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CAN A THIRD PARTY CLAIM IN A PRIVITY OF CONTRACT

 

  • MEANING OF PRIVITY OF CONTRACT

 

The doctrine of privity of contract implies that a contract affects only the parties to it, and cannot be enforced by or against a person who is not a party thereto, even if the contract was made for his benefit and purports to give him the right to sue or make him liable upon it. What this simply means is that a contract cannot confer enforceable rights or impose obligations arising under it on anyone who is not a party, except parties to the contract.

Privity, as a principle in a contractual relationship, has its origin in the English Common law system and was received into the Nigerian Legal System through the received English Laws. As a principle in a contractual relationship privity gained final approval in the case of Dunlop Pneumatic Tyres Co Ltd vs. Selfridge and company Ltd (1915) AC 847 particularly at Page 453 where per Lord Haldane’s while encapsulating the meaning and essence of privity in a contractual relationship held thus:

“My lords, in the Law of England, certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right in personam to enforce the contract”.

However, as far back as 1861 the rule was already being observed as established by the courts. See Tweddle vs. Atkinson (1861) 1 B & S 393; 121 ER 762.

 

  • THE APPLICATION AND SCOPE OF THE DOCTRINE IN A CONTRACTUAL RELATIONSHIP

 

The general application and scope of the principle of privity of contract or the rule simply put implies that strangers to a contractual relationship cannot enforce the contract even when such was made for their benefit. This can best be illustrated by this scenario – If A for a consideration promises B to render a service to C and A fails to render the service (despite the fact that consideration has passed from B to A), C cannot sue to enforce the contract though C is the intended beneficiary of the contract. The reason behind this principle is very simple because consideration is a fundamental element in any valid contractual relationship. CF: Isn’t the court under obligation to enforce the clear, express and the unambiguous intention of parties to a contract?

Although in the scenario illustrated above the contract in question was entered into by A and B for the Benefit of C, C did not furnish any consideration to the contract, the doctrine would not preclude C from taking the benefit of the Contract should A perform, but C cannot compel A by action in court to perform his obligations under the Contract entered into with B.

 

  • LOCAL APPLICATION OF THE DOCTRINE IN NIGERIA

 

 

In the course of performing their duties, as Arbiters in dispute resolution, our judges have in many cases resorted to this principle of privity of contract in settling contractual disputes between different parties in Nigeria. The first reported case where this principle was applied in settling a contractual dispute was the case of Chuba Ikpeazu vs. African Continental Bank (1965) N.M.L.R Page 374 where African Continental Bank entered into an Agreement with one of their debtors, William Emordi. Under the Agreement the Bank’s Solicitor Chuba Ikpeazu was to take over the management and control of Mr. Emordi’s Business and paid into the Bank’s account all proceeds realized from the business until his debt to the Bank is liquidated. Mr. Ikpeazu took over the business as envisaged under the Agreement but later entered into another agreement with Mr. Emordi wherein he handed his business back without the knowledge of the Bank. Under the new agreement Mr. Ikpeazu as the transferee was constituted as the guarantor of the debt owed to the Bank by Emordi. However, it was quite clear from the terms and contents of the Agreement, that it was an Agreement between Ikpeazu and Emordi only. The Bank upon realizing that Ikpeazu has handed back the Business to Emordi sued Ikpeazu as the guarantor of Emordi’s loan under the new agreement and obtained judgment and Ikpeazu appealed the judgment. The Appellate Court held thus: “Generally a contract cannot be enforced by a person who is not a party, even if the contract is made for his benefit and purports to give him right to sue upon it-Tweddle vs. Atkison 30 L.J.Q.B.265. This view was supported by the House of Lords in Dunlop Pneumatic Tyres Co. Ltd vs. Selfridge and company Ltd (1915) AC 847”

Also this principle was applied in resolving a contractual dispute in the case of Shuwa vs. Chad Basin Authority (1991)7NWLR Part 205at Page250

The facts of the case as follows: chad Basin Authority awarded a contract for some construction works to a company called AKAM. One of the terms of the contract clearly stipulates that should KAM fail to perform its contract it would forfeit its construction equipment to Chad Basin Authority. AKAM failed to perform the contract and accordingly Chad Basin Authority in accordance with the terms of the contract gave AKAM notice of forfeiture of its equipment. After this AKAM purportedly sold the same equipment to Alhaji Ali Shuwa who demanded the release of the equipment from Chad Basin Authority. Chad Basin Authority refused, Alhaji Shuwa sued. In his case, Alhaji Shuwa argued inter alia that the process under which the equipment was forfeited by AKAM was defective and invalid, and therefore Chad Basin Authority did not acquire proper title to the equipment. Upon appeal, the Court of Appeal per Okezie J.C.A held thus “… it is a fundamental principle of English law which is also applicable here, that only a person who is a party to a contract can sue on it. There is no doubt that the appellant was not a party to the contract agreement. The respondent knew nothing about the appellant and contemplated no legal relationship with him. The Courts should be unwilling to allow a person who is not a party to a contract to use its terms in order to secure a benefit which he would otherwise not be entitled to obtain”.

In a more recent case of Union Bank of Nigeria Plc (UBN) vs. Sparkling Breweries Ltd. & Ors. (1997) 5NWLR Part 505 Page 304 particularly at Page 363, the Respondent entered into an agreement with four other Companies to finance their importation of raw materials with the understanding that it will utilize part of the raw materials to be imported in its brewery business. The other four Companies subsequently applied to the Bank to open a letter of credit for its importation. The application failed. Sparkling Breweries Ltd. joined the other companies to sue the Bank for damages for breach of contract. At all times material in this case it was clear that the Bank was not aware of the agreement between the companies and the Respondent. Reversing the Decision of the trial court in this matter the Appellate court held that the Respondent had no locus standi in the matter to institute an action against the bank being a total stranger in the application to open the letters of credit and moreover the party was not a party to whatever agreement the company had with the other four companies.

We have so far seen the insistence of our law courts that a stranger to a contract cannot enforce such contracts. The courts have equally, while applying the principle of privity of contract, insisted that a stranger to a contract would not be liable. Thus, the doctrine will not apply to a non party to a contract who has unwittingly been dragged into the contract with the view of becoming a shield or scape-goat against the non-performance by one of the parties.

The case best illustrates this position is the case of United Bank for Africa (UBA) vs. Jargaba (2007)11 NWLR pt 1045 @ 247 pp. 266-267, paras H-A. The facts of this case are as follows: Sometimes in 1999, the plaintiff Alhaji Babangida Jargaba was introduced to Alhaji Ibrahim El-Rufai the 2nd Defendant in this case for the purpose of purchasing fertilizers in commercial quantities. When the plaintiff met the 2nd Defendant he inquired from him whether there are fertilizers for sale in commercial quantity. The 2nd Defendant said yes but that the fertilizers were being sold by the 1st Defendant (in this case the Bank in the trial court). He also informed the plaintiff that a truck load of fertilizers were being sold for the sum of N600,000. The Plaintiff raised Bank draft for six truckloads of fertilizers made payable to the Kaduna branch of the 1st Defendant where the 2nd Defendant has an office. Upon further assurances from the 2nd Defendant that the 1st Defendant still have more fertilizers for sale, the plaintiff raised more bank drafts made payable to the Kaduna branch of the 1st Defendant. In all, the Defendant raised drafts for 20 truck load of fertilizers. When the plaintiff went to the 2nd Defendant for the purpose of evacuating his truck load of fertilizers, the 2nd Defendant directed him to a warehouse owned by a company called Barmani Holdings Nigeria Ltd.

When the plaintiff got to the premises of Barmani Holdings Nigerian Ltd in order to evacuate the fertilizers, he was told that there had been a price increment of N50.00k per bag. The plaintiff protested and later agreed to pay for the increment. The latter started evacuating the fertilizers from Barmani’s warehouse but upon the loading of the ninth truck he was informed that the fertilizers have finished.

The plaintiff went to the 2nd defendant and complained to him, the 2nd defendant gave him the sum of N5,000,000,.00 leaving the sum of N1,960,000 outstanding. After several demands without any success, the plaintiff sued the Defendants through the undefended list procedure because to his mind the Defendants has no defence to his case. But the Defendants in their notice of intention to Defend denied entering into any agreement with the plaintiff, the defendants alleged that they just acted as Bankers between Barmani Holdings Nigeria Ltd and the Plaintiff.

After reviewing the evidence led by the parties the trial court, gave judgment in favour of the Plaintiff. The Defendants being dissatisfied with the Judgment appealed to the court of Appeal. The Court of Appeal upheld the Judgment of the lower court. The defendants further appealed to the Supreme Court.

The Supreme Court Per Muhammad J’S.C. held thus at Page 266 “let me observe here that the relationship that existed, if any, between the plaintiff and Drury Industries Ltd. and Barmani Holdings Nigeria Ltd. from the affidavit evidence considered by the learned trial Judge, is that as far as the plaintiff is concerned, both Drury Industries Ltd. and Barmani Holdings Nigeria Ltd. were third parties to the transaction between him and the Defendants/Appellants. The doctrine of privity of contract is all about the sanctity of contract between the parties to it. It does not extend to others from outside. The doctrine will not apply to a non-party to the contract who may have, unwittingly, been dragged into the contract with a view to becoming a shield or scape-goat against the non-performance by one of the parties. Barmani Holdings Nigeria Ltd. is a complete stranger in the contract between the appellants and the respondent.”

 

  • EXCEPTIONS TO THE RULE OF PRIVITY OF CONTRACT

 

 

We have so far considered cases where our courts applied the doctrine or principle of privity of contract, but despite its seeming wide application in contractual relationships, this principle admits of some exceptions.

Some notable exceptions to the doctrine of privity of contract are discussed hereunder. There are both statutory and common law exceptions to the principle of privity of contract.

  1. Insurance: Under an insurance contract, a beneficiary under a life insurance or a passenger or driver of a car under a Third Party Motor Insurance policy, though being a third party to the Contract, can enforce a claim against the insurer. In the case of Tattersall vs. Drysdale (1935) 2K.B 174 a driver of a vehicle was held to be entitled to the benefit of a motor insurance contract entered into by the owner of the vehicle, which provides cover for third parties including the driver of the vehicle. In Nigeria, a statutory in road has also been in this regard to lay credence to the exception. Section 6(3) of Motor Vehicles (Third Party) Insurance Act, provides as follows: “Notwithstanding anything in any written Law contained, a person issuing a policy of insurance under this section shall be liable to indemnify the persons or classes of person specified in the policy in respect of any liability which the policy purports to cover in the case of those or classes of person”

 

Furthermore, Section 11 of Married Women’s Property Act 1882, which is a Statute of General Application, provides a very good illustration of this point. This section provides that where a husband insures his life for the benefit of his wife or children or where a woman insures her life for the benefit of her husband or children, the policy shall create a trust in favour of the objects therein named. This essentially suspends the application of the privity of contract rule in the circumstance.

 

    1. Sale of Land under Customary Law: Another exception to the principle of privity of contract is a contract relating to the sale of family land under native law and customs. What this means is that where a family Land was wrongly sold, any member of the family even though not a party to the transaction can challenge the sell. The rationale behind this exception was explained by Karibi-Whyte,J.S.C (as he then was) in the case of Adejumo vs. Ayantegbe (1989) 3NWLR Part 110 Page 417 when he posited thus “ communal or family land belongs Hence a member of the family who is co-owner is therefore not a stranger to any transaction purported to have been made in relation thereto”

 

  • Agency: The relationship between an agent and his principal in a contractual relationship provides another exception to this. Thus, if an agent enters into a contract with another person in his capacity as an agent of his principal, the principal though not a party to the contract can sue to enforce such contract entered by his agent. So also a party to the contract can also sue the disclosed principal in that scenario to enforce the performance of any obligations thereunder.

 

  1. Beneficiaries under a Trust: The relationship between a trustee and a beneficiary under a Trust constitutes another exception to the rule. In this case once such a party can constitute himself as trustee for a third party of a right under a contract, such a right will confer enforceable rights on the third party in equity.
  2. Right under a Charge: A person in whose favour a charge or interest in some specific property has been created may enforce it though he is not a party to the Contract.
  3. Covenants on Land: Although there has been an avalanche of literature on the status of a restrictive covenant on land – whether or not the benefits and the burdens run therewith, this will be a matter for another edition of the Digest. Nevertheless the rule in Tulk vs. Moxhay (1919) 88 KB 861 H1 is that a person who purchases a piece of land with notice of certain restrictive covenants affecting the land, shall be bound by such covenants or agreement although he was not a party to the initial agreement creating the restriction or obligation on the land.
  4. Assignment under a Contract: Another exception to the general rule is the assignment of contract to a third party for the Benefit of another. This exception to the general rule was upheld in the case of Dunlop Pneumatic Tyres co Ltd vs. Selfridge and company ltd (1915) AC 847 a third party who has acquired some legal interest in the contract e.g. by way of assignment of any right thereunder. Where the contract purports to confer benefit on another, such a third party may enforce such a contract so long as there is no intention that such a contract will not be unenforceable by a third party. A benefit in this case may include payment of money, transfer of property or the rendering of services. However such benefit must be an express benefit and not a coincidental or consequential benefit to the beneficiary. The mere absence of any express statement in the contract of the right to enforce the contract is not a bar to the entitlement to enforce same. On the other hand, effect will be given to an express contractual provision relieving such third party of the right to enforce such rights against the beneficiary. A corollary to this is the doctrine of acknowledgment or estoppel. Where a party is required under a contract to make payment to a third party and he acknowledges it to that  third party, irrespective of the fact that that third party is not a party to the contract, that acknowledgment express or implied automatically creates a binding obligations on the party in favour of the third party. The third party can be allowed in law to enforce by way of a court action the performance of such obligation, see Kshirodebehari Datta vs. Mangobinda Panda (1933) 61 Cal 841.
  5. Collateral Contracts: A collateral contract is one that accompanies the main contract between two parties. The second contract may involve either of them and a third party. For e.g. in England in 1953 in the case of Shanklin Pier v. Detel Products Ltd., Shanklin Pier (plaintiff) employed contractors to paint a pier. The contractors then instructed Detel Products to supply them paint. This instruction was given based on a statement made by the defendants to the plaintiffs that the paint would last for seven years. When after just three months the paint work fell apart, the plaintiff sued and was allowed by the court to pursue the enforcement of his claim against the defendant because even though the main contract had been between the contractor and the defendant there was in existence a collateral contract between the plaintiff and the defendant guaranteeing seven years protection.
  6. Multilateral Contracts: When a person joins an unincorporated association such as a club, it could be said that he has gone into a contractual relationship with other members even if he may not be aware of their identity and if the person only liaises with the secretary of the organization. In one case the courts decided that a competitor in a race contracted not only with the organizers but with other competitors.

 

RECENT DEVELOPMENTS IN OTHER JURISDICTION

 

As the other side of the same coin, the development of the rule was questioned as unsatisfactory by erudite jurists and scholars. In Drive Yourself Hire Co. (London) Ltd vs. Strutt (1954) 1 QB 250, the avant-garde Lord Denning reasons “it is often said to be a fundamental principle of our law that only a person who is a party to a contract can sue on it. I wish to assert, as distinctly as I can, that the common law in its original setting knew no such principle. Indeed, it said quite the contrary. For the 200 years before 1861 it was settled law that, if a promise in a simple contract was made expressly for the benefit of a third person in such circumstances that it intended to be enforceable by him, then the common law would enforce the promise at his instance, although he was not a party to the contact.”

There is no doubt that the application of the principle of Privity has some inherent weakness and hardships it imposes on third parties in a contractual relationship.

The hardship this principle imposes on third parties in a contractual relationship was aptly captured by Steyn LJ in the English Court of Appeal Case of Darlington Borough Council vs. Wiltshier Northern Ltd (1995) 1 WLR Page 68 when he said thus criticizing this principle in that case, “the case for the recognizing a contract for the Benefit of a third Party is simple and straightforward. The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties. Principle certainly requires that a burden should not be imposed on a third party without his consent. But there is no doctrinal, logical, or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties, Moreover, often the parties, and particularly third parties, organize their affairs on the faith of the contract. They rely on the contract. It is therefore unjust to deny effectiveness to such a contract. I will not struggle with the point further since nobody seriously asserts the contrary.”

 

The hardship this principle imposes on third parties in a contractual relationship and its rigidity has led some countries under the commonwealth or Common-Law Jurisdictions who were once colonized by Britain like Nigeria to take steps to address the challenges imposed by the strict application of this principle in a contractual relationship as it affects third parties.

 

  • Privity of Contract under Western Australian Property Law Act 1969

 

The first country among common-law countries that took steps to address the rigidity of privity of contract is Western Australia who by its property Law Act 1969 in section 11 provides as thus “where a contract expressly in its terms purports to confers a benefit directly on a person who is not named as a party to the contract, the contract is enforceable by that person in his own name”.

 

  • Privity of Contract under Queensland Law

 

Section 55 of the Queensland Property Law Act 1974 provides that “A promisor who, for a valuable consideration moving from the promise to do or to refrain from doing an act or acts for the benefit of a beneficiary shall, upon acceptance by the beneficiary, be compelled to perform that promise”

 

 

  • Privity of Contract under New Zealand Law

 

 

New Zealand by its Contracts (Privity) Act, 1982 has also taken steps to address this problem. Section 4 of the Act provides that “where a promise contained in a deed or contract confers, or purports to confer a benefit on a person, designated by name, description or reference to a class, who is not a party to the deed or contract… the promisor shall be under an obligation, enforceable at the suit of that person to perform that Promise”

CONTRACT (RIGHTS OF THIRD PARTIES) ACT 1999

This is a major statutory affront to the doctrine of privity. Under this law, a third party may under certain conditions other than the ones recognized by Common Law enforce the performance of a contractual obligation by action in court. Section 1 of the Act provides that a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if—

(a)the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

However, subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party see subsection 2.

The condition to be satisfied by the third party before this provision will avail him is that he/she (i.e. the third party) must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

In exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly). Furthermore, where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation.

 

The English Law Commission Committee on Contract in Draft Bill,in Clause 1(4 ) and 1(5) proposed as follows: A right to enforce the contract means (1) a right to all remedies given by the Courts for Breach of contract(and with the standard rules applicable to those remedies applying by analogy) that would have been available to the third Party had he been a party to the contract, including damages, awards of an agreed sum, Specific Performance and Injunctions; (2) a right to take advantage of a promised exclusion or restriction of the promisor’s rights as if the  third party were a party to the contract.

The above represents developments in other common law jurisdictions and the steps taken to address the rigidity of the primordial doctrine of privity of contract. This is a wakeup call on the National Assembly to take urgent steps to review our contract laws to meet up to prevailing international standards as obtainable in other Common-law Jurisdictions.

 

CONCLUSION

In Nigeria, the courts still treat the rule of privity as sacrosanct. As recently as in 2009, in the case of Bakassi L.G.C vs. Bassey (2009) All FWLR pt. 473, p. 1293 at p. 1301, the court held that a person who is not a party to a contract cannot enforce it even if the contract was made for his benefit and purports to give him the right to sue on it. This should not be lauded. Our lawmakers or even our judges should abandon the doctrinal ‘our hands are tied approach’ and add a little bit of activism in their interpretative duties to be able to dot the I’s and cross the T’s- should our legislature opt to be too busy to see that development in the law of contracts the world over meant that the current position of our law in this regard is primitive and outmoded.

 
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