Third party privity and assignment

Definition of Privity of contract:
Privity of contract is the relationship that exists
between the parties to an agreement.
G.H. Trietel defines privity as ”The common law
doctrine of privity means that a person can’t
acquire rights or subject to liabilities arising
under a contract to which he is not a party”.

DOCTRINE OF PRIVITY
The essence of the doctrine of privity is the idea that
only those who are parties to the contract can have the
rights or liabilities under it.
It is closely linked to the rule that consideration must
move from promisee, but can be shown to be distinct
from it.

DOCTRINE OF PRIVITY
Hence the doctrine of privity consists of two distinct rules:
 - A person who is not a party to a contract cannot claim
the benefit of it although the contract was entered into
with the object of benefiting that third party.
 - A third party cannot be subjected to a burden by
contract to which he is not a party. Thus, a person
cannot acquire rights under contract to which s/he is not
a party.

DOCTRINE OF PRIVITY OF
CONTRACT
While applying the rule of privity, Courts have considered
these two propositions:
a. Consideration must move from the promisee and the
promisee only. If it be furnished by any other person, the
promisee becomes a stranger to the consideration and,
therefore, cannot enforce the promise.
b. A contract cannot be enforced by a person who is not a party
to it even though it is made for his benefit. He is a stranger to
the contract and can claim no rights under it.

TWEEDLE V ATKINSON
TWEDDLE V ATKINSON (1861)
Issues
Whether a third party can sue, seen as they are not a party to
the contract?
Facts
William Tweddle (plaintiff) was engaged to one Miss Guy.
The groom’s father entered into an agreement with the bride’s
father, William Guy, to pay the groom, William Tweddle, £200
if he paid the groom £100, all of which was recorded in a
written contract. However, William Guy subsequently died,
and the estate executor Atkinson (defendant) would not pay.

TWEEDLE V ATKINSON
The groom then sued William Guy’s estate for the
promised £200, namely the estate executor Mr.
Atkinson (defendant).
His suit was not successful as it was held that no
stranger (William Tweddle, as he is a third party) to
the consideration can take advantage of a contract,
although made for his benefit. It was left unanswered
if the groom’s father could have successfully sued the
estate instead.

TWEEDLE V ATKINSON
Judgment
The courts ruled that a promisee cannot bring an action unless the
consideration from the promise moved from him. Consideration must
move from party entitled to sue upon the contract. No legal entitlement is
conferred on third parties (WilliamTweddle) to an
agreement.
Third parties to a contract do not derive any rights from that agreement
nor are they subject to any burdens imposed by it.
His suit was not successful as it was held no stranger (William Tweddle),
as he is a third party) to the consideration can take
advantage of a contract, although made for his benefit.

OTHER CASES
Beswick v Beswick
Dunlop v Selfridge

a) General
 The common law doctrine of privity means that a person
cannot acquire rights or be subjected to liabilities arising
under a contract to which he is not a party.
 It does not mean that a contract between A and B cannot
affect the legal rights of C indirectly.
b) Liability in negligence to third Parties
While the primary effect of a contract between A and B is to
oblige them to perform their respective promises to each other,
the contract may also impose on A duty of care to C, the breach
of which will enable C to sue A in tort for negligence.

The contract may have this effect because it gives rise to a
relationship in which A owes a duty of care to C. For instance
the relationship of passenger and carrier, occupier of premises
and visitor, building owner and sub-contractor.
Sometimes the provider of the services is liable in tort because
his negligence in performing the contract with his client of itself
causes loss to the third party.
Sometimes the defendant's negligence results in his making
a misinterpretation to the third party and the loss is suffered by
the latter in consequence of his acting in reliance on the
representation.

EXCEPTIONS TO THE PRIVITY OF
CONTARCT
a) RESTRICTIVE LAND COVENANTS
•Covenants in a lease can benefit or bind persons, other than the
original parties to the lease, who later acquire an interest in the
property or the reversion.
A person may be able to enforce a covenant affecting land made by
his predecessor in title.
•Also one who acquires land with notice that it is burdened by a
restrictive covenant may be bound by it although he was not party
to the covenant. E.g.: the case of Tulk v Moxhay
•A restrictive land covenant is a covenant imposing a restriction on
the use of land so that the value and enjoyment of the adjoining
land will be preserved.

EXCEPTIONS
b) AGENCY
•Agency is the relationship which arises when one
person (the principal) authorizes (the agent) to act on
his behalf and the agent agrees to do so.
•One legal consequence of this relationship is that the
principal acquires rights and incurs liabilities under
contracts made by the agent on this behalf with third
parties even though the agents act is unauthorized or
where the principal ratifies.

EXCEPTIONS
c) ASSIGNMENTS
•An Assignment is a process whereby a contractual right is
transferred to someone else.
d)TRUSTS OF PROMISES
 A trust is an equitable obligation to hold property on behalf of
another. It may be express or implied; and a person may be
trustee not only of a physical thing or a sum of money, but also of
a chose in action, such as a debt owed to him.
 In equity, a person could, moreover, be trustee of a promise to
pay money not to himself, but to a third party; and where trust
was established, the third party could enforce the promise against
the promisor.

EXCEPTIONS
In the case of LES AFFRETEURS REUNIS SA V
LEOPOLD WALFORD (LONDON) LTD; HL 1919
Where a broker (C) negotiated a charterparty by which
the ship owner (A) promised the charterer (B) to pay
the broker a commission. It was held that B was
trustee of the promise for C , who could thus enforce it
against A.

EXCEPTIONS
e)THIRD PARTY INSURANCE
•In case of insurance contract, though the person who has
insured one’s life, if dies then He/her relatives can claim the
insured amount though they were not the party to contract.
• Majorly, family where by a spouse insures himself.
In the case of Tattersall v Drysdale it was held that the driver
of a motor vehicle is entitled to the benefit of an insurance
policy made with an insurance company by the owner of the
vehicle and which purports to cover the driver. Thus, this
implies that insurance is also another exception of the Privity
of contract.

The benefit of a contract may be transferred to a
third party by a process called assignment. This is a
transaction between the person entitled to the
benefit of the contract (called the creditor or
assignor) and the third party (called the assignee)
as a result of which the assignee becomes entitled to
sue the person liable under the contract (called
debtor).
The debtor is not a party to the transaction and
his consent is not necessary for its validity.

AT COMMON LAW:
The common law refused to give effect to assignments of
‘choses in action’. That is, of rights which could be asserted only
by bringing an action and not by taking possession of a physical
thing.
Later the rule was based on the fear that assignments of
choses in action might lead to maintenance, that is, to
‘intermeddling in litigation’ in which the intermeddler has no
concern. Such conduct was formerly a crime and a tort.
The common law also recognized that assignments were
effective in equity: thus a promise by the assignee not to sue the
debtor was good consideration for a promise by the debtor to
pay the assignee. And although an assignment did not at law
entitle the assignee to sue the debtor, it might be binding as a
contract between assignor and assignee, for breach of which the
assignee could recover damages.

Novation. It is a contract between debtor, creditor and third
party that the debt owed by the debtor shall henceforth be owed
to the third party. This is not assignment because the consent of
all three parties, including that of the debtor, is necessary, and
because the original debt is not, strictly, transferred.
Acknowledgment. If a creditor asks his debtor to pay a third
party and the debtor agrees to do so, and notifies the third party
of his agreement, then the third party may be entitled to sue the
debtor.
Power of attorney. A creditor can give a third party a power of
attorney, authorizing him to sue for the debt in the creditor’s
name, without any liability to account to creditor.

EQUITABLE ASSIGNMENTS
Equity regarded the common law’s fear of maintenance as
unrealistic and took the view that choses in action were
property which ought, in the interest of commercial
convenience, to be transferable eg. to provide security for a loan.
Choses in action were therefore assignable in equity. The phrase
‘choses in action’ here refers to claims for the enforcement of a
contract.
Where a chose in action is assigned, the machinery used for
enforcing the assignment varied with the nature of the chose in
action, which might be legal or equitable. A legal chose is one
which could be sued for only in a common law court e.g. a
contract debt. An equitable chose is one which could be sued for
only in the court of Chancery, e.g. an interest in a trust fund.

LEGAL CHOSES
There were four reasons why equity could not simply allow the
assignee of a legal chose to sue the debtor in the court of
Chancery:
First, equity did not in general enforce purely legal debts.
Secondly, the debtor might suffer hardship if he were later
sued for a second payment at common law by the original
creditor.
Thirdly, the assignor might retain some interest in the debt.
Fourthly, the assignor might wish to dispute the validity of the
assignment: this possibility again made it desirable to have him
before a court at some stage.

These difficulties were solved by allowing the assignee to sue
the debtor at common law in the name of the assignor, however,
if the assignor refused to co-operate, equity could not compel
him to do so.
EQUITABLE CHOSES
The assignee of an equitable chose could in his own name sue
the trustee in the Court of Chancery.
The chose being equitable, the trustee was not exposed to the
danger of a subsequent action in a different (common law)
court by the assignor.it was necessary to make the assignor a
party to the proceedings only if he retained some interest in the
subject matter. If he wished to dispute the validity of the
assignment, he could take separate proceedings for that
purpose.

Certain specific contracts were made
assignable by statute during the 19th century,
such as;
-marine insurance policies
-bills of lading

The assignee can sue alone only if the assignment is
absolute.
This requirement excludes cases in which the
assignor retains an interest in the subject matter so
that it is still desirable to have him before the court.
Absolute assignments are for this purpose
contracted with;

a) Assignment by way of charge
b) Assignment of part of a debt
c) Conditional assignments

Assignment by way of charge
Durham Bros v. Robertson
A builder to whom £1080 was due under a
building contract borrowed money and assigned
the £1080 to the lender as security for the loan
“until the money [lent]…be repaid”.
This was held to be an assignment by way of
charge.

Trancred v Delagon Bay etc Ry
A debt was assigned as security for a loan of
money, with the provision that, if the assignor
repaid the loan, the debt should be reassigned to
him.
This was held to be an absolute assignment.

DISTINCTION
The distinction between those two cases can best
be understood by taking the point of view of the
debtor and assuming that he wants to pay the
debt.
Transcrend
He cannot find out from documents in his own
possession whether he ought to pay the assignor
or assignee.

Durham Bros
She(the debtor) does not know whether to
pay the assignee until it is settled whether
the assignor still owes anything to the
assignor.
The debtor cannot find this out from
document in his own possession. He would
have to investigate the state of accounts
between the assignor and assignee.

Similarly, if the assignor sued the
debtor the court could not determine
whom the debtor should pay without
investigating the state of accounts
between the assignor assignee
(requiring the assignor to appear before
court)

CONT…….
An assignment of debt to a bank was held to
be by way of charge only, where it was
expressed to be made as security for a loan
from the bank and was to become operative
only an the assignor’s failing to perform his
obligation under the original contract
which had given rise to the debt or loan
agreement with the bank.

Bank of Liverpool v Holland
A creditor assigned a debt of £285 to a bank “ to
hold the some absolutely”.
It was agreed and declared that the amount
recoverable by his presents shall not anytime
exceed £150.
This was held be an absolute assignment of the
whole debt, with conditions that if the bank
recovered more than £150, it was to hold excess on
trust for the assignor.
This did not concern the debtor as he could get a
good discharge by paying the bank at any time.

Assignment of part of a debt
 E.g. of £500 of the £1000 that X owes me or half
of what X owes me.
 Is not absolute.
 In such a case, a debtor who wants to pay may
know perfectly how much to pay to whom.
 To hold such assignment absolute might cause
hardship to a debtor who wished to dispute the
debt.

 In this action, the debtor may be able to show
that there was no debt.
 He would have to prove this over again, therefore
if he were later sued by the assignor for the
balance of the alleged debt.
 If the assignor split the debt up into a large
number of small parts, the debtor might have to
defend many actions arising from the same
transaction.
 It is necessary to have all parties before the court,
for the debtor’s protection.

An assignor of part of a debt cannot sue for
the part he retains without joining the
assignee as a party to the action.
The above reasoning does not apply to
balance of debt.
A owes B £100 and pays £25 of the debt. An
assignment of the remaining £75 would be
absolute since it would be an assignment of
B’s entire remaining interest in the debt.

Conditional Assignment
 Many assignments by way of charge are subject to
the conditions of subsequent cease to have effect
when the assignor pays off the debt which he
owes the assignor pays off the debt which he owes
the assignee.
 Assignments subject to some other condition
(whether precedent or subsequent) should be
treated in some way.
 Whatever the condition be, the assignor retains a
contingent interest in the debt.

General requirements
a) Formalities
b) Intention to assign
c) Communication to the assignee
d) Notice to the debtor

Formalities
 A statutory assignment must be “by writing under
the hand of the assignor”.
 If not, it may still be a good equitable assignment.
 Gen. Rule; writing is not necessary for an
equitable assignment of a legal chose in action.
But a contract may provide that rights under it
shall be assigned only by use of a specified form,
such as writing. An attempt to assign out of the
stipulated form is probably not effective as an
assignment, although it may amount to a contract
to assign.

Intention to assign
An equitable assignment does not
always take a specific form. It may be
addressed to the debtor as a command,
request or a mere permission, the
language is immaterial if the meaning
is plain.

Communication to the assignee
An assignment has no effect unless
communicated to the assignee by the
assignor, or by someone with his
authority.

Notice to Debtor
There must be notice of assignment given
by assignor or assignee.
Must clearly and unconditionally tell the
debtor to pay a third party as assignee, and
not merely as agent for the creditor.
A notice which incorrectly states the date of
the assignment or the amount of the debt, is
invalid.

RIGHTS WHICH ARE NOT
ASSIGNABLE
a) Contracts expressed to be not Assignable
In this case a purported assignment of such rights is not only a
breach of that contract but also ineffective , in the sense that it
does not give the assignee any rights against the debtor. For
example, a hire –purchase agreement may provide that the
rights of the hirer shall not be assignable; and if he nevertheless
purports to assign them, the assignees cannot enforce them
against the owner.
Case …United Dominion Trust ltd v Parkway Motors [1955] 1

b) Personal Contracts
The benefit of a contract cannot be assigned if it is clear that the
debtor is willing to perform only in favor of one particular creditor,
and for it would be unjust to force him to perform in favor of another.
c) Employment contracts
An important application of this principle is that an employer
cannot assign the benefit of his employees promise to serve, but in
the case of an employee of a company, this right of choice will often
depend on distinctions which are somewhat technical. If the shares
of the company are sold, its directors replaced then at common law
the employer, it seems , is bound to continue on serving the company
but if the company sells its business then at common law the effect of
the sale is that the contract is terminated and hence the employer is
not bound to serve.

d) Contracts involving personal confidence
 The common law principle applies to all contracts hence a
publisher cannot assign the benefit of an authors contract to
write a book if the author relied on the publishers skill and
judgment as a publisher. And the holder of a motor
insurance policy cannot assign it since the insurer relies on
the holders skill and record as driver.
e) Sale of goods
 In kemp v Baerselman, a farmer agreed to supply to a
baker all the eggs which the latter should need in his business
for one year, and the baker agreed not to buy eggs elsewhere
during that period. The baker sold his business to a large
company, to whom he purported to assign the benefit of his
contract with the farmer. It was held that the farmer was
justified in refusing to supply eggs to the company.

One reason was that, the bakers promise to deal
exclusively with the farmer could not be enforced against
the company, thus if the farmer were compelled to supply
eggs to the company he would be subject to all the burdens
of the original contract but would lose the privilege of
exclusively trading for which he had originally bargained.
f) Benefit assignable by one party
In cases of “ personal contracts”, one party may be able to
assign the benefit of the contract while the other party
cannot do so. Thus in kemp v Baerselm the farmer could
no doubt have assigned the benefit of the bakers promise to
pay for the eggs .

ASSIGNMENTS BY OPERATION
OF LAW
a) Death
 Rights generally pass to personal representatives. On the
death of a contracting party, his rights damages generally
pass to his personal representatives, who can recover any
sum due under the contract or for its breach.
 The representatives may sometimes recover less than the
deceased would have done, and sometimes more. Thus,
personal representatives cannot recover exemplary ages.

Otter v church, Adams, Tatham &
Co
Solicitors negligently advised a client that he had an
absolute interest in property, when in fact he had an
entailed interest.
Had the mistake been discovered while the client was
alive, he could have barred the entail, so that the
solicitors would only have been liable for nominal
damages, but the mistake was not discovered until after
the client’s death ,with the result that the solicitors had
to pay substantial damages as entailed property was
through their negligence lost to the client’s estate.

b) Personal contracts
• Where, at time of death, the contract is still partly executor
,the personal representatives are generally entitled to
complete its performance and to claim the agreed
remuneration.
 But they cannot do so if the contract is “personal “in the
sense that one party places confidence in the skill, judgment
or integrity of the other. Thus if either party to a contract of
employment dies, his rights to go on serving, or to be served,
does not pass to his representative: they can enforce only
rights which has accrued before, or which accrue on, death.
 It is possible for one party, but not the other, to rely on such
personal consideration.

• If a painter contracted to paint a house and
died when the work was half-done, his
representatives might not be entitled to
finish the work and claim the contact price;
but if the house owner died, his
representative might well be able to demand
further performance from the painter.

c) Bankruptcy
Deemed assignments to trustee in bankruptcy
• When a person is adjudged bankrupt, things in action
forming part of his estate at the commencement of the
bankruptcy are deemed to have been assigned to his trustee in
bankruptcy.
• The trustee can recover debts due to the bankrupt and claim
damage for bridge for breach of any contract with the bankrupt.
• If it’s a executory contract the trustee can claim payment from
the other party.

PERSONAL CONTRACT
Certain personal rights do not pass to trustee. The word
personal is used to mean two things
•First: rights do not pass to the trustee if they are concerned
with the person or personal affairs of bankrupt. The rule is
based on the view that the bankrupt property is divisible
between the creditors: they are not entitled to benefit from the
injuries to his person.
The proceeds of insurance against permanent disability, on the
other hand, do pass to the trustee since the purpose of such
policy is to protect the insured against economic loss by the
payment of premiums which, has they not used for this
purpose, would have been available for the payment of his
debts.

• Secondly: the benefits of an executory contract does
not pass to the trustee if it was “personal” in the sense
that the other contracting party relied on the skill and
judged of the bankrupt. In such a case the other party
cannot be required to accept performance from the
trustee or someone employed by him.
Thus where a contract to build a house was personal in
this sense, the trustee was nor entitled to finish the
house and then to demand payment, but the trustee
may employ the bankrupt to finish the work , and if the
other party in this way gets precisely what he bargained
for, the trustee can enforce the contact against him.

 Income of the bankrupt is from time to time entitled.
Special rules apply to payments in the nature of income
to which the bankrupt is entitled. They may arise until
after the commencement of the bankruptcy, typically
where the income consists of the bankrupt’s earning
after the date of the bankruptcy. In respect of such
earnings ,the trustee may apply to the court for an
income payment order requiring either the bankrupt or
the person from whom the payment are due.
Priority
A trustee in bankruptcy is in a less favorable position
than at ordinary assignee in that he cannot gain priority
over a previous assignee for value by being the first to
give notice to the debtor.

In conclusion
DEATH
 Contractual liabilities pass to the personal representative of a
deceased person in the sense that they must apply this assets in
discharging those liabilities. They are not personally liable, so that
there is no true transfer of liability.
BANKRUPTCY AND INSOLVENCY
 Contractual liabilities of a bankrupt pass to his trustee in
bankruptcy in the sense that the latter must distribute the
bankrupt’s assets among creditors.
There is no transfer of liability as the trustee is not personally
liable.
 He can disclaim a contract which is wholly or partly liable if
unprofitable.

Third party privity and assignment

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