COURSE UNIT: CONTRACT LAW
GROUP FIVE.
Number Name Registration signature
Number
1 NDYAMUHAKI EDSON 2023-08-16823
2 SEMPA GEORGE WILLIAM 2023-08-18267
3 TUMUSIIME VICTOR ISAIAH 2023-08-17296
4 BYARUHANGA DERICK 2023-08-17974
5 BULUKO DERICK 2023-08-18264
6 KATSIMBAZI.K.EMMANUELIN 2023-08-17417
7 NANDOLO LINDAH 2023-08-17092
8 LUKWAGO ASHIRAF SSEMABIRA 2023-08-18063
9 MUDDE MUSA 2023-08-17256
10 KAVARA EDSON 2023-08-16620
PRIVITY OF CONTRACT
Privity of Contract is a legal doctrine that generally states that only the
parties who are directly involved in the contract have rights and obligations
under the contract. This means that the third party who is not a party to the
contract typically cannot enforce or be bound by the terms of the contract.
Therefore, the doctrine of Privity of Contract means, “Only a person who is a
party to a contract can sue or be sued.”
An example is derived from the case of Dunlop Pneumatic Co Ltd VS Selfridge
& Co Ltd where Dunlop sold tyres to Dew Company and agreed not to sell the
tyres below the price agreed upon. Dew and company sold the tyres to Selfridge
and agreed not to sell the tyres below the price provided. Selfridge breached
this agreement and sold the tyres below the price list provided and Dunlop sued
Selfridge for breach of contract due to the fact that Dunlop was not a party to
the contract, they could not sue the defendants (Selfridge).
However, there are exceptions and variations to this rule in different
jurisdictions namely;
➢ Insurance Law
➢ Trust Law
➢ Restrictive Covenants
➢ Assignment
➢ Agency
➢ Negotiable Instruments
Refer to the Contracts Act 2010 Section 65 subsection (1) paragraph (a)
and subsequent sections which talks about Rights of the third party to enforce
contractual term.
1. INSURANCE LAW
Parliament as the supreme law maker, is inevitably not bound by the
strict rules of contract law when enacting laws. The result is that
there are statutes that confer rights and obligations on a person who
is not a party to a contract, The contract will be between the
insurance company and the insured that is to say the vehicle owner.
For example, the Road and Traffic Act (Traffic and Road Safety
Act). This Act allows the injured party in certain circumstances to
claim directly on the contract between a negligent driver and his
insurance company. The injured party can claim for damage or any loss.
The insurance is enforceable despite the fact that the other motorist
(injured party) lacks any privity in the insurance contract.
2. TRUST LAW
A trust relationship is an equitable relationship where one party called
the settler conveys property to another party called the trustee upon
the understanding that the trustee will use the property for the
benefit of another party called the beneficiary. The law of
constructive trusts allows the beneficiary to acquire a right to sue the
trustee if he or she applies the property for his or her own benefit
not withstanding that the beneficiaries weren’t party to the
agreement. The trustee is bound according to the beneficiaries
therefore he can’t hide to privity. This was discussed in the case of
Beswick VS Beswick (1968) whereby the court granted the widow an
order of specific performance for the payment owed by Peter
Beswick’s nephew as an administrator to her husband’s estate.
However, the court found that Peter Beswick’s widow could claim
under her personal capability though she was a third party to the
contract and was not a party to the original agreement.
3. RESTRICTIVE COVENANTS
Restrictive Covenants are legal contracts between two or more parties
that restrict one or more parties in engaging in certain activities.
These covenants are agreements often used to protect trade secrets,
business interests and other confidential information.
They are common in land transactions where a person buys land from
another and it is agreed that the use of land will not go against the
terms reached at in accordance to the contract as signed. Therefore,
the new successors of the land are also bound by the restrictions of
the original owners regardless of the reselling of the land in various
occasions.
With the case example of Charles Augustus Tulk VS Moxhay 1848,
where Tulk who owned land in Leicester square and happened to sell a
plot to someone on a guarantee of following the promise that he and
successors in title will keep the land in its present form, after the
original buyer also sold the land to another person, likewise the land
was sold in different occasions. Moxhay then bought the land and
sought to build a garden despite knowing the covenant before buying
the land. Tulk the original owner sought to enforce the covenant and
was successful and allowed by the court therefore Moxhay was bound
by the covenant.
Therefore, Tulk entered as a third party though was not a privy to the
contract hence an exception to the privity of contract and so the
reasoning was based on preventing the unjust enrichment of the
vendor.
4. ASSIGNMENT
An assignment is an arrangement where one person assigns or gives his
rights to another person who was not originally privy to the contract.
A gives B a loan of 30,000/=. A can at a fee assign his right to recover
this loan to C. C who is the assignee of the debt can sue a debtor in his
own name. An assignment is basically done in commercial transactions.
(Refer to Section 65 subsection (1) paragraph (a) of the Contract
Act 2010)
5. AGENCY
This is an exception to the doctrine of privity in that an agent may
contract on behalf of the principal with the third party. A principal
may therefore sue the third party on a contract made by his agent so
can the third party sue the principal on a contract he entered into
with the agent not putting into consideration that the principal was
not privy to the contract.
Refer to Section 36(b) of the contract Act 2010 which states that
the promisor or the representative of the promisor may employ a
competent person to perform the promise.
6. NEGOTIABLE INSTRUMENTS
A holder for values of a bill of exchange can sue prior parties on that
cheque. For example, if Samuel bought cosmetic products from Lindah
and paid with a cheque which Lindah endorsed or negotiates in favour of
Israel for value. Israel acquires a right sue Samuel if the cheque is
dishonoured. The leading authority on what amounts to negotiable
instruments as an exception to privity of contract is Crane Bank Ltd V
Mrs. Anke Alemoyehu Rainbow International School 23 April 2003.
MERITS OF PRIVIRTY OF CONTRACT.
a. It protects the parties to a contract from third party
interference.
b. It protects third parties to a contract from law suits arising
from the contracts.
c. It prohibits non contractual parties from enforcing the contract.
d. Strict liability and implied warranty doctrines allow third parties
to sue manufacturers for faulty goods even though they are not
parties to the original contract.
e. It promotes fairness and equity.
DEMERITS OF PRIVITY OF CONTRACT.
a. Privity does not recognize an obligation to enforce a contract
under a trustee, where a promisor receives an agreed
consideration and fails to fulfill its obligation to a third party it
is unjustly enriched and privity sees no injustice.
b. In some cases, there is a degree of unfairness and inequity to
third parties in some cases.
In conclusion, Privity of contract means only a person who is
privy to a contract can sue or be sued however, there are
exceptions that allow the third party to enforce contractual
terms can be seen in the Contracts Act 2010 section 65.
