Privity of contract: the potential impact of the law reform commission recommendations on irish contract law

• Author: Kevin T. O'Sullivan
• Position: B.C.L., LL.M (First Class Honours)
• Pages: 97-134

Judicial Studies Institute Journal [2010: 2

110

PRIVITY OF CONTRACT:

THE POTENTIAL IMPACT OF THE

LAW REFORM COMMISSION

RECOMMENDATIONS ON

IRISH CONTRACT LAW

KEVIN T. O’SULLIVAN*

INTRODUCTION

The doctrine of privity, described as both a “fundamental

principle of English law”1 and an “anachronistic shortcoming”,2

is a controversial rule of the law of contract. The doctrine

prevents a person who is not a party to the contract from having

any legal right to enforce the contract, or to have contractual

liabilities imposed as a result of the contract, and that contractual

remedies are for the contracting parties alone.3 The underlying

rationale for the doctrine is to protect the contracting parties from

any interference in their agreement by a third party. Thus, it

operates so as to deny a third party any right of enforcement

under the contract. Indeed, the traditional approach taken by the

courts went so far as to deny any right of enforcement even where

the contract provided for such third party rights.4 Such a position

is clearly untenable, thus the modern approach is to give effect to

the intentions of the parties as they appear under the contract.

Thus, permitting enforcement by third party beneficiaries is seen

as giving effect to the intentions of the parties under a contract

which creates a benefit for such parties.

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* B.C.L., LL.M (First Class Honours).This article, in its original form, formed

part of a Master’s thesis undertaken in University College Cork, under the

supervision of Mr. Frank Martin.

1 Per Haldane L.J., Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge and Co. Ltd.

[1915] A.C. 847, at 853.

2 Per Diplock L.J., Swain v. Law Society [1983] A.C. 593, at 611.

3 Clarke, Contract Law in Ireland (5th ed., Thomson Round Hall, 2004), p. 473.

4 Tweddle v. Atkinson (1861) 121 E.R. 762.

2010] Privity of Contract 111

However, a key rationale underpinning the doctrine 5 is the

provision of clarity for the contracting parties viz. the scope of

their contractual obligations and liabilities and establishing the

enforcement rights under the contract itself. Indeed, when it is

considered that the raison d’être of contract law theory and

practice is synonymous with providing certainty and stability for

the contracting parties, the doctrine is, prima facie, a legitimate

manifestation of the wider role of contract law in this sense.6

However, the operation of the doctrine gives rise to an

unacceptable dichotomy between certainty and uncertainty in

relation to those affected by the formation of the contract. While

the creation of certainty is an integral part of common law

systems, the central role for the law has always been the provision

of justice. Thus, the creation of certainty for the contracting

parties by virtue of the doctrine is not reconcilable with the

provision of justice for third parties, particularly where an express

term of enforcement exists in the contract.

As a result, the law has grappled with protecting the

contracting parties on the basis of their bargain while also

creating justice for third party beneficiaries. As Tisdale aptly

notes, “[t]he life of the law lies in its ability to solve specific

problems … [W]ithout some degree of flexibility law could not

grow … to meet the needs of people”.7 The Irish law of contract

is faced with such a “specific problem” with regard to privity of

contract. The operation of the doctrine has the effect of

marginalising those third parties wishing to enforce a contract

made for their benefit. However, any attempts to reform the rule

is considered to be at odds with the fundamentals of contract law

theory. Critics of the doctrine have focused on the harshness of

the rule on third parties, thus existing reforms of the doctrine have

placed an emphasis on creating substantial rights for such third

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5 Anson’s Law of Contract (28th ed. by J. Beatson, Oxford University Press,

2002), p. 4.

6 As Wilson notes, Kessler and Gilmore make the argument that privity is an

essential element in the role of contract law: “To lack privity is to have failed

to achieve the requisite state of contractual grace”: Wilson, “Contract and

Benefits for Third Parties” (1986-1988) 11 Sydney Law Review 230, 230.

7 Tisdale, “The Place of Certainty in the Law” (1959) 35 North Dakota Law

Journal 99, 118.

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parties. Such substantial rights may be seen in both the English

and the proposed Irish reforms, where a presumption of

enforcement for third party beneficiaries has been included.

However, such reforms may tilt the law in favour of the

third party to the detriment of the contracting parties. Indeed, the

recent recommendations by the Irish Law Reform Commission8

(hereinafter “the LRC”) arguably tilt the law unnecessarily in

favour of the third party to the detriment of the contracting

parties, particularly where the third party is the beneficiary of an

express benefit under the contract. However, upon evaluating the

recommendations of the LRC it becomes apparent that there is an

incongruity between the rationale for reform and the

recommendations which were ultimately proposed. Thus, an

imbalance subsists such that the recommendations do not address

all third party beneficiaries and place restraints on the contracting

parties, notwithstanding their intentions under the contract. While

the justificatory rationale of the LRC’s reform agenda is to give

effect to the intentions of the contracting parties, the effect of

their recommendations shall frustrate such intentions in relation

to beneficiaries of an implied or an unambiguous benefit. In this

context, the LRC creates an arbitrary distinction between third

parties that are expressly conferred with a benefit and those that

are conferred with a benefit which is ambiguous or implied.

Thus, whereas an expressly-conferred beneficiary would have a

presumption of enforcement, the non-expressly conferred

beneficiary seemingly has no redress in law, under the LRC

recommendations. The result is that notwithstanding a clear

intention (on behalf of the contracting parties) to confer a benefit,

the LRC deny such third parties any redress for want of clarity

viz. the benefit conferred.

As noted, where the contracting parties have expressly

conferred a benefit under the contract, the LRC propose a

presumption in favour of such third parties. However, the LRC

recommend that the contracting parties, in rebutting this

presumption, should be denied recourse to the entire surrounding

circumstances relating to the formation of the contract. In this

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8 Law Reform Commission, Report on Privity of Contract and Third Party

Rights (LRC 88 – 2008), hereinafter “LRC Report”.