Impact of privity of contract in modern business and commercial transactions

IMPACT OF PRIVITY OF CONTRACT IN MODERN BUSINESS AND COMMERCIAL TRANSACTIONS

Joy Mbadiugha LL.B, B.L, Grad. ICSAN

ABSTRACT

The world is a global village and the global economy is currently undergoing fundamental transformations. In today’s business and commercial transactions, contract and its formation ??is key as it impacts daily transactions and business relationships. Law is dynamic, so also commercial law which governs commercial transactions. Commercial law responds to the legitimate needs of the business environment and continues to develop to meet the economic and scientific needs of the country.

The foundation on which commercial law rests is the Law of Contract. Commercial law is concerned with the rights and duties arising from the supply of goods and services in the way of trade[1].

1.1 INTRODUCTION:

Generally, the doctrine of privity of contract is a common law doctrine, which precludes the enforcement of contract by persons who are not parties to contract or agreement. It also prohibits them from benefitting from the said contract or agreement, even if same was made for their benefit. It must always be between the contracting parties who must stand or fall, benefit or lose from the terms of their contract. That is to say, their contract cannot bind third parties nor can third parties take or accept liabilities under it, nor benefit there under.

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1.2 BRIEF HISTORY OF THE DOCTRINE OF PRIVITY

Privity of contract dates back to the 18th century. It was developed in the case of TWEDDLE V.ATKINSON[2] and also applied as can be seen in the case ?of DUNLOP PNEUMATIC TYRE CO. LTD. V. SELFRIDGE & CO. LTD[3].

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1.3 BACKGROUND OF STUDY

In contractual relationships, situations arise where parties may want to enforce or benefit from written agreements which they were not party to. The doctrine of privity of contract in our legal system precludes the courts from enforcing such terms of contract against total strangers to that contract. That is to say, only parties to a contract or an agreement can enforce it. A person who is not a party to it cannot do so even if the contract was made for his benefit. In MAKWE V NWUKOR1[4] the Supreme Court held as follows:

?“It is trite law that as a general rule, a contract affects only the parties thereto and cannot be enforced by or against a person who is not a party to it. In other words, only parties to a contract can sue or be sued on the contract and generally, a stranger to a contract can neither sue nor be sued on the contract even if the contract is made for his benefit and purports to give him the right to sue or to make him liable upon it. In the same vein the fact that a person who is a stranger to the consideration of a contract stands in such near relationship to the party from whom the consideration proceeds that he may be considered a party to the consideration does not entitle him to sue or be sued upon the contract”..

See also MALONE V. LASKEY[5], CAMERON V. YOUNG [6]., BESWICK V. BESWICK[7], FREDERICK OBOYE NEGBENEBOR V. EUDORA OMOWUNMI NEGBENEBOR5[8] See also IKPEAZU V. AFRICAN CONTINENTAL BANK LTD.[9] where the court per Ademola, C.J.N., put the matter as follows:-

?“What advantages, if any, can the bank gain from the deed, Exhibit D Can the bank sue on it as a guarantee Not being a party to it we are of the view that the bank cannot acquire any rights under the deed. Generally, a contract cannot be enforced by a person who is not a party, even if the contract is made for his benefit and purports to give him the right to sue upon it” See also TWEDDLE V. ATKINSON[10] and the decision of the House of Lords in DUNLOP PNEUMATIC TYRE CO. LTD. V. SELFRIDGE & CO. LTD[11]?

1.4. STATEMENT OF PROBLEM

?It is only parties to a contract who are liable or have the rights to enforce those rights and obligations arising from the contract. For instance where there is a clause in a contractual document that no term of the agreement shall be enforced by any person who is not a party to that agreement, nor shall any such person have any right under that agreement, Can a stranger to that agreement seek to enforce the terms of that agreement,? The question now is whether the court can enforce a contract against a party who evidently was not a party to the said contract. Can the court enforce such an agreement in favour or against a total stranger ? It is a trite principle of law that a clause or an agreement can only be invoked against parties to the said agreement. A third party is merely a stranger and not party to the agreement. Where the court seeks to invoke the terms of the agreement against a 3rd party, same is tantamount to?re-writing the express agreement of parties. Courts are stopped from rewriting agreement of parties. Courts can interpret agreement or contractual documents of parties but not to rewrite or make new contracts in the process of its interpretation. Courts are expected to honour the terms of contract or agreement between parties. In LEWIS V.UBA[12], the Supreme court per Kekere Ekun JSC held that, “in the construction of a contract, the meaning to be placed on it is that which is plain, clear and the obvious result of the terms used. A contract or document is to be construed in its ordinary meaning. When?the language of a contract is not only plain but admits of one meaning, the task of interpretation is negligible”.?

The Supreme Court in the case of A.G. FEDERATION, V A.I.C. LTD[13]?held thus, “The Law is sacrosanct that a contract binds only the parties to it and cannot be enforced by or against a person who is not a party even if the contract is made for his benefit and purports to give him the right to sue or to make him liable upon it.”

The terms of a contract are binding only on the contracting parties and they cannot bind third parties nor can third parties take or accept liabilities thereunder, and it is about the sanctity of contract and meeting of minds consensus ad idem. It is pertinent to say that only the contracting parties know what their enforceable rights or obligations are and therefore a stranger should not be saddled with the responsibility of what he knows nothing about. See EBHOTA V.PLATEAU INVESTMENT AND PROPERTY DEVELOPMENT CO. LTD[14]. In the Supreme court decision in UNITED BANK FOR AFRICA & ANOR V. ALHAJI BABANGIDA JARGABA[15]the court held that the doctrine of privity of contract is all about the sanctity of contract between the parties to it.

For privity of contract to arise, the contract itself must be enforceable. The question is, what constitutes an enforceable contractual relationship in law?. In the case of FIC CONSTRUCTION LTD. V. NDIC[16] ?the court held that a contract is an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law. That it is a promise or a set of promises the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Parties must reach a consensus "ad idem'' for a contract to be regarded as binding and enforceable. The two or more minds of the parties must meet at the same point, event or incident. The meeting of the minds of the contracting parties is the most crucial and overriding factor or determinant in the law of contract.

?In considering whether an enforceable contract has been formed or entered into, there are certain factors to be considered. There must be: (i) Offer (ii) Acceptance (iii) Consideration (iv) Intention to create legal relationship, and (v) Capacity to enter into contract. It is a settled that these five (5) elements or ingredients must be present before there can be a valid contract in law. For a contract to be valid in law, there must be an offer and an acceptance. An acceptance of an offer may be in writing, by conduct or by other means agreed to or acceptable to the parties. Stricto Sensu, therefore, a third party, becomes a meddlesome interloper. That third party can neither enforce the contract nor be made liable in the contract.

But there are exceptions to this general rule of the doctrine. Courts have devised various avenues to escape the strict application of this doctrine. What are these exceptions? These general exceptions include agency, the contracts (rights of third parties Act) 1999, which largely abrogated the principle that a third party cannot enforce a contract?made for his benefit (though there are certain exceptions) ?trust, third party insurance, suretyship, guaranteeship, novation and the likes. Some of these exceptions shall be briefly discussed.

1.5.SOME OF THE EXCEPTIONS TO PRIVITY OF CONTRACT:

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1.5.1???????Guaranty :

Huge sums of money are lent all the time on the security of a guarantee furnished by third parties. Black’s Law Dictionary Ninth Edition( 2004) defines guarantee as a promise to answer for the payment of some debt, or performance of some duty, in case of the failure of another who is liable in the first instance. A guaranty is?a written promise of an individual to pay the debt of another. In??commercial settings,?situations can arise where the owner or Director of a corporate entity or private limited company applying to banks for loan facilities may be required by the bank to undertake?to pay the debt of that corporate entity should it default in its obligation.

??????Most international commercial transactions are facilitated by bank guarantees. Guaranty contract is mostly applied in banking and finance transactions. It is an undertaking made by a person to pay or do some act. It is collateral to the duty of the primary obligor. One of the essential features of a Guaranty contract is that it must be in writing[17].?. It is important to note that non compliance with this formal requirement renders it unenforceable but not void. See MADDISON V. ALDERSON[18]

?????Guaranty contract also relates to the future as a collateral promise designed to protect the promise from loss in case the other party fails to perform his duty. The agreement is usually tripartite in nature: a promisor, a creditor ( the person to whom the promise is made) and a debtor?– although at the time the promise is made, the person denominated the creditor need not have extended the credit. Guaranty contract is similar to Warranty in that both guaranty and warranty are undertakings by one party to another to indemnify the party assured against possible default or defect, but there are difference. While?warranty relates to things (not persons), is not collateral and need not be in writing, Guaranty is an undertaking that a person will pay or do some act. See CHAMI V. UNITED BANK FOR AFRICA PLC[19] .

?????In GUARANTY TRUST BANK V. FOX GLOVE NIGERIA LIMITED[20] the Respondent initially entered into contract with MTN Communications Limited, a communications company for which the Respondent was a distributor. The Appellant who was not a party to their agreement advanced a bank guarantee to the Respondent to guarantee its trading capacity with MTN. The parties agreed that the contract can only be?terminated by giving 60 days’ notice period. The appellant?unilaterally terminated the contract.?The Respondent successfully challenged the termination in a?lower court and was awarded damages amounting to Ten?Million Naira with pre-trial interest. The Appellant appealed the?decision on the basis that it withdrew the bank guarantee after?the Respondent breached the agreement. It argued that the?respondent’s claim was premised on negligence which had?not been proven. The court held there was no evidence to show that the?termination notice was delivered to the Respondent. It found?that the withdrawal of the bank guarantee amounted to a breach?of contract. See also the case of MOSCHI V. LEP AIR SERVICES LTD[21]

?????In YOUNIS V. CHIDIAK AND ANOR.[22] the court held that a contract of guarantee to pay the debt of another must be under seal or otherwise supported by valuable consideration and that forbearance to sue or take the principal debtor to court given at the request of the guarantor is a sufficient consideration for a guarantee.

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1.5.2.?????Insurance:

?Guarantee seems similar to a contract of insurance by which the insurer undertakes to make payment to the insured on default of third parties. The difference is that while a guarantee undertakes to make payment or be obligated to another person’s default, an insurance contract provides an indemnity against loss and unlike a guarantee is not dependent on any default, so that while a guarantor’s obligation is accessory to a principal obligation, the obligation of an insurer is a primary obligation[23].

1.5.3.?????Agency

It is the relationship arising where one person, the principal appoints another , the Agent to bring about, modify or terminate legal relations between the principal and one or more third parties.?In some situations the principal’s status may be undisclosed. Black’s law dictionary[24] defines agency as a fiduciary relationship created by express or implied contract or by law, in which one part (agent) may act on behalf of another party(the principal) and binds that other party by words or actions. it enables a person through the services of another to broaden the scope of his activities and receive the product of another’s efforts, retaining for himself any net benefit resulting from the work performed.

1.5.4.?????Novation:

This term is usually employed to denote a change of parties as where in a contract between A and B, it is agreed that B shall be released and C shall take his place as the other party to the contract. It is the emerging and transfer of prior debt into another obligation which consequently destroys the old one[25]. Novation is opened to parties to provide for it in advance and in particular to establish a contractual mechanism by which it will automatically take place on the occurrence of a designated event. In contract law, novation is a powerful market tool for reducing risk and facilitating the transfer of financial assets.

1.6.??????QUESTIONS

What role does privity of contract play in modern business and commercial transactions?

Has privity of contract made any impact on business and commercial transactions?

Does strict application of privity of contract negatively affect business today?

Presently, commercial transactions require enabling environment and law to thrive. The common law doctrine that precludes third parties from enforcing contracts made for their benefits are not sacrosanct as can be seen in various exceptions.?This doctrine should not be strictly applied and should be reviewed to make businesses more attractive and build more wealth and sustain the economy.

?With the birth and development of e-contract and e-commerce, it is practically impossible for this doctrine to be applicable in business transactions. This aspect of the privity rule was frequently criticized as unfair and unnecessary.[26] Unquestionably, e-contract involves e-commerce (electronic commerce) which is the buying and selling?of goods and services or transmitting of funds over an electronic network, primarily internet. These business transactions occur either as business to business (B2B), Business –to- Consumer(B2C), Consumer to Consumer, or Consumer to Business. Thus, such contracts involve several parties through the internet platform and as such, holding the doctrine of privity of contract sacrosanct will not augur well or be profitable to the modern business world..

Furthermore, ?garnishee proceedings, where a judgment creditor is required to garnish, that is furnish the creditor with the money in debtor’s account to pay off a debt. For instance, Mr White owes Mr. Red?a certain amount of money. If Mr.White who is the debtor does not pay. Mr. Red.?the Creditor obtains judgment against the debtor for the debt. Still he does not pay. The creditor then discovers that the debtor is a customer of a bank and has an amount in his account equivalent or more than the judgment sum. The creditor can get a garnishee order against the bank by which the bank is required to pay into court or direct to the creditor, sums of money out of the debtor customer’s account which he owes the creditor in order to satisfy the debt.

From the example given above, it is normally clear from the account mandate form that the bank is in privity of contract with the account holder. Ordinarily with the general principle of privity of contract the contract confers right?or impose duties on the bank and its customer the debtor and not the judgment creditor who is not a party to the contract but a stranger.

1.7.??????CONCLUSION:

Business and commercial transactions should look inward and enter into contract or restructure their contractual agreements in a way to meet the intrigues of business in modern day settings.

1.7.1 Significance of this research

It is hoped that the legislatures and courts of different countries and drafters of legal documents?will be ready to jettison long established, rigid principles that are not friendly to businesses and commercial transactions in these modern times, so as to bring about prosperity especially in developing countries like Nigeria.

Judges should strive to meet the challenges posed by strict applications of privity of contract and the challenges it offers to business development. Courts in giving decisions should consider the changes in modern day to day business transactions as their decisions on their own, case laws constitute a body of rules often cited and relied on.

It is hoped that students, lecturers, young legal practitioners will find this research work helpful as it will serve as a vital academic tool and for those who may wish to write further on this topic.

[1] See Mark Hapgood QC, ‘Piaget’s Law of Banking’ 12th Ed.(2002)

[2] Supra

[3]supra

[4] ?(2001) 14 NWLR (Pt. 733) 356

[5] (1907) 2 K.B. 141 C.A.

[6] (1908) A.C. 176 H.L

[7] (1967) 2 ALL E.R. 1197

[8] ?(1971) 1 ALL N.L.R. 210.

[9] (1965) 1 N.M.L.R. 374 AT 379

[10] 30 L.J.Q.B. 265

[11] (1915) A.C. 847.

[12] (2016)ALL FWLR (PT.833) 1860@1878-1879, PARAS H-A

[13] (2000) 10 N.W.L.R. (PT. 675) 293

[14] ?(2005)?15 NWLR9PT. 948) 266

[15] ?(2007) LPELR-3399,

[16] (2013) 13 NWLR PT.1371 P.390 @ 406 - 407,

[17] See Section 4 of the Statute of Frauds 1677

[18] (1883)8 APP CAS 467

[19] (2010) 6 NWLR (PT.1191)474.

[20] (2016) LPELR-40167 PG 11-12.

[21] (1973) AC 33

[22] (1970)1 ALL NLR 188,

[23] See Roy Goode?on Commercial Law?2004 3rd Edition

[24] Supra

[25] P.S Atiyah, Introduction to the Law of Contract 283(3d ed. 1981

[26] See B.S. Markesinis,?‘An Expanding Tort Law- the Price of a Rigid Contract Law’ (1987)103 LQR 354, cited in White V.?Jones (1995) 1 All ER 691