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The Doctrine Of Privity Of A Contract Notes

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Week 12 Chapter Eleven (principles book- not case book)- talks about the Doctrine of Privity of a contract. Page 205-222 What is the doctrine of Privity of a contract?

* A party who is not a party to a contract cannot enforce the contract or incur any obligations under it.

* It has been criticised because it is subject to significant exceptions and can be circumvented in many ways and has been substantially abrogated in numerous jurisdictions. What are the Benefits?

* It is used to prevent non-parties from enforcing contractual promises that benefit them.

* It does not prevent a contract from conferring a benefit to a third party. It simply prevents the third party from enforcing the contract.

* E.g. A and B have a contract. A has agreed to pay money to C in return for a service from B. If A does not pay C, C cannot sue. B can only sue on behalf of C. The remedies open to B may not be enough to ensure C gets paid.

* In Coulls v Bagot's Executor and Trustee Co Ltd, for example Arthur Coulls granted a company the right to quarry stone from his property in return for royalties. Arthur and his wife signed the contract because they were joint tenants. After Arthur's death the High Court found that the wife was not entitled to the royalties because she was a third party and the promise was not expressly made to her.

* In Trident v McNiece, McNiece was the principal contractor for a plant owned by Blue Circle. Blue Circle entered into a contract with Trident to get insurance against injury of non-employees. McNiece tried to get insurance when a non-employee was injured.
? Mason CJ and Wilson J reasoned that the High Court had a responsibility to reform unjust rules, even if they are well entrenched. A third party should be able to enforce a contract in some cases.
? Toohey J reasoned that the privity rule and consideration should not prevent enforcement of an insurance contract.
? Gaudron J reasoned that not being able to prove consideration for a promise towards a third party is unfair because it unjustly enriched Trident and McNiece's expense. The third party is entitled to enforce the obligation.
? Deane J reasoned that McNeice should plead a trust to join Blue Circle as a party to the action to have the contract enforced.
? Brennan and Dawson JJ dissented. They reasoned that there is no basis in policy to allow third parties to enforce contracts of insurance. There is no basis for overruling the doctrine of privity because it would create to many issues for the court to resolve.
? Today there is the Insurance Contracts Act 1984 (Cth) to allow third parties to claim insurance. What are the Burdens?

* The privity doctrine prevents a contract from imposing a legal burden on a third party.

* An exception to this is a restrictive covenant affecting land, which can bind subsequent owners of land. This called privity of estate rather than privity of contract. E.g. You can contract with a buyer of your land not to build on the land. You cannot impose positive covenants however like maintaining a house.

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