Contract law- The Doctrine of privity.
The law of contract is not about only private justice or public regulation; it is clearly concerned with a combination of both of these aspects of contract law in a number of ways. I will discuss this point in relation to the debate concerning privity of contract and whether a third party beneficiary of a contract should have a cause of action against the promisor.
The general rule or doctrine, of privity in contract is that onlyparties to a contract, hence persons privy to it, have rights or liabilities under it. A non-party is a stranger to contract or (reflecting the two-party contract) a third party. It is from this general rule, that the debate surrounding privity of contract, and causes of action for a third party erupts. The debate is a basically two-sided as outlined in Trident1 in the
judgements of Mason CJ, Wilson J, and Brennan J. Mason and Wilson represent the radical 2 side of the debate, those who wish to make an exception to the doctrine and not be worried, by allowing parties not privy to the contract to sue upon it. The latter conservative side of the debate is encompassed by the argument of Brennan J in the same case. The conservative argument sanctifies the notion of contract as a bargain and wishes to preserve the doctrine of privity, by excluding third parties from the exclusive relationship denying them a cause of action against the promisor.
The basic for and against debate concerning privity of contract seems a relatively clear-cut dichotomy. The question of whether contract is about private justice (justice to the parties) or public regulation however, is not an either/or answer. The answer is a blurred combination of the two elements.
When discussing the law of contract as private justice, it is crucial to define who the parties are. In its most elemental and conservative sense, contract law is concerned with private justice within a two-party model. Within this model the relationship between the two parties is an exclusive one. It is characterised by the consideration flowing from the promisee. The consideration given is the payment for the price of the promise. As a third party has not provided consideration, and paid no price
for the promise, it would possibly be unjust if he or she were able to intervene, (suing on the contract) conceivably invading the autonomy of the in personum relationship of the parties involved. In appointing a right in a two-party contract only to the parties involved, the law of contract is about private justice as it protects the autonomy of the parties, leaving them less exposed to potential liability from non-parties who have not provided consideration.
The law of contract is also about private justice when treating third parties as parties to a contract, and moreover, private injustice. In Trident, private injustice is a crucial element of the radical argument in the debate concerning privity of contract.
The radicals emphasise that a cause of action should be allowed in contract for McNeice, as Trident made a contract to insure “Blue Circle Southern Cement Limited, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers. 3 Mason CJ and Wilson J agreed that this policy was “intended to cover any contractor, sub-contractor or supplier”4 (hence McNeice). And while they ponder the “problems arising 5 from allowing a third party a cause of action on promise, they consider the “injustice which flows from a…failure to give effect to expressed intention 6 and the private injustice of contract law that would flow from this failure.
The combination of private justice, and public regulation is given rise to by the very nature of contract law. In a large societies social sanctions are largely ineffective and so contract law adopts the role of public regulation by both enforcing contracts and reconciling breaches or discrepancies. By its virtue, contract is a law; it publicly
regulates private justice. Hence, without this public regulation, private justice seems inconceivable. In regards to the debate surrounding privity of contract and whether or not a third party beneficiary should be allowed a cause of action against the promisor, the question arises as to how does a legal system publicly regulate private justice.
The approach taken by the radicals is pragmatic, they are willing to make exceptions and allow a third party to sue on a contract. The conservative approach is based on principle, that although the doctrine of privity may produce some unjust results, a third party has not provided consideration, and has no cause of action in contract. It is this dichotomy that raises problems in the public regulation of private justice.
We have already discussed contract law as a public regulation of private justice. Public regulation within the privity debate can also be regarded as public regulation in terms of efficiency within a business/contract environment. The pragmatic approach adopted by the radicals as aforementioned is a stark contrast to the principle-based conservative attitude. The pure pragmatism of the radical judgements appears not solely to be based upon the rationale of private injustice. It also implies an attitude of
inconvenience towards the privity rule. In that contract largely exists within a business environment, and the principle-based (the concept of contract as a promise) doctrine of privity is incompatible within such an economic sphere.
It is clear that the law of contract is about both private justice (justice to the parties) and public regulation. The two are inherently intertwined initially by the mere virtue of contract being a law automatically adopting the role of publicly regulating private justice. Bearing this in mind, I will answer the final question as to whether or not a third party beneficiary should have a cause of action against the promisor in contract.
I find the rule of privity in terms of private justice, potentially very unjust. In terms of public regulation, I also find the doctrine of privity to carry with it, a major byproduct of inconvenience, incompatible with the largely business oriented environment of contract. Saying that however I tend to agree with the point of view taken by Brennan J that if the courts were free to disregard a fundamental doctrine an endemic
uncertainty would infect the administration of justice. 7 In other words, although I find the pragmatic approach adopted by the radicals to be in many ways just, I feel that the public regulation of private justice would be most effective within a principle-based system. To replace these principles with an open-ended variable approach would indeed be problematic, and contract law would expose itself further to more difficult cases involving questionable right, and liability.
In conclusion, I am by no means against the pragmatic approach adopted by the
radicals. Nor am I concerned about the departure from the doctrine of privity. But to do this, and hence to allow third parties to have a cause of action in contract against the promisor, the solution must less pragmatic, and more consistent and concrete to ensure that private justice can be effectively administered by public regulation. Until that stage I d advise the third party to follow a cause of action outside the doctrine of privity, not allowing him or her a cause of action against the promisor.