EMBARGO: MIDNIGHT 13th November 2006
LAW REFORM COMMISSION ISSUES CONSULTATION PAPER ON PRIVITY OF CONTRACT: THIRD PARTY RIGHTS
Tuesday, 14th November 2006: The Law Reform Commission’s Consultation Paper on Privity of Contract: Third Party Rights will be formally launched by Professor Robert Clark, School of Law, University College Dublin, at the Commission’s offices at 6pm this evening.
Privity of Contract and Third Party Rights
Privity of contract is a long-established aspect of the law of contract. The essence of the privity rule is that only the people who actually negotiated a contract (who are 'privy' to it) are entitled to enforce its terms. Even if a person is mentioned in the contract - and the contract was intentionally for their benefit - this 'third party' cannot sue. In its Consultation Paper, the Commission has provisionally recommended that, subject to certain limitations, the privity of contract rule should be changed so that a third party who the contracting parties clearly intended to benefit from their agreement would be able to sue if the agreement is not carried out properly.
The Consultation Paper notes that various pieces of legislation have already created specific exceptions to the privity rule, because there is a recognition that it can cause hardship, especially for consumers. For example, the Sale of Goods and Supply of Services Act 1980 states that where a consumer buys a car on a finance deal, and the car turns out to be defective ('not fit for purpose'), they have the choice of suing either the dealer or the finance company. Depending on the type of finance package, the actual sale might be between the dealer and the finance company, so the consumer might be a third party to the car sale and might not be able to sue, but the 1980 Act means that the privity rule is no obstacle to the consumer. In its Consultation Paper, the Commission provisionally recommends that a more general rule giving rights of enforcement to third parties should be put in place.
Effect of privity rule in simple building contracts
To take a simple example, if a woman agrees with a builder that the builder will build an extension for the woman's son, and the builder fails to complete the building, only the woman could sue the builder. Her son is not privy to the contract: in law, he is a third party, so even though he is a clear beneficiary of the contract, the privity rule prevents him from suing the builder. The Commission recommends in its Consultation Paper that this should be changed to allow the son to sue.
Effect of privity rule in complex building and civil engineering contracts
In the more complicated setting of major construction and civil engineering projects, the privity rule has had a different impact. These major infrastructural projects - whether house building or road construction - sometimes involve hundreds of contractors and sub-contractors who contribute to the overall project. Even though much of the work they do is interconnected and interdependent, the privity of contract rule means that it would be difficult for one contractor to sue another contractor who had, for example, held up a part of the project.
To get around this, the professional and representative bodies involved in the construction industry (representing architects, builders, engineers and lawyers) developed highly complex written standard form contracts to ensure some level of connection between the various sub-contractors. Because many of these construction projects are financed by central or local government, standard form contracts have also been developed by the Government Contracts Committee in the Department of Finance.
The Commission believes that, while these complex projects will continue to need detailed standard form contracts to regulate their performance, reform of the privity rule might lead to simplification of some terms. The Commission notes that, after the privity rule was reformed in the UK in 1999, the new versions of the standard form building and civil engineering contracts used there have become more simplified.
The Consultation Paper makes detailed provisional recommendations for reform of the privity rule, which aim to ensure that a third party who was clearly intended to benefit from the terms agreed by the contracting parties should be able to do so in practice. The Commission welcomes submissions on the provisional recommendations before 31st March 2007. The Commission intends to publish its final Report on this topic by the end of 2007.
The Law Reform Commission was established by the Law Reform Commission Act 1975 as an independent statutory body whose main aim is to keep the law under review and to make practical proposals for its reform. To date, the Commission has published over 120 documents containing proposals for law reform. These are available on the Commission’s website: http://www.lawreform.ie
The Commission usually publishes in two stages: first, a Consultation Paper and then a Report. A Consultation Paper is intended to form the basis for discussion and accordingly the recommendations, conclusions and suggestions are provisional. Submissions on the provisional recommendations contained in this Consultation Paper are welcome by 31st March 2007.