Chapter 7Introduction to the law of contractPrivity of contract
The common law doctrine of privity of contract states
that a person cannot be bound by, or take advantage of,
a contract to which he is not a party. The doctrine,
which had been developed by the common law judges
by the middle of the 19th century, was reaffirmed by the
House of Lords in 1915.
If A enters into a contract with B for the benefit of C,
the common law doctrine of privity prevents C from
suing B on the contract. There is nothing to stop A from
suing on behalf of C, but the question arises whether A
is limited to recovering damages only for his own loss,
or can he also recover for losses suffered by C?221
on C for the outstanding balance. Meanwhile, B and F
had been declared bankrupt in 2002 and 2004 respect-
ively. C applied to have the statutory demand set aside
on the following grounds:
1 that the agreement he made in 2000 was binding,
because by accepting sole responsibility for a one-
third share of the debt, he gave consideration for W’s
promise to accept him as a debtor of one-third share
of the judgment debt;
2 that W was estopped from proceeding against him for
more than one-third of the judgment debt.
The Court of Appeal applied the rule in Pinnel’s case to
hold that the 2000 agreement between C and W was not
binding. However, all three Lord Justices agreed that C
had raised a triable issue as to promissory estoppel. In
the words of Arden LJ,
if (1) a debtor offers to pay part only of the amount he
owes; (2) the creditor voluntary accepts that offer; and (3)
in reliance of the creditor’s acceptance the debtor pays
that part of the amount he owes in full, the creditor will by
virtue of the doctrine of promissory estoppel, be bound to
accept that sum in full and final satisfaction of the whole
debt. For him to resile will of itself be inequitable.... in
these circumstances, the promissory estoppel has the
effect of extinguishing the creditor’s right to the balance
of the debt.
These comments are obiter dictaas the Appeal Court
was not trying the substantive issue, only considering
whether C had raised a triable issue.Dunlop Pneumatic Tyre Co Ltdv
Selfridge & Co Ltd(1915)
The claimants, Dunlop, sold a quantity of tyres to Dew
and Co, dealers in motor accessories, on the basis that
Dew and Co would not sell the tyres below the claimants’
list price and they would obtain a similar undertaking from
anyone they supplied with tyres. Dew and Co sold tyres
to the defendants, Selfridge, which agreed to observe
the restrictions and to pay Dunlop £5 for each tyre soldbelow the list price. Selfridge sold some of the tyres
below list price and Dunlop sued for breach of contract.
Selfridge argued that they were not a party to a contract
with Dunlop. The House of Lords held that, as there was
no contract between Dunlop and Selfridge, Dunlop could
not enforce the penalty of £5 for every tyre sold below
Dunlop’s list price. Viscount Haldane based his decision
on two principles: first, that only a person who is party to
a contract can sue on it; and second, in order to enforce
a simple contract, a person must provide consideration.
Comment.The agreement between Dunlop and Dew
and Co is known as a resale price maintenance agree-
ment. Such agreements are now outlawed by Art 81 of
the EC Treaty and s 2 of the Competition Act 1998. UK
and EC competition law will be considered in more detail
later in this chapter.Jacksonv Horizon Holidays Ltd(1975)Mr Jackson entered into a contract with Horizon for a
four-week family holiday to Ceylon for £1,200. The holi-
day was a disaster. Mr Jackson was awarded £1,100 for
breach of contract by the Court of Appeal. The damages
covered not only his own distress and disappointment
but also that suffered by his wife and children. Although
the outcome in this case can be justified by saying that
the damages were compensation for his own distress
because his family’s holiday had been ruined, Lord Denn-
ing made it clear that the award was designed to cover
not only Mr Jackson’s loss but also the loss suffered by
his wife and children.The House of Lords expressed disapproval of Lord
Denning’s reasoning in the Jacksoncase in Woodar
Investment Development Ltdv Wimpey Construction
UK Ltd(1980), but gave its support for the level of dam-
ages awarded. More recently the House of Lords has
shown that it is prepared in limited circumstances to
allow a party to a contract to recover damages which
represent a third party’s loss.