such a relationship be created. The
following are the circumstances under which the an agency relationship will be
deemed to have come into existence by operation of the law:

i) Agency of necessity: A person who acts in an emergency e.g. to preserve the

property or interest of another may be treated as an agent of necessity with the
result that his actions will be deemed to have been authorized even if no actual
authority had been given. It should be noted that an agent of necessity only arises
in extreme circumstances where there is actual and definite commercial
necessity for the actions of the agent.

The following requirements must be satisfied by an agent for an agency of

necessity to exist:

(a) There must have been a genuine commercial emergency.

(b) As a result of the emergency, it must have been practically impossible for the
agent to obtain instructions from the principal.

(c) The agent must have acted bonafide in the principal’s interests and not in this
own interests.

(d) The agent must have acted reasonably in all the circumstances.

(a) There must have been a genuine commercial emergency. Agency of

necessity will only arise where there is an emergency. Where the circumstances
are such as not to imply an emergency, the law will not recognize the person
acting on behalf of another as being an agent of necessity.

• Great Northern Railway v. Swarfield (1874) LR 9

Mr Swaffield sent his horse by railway to a station at Sandy. The horse arrived
late at night, and the railway company lodged the horse overnight for their own
account at a livery stable. Mr Swaffield failed to collect it on the following
morning. The only basis on which he was prepared to give any instructions about
the fate of his horse was that the railway company assumed all responsibility for
storing and delivering it to him from the time of its arrival at Sandy. After four
months of this, the railway company lost patience. They unilaterally delivered the
horse to Mr Swaffield’s farm and then sued him for the livery charges to date.
Held: The contract of carriage had come to an end on the day after the arrival of
the horse at Sandy, when the performance required of them as carriers was
completed. Baron Pollock drew attention to Cargo ex Argos in the course of
argument and based his judgment upon it. Having referred to previous authority
to the effect that the railway company was bound to take reasonable care of the
horse notwithstanding the termination of the contract of carriage, he observed
that “if there were that duty without the correlative right, it would be a manifest
injustice.” Kelly CB, concurring treated the principle as applying because it was
necessary for the railway company to incur the expenditure. “They had no choice
unless they would leave the horse at the station or in the high road to his own
danger and the danger of other people.”

• Sims & Co. v. Midland Railway Company (1913) 1 KB 103

The defendant consigned certain quantity of butter with the plaintiff, Midland
Railway Company. Due to the strike, the butter was delayed in transit. The
plaintiff sold the butter as it was of perishable nature.
It was held that the sale was binding on the owner the Defendant, and that the
plaintiff was an agent of necessity.

b)It must have been impracticable to obtain instructions from the principal

It must be shown that the person who acted on behalf of another could not obtain
that other’s instructions before acting because it was impracticable to or
commercially impossible to obtain instructions. This requirement is however,
getting more and more watered down with the improvements in com Whereas
before, the quickest means of communication would have been the telex machine
where no phone facilities existed, the world has in recent years witnessed
phenomenon increase in modes of communication such as fax machine, cell
phone, the internet, etc. which have made communication easier and fast. This in
turn makes the satisfaction of this requirement in proving agency of necessity
less easy.

Springer v. Great Western Railway (1921) 1 KB 257; 24 LT

79

The plaintiff instructed the defendant railway company to transport tomatoes

from the Channel Island to London, by ship to Weymouth and by train to London.
Owing to bad weather, the ship was detained at Channel Island for three days.
When the ship finally arrived at Weymouth, the railway company’s employees
were on strike, and so offloading was delayed for two days. Worried that the
tomatoes would go bad, the railway company sold the tomatoes off locally
without communicating, as they could have done, with the plaintiff. The plaintiff
then brought this action claiming damages for breach of the contract of carriage.
The defendant sought to justify their action of selling the tomatoes under an
agency of necessity.

Held; that for there to be an agency of necessity, it must have been practically
impossible for the ‘agent’ to obtain the owner’s instructions as to what should be
done. In the circumstances of this case the defendant should have communicated
with the plaintiff when the ship arrived at Weymouth, in order to get the
plaintiff’s instructions. There was no agency of necessity in this case since
communication was not impossible.

(c)The act must be done with the principal’s best interest in mind

The law does not encourage people to employ themselves all in the name of
agency of necessity and thereby impose liabilities on other persons behind their
backs. Therefore, it is a requirement that the agent must have acted bona fide in
the principal’s interests rather than the agent’s own interests, and must have
acted reasonably in the circumstances. The best interests of the principal will
however not override the express instructions given.

Sachs v. Miklos (1948) 2 KB 23

The defendant accepted to store the plaintiff’s furniture for no charge to the
plaintiff. Subsequently the plaintiff changed address without informing the
defendant. In due course, the defendant’s premises were destroyed by bombing
and the defendant then wished to use the room in which the plaintiff’s furniture
was stored. The defendant attempted to communicate with the plaintiff by letter
addressed to the plaintiff’s last known address. He also tried to telephone the
defendant, but to no avail. The defendant then sold the furniture to create room
for him. The plaintiff then sued the defendant for damages for conversion.

Held; that the defendant was liable. He had not acted in the best interests of the
plaintiff but for his own convenience.

Fray v. Voules (1859) 120 ER 1125

An attorney was engaged to conduct a case on behalf of his client. He reached a

compromise on the advice of counsel. This compromise was contrary to the
express instructions given by the client.
Held; that an attorney has no authority to enter into a compromise against the
directions of the instructing client even if he is acting bona fide in the interest of
his client.

II)Agency by Cohabitation: A wife who lives or cohabits with her husband is

regarded has having authority of her husband to buy articles of household
necessity. This means that the wife is considered an implied agent of the husband
for the purpose of buying household necessaries on credit, and the husband
becomes bound to pay for the same. The presumption of cohabitation is
rebuttable by the husband showing that his wife is adequately supplied with
necessaries or that the goods supplied are not necessaries.

Debenham v. Mellon (1880) 6 AC 24

A man and his wife were manager and manageress respectively of the hotel in
which they cohabited. The husband gave his wife an allowance for clothes but
expressly forbade her from purchasing goods on his behalf as an agent. The wife
ordinarily purchased clothes from the plaintiff in her own name. On one occasion,
however, she purchased clothes and pledged her husband’s credit.

Held; that there was no agency in this case as the husband had expressly
forbidden it. No agency could be implied from cohabitation either as the couple
was not cohabiting in a domestic situation. As the plaintiff well knew, the couple
lived in a hotel as manager and manageress, not as a family. The husband was
consequently not liable for the debt incurred.

The presumption is rebuttable by the husband showing that his wife is

adequately supplied with necessaries or that the goods supplied are not
necessaries.

iii)Agency by Estoppel: An agency relationship may arise by operation of the

doctrine of estoppel where a person holds out another as having authority to
represent him. The term ‘estoppel’ may be defined as prevention of a claim or
assertion by law. In other words, when someone makes another person to
believe that a particular thing or fact is true, then later on he cannot be allowed
to deny the truth of that thing. Therefore, when a person, by his conduct or
statement, wilfully leads another person to believe that a certain person is an
agent, then he is estopped or prevented from denying the truth of the agency.

iv) Ratification: The term ‘ratification’ may be defined as the confirmation of the
acts already done. Ratification occurs where the agent does an act on behalf of his
principal without the principal’s prior authority and the principal subsequently
adopts the act done. Ratification need not be expressly done; it may be inferred
from an act showing an intention to adopt the act performed on behalf of another
without that other’s prior authority. The acts of a person not appointed agent by
another may bind that other if he does an act that amounts to ratification of those
acts. There are a number of conditions that must be satisfied for there to be a
valid ratification:
- The principal must be in existence at the time the act was done.
- The principal must be ascertainable or known.
- The principal must have had capacity to contract at the time of the act.
- The act must be ratifiable.
- The ratification must be made within a reasonable time.
- The acts to be ratified should be valid and lawful

Existence of the principal

The principal must be in existence at the time the act was done. A nonexistent
principal cannot ratify an act purportedly entered on his or its behalf by an agent
before he or it came into existence.

Kelner v. Baxter (1866) LR 2 CP 174; 36 LJ CP 94

Three promoters of a company entered into a contract to purchase wine on

‘behalf of the proposed Gravensend Royal Alexander Hotel Company.’ The wine
was supplied and consumed in the business. The company was incorporated but
it collapsed shortly thereafter. The plaintiff then sued the trio on the contract for
the price of the goods. The Court held the promoters liable instead of the
company because the company could not ratify the acts of the agents( the
promoters) as the company (the principal) was not in existence at the time of
formation of the contract.

(ii) The principal must be ascertainable.

Watson v. Swann (1862) 11CB (NS) 756; 142 ER 993

The plaintiff asked an insurance broker to effect a policy of general insurance in

respect of certain goods. The underwriters were however, not willing to issue
such a policy. The broker then declared the same goods at the back of a policy
which had been effected earlier in respect of some other goods. The underwriter
then initialed it. In due course the goods were lost and the plaintiff sued to
recover on the policy.

Held; the ‘principal’ was not ascertainable at the time the agent effected the
policy. The policy was effected before the broker was approached by the plaintiff,
therefore he could not be said to have been acting on behalf of the plaintiff.
Ratification was therefore, not possible in these circumstances.
WILLES, J.: the law requires that the person for whom the agent professes to act
must be capable of being ascertained at the time. It is not necessary that he
should be named; but there must be such a description of him as shall amount to
a reasonable designation of the person intended to be bound by the contract.

(iii) The principal must have had capacity at the time of the act

At the time the act was performed on behalf of another, that other must have had
legal capacity to do the act in question. A minor, for example, generally has no
contractual capacity. An act done on behalf of a minor cannot be ratified by the
minor on attainment of the age of majority. The logic for this legal rule is easy to
appreciate. Persons without legal capacity could contract in the hope that they
would in due course acquire legal capacity. This woulde be to circumvent the law.

Where a contract of fire insurance is made by one person on behalf of another

without authority, it cannot be ratified by the party on whose behalf it is made
after and with knowledge of the loss of the thing insured.

Grover & Grover Ltd v. Matthews (1910) 2 KB 401

Ratification on a policy of fire insurance was made after a fire had happened, the
principal ratified the agent’s act after the premises had been destroyed by fire.
Therefore the ratification was held to be ineffective, because the ratification on
agent’s act should be done before the loss of goods.

(iv) The act must be ratifiable: The act performed by the agent which the
principal seeks to ratify must be ratifiable. An act which is illegal or contrary to
public policy, for example, cannot be ratified.

Brook v. Hook (1871) LR 6 Exch 89; 24 LT 34

An agent forged the signature of his brother-in-law on a promissory note which

had been made out in favour of the plaintiff. Before the date of maturity of the
promissory note, the plaintiff met the brotherin-law and, having discovered the
truth, threatened legal action. In an attempt to protect the agent, the brother-in-
law purported to ratify the agent’s act.
Held; that a forgery is an illegal act which is void. It accordingly could not be
ratified. The court drew a distinction between an act which was void and one
which was voidable. The latter was ratifiable.

• Ashbury Railway carriage & Iron Co. v. Richie (1875) LR 7HL 653
Incorporated under the Companies Act,1869, the Ashbury Railway Carriage and
Iron Company Ltd’s memorandum, clause 3, said its objects were ‘to make and
sell, or lend on hire, railway-carriages…’ and clause 4 said activities beyond
needed a special resolution. But the company agreed to give Riche and his
brother a loan to build a railway in Belgium. Later, the company refused the
agreement. Riche sued, and the company pleaded the action was ultra vires.

v) Agency under Statutory Provisions: Provisions of certain Acts of Parliament

provide for the existence of an agency relationship between parties.
- Partnership Act, 1890 – section 5, provides that every partner is an agent
of the firm and his partners for purposes of the business of partnership.
- The Income Tax Act – section 84 provides that any person or partnership
may be declared by the Commissioner General to be an agent for the payment of
tax due by another person or partnership.
- Bank of Zambia Act – section 48 provides that the Bank (BOZ) shall act as
agent for the Government for such purposes and on such terms and conditions as
the Minister may determine.