Exceptions to Privity of Contract

  1. Covenants running with the land
  2. Contracts for the hire of a chattel
  3. Interference with contractual rights
  4. Restrictions upon price
  5. Insurance contracts
  6. Privity and trust concept
  7. Banker’s commercial credits.

Covenants running with the land

The doctrine of privity of contract was so inconvenient in the case of contracts affecting land that special exceptions were created by courts in this regard.

Thus according to the rule in Tulk V. Moxhay, (1848)2 Ch.774, 18 L.J. Ch. 83., a restrictive covenant voluntarily accepted by a purchaser of land as part of a contract of sale will in certain circumstances bind persons who subsequently acquire the land.
The characteristics of a covenant which runs with the land are well-illustrated in Smith V. River Douglas Catchment Board (1949) 2 K.B. 500; (1949) 2 All E.R. 179.

Facts of this case were as follows:
In order to prevent flooding of their individual lands, eleven owners of land through which a river ran, made an agreement with a catchment board, under which the board agreed to widen, deepen and make good the banks of the river and thereafter to maintain them, in that condition. The land owners for their own part agreed to contribute towards the cost of such maintenance.

In 1940, the first plaintiff bought the land of one of the original parties to the agreement, and the deed of conveyance expressly extended the benefit of the 1938 agreement to him. In 1944, the first plaintiff let the land to the second plaintiff as a yearly tenant. In 1946, the river burst its banks and flooded the plaintiff’s land.

In response to an action by the plaintiffs for breach of contract, the board contended that, if there was a breach, there was no privity of contract between the plaintiffs and the board, and the covenant did not run with the land so as to give the plaintiffs a cause of action.

Having held that there had been a breach of obligation on the part of the board, the court considered whether the plaintiffs were bring the action in spite of the absence of privity of contract between the parties.

On this point, it was held that this was a covenant which ran with the land and that it was the intention of the parties that it should attach to the lands, no matter into whose hands they came. The covenants were, therefore, binding on the board and enforceable by the plaintiffs, even though they were strangers to it.

According to Somervell, L.J. (adopting a passage from Farwell, J.’s judgment in Rogers V. Hosegood (1900) 2 Ch. 388) covenants which run with the land must have the following characteristics:
a. They must be made with a covenantee who has an interest in land to which they refer, and
b. They must concern or touch the land. In the learned Lord Justice’s view, these conditions were satisfied in this case.
Tucker, L.J., took the same view because the covenant:
i. Affected the value of the land per se and converted it from flooded meadows to lend suitable for agriculture, and
ii. It showed an intention that the benefit of the obligations to maintain “shall attach thereto into whatsoever hands the lands shall come”.

Another exception to the doctrine of privity, is a contract relating to the sale of family land in customary law. Thus, in cases like Lewis V. Bankole (1908) 1 NLR 81., and Agaran V. Olushi, decided in the very first decade of the 20th century, it was held that members of a family were entitled to bring an action to set aside conveyance (to which they were not parties) which had been made without their consent.

In Adejumo V. Ayantegbe, Karibi-Whyte, JSC, explained the judicial basis of this principle on the concept of ownership of communal land at customary law. According to the learned Justice, at customary law, ownership of family land is vested in the past, existing and future members of the family.
…thus communal or family land belongs to all members of the society or family…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.

Exceptions to Privity of Contract. Exceptions to Privity of Contract.

Contracts for the hire of a chattel – Exceptions to Privity of Contract

The issue of the enforcement of third party rights had arisen quite often in contracts for the hire of chattels, particularly charter parties. The problems has usually presented itself in the following manner: A, the owner of a ship charters it to B for a period, say, three years. During the currency of the charter party, A sells the ship to C, who buys with notice of the charter party, with B.

Nevertheless, C attempts to use the ship in a manner contrary to the charterparty. Can B obtain an injunction restraining C from doing so? In other words, can the ship be enforced against C?
In one of the earliest cases in which this issue arose, De Mattos V. Gibson, Knight Bruce, L.J., tried to evolve a principle to govern all such situations this:

“…reason and justice seem to prescribe that, at least as a general rule, when a man by gift or purchase acquires property from another with knowledge of a previous contract lawfully and for valuable consideration made by him with a third person to use and employ the property for a particular purpose in a specified manner, the acquirer should not, to the material damage of the third person, in opposition, to the contract and inconsistently with it, use and employ the property in a manner not allowable to the giver or the seller.

Applying this principle to the hypothetical case above, an injunction would be issued, restraining C from using the ship in a manner that is inconsistent with the charter party.
In De Mattos V. Gibson itself, A, chartered a ship to B, and during the currency of the charter party, A mortgaged the ship to C who was aware of the existence of the charter party. B alleged that C as mortgagee had threatened to sell the ship in total disregard of his contractual rights. He applied for an interlocutory injunction to restrain C from doing so.

On the application being refused by the court of first instance, B appealed. Knight Bruce and Turner, L.J.J. allowed the appeal and granted an interlocutory injunction. The case was remitted back to Wood, V.C., for trial, who ruled that on the facts before him, no injunction should be granted and this was affirmed on appeal to the Lord Chancellor, Lord Chelmsford.

However, this had no effect on the principles laid down by Knight Bruce, L.J; for five years later, in Messageries Imperials Co. V. Baines, whose facts were similar to those of De Mattos V. Gibson, Wood, V.C., applied the principle, and granted an injunction. With a few notable exceptions, the principle contained to be applied right into the twentieth century.

The principle received a very powerful booster in the Privy Council decision of Lord Strathcona in Streamship Co. V. Dominion Coal Co. in that case (which originated from Canada) the Lord Curzon steamship company chartered its ship, the Lord Strathcona, to the respondents for ten years, with option for another eight years at the end of the first period.

The ownership of the ship changed hands on a number of occasions, until it finally got to the appellants. They and all the previous buyers, were fully aware of the charter party and indeed by a memorandum of agreement made with the immediate previous owner of the ship, the appellants undertook to perform and accept all responsibilities under the charter party.

Contrary to this undertaking, they did not deliver the ship to the respondents for the continued performance of the charter party. The respondents sought to enforce the charter party against the appellants. The appellants submitted that they were not bound either in law or equity to respect the terms of the charter party.

The respondents were granted an injunction restraining the appellants from using the ship in any manner inconsistent with the charter party in the courts of Nova Scotia, Canada. On appeal to the Privy Council, this ruling was confirmed.
Their Lordships relied strongly on Knight Bruce, L.J’s. judgment in De Mattos V. Gibson which they said applied directly to this case. In their views, the facts of this case went beyond:
“…a mere case of notice of the existence of a covenant affecting the use of the property sold, but it is the case of the acceptance of their property expressly sub condition…”

Exceptions to Privity of Contract. Exceptions to Privity of Contract.

Interference with contractual rights

it should be noted that at common law it is a legal wrong (tort) for someone to knowingly interfere with the contractual rights of others. In Lumley V. Gye (1853) 2 E & B. 216, the plaintiff had employed one Johanna Wagner as an opera singer.
The defendant, knowing of this contract willfully induced her to refuse to perform it. He was held liable to the plaintiff for what later became known as the tort of wrongful interference with contractual rights.

This principle is equally applicable to chattels as to services. In British Motor Trade Association V. Salvador (1949) Ch.556;
Facts of the case were as follows:
A brought a car and covenanted with B that he would not resell it for one year without first offering it to B. C bought the car from A within the year with notice of the covenant. He was held liable for wrongfully interfering with B’s contractual rights against A.

As Browne-Wilkinson, J., suggested in the Swiss Bank case that the Strathcona decision could also be justified on this ground. But this is based on tort and not on contract, and the rule in De mattos V. Gibson is, therefore, separate and independent of it.

Restrictions upon land – Exceptions to Privity of Contract

Neither the rule in Tulk V. Moxhay, nor in De Mattos V. Gibson applies to attempts to impose resale prices of goods on third parties. Thus, if A, a manufacturer of goods, sells to a dealer B on condition that all retailers buying from B must undertake not to sell the goods below a particular price. A has no direct right of action against any such retailer C, who sells below the stipulated minimum price. There is no contract between A and C.
We saw this in Dunlop Pneumatic Tyre Co. Ltd V. Selfridge Ltd.

In Taddy & Co. V. Sterious & Co., the plaintiffs, who were manufacturers of tobacco, sold packets of tobacco subject to printed terms and conditions fixing a minimum price below which they were not to be sold. The terms contained the following proviso: “Acceptance of the goods will be deemed a contract between the purchaser and Taddy & Co; that he will observe the stipulations” and that “in the case of a purchase by a retail dealer through a wholesale dealer, the later shall be deemed to be an agent of Taddy & Co”.

The plaintiffs sold to a dealer, who resold at a profit to the defendant, a retail dealer. The later, through aware of the conditions, sold below the stipulated minimum price, and the plaintiff sought a declaration that they (the defendants) were bound by the conditions.

The action was dismissed. It was held that there was no contract between the plaintiffs and the defendants which the plaintiffs could enforce and that conditions could not be attached to goods so as to bind all purchasers with notice. Conditions do not run with goods as they could with land, and prior notice has no effect in respect of resale prices of goods, as it has in the case of ships subject to a subsisting charter party.

Regarding the assertion that on the basis of the printed terms, the dealers, Messer’s Nutter, were their (the plaintiffs’) agents, thus bringing them in direct contractual relationship with the defendants, the court dismissed this as an attempt to create a contract by ultimatum.

In Mc Gruther V. Pitcher, a case whose facts were similar to Taddy V. Sterious, which came up a few months later, the Court of Appeal confirmed the earlier decision of the Court of Chancery, and held that they had no cause of action.

Exceptions to Privity of Contract. Exceptions to Privity of Contract.

Insurance contracts

The law if insurance provides a good example of a statutory exceptions to the doctrine of privity. Section 11 of the Married Women’s Property Act 1882, provides that where a man 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 provision is restricted to policies for the benefit of spouses and children and does not apply in favour of other dependants.

However, in the re-enactment of this law for Western Nigeria, as the Married Women’s Property Law 1958, the provision relating to life insurance by a spouse in favour of the other souse or the children was left out.
Consequently, the common law and equity apply when the rights of the benefited spouse or children come up for consideration in the states created from the former Western Region.

Thus, in Akene V. British American Insurance co. (Nig) Ltd; where this issue arose directly for consideration, in the Ughelli judicial division of the High court of Mid-Western State, Ogbobine, J., was forced to resort to the truth concept in equity, for a solution to the problem posed by the facts of the case.

The facts were as follows:
The plaintiffs father who have died as a result of an accident had in his life time taken out a life insurance policy in which he named the plaintiff as beneficiary in case of his (the insured’s) death before the maturity of the insurance policy. The plaintiff brought a claim for £1,900, which was the amount in respect of which the policy was taken, when the defendant company offered him only £500.

The defendants argued that there was no privity of contract between them and the plaintiff, and the latter could, therefore, not sue to enforce the insurance contract.
Relying on the trust concept, the court held that the deceased was in the position of trustee for the plaintiff and the latter was entitled to sue as beneficiary. If the case had come up in any of the Northern or Eastern states, the relevant court would have been able to apply Section 11 of the English Married Women’s Property Act directly to it.

With regards to Motor insurance, Section 6(3) of the 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 persons specified in the policy in respect of any liability which the policy purports to cover in the case of those persons or classes of person.

This implies that any person or classes of persons thus indemnified, can bring a claim against the insurance company, even though such person or persons were not parties to the insurance contract.

In Sule V. Norwich Fire Insurance Society Ltd.,
The facts of the case were as follows:
The plaintiffs was the driver of a car belonging to Action group Party of Nigeria, and the defendant was an insurance company with which the owner and the driver of the car were insured against all liabilities intended to be covered under the Moto Vehicle (third party) Insurance Act 1958.

The plaintiff was involved in an accident with one Mr. Bada, an Action Group Party leader. Bada brought an action and obtained judgment against the plaintiff for the sum of £2,710 pounds. The plaintiff sought an indemnity from the defendant.
The defendant denied liability and argued inter alia that the plaintiff was not a party to the contract of insurance between the defendant and the Action Group Party and could not, therefore, bring a claim under it.

It was held by Johnson, J., that by the provision of Section 6(3) of the Act, a third party in the position of the driver derived the right to claim directly against the insurance company even though he was not in a strict sense a party to the contract.

However, in the absence of clear statutory provisions like those above, even in insurance matters generally, the strict doctrine of privity is applicable, and a person, regardless of the legal or other interest he may have in a matter involving insurance, will not be able to bring a claim against an insurance company, unless he is a party to the insurance contract on which his claim is based.

This is well-illustrated by the case of Liability Insurance Co. V. John, (1996) 1 NWLR (pt.423)192.
Facts of the case were as follows:
The respondents lost her husband as a result of a motor accident. The owner of the car which was driven negligently, resulting in the death of respondents’ husband’s death, insured it with the appellant company.

The respondent claimed ₦75, 000 and she succeeded in the trial court and was granted damages of ₦59, 538.15 against the appellant company. The latter appealed.
Upholding the appeal, the court of appeal held that it was trite law that a third party cannot sue an insurer of a risk either at common law or in equity for the wrong done by the insured tort feasor.

In this case, the respondent, being a third party, could not maintain an action against the insurance company as there was no privity of contract between her and the company.
There is, however, one major exception to the privity principle as applied in Liberty Insurance Co. V. John. This is in a situation involving a tripartite agreement. In J. E. Oshivere Ltd. V. Tripoli Motors, the appellant’s car was involved in an accident. He took it directly to the respondents for repairs, informing them that the car was insured by Royal Exchange Assurance Co. and that the latter would pay for the repairs.

The respondent contacted the Royal Exchange Assurance Co. and the latter confirmed its liability to pay and indeed willingness to do so. The respondent, therefore, carried out the repairs, but did a very shoddy job, resulting in a dispute between it and the appellant.

Consequently, it refused to release the car to the appellant, claiming that there was no privity of contract between it and the appellant.
Holding that there was privity of contract between the parties, the supreme court stated that in a situation where the owner of a vehicle takes it to a repairer for repairs and indicates that the cost of repairs would be borne by his insurers, and introduces the said insurers to the repairers, and his insurers expressly agree to settle the cost of repairs, there exists a tripartite contract involving the owner of the vehicle, the repairers and the insurers, and each acquires right and comes under obligations there under.

Under such circumstances, there is a contract between the owner of the car and the repairers. There was, therefore, privity of contract between the appellant and the respondent and the appellant was entitled to sue the respondent without joining his insurance company.

The court went further to state that in such tripartite contracts, there are two separate contracts.
i. A contract between the repairers and the insurers whereby the insurers undertake to pay the cost of repairs, less any “excess”; and

ii. A contract between the repairers and the owner of the car whereby the repairers undertake to do the repairs efficiently and expeditiously, and the car owner to pay any insurance excess.
This was the nature of the instant case before the court.

Privity and the trust concept

In the many and vigorous attempt at getting around the restrictions of privity, one of the sources most often tapped has been equity, particularly the use of the trust concept. The concept is applied in the following manner:
If A, for a consideration from B, promises B that he will confer a benefit on C, it is clear that C, not being a party to the contract, and offering no consideration, cannot bring an action to enforce the contract against A.

Only B can do so. But should B be unwilling to do so, or be dead, equity will treat B as trustee for C with regard to the agreement and will allow C to join B to A as defendants, and sue on the agreement, or where B is dead, sue A alone to enforce the agreement. As we shall see later, the conditions under which the courts will accept that a trust exists in such circumstances, have be considerably tightened up.

In Gregory & Parker V. Williams, one of the earliest cases in which the principle was considered, Parker owed rent to Williams and owed money to Gregory. Parker agreed with Williams to transfer all his property to Williams on the understanding that the transfer would discharge Parker’s debt to Williams, and also that Williams would pay Parkers debt to Gregory.
Parker transferred his property to Williams in accordance with the agreement, but Williams failed to pay Gregory and Parker sued Williams for the enforcement of Williams’ promise and succeeded.

The court held that Parker must be regarded as trustee for Gregory and that Gregory derived an equitable right through the mediation of Parker’s agreement, and that if Parker have refused to be joined as plaintiff, Gregory would have been entitled to bring the claim by himself by joining him with Williams as defendants.

However, the use of the trust concept as a means of getting round the requirements of the privity, has all but become extinct in the United Kingdom, the device appears to be alive and still living in Nigeria.

Thus, in the Akene V. British American Insurance Co. (Nig.) Ltd;
Facts of the case were as follows:
A child named as beneficiary in the father’s life insurance policy was allowed to sue for the specific performance of the agreement, even though he was clearly not a party to it. In arriving at this decision, Ogbobine, J., applied the trust concept.

“…when a party to a contract has deliberately in plain words agreed to confer some benefits on a third party, he cannot go back on his plighted word and disregard the undertaking. This is certainly one of those cases where a third party can take advantage of a contract made for his benefit…

His Lordship, however, made it clear that it is not every contract containing a provision for the benefit of a third party that creates trust in his favour.
“…Trust may be expressed, implied or constructive. Intention to create a trust is duly relevant in connection with trusts which came under the first category. Any trust which is intended to benefit a third party must be an express one or none at all; in which case equity will treat the promisor as a trustee of his promise for third party beneficiary…”

(the proposition that it is the promisor who is regarded as trustee is a novel one. In all the other cases, the promise was regarded by the court as the trustee.)
Thus, the important element here was that the deceased acted on behalf of and for the benefit of his son. Thus, a trust could be implied, and the deceased (the promisee not the promisor) was vested with the status and duties of a trustee, and the son, the beneficiary, became cestui que trust.

Thus, the element of intention is the crucial one. Once it is clear that the promise was acting on behalf of the beneficiary, a trust can be discovered, even though that might not have been used.

Exceptions to Privity of Contract. Exceptions to Privity of Contract. Exceptions to Privity of Contract. Exceptions to Privity of Contract.

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