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Agency and Privity

Law of Contract LW1154

BCL 2005-2006

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Reading

TextClark chapter 17

ReferenceMcDermott chapter 18

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Multiple parties

We have assumed up to this point that there are only two parties to the contract …

… each of whom can enforce it against the other

We now consider various ways in which the net can be cast wider

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Agency

One person (the “agent”) may negotiate a contract on behalf of another (the “principal”)

If the contract is agreed, then a valid contract is formed

The principal is party to the contract, but the agent is not

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Privity

In general, a contract affects only the parties who actually agreed it

However, in certain cases a contract may create rights to benefit others …

… or even (very, very rarely) to bind others

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Agency

A brief introduction

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Agency - definition

When someone (the agent) makes a contract on behalf of someone else (the principal) …

… then the contract is made with the principal, not the agent

The agent can neither sue nor be sued on the contract

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Limits on agency

However, an agent is usually only able to act as such in a limited respect or on limited matters

Outside that limited area, the agent cannot bind the principal

But how is the scope of the agency determined?

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The scope of the agency

Agency usually arises through express appointment by the principal

This may be written or oral

The limits of the agency will be as specified by the principal on appointment or later

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The scope of the agency

Agency may also arise:-

1. by subsequent ratification

2. by necessity

3. by estoppel

But these cases are relatively rare

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Termination of agency

Agency comes to an end on:- cancellation by the principal agreement of principal and agent

supervening illegality death of either principal or agent

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Rights created by agent

Suppose an agent makes a contract with a third party

What rights are created? We must consider:-

1. Principal v. Agent 2. Third party v. Principal3. Agent v. Third party

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Principal v. Agent?

The mutual rights of principal and agent depend on an agreement between them

Agency does not necessarily involve a contract between principal and agent

Agency does not necessarily imply that the agent is to be paid

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Principal v. Agent?

Possible legal relations are:- The agency is gratuitous The principal employs the agent The agent is self-employed but paid by the principal(see EC (Commercial Agents) Regulations SI 1997/31)

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Third party v. Principal

The principal is bound by any contract falling within the scope of the agent's authority

The principal is not bound by contracts outside the agent’s authority, unless:- Principal later ratifies, or Principal is estopped

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Agent v. Third party

Where the agent makes the contract strictly within the terms of their authority, the contract does not bind the agent

The agent drops out of the picture, and the resulting contract does not involve them

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Agent v. Third party

However, the agent is bound if s/he gives a personal promise

Agents may simultaneously act for themselves and for others eg a trade union, negotiating both for themselves and as agent for their members (Pattison v. IIRS (HC, 31/5/79))

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Agent v. Third party

An agent who acts beyond their authority may be personally liable

Someone who claims to act as agent is taken to guarantee that they are fully authorised …

… and if they are not, they are liable to compensate the 3rd party (Collen v. Wright (1857) 120 ER 241)

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Undisclosed agency

Suppose two people negotiate a contract and agree terms ...

... then one reveals that s/he was in fact only negotiating as agent for another

What rights are created by this agreement?

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1. Personal contracts

Some contracts have a strong personal element, and so it is impossible to substitute the principal for the agent

Whether this is so depends on the terms of the contract itself

If it is, the agent is bound, and the principal has no rights

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2. Non-personal contacts

Otherwise, the third party is free to hold either the agent or the principal to the contract …

… but must make an election as to which …

… and is bound by that election

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Rights of the principal

If no election has been made, the principal may insist that the contract is with them …

… and so sue the third party, the agent dropping out of the picture

However, this can only be done where the agent stayed strictly within the scope of their authority

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Privity of contract

Law of Contract BCL LW1154

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The general rule

In general, only those who are party to a contract can sue on it

Equally, those who are not party to contracts are not bound by their terms, and can go against them with impunity

There are relatively few exceptions

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Example 1Murphy v. Bower (1868) IR 2 CL 506

Railway contractors took on work for a railway operator

As each stage of the work was complete, a certificate of completion was to be issued by Bower, the engineer

But Bower wrongly refused to issue certificates

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Example 1Murphy v. Bower (1868) IR 2 CL 506

The contractors sue Bower

Even though Bower’s refusal was wrong, he was not party to any contract with the contractors

The contractors should have sued the railway operators instead

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Example 2MacKey v. Jones (1958) 93 ILTR 177

P was a 14-year-old boyP’s uncle promised P’s mother that

if P came to look after his farm, he would leave it to P in his will

P did as requested, but the uncle left it to someone else

Could P enforce the promise?

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Example 2MacKey v. Jones (1958) 93 ILTR 177

Judge Deale was not convinced that the uncle intended a legally binding arrangement

Even if he did, it was not an arrangement to which P was a party

P was not making a contract, but following his mother’s orders

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Scheme of these lectures

1. Definition of “parties to the contract”

2. Passage of benefit despite the privity rule

3. Passage of burden despite the privity rule

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‘Parties to the contract’

Most contracts have only two parties to them

So the contract can only be enforced by the parties to it

Equally, it can only be enforced by one who has given consideration

Some say that this is just the same rule in different language

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Joint contractors

However, in one situation at least, ‘consideration’ is not the criterion:

Where two people jointly make a promise to a third, then all three are parties and all three can sue …

… whether or not the two joint parties both provided consideration

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Example 1McEvoy v. Belfast Banking [1935] AC 24

Suppose A and B jointly open an account with the C Bank

A pays money in, but B does notNonetheless, B is party to the

contract with the bank …… and can sue the C Bank if it

does not comply with the terms of the account

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Example 2Lockett v. Charles [1938] 4 All ER 170

H and W stop at a hotel for lunchAt the end of the meal, H pays W suffers an attack of food

poisoningCan W sue the hotel in contract … … or can the hotel say that the

contract was between them and H?

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Example 2Lockett v. Charles [1938] 4 All ER 170

Hilbery J holds that W is party to a contract with the hotel …

… either because she contracted individually for her meal, or because H and W were contracting jointly

It was irrelevant who actually provided the payment

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Multi-party situations

Who are the parties to a contract can be a difficult question

We must bear in mind what was expressly agreed …

… and the possibility that a party was acting as agent for others

Ultimately, it is a question of what the parties intended

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Example 1Hearn v. Collins HC 3/2/98

A boxer entered into a bout agreement with a boxing promotion company

One term of the agreement was that if the boxer won the bout, he would extend his own manager’s contract for another year

Could the manager enforce this?

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Example 1Hearn v. Collins HC 3/2/98

O’Sullivan J held that the manager could enforce it

The boxing promoters were acting as agents for the manager

If this were not so, the term was effectively unenforceable …

… especially since a company could not act as manager

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Example 2Henley Forklift v. Lansing Bagnall SC 13/12/79

English manufacturers distributed their products in NI by granting a sole agency to a NI firm

An Irish firm was established to distribute the products in Ireland, obtaining them from the NI firm

Was there a contract between the Irish and English firms?

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Example 2Henley Forklift v. Lansing Bagnall SC 13/12/79

It is possible to have a 3-party agreement, which any of the three could enforce against the other

But here, judging from the documents, the English firm dealt only with the NI firm

So the English firm could not sue the Irish firm

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Example 3Shanklin Pier v. Detel Products [1951] 2 KB 854

The owners of a pier hire contractors to re-paint it

DP recommend DMU paint for the job

Owners instruct contractors to use DMU paint

It proves to be completely unsuitable

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Example 3Shanklin Pier v. Detel Products [1951] 2 KB 854

Can the owners sue DP?The paint was bought by the

contractors, and the owners were not party to that contract

However, DP’s assurance that the paint was suitable was held to create a collateral contract between DP and the owners

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Exceptions - benefit

1. Enforcement by the promisee

2. Promises expressly for the benefit of others

3. Miscellaneous commercial exceptions

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Exceptions - benefit

1. Enforcement by the promisee

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Definition

Suppose A contracts with B that s/he will confer a benefit on C

Then B can enforce the contract, claiming a remedy of:-

1. Specific performance2. A stay of proceedings3. Damages reflecting C’s loss

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1. Specific performance

Where A contracts with B to confer a benefit on C …

… then B may obtain an order forcing A to comply with the contract

If A refuses to comply, in principle A could be prosecuted for contempt

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1. Specific performance

This is an exceptional remedy

Whether it is granted lies in the discretion of the court

The threshold requirement is that the ordinary contract remedy – damages – would not be adequate to do justice

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ExampleBeswick v. Beswick [1968] AC 58

A man transferred his business to his nephew

In return, he was to get £6 10s a week while he was alive …

… and his widow was to get £5 a week thereafter

On the man’s death, the nephew refused to pay the widow

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ExampleBeswick v. Beswick [1968] AC 58

The widow was appointed as administratrix of her husband’s estate

She sued the nephew personally and as administratrix

She succeeded, but only on the second ground

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2. Stay of proceedings

Where A promises B that A will not sue C …

… then A sues C in breach of that promise …

… then B may apply to the court to stay A’s action against C

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3. Action for damages

In general, damages in contract are meant to make good the loss of the person suing

Therefore it is not usually possible to sue for another’s loss (see eg Woodar v. Wimpey [1980] 1 AER 571)

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3. Action for damages

In 3 situations, exceptions have been made:

a. Actual performance by promisee

b. Loss of enjoyment

c. The ‘legal black hole’ doctrine

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a. Actual performance by promisee

Suppose A and B agree that A should confer a benefit on C

A does not do soB thereupon confers the benefit on

C, and sues A for the cost doing so This action should succeed, unless

B’s behaviour seems unreasonable

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b. Loss of enjoyment

Where A contracts with B for leisure services (eg package holiday) …

… then damages for failure to perform may include damages for disappointment …

… including the disappointment of non-parties (Jackson v. Horizon Holidays [1975] 1 WLR 1468)

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c. The ‘legal black hole’

Suppose A agrees to do work to B’s property ...

... but B then sells the property to C

B is allowed to sue for the loss if A does not perform as agreed ...

... even where it is C who loses

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ExampleDarlington BC v. Wiltshier Northern [1995] 3 AER 895

A agreed to complete a building project for B

B agreed with C to transfer their rights to C

C acquired the building site tooWhen A defaulted, it was held that

B had a right to sue …… which was then transferred to C

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c. The ‘legal black hole’

However, this doctrine is rarely invoked

It does not seem to apply except where work is to be done on property

It certainly cannot be invoked merely because there is a ‘legal black hole’

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Exceptions - benefit

2. Promises made to benefit others

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Definition

Suppose a contract is made which, if performed, would benefit a third party …

… and it was the intention of the contractors that the third party should get a right of action

Does the third party have the right to sue?

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Different approaches

Some common law jurisdictions allow a right of action there (eg London Drugs v. Kuehne (1992) 97 DLR (4th) 261 (Canada))

Others have achieved the same result by legislation (eg Contracts (Rights of Third Parties) Act 1999 (UK))

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The Irish approach

Ireland does not yet permit a right to third parties generally …

… but there are various special cases that can be seen as examples of a wider principle

These cases are a mixture of common law and statute

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Contracts to benefit others

1. Rights held on trust

2. Special provisions on family insurance

3. Special provisions on protecting families generally

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Rights held on trust

If A promises B that s/he will confer a benefit on C …

… and B can be regarded as acting as a trustee for C …

… then B can sue A to recover damages on C’s behalf

Indeed, C can compel B to sue

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ExampleDrimmie v. Davies [1899] 1 IR 176

A father and son established a dental practice together

In the partnership deed, the son promised to pay certain sums to his brothers and sisters after the father’s death

However, he refused to do soCould his father’s executor sue?

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The executor had suffered no lossHowever, it was held that the

father had extracted the promise as trustee for his other children …

… and so he (and his executor) could sue in that capacity

The measure of damages was the children’s loss, not the father’s

ExampleDrimmie v. Davies [1899] 1 IR 176

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Decline of the doctrine

Cases such as Drimmie are still good law today

However, judges today tend to be somewhat suspicious of the idea of a trust here …

… and demand strong evidence before they will accept that one was intended

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Reasons for the decline?

1. A trust of a contract is a rather subtle notion, and anyone who means to create one should perhaps say so expressly

2. If such a trust is created, the contract cannot be varied or cancelled without the beneficiary's consent

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ExampleMcManus v. Cable Management HC 8/7/94

Employers took out an insurance policy to cover them if their employees sued for work injuries

Such a policy plainly benefited employees in fact

But Morris J refused to infer a trust The purpose of the policy was to

protect the employer

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Family Insurance Married Women's Status Act 1957

7.—(1) This section applies to a policy of life assurance or endowment expressed to be for the benefit of, or by its express terms purporting to confer a benefit upon, the wife, husband or child of the insured.

(2) The policy shall create a trust in favour of the objects therein named.

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(3) The moneys payable under the policy shall not, so long as any part of the trust remains unperformed, form part of the estate of the insured or be subject to his or her debts.

(8) In this section "child" includes stepchild, illegitimate child, adopted person (within the meaning of the Adoption Act, 1952) and a person to whom the insured is in loco parentis.

Family Insurance Married Women's Status Act 1957

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Families generallyMarried Women's Status Act 1957

8.— (1) Where a contract (other than a contract to which section 7 applies) is expressed to be for the benefit of, or by its express terms purports to confer a benefit upon, a third person being the wife, husband or child of one of the contracting parties, it shall be enforceable by the third person in his or her own name as if he or she were a party to it.

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‘purports to confer a benefit upon’

Does a lease ‘purport to confer a benefit upon’ the tenant’s family?

The Supreme Court held that it did not …

… even if the rent depended on the number of children (Burke v. Dublin Corporation [1990] 1 IR 341)

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Families generallyMarried Women's Status Act 1957

8.— (2) The right conferred on a third person by this section shall be subject to any defence that would have been valid between the parties to the contract.

(3) Unless the contract otherwise provides, it may be rescinded by agreement of the contracting parties at any time before the third person has adopted it either expressly or by conduct.

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Exceptions - benefit

3. Miscellaneous exceptions affecting

commercial contracts

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Exemption clauses covering goods

Suppose A hands over goods to B for international transport

A agrees that s/he will purchase insurance, and will rely on that if the goods are damaged

C, an intermediary, negligently damages the goods

Can A sue C?

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ExampleThe Eurymedon [1975] AC 154

Goods were to be sent from Liverpool to Wellington

The owners agreed with the shipping company that damages for injury would be limited

On unloading, the stevedores damaged the goods

Could the owners sue the stevedores?

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It made commercial sense to let the stevedores rely on the limitation

The price for carrying the goods assumed that they could rely

But it was hard to find a legal justification for allowing them to rely on a contract they were not parties to

ExampleThe Eurymedon [1975] AC 154

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The Privy Council held that:- The owners knew that liability

was to be limited They had authorised the shipping

company to make incidental contracts as appropriate

So the shipping company could limit the stevedores’ liability

ExampleThe Eurymedon [1975] AC 154

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An artificial doctrine?

However, this seems to be a very artificial solution

It assumes that the stevedores and owner made an agreement to limit any damages …

… which is almost certainly not how they saw the situation themselves

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A less artificial doctrine?

A more realistic approach is to say that if the owner of goods hands them over to another for safe keeping …

… then they are bound by whatever terms they agreed …

… whoever may be the precise parties to any future litigation

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Example The Pioneer Container [1994] 2 All ER 250

A shipping company agreed to carry goods on an ocean voyage

The contract permitted the shipping company to sub-contract part of the voyage, which they did

The sub-contracting carrier could rely on any limitation protecting the first shipping company

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Privity of contract

Exceptions – passage of burden

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Privity of contract - burden

While there are many ways in which the benefit of a contract may pass to someone not originally party …

… it is almost impossible to pass on the burden of a contract

Only the person who originally undertook it is liable

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The single exception

Where A promises B that s/he will use some of her property in a particular way …

… then it is possible to attach the obligation to the property

The obligation is therefore enforceable even if the property comes into someone else’s hands

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Example 1De Mattos v. Gibson (1859) 45 ER 108

If two neighbours agree to mutual restrictions (eg neither to block the other’s view) …

… then perhaps these restrictions will survive sale of the properties …

… and be enforceable against successors in title

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Example 2Lord Strathcona SS v. Dominion Coal [1926] AC 108

If the owners of a steamship hire it to a company …

… but then sell the steamship …

… the new owners will be bound to honour the contract of hire (even though they never agreed to it)

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A good doctrine today?

However, the leading cases are quite old

They have been doubted (and it is not clear whether Lord Strathcona is still good law)

If there is a doctrine of this sort today, it is limited

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Limits on the doctrine

Such a doctrine will only apply to negative restrictions (ie terms not to use property in certain ways)

It cannot be used to support resale price maintenance schemes(Taddy v. Sterious [1904] 1 Ch 354)

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Tort as a way around privity

An unexplored route?

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Negligence law

Under the general law of negligence, a plaintiff can sue for harm caused by a defendant, provided that:-

1. The defendant owed plaintiff a duty of care

2. The defendant broke it by careless behaviour

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Breach of contract as negligence?

Sometimes, the careless behaviour is a breach of a contract

So in effect, the plaintiff can complain of a breach of contract which harms him/her …

… even though the contract was not with the plaintiff

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An exception to privity

So effectively there is an exception to privity …

… so long as the requirements of the tort of negligence are satisfied

This exception has so far been very little explored in Irish law

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Example 1Smith v. Bush [1990] 1 AC 831

P sought to buy a house, and applied for a mortgage on it

D, a valuer, was appointed by the mortgage company to value it

D carelessly gave the house a good report

P bought the house, relying in part on the report

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The HL held that P could sue: D knew that P would see the

report, and would probably rely on it

It was obviously foreseeable that P would therefore suffer loss if the report was not done well

Therefore D owed a duty to P

Example 1Smith v. Bush [1990] 1 AC 831

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However, this does not always give P the same rights as if P had paid D:

Not everyone in P’s position will be thought reasonable for relying on that report

D only had to prepare a valuation report, not a full survey

Example 1Smith v. Bush [1990] 1 AC 831

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Example 2Wall v. Hegarty [1980] IRLM 124

Solicitors agree to draw up a will for a client

However, they delay unreasonably, and the man dies before the will is ready

Can the relatives who would have benefited from the will sue the solicitors?

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This case is almost within Married Women's Status Act 1957 s 8 …

… but the Irish courts have tended to interpret that provision narrowly

The court found a remedy under the tort of negligence

Example 2Wall v. Hegarty [1980] IRLM 124

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That’s all on

privity