Contract Law Notes - Reform of Privity

These exam revision contract law notes cover the reforms to the doctrine of privity of contract and the ways in which it is protecting subcontractors.

Protecting subcontractors; reform of privity

Elder, Dempster v Paterson, Zochonis [1924] AC 522 (BBF 1153)

(Company issued bill of lading containing exclusion clause.  Goods actually carried by ship Company had chartered; held owners of ship entitled to same protection as Company (Vicarious immunity)).

Scruttons v Midland Silicones Ltd [1962] AC 446 (BBF 1154)

(Bill of lading contained limitation of liability clause, in accordance with Hague Rules, limiting liability to $500 per package (“neither the carrier nor the ship shall be liable...”). Drum of chemicals worth £593 negligently dropped by stevedores.)

(a) Agency

Summary of rules of agency

If a properly authorised agent makes a contract with a third party on behalf of the principal, the normal position is that the agent "drops out", i.e. is not liable nor entitled to sue on the contract, which is between the principal and the third party. Note that this means that the principal must provide the consideration; it was for this reason that the attempt to evade privity via agency failed in Dunlop v Selfridge [1915] AC 847. (In contrast, the PC found that the stevedores had provided consideration in New Zealand Shipping v Satterthwaite.)

Exceptionally, some agents may also contract as a second principal, e.g. the company director in The Swan [1968] 1 Lloyd's Rep 5 (noted, BBF 1128) who signed 'J.D.Rodger, Director' and was held to be personally liable on the contract as well as committing the company.

Normally the agent will disclose that they are acting for someone else. It is not necessary that they identify who the principal is at the time.

In English law it is possible for the agent to act for an undisclosed principal. When the third party finds out, they have the choice of suing either the agent or the principal. The third party can be sued by the principal. However, this only works in cases in which the agent was authorised in advance: an undisclosed principal cannot ratify.

An agent may have authority in various ways:

1. Actual or express authority.
2. Implied authority to do that which is reasonably incidental to what has been authorised expressly: e..g a solicitor retained to litigate a case on behalf of a client has implied authority to settle. However the implied authority may be excluded by a contrary instruction from the client.
3. Ostensible or apparent authority derived from a representation by the client that the agent is authorised to act in a particular way even if in fact such authority has not been given to the agent. To limit this apparent authority the third party must have been notified. It follows that an agent may have ostensible authority to do things which the client has actually forbidden, thereby revoking any express or implied authority to do them, e.g. Waugh v Clifford [1982] 1 All ER 1095 (BBF 1129).

The principal may also ratify an act done by an agent without authority; the effect is as if the agent had been authorised all along.

However, there are two limitations on ratification:

(i)         The undisclosed principal. An agent may make a contract without disclosing the (s)he is an agent. If in fact the agent was acting for a principal who had expressly authorised the act, or who had impliedly done so by appointing the agent to a position in which it would be usual for the agent to have such authority (Watteau v Fenwick [1893] 1 QB 346, BBF 1134), the undisclosed principal may sue or be sued on the contract. It might be unfair for the third party to find that the contract was with the principal when it had appeared to be with the agent. In contracts of a personal nature undisclosed principals cannot intervene at all. In all other cases the third party is given the choice of suing the agent or the undisclosed principal; but the latter can sue the third party.  However an undisclosed principal may only do this if the agent's action had been authorised in advance; the undisclosed principal may not ratify an act by the agent which was not previously authorised Keighley, Maxted v Durant [1901] AC 240, BBF 1133.

(ii)        The unidentifiable principal. Even if the agent discloses that (s)he is acting merely as an agent, there can be no ratification if at the time the contract was made it is not possible to identify the principal: Southern Water v Carey [1985] 2 All ER 1077, BBF 1161.

An agent who represents that (s)he has authority when this is not the case will be liable personally to the third party on what is known as the agent's "warranty of authority". Liability is strict in the sense that the agent need not be at fault in not knowing that there was no authority: Yonge v Toynbee [1910] 1 KB 215 (BBF 1130).

It is likely that the agent is not liable personally if the argument is simply a matter of the construction of the document which confers the authority on the agent and the third party has a copy of it.

Using agency to protect sub-contractors

New Zealand Shipping v Satterthwaite (The Eurymedon) [1975] AC 154 (108, 1157)

(carrier took exemption clause as “agent or trustee” for sub-contractors. The stevedores were part of the same group of companies as the carrier and had presumably authorised the carrier to take the limitation clause on their behalf, but perhaps subsequent ratification would do.)

Raymond Burke Motors v Mersey D&HB [1986] 1 Lloyd's Rep 155 (Contract between owner and third person not yet formed)

Southern Water v Carey [1985] 2 All ER 1077 (noted, BBF 1161).

(contractor took clause on behalf of nominated sub-contractor, but at time of contract sub had not been selected)

The Mahkutai [1996] AC 650

(Exclusive jurisdiction clause in bill of lading issued by charterers of ship to goods owners. Could ship owner take advantage of clause?

(b) Consent to bailment on limited liability terms

The Pioneer Container [1994] 2 AC 324 (BBF 1200)

(Owners of goods consented to carriage on ship of third party subject to terms in third party’s bill of lading)

(c) Circle of indemnities

Gore v van der Lann [1967] 2 QB 31 (BBF 1174) (Pensioners bus pass: Neither LC nor its servants shall be liable. P sued conductor, LC applied for stay of action, failed)

(d) Volenti/ absence of duty?

Norwich City Council v Harvey [1989] 1 All ER 1180 (BBF 1168) (clause in main contract stating employer bore risk of damage to building by fire. Sub-contractor negligent with blowlamp and caused fire; no duty of care)

Marc Rich v Bishop Rock [1994] 3 All ER 686 (BBF 1170) (ship developed crack; classification society inspected, allowed ship to go to sea where sank; claim by cargo owners)

Reform of privity

Law Commission Report No. 242, Privity of Contract:  Contracts for the Benefit of Third Parties (Cm 3329, 1996)