Privity of Contract Principle

Discuss about the Common Law Principle of Privity of Contract.

The areas of law considered in this task are Common Law Principle of Privity of Contract, Rights of Third Party Act, 1999, and website exclusion .

Under the Common Law principle of Privity of Contract,law

“The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it”

The principle is that the parties to the contract can only sue to impose their rights or claim damages in breach of contract condition. In case of Tweddle v Atkinson [1861], it was established by the court that no outsider to the consideration can take benefit of the contract, however made for his/her benefit. The principle was based on two grounds, firstly, the third party was not aware of the contract and secondly, the consideration did not flow through the third party that is claiming within the contract (Sinjini, 2015). 

In a similar manner, Dunlop Pneumatic Tyre Company Ltd v. Selfridge [1915], it was considered to be as the important principle of the English law that only party to the contract provided with consideration, could sue on it.

However, exception to the rule of privity is collateral contract, which can be used as a means of interpreting exclusion clauses which are enforceable by a third party (LawTeacher, 2013).

The reform in the privity rule in English Contract Law recommended that the third parties should have the right to impose contractual provisions. Section 1 of Contracts (Rights of Third Parties) Act 1999 provides right to third party to enforce contractual terms (legislation.gov.uk, 1999). Subsection (1) states that third party may have the right to enforce contractual terms if;

• mentioned in express terms in the contract
• The contracting parties expect to confer the right upon the third party
• The contracting parties expect to confer a benefit on the third party

Subsection (3) requires the third party to be expressly recognized in the contract by name or as a member and need not be in presence when the contract is created.   However, Subsection (1) (b) of Section 1 is not applicable if during the formation of the contract, the parties to the contract did not aim the terms to be enforced by the third party (LawTeacher, 2013). This provision binds third party to give up their rights.

The right to enforce puts third party receiver in an enhanced position than the gratuitous promise because neither of them provides consideration. Thus, third parties are provided with the right to impose contractual provisions under above mentioned conditions (westlaw.co.uk, 2018).

Exceptions to Privity of Contract Principle

However, Privity rule is governed by lack of consideration as being a party to the contract does not qualify for Privity rule and there must be some consideration from the side of third party as well (In Brief.co.uk, 2018). At common law, contractual relationship has been established between QuickSnaps and Fixit as in contract between Best and Fixit, Fixit agreed to provide service, maintenance, and supply good quality ink to the printing machines and keep them in a usable condition for the duration of contract (Allen & Overy, 2016). In addition, this clause of the contract was enforceable by the customers with whom Best has contracts for hiring the printing machines, which include QuickSnaps. QuickSnaps and Best both can sue Fixit for compensation, however, Fixit can deny for compensation relying on the website exclusion clause. But, there are few requirements that need to be fulfilled by the exclusion clause cover off all the legal formalities, which are;

• It should be easy to find and are conveyed to the notice of the customers.
• It should be easy to read and understandable and should be emphasised in red or written in bold text with capital letters.
• All different types of liabilities should be clearly excluded.
• All types of liabilities are not allowed to be contravening the legislation or case law of the region(Leah, 2016).

So, Fixit could be held liable for compensating both the parties to the contract as the disclaimer shown by them is not fulfilling the criteria for exclusion clause.

1. The areas of law considered in this task are exclusion clauses and Unfair Contract Terms Act (UCTA) 1977. Exclusion clauses generally exist in contracts and operate in the form of excluding the rights of a party. In some situations, they are included in an attempt to exclude all the liability for a certain matter or thing that could go wrong but exempt the party including the exclusion clause. However, the effectiveness of the exclusion clause rely upon its being a measure of the legally binding contract between the parties (Cartwright, 2016). The contract law requires the party to notice the exclusion clause during the formation of contract, which can be done through actual or beneficial notice. The occurrence of actual notice takes place when the party relying on the exclusion clause actually brings it to the attention of the other party or the other party merely reads it (University of London , 2017). On the other hand, constructive notice results when the party is not actually attentive of the presence of the clause but the party relying on the clause has done all that is rationally essential to get it in attention of the other party.

The website user is contractually bound by the terms of use (TOU) or terms of service (TOS) of the website rely on whether a reasonable being would be considered to be noticing such terms (Arts Law Centre of Australia, 2018). It is stated by TOU and TOS that there would be no responsibility taken for losses caused by relying the information provided. Thus, the terms or conditions disclaiming the legal liability for losses occurred by relying on the information is expected to be effective wherever reasonable person would have notice the disclaimer (Normington, 2013).  In such a situation, a reader would be bound albeit he/she had never read the disclaimer, if a reasonable person would have observe it. In L’Estrange v. Graucob [1934] the decision of the court was that when a party has signed an agreement, it is irrelevant to the question of his/her liability under it even if he/she has not read it and does not identify its contents. The question arises here is the incorporation of disclaimer into the contract. As informed, there was no information of disclaimer in the contract and Fixit exhibited the disclaimer at the time of denial for compensation. The contract was signed between the two parties without informing the plaintiff about the disclaimer existing on their website (lawplainandsimple.com, 2018).

Reform in Privity Rule

In addition, according to the terms and conditions essential for the formation of contract, the ‘parol evidence’ rule sates that an evidence cannot be added to show a discrepancy or challenge the written document for contract because a written document creates a presumption that the written content has been projected to include all the terms related to contract and none of the party to the contract can depend on any other extrinsic evidences of terms supposed to have been agreed not existing in the document (Crystal, 2018). Through parol evidence rule, a party is prevented from relying on extrinsic evidences regarding the contents of a contract specifically the express terms of the contract. Fixit denied any liability for the loss incurred to Best drawing attention to the disclaimer on their website, which was not visible even unless clicking on a link present on their website printed in small. In Olley v. Marlborough Court Hotel [1949], the decision of court was in favour of plaintiff as the exclusion clause had not been incorporated successfully within the contract. The contract was formed at the reception and the notice for exclusion of liability was not visible at that time.  

The ‘reasonableness’ test under UCTA states that considering a notice, which is not under contractual effect, the requirement of reasonableness requires it to be fair and reasonable to rely on it and the resources expected to be available for the determination of meeting the liability if arise (legislation.gov.uk, 2018). Taking into consideration, the exclusion clauses and UCTA (1977), the disclaimer seems to be invalid and Best should not be bound to the disclaimer.

However, it is not clear whether they have discussed anything in clauses of contract about the disclaimer on their website as well as the requirement of being in compliance with the content existing on their website. That is why, it can be argued that disclaimer can be added to as the evidence in the terms of contract but if it is not included as a term in the contract, Fixit cannot deny from their liability from the loss occurred to Best due to breach of contract by them (Cotton, 1999). In addition, the disclaimer is not instantaneously on their website but appears on clicking on a link printed small on the webpage of Fixit. If the company preferred to attract the attention of the parties in contract with it to notified by their disclaimer, they should provide it directly on their webpage and should mention about it in their contracts as well. If both the parties had already agreed to the terms and conditions of the contract, then there is no probability of including website and disclaimer in the terms or as evidence to get eliminated from the liability of the loss occurred to the other party of the contract because of breaching the contract by the other (nidirect.gov.uk, 2018). Thus, it can be considered that the evidence of disclaimer cannot be binding on Best if there is no mention of such disclaimer to be in existence in the terms and conditions of the written contract formed between the two parties (Saunders Law, 2017). 

1. The area of law in this task are damages. The contract between Best and Fixit was terminated due to the breach of contract by Fixit without any legal excuse due to performing defectively under the contract. Damages are proposed to provide compensation to the injured party for the loss suffered by them due to the breach of contract by the guilty party.

Incorporating Exclusion Clauses in Contracts

The entitlement to the substantial damages for the breach of contract can be recognised on the basis of actual loss caused to the injured party due to breach, type of loss whether giving entitled to compensation for loss or on remoteness of loss.  The breach of contract can be recognised even in condition of no actual loss but the privilege to only nominal damages. The provision of damage is to keep the injured party in a financial position, it would have been in had the contract been fulfilled successfully (Nelsons, 2017).

Generally, damages are reliant on loss to the claimant and not gain to the defendant, which means providing compensation to the loss and not to provide unnecessary benefit to the injured party.

In this case as pecuniary loss is relevant, the amount could be in the form of monetary compensation to the plaintiffs. Generally, compensatory damages are awarded for “expectation loss” i.e. loss of bargain or for “reliance loss” i.e. wasted expenditure. Expectation Damages are projected to cover what the injured party expected to receive from the contract (LexisNexis , 2018). While Consequential or Reliance Damages are projected to compensate the injured party for indirect damages other than contractual loss. In this case, however, Best had to hire printing machines from another company for replacing the broken machines and the total cost incurred was £40,000. Due to the issues with the machines, QuickSnaps had to face loss in business as a result of which, it terminated its contract with Best early causing the loss of £75,000 in profits. In addition, due to negative publicity in the industry that the printing machines hired out by Best are unreliable, Best lost a potential contract with a large company (lawmentor.co.uk, 2018). Thus, the estimated loss of profit to the company was £100,000. Best can sue Fixit for the amount £75,000 lost profit along with £40,000 compensation for the replacement of broken machines, which they hired from another company. However, the estimated loss of profit of amount £100,000 cannot be compensated because the aim of the provision of damages is to recompense the injured party and not to provide benefit to the injured party. Best could claim compensation on the basis of Expectation Damages as well as under Consequential Damages.

The concept of remoteness determines the types of loss occurred due to breach of contract which might be compensated by awarding damages. In case of Hadley v. Baxendale [1854], the test of remoteness was established by the decision of court (Thomson Reuters, 2018). It provided that the loss can only be recoverable if it had been in the observation or foreseeable by the parties. The observation of the parties exists under two limbs i.e. first in the knowledge of the parties under ordinary course of things, and second, is actual knowledge to the defendant or by both the parties, about the specific conditions outside the ordinary course of things. In a similar manner, in case of Victoria Laundry Ltd v. Newman Industries Ltd [1949], the court held that the losses can only be recovered which are in reasonable contemplation of the parties including the loss of profit expected from the completion of contract. 

Entitlement to Damages in Case of Breach of Contract

In Jackson v. Royal Bank of Scotland [2005], the court held that damages should be paid to the claimants on the basis of their loss of profit which would have earned till the completion of the contract and the loss of profit was not considered to be as too remote. Thus, Best could claim compensation for actual loss as well as for loss of profits till the completion of contract with QuickSnaps but is not liable to claim for estimated profit because that contract is not relevant to the contract between them as well as defendant was not also aware about the contract.

The principle of mitigation requires the claimant to take initiatives to reduce the amount of losses well as to avoid unreasonable steps that could increase the loss (Thomson Reuters, 2018). In British Westinghouse Electrical and Manufacturing Co Ltd v. Underground Electric Railways Co of London [1912], the court held that damages for breach of contract aimed to put the injured party in the position they would have been had the contract have been performed successfully (LawTeacher, 2013). The additional profits made due to acts conducted in mitigation should be considered while quantifying the damages. Best was not in a position to mitigate the loss as printing machines stopped working due to bad quality ink and they had to replace it. They lost the contract with QuickSnaps due to this reason as well.

Thus, Best should claim for loss of actual profit and loss occurred due to replacement of machines. However, the loss for estimated profit cannot be claimed by Best.

1. The area of law in this task is the breach of express term of contract. The breach of contract entitles the plaintiff to claim for damages. However, in case of repudiatory breaches, the innocent party could treat the contract as discharged if the breach of a condition i.e. a term is the root of the contract, breach of an intermediate term deprives the innocent party from the benefit it would have obtained in case of performance of contract, and if the words or conduct of the party breaching the contract amount to refusal of the obligations under the contract. In Poussard v Spiers [1875], the decision of the court held that failure to improvement did amount to the breach of a condition of the contract being its root and the other party were therefore free to cancel the contract.

As mentioned in the case study, there were clauses included in the contract, under which, Fixit agreed to provide services to the Best and the customers of Best will be able to enforce the terms of contract. It shows that the terms of contract has been in express terms, which means that both the parties have set out certain terms and conditions in their agreement. However, the document setting out the agreement between the parties is required to be interpreted without prejudice there must not be any probability of what a party actually intended and what the other actually understood to have been intended. The express terms should be interpreted in accordance with their sense in conventional utilization. It requires the terms of the contract to be read as factual matrix, which means the facts should be reasonably made available to both the parties to the contract.  

The contract between Best and Fixit was terminated due to the breach of contract by Fixit without any legal excuse due to performing defectively under the contract. Defective performance refers to the breach of contract due to the promise made by a person to perform one thing but does another different from as required under the contract such as in time, quality, and quantity. In case, the defect in performance is extremely serious, the breach might amount to the non-performance instead of their defective performance.

Termination for breach of contract is the remedy provided by the contract law of UK, through which, the injured party is released from its obligation to perform in accordance with the contract  due to the defective or non-performance of contract by other party. The breach provides the right to the injured party for terminating the contract or to affirm it as well as to claim further performance. The conditions of termination depends upon the selection of the injured party and the guilty one is not allowed to rely on their own breach of duty towards other party in order to get out of the contract. To achieve the purpose, the injured party is required to clearly indicate its intention to terminate through notice or commencing the proceedings and should terminate the contract completely. Thus, Best is free to rescind the contract with Fixit.

After taking a look at the relevant laws of the UK, it has been found that Best was not legally binding to the evidence of disclaimer produced by Fixit as it was not in the express terms of contract as well as implied and was not directly visible on their website but appear on clicking on the link printed in small font size and does not satisfy the reasonableness test. It has also been identified that QuickSnaps has the right to sue Fixit according to the Contract (Rights of Third Parties) Act 1999. Best has the right to sue Fixit for the compensation of loss incurred to them due to the breach of contract by Fixit. Best had to suffer a lot of monetary loss due to defective performance of Fixit. As per the provisions of damage in the contract law of the UK, the injured party i.e. Best can sue Fixit for the compensation for the loss incurred to them due to breach of contract. It will include the compensation for replacement of machines as well as the loss occurred due to termination of contract by QuickSnaps. For the purpose of loss of potential contracts and various other contracts in future due to defamation of image caused due to the defective performance by Fixit, Best can file the case for defamation of image and claim compensation on that basis and terminate the contract with Fixit before the end of term of contract.

References

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