Legal Articles
LRC recommends change in privity of contract rules (23rd January 2007)
The Law Reform Commission ("LRC") has suggested a number of provisional changes to the law in relation to privity of contract in its Consultation Paper on Privity of Contract: Third Party Rights which was launched on 14 November 2006.
Privity of contract is a long-established rule of contract law which prevents a contract from being enforceable in favour of, or against, someone who is not a party to a contract. This means that only the persons who are a party to the contract can enforce its terms and have those terms enforced against them. Therefore, despite the fact that a party may be mentioned in the contract, or stand to receive a benefit under it, such a third party cannot sue to enforce its terms.The LRC has recommended that, subject to certain limitations, the rule of privity should be changed so that where the contracting parties clearly intended a third party to benefit from the contract, that third party may sue if the contract is not carried out properly.
There are already a number of exceptions to privity of contract based upon case law and statute. The exceptions recognised by case law include:
- trusts of contractual rights;
- agency,
- restrictions on the use of land and chattels;
- collateral contracts;
- exemption clauses;
- remedies of the promise; and
- the “principled approach” exception. (1)
The statutory exceptions include those in the Data Protection Acts 1988 and 2003 and the Sale of Goods and Supply of Services Act 1980, for example. The Data Protection Acts 1988 and 2003 stipulate in section 11(6) that a data subject may enforce rights under a data export agreement which is made between the data exporter and the data importer and not the data subject. Similarly, section 14 of the Sales of Goods and Supply of Services Act 1980 provide that if a consumer buys a car on a finance deal, and the car turns out to be defective, the consumer may sue either the dealer or the finance company, despite the fact that, depending on the finance package, the actual sale might be between the dealer and the finance company.
In summary, the LRC has made the following provisional recommendations:
- The development of the rule of privity should take the form of detailed legislation, and in doing so, the legislation should not constrain judicial development of third party rights.
- Reform of the promisee’s remedies should not form part of the proposals to reform the privity rule.
- A general clause should be included in the legislation that preserves the existing exceptions and existing remedies available to third parties.
- The relevant test should be whether:
1. the contracting parties intended the third party to benefit from the contract or term of the contract; and
2. the contracting parties intended that the term benefiting the third party be enforceable by the third party.
- The contracting parties should be entitled to rebut any presumption in favour of enforceable third party rights, under normal contract interpretation principles.
- The third party should be identified in the contract by name or description. There should be an express provision in the legislation such that there is no requirement that the third party be in existence at the time of the entering into of the contract.
- Reliance and acceptance by the third party should be an alternative means for determining whether third party rights have crystallised. The contracting parties should require the consent of the third party prior to modification or termination of the contract, unless the contract expresses excludes this.
- The promisor in the contract should be able to rely on (as a defence/set-off) other outside issues relevant to the conduct of the third party, which would have been available had the third party been a party to the contract. Contracting parties should also be free to expressly restrict or expand the scope of the defences/set-off.
It is envisaged that the practical effect of the change will mean simplification of contracts, particularly complex building contracts which often involve a substantial number of contractors and sub contractors. At present, one contractor, due to the rule of privity, has difficulty suing another contractor (e.g. for holding up part of the project). To get around this, complex standard form contracts have been developed to ensure some level of connection between sub-contractors.
The LRC notes in its Consultation Paper that similar changes in the UK in 1999, which were introduced by the Contracts (Rights of Third Parties) Act 1999, lead to a simplification of standard form building and civil engineering contracts.
Submissions by the public on the provisional recommendations are invited before 31 April 2007. It is expected that the final report will be published by the LRC at the end of 2007.
The Consultation Paper is available on the Commission’s website, www.lawreform.ie.
If you would like Mason Hayes+Curran to advise in relation to the public submission process or in relation to the implications of the proposed changes to the rule of privity, please contact:
| Robert McDonagh | Tel: + 353 1 614 5077 | Email: rmcdonagh@mhc.ie |
| Shane Dolan | Tel: + 353 1 614 5811 | Email: sdolan@mhc.ie |
| Dr Brian Hunt | Tel: + 353 1 614 5262 | Email: bhunt@mhc.ie |
The content of this article is provided for information purposes only and does not constitute legal or other advice. Mason Hayes+Curran (www.mhc.ie) is a leading business law firm with offices in Dublin, London and New York.
© Copyright Mason Hayes+Curran 2007. All rights reserved.
(1) Contract Law; Paul A. McDermott (Butterworths).
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