Business Law Part 6 – Privity
1 Background
General Rule: A third party to a contract cannot enforce a benefit promised under that contract. The contracting parties cannot, by a contract between them, impose a burden on a third party.
Problem
- X contracts with Y; X agrees to provide a benefit to Z, a third party
- X breaches the contract
- Y cannot sue X for substantial damages because he suffers no loss
- Y cannot sue X on Z’s behalf because Y is only entitled to recover his own losses
- Z cannot sue X because Z is not privy to the contract
2 The locus classicus of privity
Tweedle v Atkinson (1861)
- Context: T was to marry A. Before he did, T’s father agreed with A’s father that each of them would pay some money to T by a certain date. A’s father failed to pay, and passed away shortly. T sought to sue the estate of A’s father.
- Holding: T could not enforce the contract even though the contract was for his benefit. He did not provide consideration.
3 Contracts (Right of Third Parties) Act
- A person not party to a contract may enforce a term of a contract if the contract expressly provides that he may - Section 2(1)(a) Contract (Right of Third Parties) Act
- A person not party to a contract may enforce a term of a contract if the term purports to confer a benefit on him UNLESS on a proper construction of the contract, the parties did not intend the term to be enforceable by the third party - Sections 2(1)(b) and 2(2) Contract (Right of Third Parties) Act
- The third party shall 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 - Sections 2(3) Contract (Right of Third Parties) Act
CLAAS Medical Centre Pte Ltd v Ng Boon Ching (2010)
- Context: NBC was a shareholder-director of CLAAS. A particular agreement precluded its signatories from competing with CLAAS if they were a director OR while and for 3 years after they were shareholders. In default, they would have to pay $1 million. CLAAS was not a signatory to this agreement. NBC sold his shares, resigned as director, and set up a practice in competition with CLAAS. He was sued for $1 million. CLAAS sought to rely on the CRTPA to enforce the contract.
- Holding: CLAAS could rely on the CRTPA to claim damages against Dr Ng.
- Section 2(1)(a) did NOT apply, as the agreement did not expressly allow CLAAS to sue.
- However, section 2(1)(b) applied. - Clause 11(c) of the agreement expressly stated that damages for breach are payable to CLAAS. - NBC failed to show (under section 2(2) CRTPA) that the parties did not intend for CLAAS to enforce the contract.
4 Common Law Exceptions to Privity
Under common law, there are two possible exceptions to the general rules of privity – the “narrow” exception and the “broad” exception. Note that cases dealing with the common law exceptions to privity are extremely rare.
4.1 Common law “narrow” exception
- Usually only surfaces in real estate transactions
- Y can sue X on Z’s behalf for Z’s losses if both X and Y (at the time of contract) contemplated that the proprietary interest in the contractual subject matter may be transferred from Y to the Z after the contract had been entered into and before the defendant’s breach occurred - Family Food Court v Seah Boon Lock (2008)
- However, this exception does NOT apply if Z has a contractual cause of action against X
Chia Kok Leong v Prosperland Pte Ltd (2005)
- Context: Prosperland developed a condominium. CKL was the architect. Prosperland sued CKL for breach of contract for defective works. However, Prosperland was no longer the owner of the condominium and it had not been sued by the condominium’s management.
- Holding: Since buyers of the condominium unit could only sue CKL in tort (they were not privy to the contract), there was no express right for them to sue CKL, this case fell within the narrow ground and Prosperland was able to claim for substantial damages on behalf of the later owners
4.2 Common law “broad” exception
- Y can recover substantial damages for his own loss (as opposed to Z’s loss), on the basis that Y has an interest in the contract being performed and later his receiving the benefit which he had contracted for (performance interest): Family Food Court v Seah Boon Lock (2008)
- Such performance interest must be a genuine and reasonable one and cannot be a windfall for Y
- Depending on the circumstances, Y may need to show that it will use the damages to compensate Z
- •Cannot be applied simultaneously with narrow ground as they are conceptually inconsistent
Family Food Court v Seah Boon Lock (2008)
- “It should also be noted that a significant factor which influenced this court’s view as to why the broad ground should also (apart from the narrow ground) be of avail to Prosperland was that the MCST was, in fact, contemplating an action against Prosperland in respect of the defects in the condominium… In other words, Prosperland was technically facing a potential claim for loss suffered by the MCST in respect of the defects in the condominium and was, in fact, prepared to make good those defects using the damages recovered in its suit against the Defendants”