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report PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS (lrc 88 – 2008) © copyright law reform commission 2008 First published February 2008 ISSN 1393-3132 i lAw reForM coMMissioN THE LAW REFORM COMMISSION’S ROLE the law reform commission is an independent statutory body established by the Law Reform Commission Act 1975. the commission’s principal role is to keep the law under review and to make proposals for reform, in particular by recommending the enactment of legislation to clarify and modernise the law. since it was established, the commission has published over 130 documents containing proposals for law reform and these are all available at www.lawreform.ie. Most of these proposals have led to reforming legislation. the commission’s role is carried out primarily under a programme of law reform. its Third Programme of Law Reform 2008-2014 was prepared by the commission following broad consultation and discussion. in accordance with the 1975 Act, it was approved by the government in december 2007 and placed before both houses of the oireachtas. the commission also works on specific matters referred to it by the Attorney general under the 1975 Act. since 2006, the commission’s role includes two other areas of activity, statute law restatement and the legislation directory. statute law restatement involves the administrative consolidation of all amendments to an Act into a single text, making legislation more accessible. under the Statute Law (Restatement) Act 2002, where this text is certified by the Attorney general it can be relied on as evidence of the law in question. the legislation directory - previously called the chronological tables of the statutes - is a searchable annotated guide to all legislative changes. After the commission took over responsibility for this important resource, it decided to change the name to legislation directory to indicate its function more clearly. ii PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS MEMBERSHIP the law reform commission consists of a president, one full-time commissioner and three part-time commissioners. The commissioners at present are: President: The hon Mrs Justice catherine Mcguinness, former Judge of the supreme court Full-time Commissioner: Patricia t. rickard-clarke, solicitor Part-time Commissioner: Professor Finbarr McAuley Part-time Commissioner: Marian shanley, solicitor Part-time Commissioner: Donal o’donnell, senior counsel iii lAw reForM coMMissioN LAW REFORM RESEARCH STAFF Director of Research: Raymond byrne bcl, llM (Nui), Barrister-at-law Legal Researchers: Áine clancy bcl, llM (Nui) Kate dineen llb, llM (cantab) Philip Flaherty bcl, llM (Nui), diop sa gh (Nui) Eleanor leane llb, llM (Nui) Richard McNamara bcl, llM (Nui) Gemma Ní chaoimh bcl, llM (Nui) Verona Ní dhrisceoil bcl (dlí agus gaeilge), llM (Nui) Jane o’grady bcl, llb (Nui), lpc (college of law) Charles o’ Mahony bA, llb (Nui), llM (lond), llM (Nui) Nicola white llb, llM (dub) Attorney-at-law (Ny) Joanne williams llb, llM (Nui), barrister-at-law STATUTE LAW RESTATEMENT Project Manager for Restatement: Alma clissmann, bA (Mod), llb, dip eur law (bruges), solicitor Legal Researchers: John p. byrne bcl, llM (Nui), barrister-at-law John Kenny llb, llM (cape town), barrister-at-law LEGISLATION DIRECTORY Project Manager for Legislation Directory: Deirdre Ahern llb, llM (cantab), dip e-commerce (law society), solicitor Legal Researchers: Eóin McManus bA, llb (Nui), llM (lond) Tina o’ reilly bcl (law and german), llM (Nui) iv PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS ADMINISTRATION STAFF Secretary/Head of Administration John Quirke Head of Administration and Development: John glennon Higher Executive Officer: Alan heade Executive Officers: Emma Kenny Darina Moran Peter trainor Legal Information Manager: Conor Kennedy bA, h dip lis Cataloguer: Eithne boland bA (hons), hdip ed, hdip lis Clerical Officers: Ann browne Ann byrne Liam dargan Sabrina Kelly PRINCIPAL LEGAL RESEARCHER FOR THIS REPORT Cliona Kelly bcl, phd (Nui) v lAw reForM coMMissioN CONTACT DETAILS Further information can be obtained from: Head of Administration and development Law reform commission 35-39 shelbourne road Ballsbridge Dublin 4 TELEPHONE: +353 1 637 7600 FAX: +353 1 637 7601 EMAIL: [email protected] WEBSITE: www.lawreform.ie vi PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS ACKNOWLEDGEMENTS the commission would like to thank the following for their assistance in the context of this report. Ms Deirdre Ahern, school of law, trinity college dublin Mr Paul Appleby, director of corporate enforcement Prof Hugh Beale Qc, university of warwick (formerly law commissioner) Prof Robert Bradgate, university of sheffield Mr Adrian Brennan, office of the director of corporate enforcement Dr Nael Bunni, chartered engineer Mr Andrew Burr Qc Prof Robert Clark, university college dublin Mr Bill Cox, department of enterprise trade and employment Mr David Dillon, dillon eustace solicitors Mr Giles Dixon, solicitor Mr Peter Hibberd, Joint contracts tribunal (JCT) Mr Mark Hanson, law society of england and wales Mr Paul Keane, reddy charlton McKnight solicitors Ms Jeanne Kelly, Mason hayes and curran solicitors Ms Siobhan Kenny, hussey Fraser solicitors Mr Frank Lee, engineers ireland Mr Paul MacDonnell, irish insurance Federation Mr Richard Mossop, society of chartered surveyors Ms Niav O’Higgins, Arthur cox & co solicitors Mr Peter Osborne, Mccann Fitzgerald solicitors Mr Don O’Sullivan, construction industry Federation Ms Carol Plunkett, william Fry solicitors Ms Alvin Price, william Fry solicitors Mr Nathan Reilly, department of enterprise trade and employment Full responsibility for the contents of the report rests, however, with the commission. vii TABLE OF CONTENTS Table of Legislation xi Table of Cases xiii INTRODUCTION 1 A Background 1 B Outline of the Report 1 CHAPTER 1 THE CURRENT LAW IN IRELAND 5 A Introduction 5 B Overview of the privity rule 5 C The exceptions to, and means of circumventing, the privity rule 6 (1) Agency 6 (2) Trusts 8 (3) Assignment 9 (4) Collateral Contracts and Collateral Warranties 12 (5) Tort of Negligence 13 (6) Contracts for the benefit of a spouse or child 16 (7) Insurance 16 (8) Consumer Law 17 (9) Negotiable Instruments 19 (10) Carriage of Goods by Sea 19 (11) Employment Law 20 (12) Company Law 21 (13) Covenants Running with Land 21 D Remedies available to the promisee 21 (1) Damages for Third Party Loss 22 (2) Specific Performance 23 (3) Discussion 24 CHAPTER 2 GUIDING PRINCIPLES FOR REFORM 25 A Introduction 25 B The need to reform the privity rule 25 (1) The intentions of the contracting parties 25 (2) The third party who suffers a loss cannot sue, while the contracting party who can sue has not suffered a loss 26 (3) The injustice to the third party 26 (4) The effect of the exceptions to the privity rule 26 (5) Commercial inconvenience and expense 28 (6) The use of collateral warranties 29 (7) Software licences 33 (8) Insurance contracts for the benefit of third parties 33 (9) Recovery in Tort for Economic Loss 37 (10) Risk allocation and exemption clauses 37 (11) Comparative analysis 41 (12) Conclusion 46 ix C Options for Reform 47 (1) Judicial development of the rule of privity 47 (2) Legislative reform of the promisee‘s remedies to give more protection to a third party 48 (3) Legislative reform to create further exceptions 49 (4) Detailed legislative reform to create a general scheme of third party rights 50 D Guiding Principles for Reform 51 CHAPTER 3 SPECIFIC ISSUES FOR REFORM 53 A Introduction 53 B When a third party can enforce their rights under a contract 53 (1) The presumption in favour of third party enforcement when a term of the contract expressly benefits the third party 54 (2) When the contract expressly states that the third party has a right to enforce a term of the contract 57 (3) When the contract excludes or limits the liability of the third party 58 C Identification of a third party beneficiary 59 D The requirement of consideration 60 E The right of the contracting parties to vary or cancel the contract 61 F Third party rights are subject to the terms of the contract 66 G Who is the proper defendant? 67 H Defences 67 I Remedies 69 J Overlapping claims 71 K Existing exceptions to the privity rule 74 L Contracts to which the proposed legislation will not apply 76 (1) Contracts of Employment, where the promisor is an employee 76 (2) Company Law 77 (3) Contracts for the International Carriage of Goods by Air, Rail and Road 79 (4) Contracts for the Carriage of Goods by Sea 80 (5) Negotiable Instruments 82 (6) Letters of credit 83 M Insolvency 83 N The application of the proposed legislation to deeds 85 O Insurance Contracts 85 P Consumers 86 Q Unfair contract terms 89 R Arbitration Agreements and Jurisdiction Agreements 90 S Contracting out 92 CHAPTER 4 SUMMARY OF RECOMMENDATIONS 95 APPENDIX DRAFT CONTRACT LAW (PRIVITY OF CONTRACT AND THIRD PARTY RIGHTS) BILL 2008 101 x TABLE OF LEGISLATION Air Navigation and Transport (International Conventions) No 11 / 2004 Irl Act 2004 Air Navigation and Transport Act 1936 No 40 / 1936 Irl Arbitration Act 1996 c.23 Eng Bills of Exchange Act 1882 45 & 46 Vic c 61 Irl Bills of Lading Act 1855 18 & 19 Vict c Eng 111 Bills of Lading Act 1855 18 & 19 Vict c Eng 111 Carriage of Goods by Sea Act 1992 c.50 Eng Central Bank and Financial Authority of Ireland Act 2004 No 21/2004 Irl Civil Liability Act 1961 No 41 / 1961 Irl Companies Act 1963 No 33/1963 Irl Consumer Credit Act 1995 No 24/1995 Irl Contracts (Privity) Act 1982 1982 No 32 NZ Contracts (Rights of Third Parties)
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