DAMAGES General

Underlying Principles The Basis of the Award of Damages

[21-3]The underlying principle in contract law is that a party who falls victim to a breach of
contract should be entitled to recover damages reflecting the position he would have
found himself in, had the contract been performed. If you need authority for that, you can find it
in Robinson v Harman (1848) where1 Parke B said “the rule of common law is that where a
party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be
placed in the same situation, with respect to damages, as if the contract had been performed”
Types of Loss
[21-4]Three types or heads of loss are generally recognised as existing.
[21-5]The first is expectation loss, which represents the expected profit to the plaintiff had the
contract been carried out. If I pay for goods intending to resell them at a profit, and the vendor
fails to supply the goods, then my expectation loss is the amount of the profits which I would
have made had the vendor performed the contract.
[21-6]Second is the category of reliance loss. In relying on a person to carry out a contract, I may
have incurred further expenditure which is wasted if that person breaks the contract. If I book U2
to play in Dublin, and they breach their contract, then the money which I have paid to rent
Landsdowne Road for the day has been wasted, having been expended in reliance on U2’s
performance of the contract.
[21-7]Third is the category of restitutionary loss, which comes about where the plaintiff has
conferred some benefit on the defendant under the contract. If the defendant then fails to
perform the contract, it is open to the court to order that the benefit be returned to the
plaintiff.
[21-8]Sometimes the choice is forced by circumstance upon the claimant. This comes out
clearly in Anglia Television v Reed (1972).2 Oliver Reed contracted with the plaintiffs to play
the leading man's part in a television play which they were producing. A few days afterwards the
defendant repudiated the contract. The plaintiffs could not get a substitute for the
defendant and accepted his repudiation. They abandoned the production. Anglia
Television did claim their profit because they could not say what their profit would have
been on this contract if Mr. Reed had performed it. So, they claim for the wasted expenditure.
They had incurred the director's fees. the designer's fees, the stage manager's and assistant
manager's fees, and so on. Obviously, in that case had the profit been capable of estimation, the
profit claimed would have be a true profit which would have to reflect a balancing of the
expenditure as against the sums taken in – i.e. net profit.
[21-9]The case also illustrates another very important point. Reed maintained that Anglia could
not recover for expenditure incurred before the contract was concluded with Mr. Reed. It was
argued that they could only recover the expenditure after the contract was concluded.
This was rejected by Lord Denning MR in the Court of Appeal who noted simply that:- “wasted
expenditure can be recovered when it is wasted by reason of the defendant's breach of contract. It
is true that, if the defendant had never entered into the contract, he would not be liable, and the
expenditure would have been incurred by the plaintiff without redress; but, the defendant having
made his contract and broken it, it does not lie in his mouth to say he is not liable, when it
was because of his breach that the expenditure has been wasted.”
[21-10]Also interesting is the case of Bowlay Logging v Domtar (1978).3 In that Canadian
case, the defendants agreed to provide trucks to transport logs to a sawmill. In breach of
contract, they failed to provide sufficient trucks. The plaintiff would not have made a profit
had sufficient trucks been available; in fact, the sawmill was an uneconomic operation which
was losing money on each consignment of logs. It would, therefore, have made an even greater
loss had the defendants performed their contract. The plaintiff claimed for the recovery of
expenditure incurred in the expectation that sufficient trucks would be available. Could it
recover this expenditure? It was held that it could not: it was contrary to the principle
of reliance loss to put the plaintiff in a better position than it would have been in had
the contract not been performed. In short, reliance could not be said to have led to any loss.
[21-11]Bowlay Logging was followed in the case of C & P Haulage v Middleton (1983).4 In this
case a commercial tenant was evicted and sought to recover the money spent on
improvements to the property during the lease. The lessee went on to set up his business from his
home with the permission of the council at less expense. The court held that it was not their
function to put the lessee in a better financial position than he would have been in had the
contract been properly performed.
Remoteness [21-12]Apart from assessing the heads of loss and the rules relating to the
award of compensatory and non-compensatory damages the most contentious aspect of the
remedy of damages for breach of contract is the way in which the law restricts the amount of
damages recoverable for breach of contract – the remoteness of damages. If damages are
too remote they will not be recoverable. For example, if a passenger is not permitted on a flight
due to over booking, she would arguably not be entitled to compensation if she lost a
business contract as a result, as this is neither a typical result of such an event nor will it have
been within the contemplation of the airline.
The Rule in Hadley v Baxendale: [21-13]Students should never approach any contract law exam
without, at least once, having read the original statement of the rule in Hadley v. Baxendale
(1854)5 per Alderson B:- [21-14]A loss would only result in damages if it was either: 1) A
loss that a reasonable person would consider to be the natural consequence of the breach (that the
loss arose in the usual course of things); or 2) A loss was within the reasonable
contemplation of both parties, at the time the contract was made, as a loss that would result
from a breach of contract [21-15]In that case the plaintiffs were the owners of a flourmill.
A crank shaft had been broken in the mill and the defendants contracted with the
plaintiffs to transport the crank shaft to Greenwich to use as a template for the
construction of a new crank shaft. This carriage was delayed because of the negligence of
the defendants with the result that the new crank shaft ultimately arrived late to the plaintiffs
mill. Consequently the plaintiff’s mill was closed for five days more than would have been
necessary had the crank shaft been delivered on time in accordance with the contract. Thus the
plaintiffs claimed for loss of profits for those five days. However the plaintiffs, at no stage
informed the defendants that the mill would be shut down pending the delivery of the crank
shaft. Indeed the ‘only circumstances … communicated by the plaintiffs to the defendants at
the time the contract was made were that the article to be carried was the broken shaft of a mill,
and that the plaintiffs were the millers of that mill’.6 Therefore the damages claimed were held
to be too remote. Essentially the Court was of the view that the stoppage was not the natural
consequence of the delay: it could not have been contemplated by a carrier that delay in
delivering he shaft would keep the mill idle.7 For instance the plaintiffs might have had a
spare shaft or been able to get one. Thus ‘in the great multitude of cases of millers sending off
broken shafts to third persons by a carrier under ordinary circumstances, such consequences
would not, in all probability, have occurred’.8
[21-16]The modern reformulation (i.e. another way of saying it) of the rule in Hadley v
Baxendale is contained in the judgment of Asquith LJ in Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd (1949)9:
[21-17]In Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd the defendants were held
liable for the plaintiff’s loss of profits arising out of the late delivery of a boiler but not for the
loss of lucrative government contracts as this was neither a natural consequence of such a breach
nor was the defendant aware that such a contract was at stake. The Irish Adoption of the Rule in
Hadley v Baxendale:
[21-18]The first part of the rule in Hadley v Baxendale was approved by Henchy J in
McGrath v. Kiely (1965).10 Later in Lee v. Rowan (1981) 11 Costello J approved the
whole passage from the judgment of Alderson B before going on to state that ‘[he] must decide
what damages may reasonably be supposed to have been in the contemplation of the parties at
the time they made the contract as a probable result of its breach’.
[21-19]In Waterford v. Harbour Commissioners v. British Rail Board (1981) 12 Henchy J
stated that the measure of damages ‘is the sum of money which may reasonably supposed to
have been in the contemplation of both parties when they made the contract, as the probable
result of a breach of it by the defendants if they totally repudiated their obligations under it’.
[21-20]More recently Keane J has stated the following in Lennon v Talbot (Ireland) Ltd
(1985)13: “[The] plaintiffs are entitled to the damages which might fairly and reasonably
be considered as arising naturally from the breach or might reasonably be supposed to
have been in the contemplation of both parties at the time of the agreements as a
probable result of the breach.” In Kemp v. Intasun (1987).14 In that case the defendant travel
company was made aware by Mrs Kemp that her husband suffered from asthma, before
agreeing a package holiday to Mallorca. The intended hotel was booked out and the family
was moved to a hotel of inferior quality. In particular the dust in the inferior hotel proved
troublesome so much so that Mr. Kemp suffered an asthma attack. The court at first instance
awarded £400 for inconvenience and disappointment and £800 for the consequences of the
asthma attack. The defendants appealed the award of £800 for the consequences of the asthma
attack on the basis that it was too remote. In the Court of Appeal Kerr LJ found that the issue
was whether the defendants should have reasonably contemplated the conditions in a room
provided by way of alternative accommodation might foreseeably be injurious to Mr Kemp’s
health.15 On this point Kerr LJ held that the communication in question was borne out in
evidence to be casual in nature. Therefore the trial judge was wrong to elevate that
communication to a contractual plane.
Putting a Figure on Intangible Loss
[21-21]It can be difficult to calculate damages where a loss is intangible or difficult to
quantify. However, the courts have taken a pragmatic approach to the assessment of loss in these
circumstances. A particular example exists where a plaintiff claims for “loss of a chance”: that is,
claiming that but for the defendant’s breach of contract, a certain event might have happened.
[21-22]This can be seen in Hawkins v Rodgers (1950)16. In that case, the plaintiff and the
defendant were partners in horse breeding and racing. The partnership was dissolved, and its
assets sold. The plaintiff purchased one of its assets, a promising racehorse which had been
entered for a number of classic races. However, shortly after the sale, the defendant struck the
horse’s name from each race, with the consequence that the horse could not be re-entered for
each race. This was found to be wrongful on his part, presenting the issue as to what damages the
plaintiff could claim. What loss had been suffered by the loss of the right to take part in each
race? Clearly the plaintiff could not establish that the horse would certainly have won any or
all of the races in question. However, the plaintiff could establish that the horse had a possibility
of winning as regards each race, which would carry with it prize money and which would
increase the value of the horse. The defendant had wrongfully deprived the plaintiff of this
possibility, and the damages to be awarded would reflect the potential value of the
possible outcome discounted by its probability.17
[21-23]In less extreme circumstances, the courts will also apply this reasoning. Thus, in
Hickey & Co. v Roches Stores (1980)18, the High Court was prepared to make an assessment of
loss of profits over a two-year period into the future, notwithstanding the element of
guesswork involved.
Emotional Distress and Related Situations
[21-24]One particular class of cases concerns situations where little or no financial loss may
have taken place, but a plaintiff has suffered distress, annoyance or frustration. Until quite
recently, it was clear that such harm could not attract an award of damages. In Hobbs v
London & SW Rwy Co (1875)19, the plaintiffs took a train which was supposed to go
to Hampton Court; it did not, with the consequence that the plaintiffs had to walk, with their
children, an extra three miles on a wet night; they were awarded damages for the
physical inconvenience of having to walk, but were refused damages for the element of
“annoyance and loss of temper, or vexation ... without real physical inconvenience
resulting” since such was “purely sentimental.” (per Mellor J.)
 [21-25]However, the law in this area has recently been quite radically changed. The English
case of Jarvis v Swan Tours (1973).20 was the leading case in making this change. In that case,
the plaintiff was a solicitor who took a rather disappointing skiing holiday, in breach of
contract. For example, “The only cakes for tea were potato crisps and little dry nutcakes. The
yodler evening consisted of one man from the locality who came in his working clothes for a
little while and sang four or five songs very quickly” (per Lord Denning M.R.). At first instance
he was awarded the difference in value between what he paid for and what he got. The
plaintiff appealed that award of damages, contending that he should also be awarded damages to
reflect the loss of enjoyment he had suffered. The defendant unsuccessfully relied on Hobbs v
London & SW Rwy Co. The Court of Appeal held that this decision was “out of date” (per Lord
Denning M.R.): in a proper case, damages for mental distress can be recovered in
contract, and such a case would include contracts for holidays, or any other contracts where the
purpose of the contract is to provide entertainment or enjoyment.
[21-26]In Johnson v. Longleat Properties Ltd. [1976-1977] I.L.R.M. 93 McMahon J. stated:- "It
appears to me that in principle damages may be awarded for inconvenience or loss of enjoyment
when these are within the presumed contemplation of the parties as likely to result from
the breach of contract. That will usually be the case in contracts to provide entertainment or
enjoyment …"
[21-27]One modern Irish case is Dinnegan v Ryan [2002] 3 IR 178 where the defendant
publican refused entry to a bride and groom and their wedding party in breach of a contract.
Court granted damages for emotional distress. Murray J held as follows: The loss sustained by
the plaintiffs arising from the breach of contract was not just disappointment at losing the
advantages which might accrue from a successfully completed commercial transaction. The
loss which they sustained, was the denial to the plaintiffs of an occasion for enjoyment and
happiness to be shared with their family and friends. That was the essence of the contract.
For that loss they are entitled to compensation. The degree of that loss was undoubtedly
exacerbated by the manner in which the contract was breached, namely, without forewarning and
at the last minute when they arrived in the public house. This meant that instead of their wedding
day ending on a memorable and high note, it was plunged to the depths of humiliation,
shock and disappointment, which not only brought it to a distressing end but engraved a
permanent blotch on the memory of what should always have been a day of good
memories. Given the nature and purpose of the contract, the loss in this regard which the
plaintiffs sustained was reasonably foreseeable and, moreover, flows directly from its breach.
Damages are intended to be compensatory. In the circumstances of this case, I am satisfied
that the plaintiffs are entitled to be compensated for the fact that they were wrongfully and in
breach of contract deprived of their happy occasion to celebrate their wedding day and
suffered the distress and disappointment which is inevitably a direct consequence of the
breach of such a contract
Duty to Mitigate Loss
[21-28]In assessing the quantum of damages which will be awarded for breach of contract, it
must be remembered that a person who suffers loss by reason of a breach of contract is under a
duty to mitigate that loss so far as possible. Suppose that an employee is dismissed summarily, in
breach of a contract of employment under which she is entitled to six months’ notice. Is she
entitled to sit at home for six months and thereafter claim the loss of six months’ earnings? No.
She will be under a duty to seek alternative employment. If, having done so, she
remains unemployed at the end of the six-month period, then the loss of six months’ earnings can
be claimed. If, however, she finds a job paying the same salary after three months’
unemployment, then her claim will be limited to her actual loss: which will be three months’ loss
of earnings.
[21-29]So, in Cullen v Horgan [1925] 2 IR 1 where a case concerned Case concerned non-
delivery of goods the court held that at some reasonable point after breach the plaintiff must treat
the contract as at an end and seek to mitigate his loss by purchasing substitute goods elsewhere.
[21-30]However, the courts will not impose unreasonable duties on a person who is on the
receiving end of a breach of contract. In Lennon & Ors v Talbot (1985),21 the plaintiffs were
motor dealers whose dealership agreements were wrongfully terminated by the defendant
motor importer and distributor. The plaintiffs were offered the option of entering into
new dealership agreements with the new importers of the cars in question, but for the most part
refused. The terms of the new agreements would be significantly different in a number of ways
from their existing agreements, to their disadvantage.
[21-31]Keane J. held that a court would not reduce an award of damages if satisfied that the
plaintiffs had acted reasonably in the circumstances, as they appeared to be at the time, even
though with the benefit of hindsight some other measures to reduce their loss might have been
open to them. In these circumstances, it was not reasonable to expect the plaintiffs to enter into
new agreements with the new importers, and accordingly their damages would not be
reduced by reason of their failure to do so. Indeed, he cited from
PENALTY CLAUSES AND LIQUIDATED DAMAGES
[21-32]The parties to a contract may agree to a term such as the following: “In the event of a
breach, A agrees to pay to B the sum of £100”. Is such a term enforceable? The answer will
depend on whether the clause is a so-called penalty clause or is a genuine liquidated damages
clause. If the clause is a penalty clause, ie an attempt to deter breach by imposing a penalty
therefor, it will be unenforceable. The courts have always been wary of such clauses,
which often seek to impose a penalty which is disproportionate to any loss actually suffered. On
the other hand, the clause may be a genuine attempt to reduce the costs of litigation and
assessment of damages by making an advance assessment of the damages likely to be suffered in
the event of breach. If so, it is a liquidated damages clause, and is enforceable.
[21-33]The primary test of whether a clause is one or the other is that set out by Lord
Dunedin in Dunlop Pneumatic Tyre v New Garage & Motor Company (1915).22 In that case, the
clause in question was part of a resale price maintenance agreement, and provided that sale of
any item at prices other than those agreed, or to persons on a blacklist, or other wrongs, would
each create an obligation to pay £5. Per Lord Dunedin, the court must look to whether the
amount is out of all proportion to the possible consequences of a breach; and whether the amount
is the same for each of a number of possible breaches of varying seriousness. In
addition, he held that a clause requiring a larger sum to be paid on failure to pay a smaller sum is
necessarily a penalty clause. Since the exact loss suffered is capable of precise.
definition, there can never be a genuine pre-estimate of its amount. Applying these criteria, it
was held that the sum of £5 was a genuine estimate of damages, notwithstanding that it
applied to a number of different events. Since the precise harm of each breach could not be
accurately quantified, the court held it was reasonable to quantify the damage at a fixed figure
which was not extravagant.
[21-34]This has since been upheld by the Supreme Court in Truck and Machinery Sales v
O’Donnell & Co (1998)23 where the court held that a contractual term requiring interest to be
paid on sums outstanding as a result of breach of contract, at a rate in excess of the prevailing
commercial rate, amounted to a penalty clause. In that case, therefore, a contractual term
requiring interest to be paid at a sum of 2.5 percent per month on sums outstanding for breach
was disregarded. The court (per Barron J.) also accepted the principle that the penalty clause rule
applies only where liability is dependent on a breach of contract, and that the principle has no
application in the case of acceleration clauses (considered below).
[21-35]The application of these factors can be seen in Ford Motor Co v Armstrong (1915)24
where the Court of Appeal came to a different conclusion regarding a very similar contract.
The defendant was a retailer who agreed not to sell below listed price, not to sell Ford cars to
other retailers or to exhibit Ford cars without Ford’s consent. In the case of breach of
each condition, he was to pay £250 as the “agreed damage which [Ford] will sustain.” This was
held, notwithstanding the label put on it by the parties, to be a penalty clause, by virtue of the
fact that the sum was substantial, arbitrary and payable for each of a number of breaches
differing in kind and in gravity.
[21-36]The same conclusion was reached in Jobson v Johnson (1989)25 where the contract
related to the sale of shares in a soccer club. The purchaser agreed to pay a sum of £350,000 by
way of a down-payment of £40,000 and six equal instalments of the balance. If payment of any
instalment was missed, the purchaser would be obliged to resell the shares to the vendor for
£40,000. This was found to be a penalty clause: it had the effect of forcing the purchaser to sell
at an undervalue, to the benefit of the vendor, where the amount of the undervalue was wholly
unrelated to the harm caused to the vendor by the breach. English Development
[21-37]There has been some shift away from Dunlop in England in recent years. The net effect
is that freely negotiated clauses are now less likely to be struck down as penalty clauses. Of
interest here are the combined effect of the decisions in Lordsville Finance plc v Bank of Zambia
(1996)26 and Phillips Hong Kong Ltd v AG of Hong Kong (1993).27 These would seem to
support the following:- The main question is to ask whether the clause is a deterrent to
stop someone breaching a contract or whether it is supposed to compensate one party in the
event of breach. Even if clauses may appear to be deterrents (i.e. those which increase the
consideration payable upon breach) will not be struck down if “the increase can be
explained as commercially justifiable” provided it’s dominant purpose was not to deter any party
from breach” Overall, the Courts should respect the notion that what the parties have agreed
should normally be upheld.
Recent Test Cavendish Square Holding BV v. El Makdessi [2015] UKSC 67
Majority judgment avoided references to “penal” “unconscionable” or “extravagant” saying that
“the true test is whether the impugned provision is a secondary obligation which imposes
a detriment on the contract breaker out of all proportion to any legitimate interest in the
enforcement of the primary obligation. The innocent party can have no proper interest in simply
punishing the defaulter. His interest is in performance or in some appropriate alternative
to performance” The El Makdessi case related to the sale of a Middle Eastern media
business and the provisions of a share purchase and shareholders' agreement. The agreements
provided that if the seller was in breach of certain non-compete restrictions, then he lost
his entitlement to deferred consideration that would otherwise have been payable, and he
must sell his remaining shares at a price that excluded the value of the goodwill (which would
have been diminished by his breach of the covenants). The Court of Appeal held that these
provisions were penal, as their purpose was to deter an act rather than to compensate the loss
suffered by the innocent party.
In El Makdessi, the Court concluded that the provisions in the agreements protected the
buyer's legitimate interest in enforcing the non-compete restrictions so that the goodwill of the
business was protected. The goodwill of the business was critical to its value to the buyer. The
provisions therefore did not go beyond protecting the buyer's legitimate interests. In addition to
the principles of primary versus secondary obligations, proportionality and the legitimacy of a
deterrent, the Supreme Court judgment in respect of El Makdessi also referred to the
importance of considering the circumstances in which the parties entered into the contract
– "in a negotiated contract between properly advised parties of comparable bargaining power, the
strong initial presumption must be that the parties themselves are the best judges of what is
legitimate in a provision dealing with the consequences of breach [35]".
The Supreme Court has set a new test which recognises that a contractual party will often
have a legitimate interest which can be protected by a contractual penalty which does not have to
be a genuine pre-estimate of loss. Provided that a contracting party can demonstrate that it is
using a penalty clause to protect a legitimate interest and the penalty is not exorbitant or
unconscionable, the following principles now apply: It is no longer necessary for the penalty to
be a genuine pre-estimate of loss. A party relying on the penalty clause does not have to suffer a
loss. The predominant purpose of a clause can be to act as a deterrent against a certain
breach of contract. The penalty does not just have to be a specified financial amount. A
party can, for example, withhold deferred consideration or require the transfer of certain
property as the consequence for breach. Generally, parties have a greater freedom to contract for
the consequences for breach.
ParkingEye Ltd v Beavis [2015] UKSC 67
The ParkingEye case related to a parking fine of £85 imposed after a driver overstayed
the two-hour limit in a privately-run car park. The driver, Mr Beavis, attempted to argue that this
was a penalty (as the owner of the car park had not suffered any clear loss) and
therefore unenforceable. In ParkingEye, it was clear that whilst the £85 charge may have
been perceived understandably by users of the car park as a deterrent from over-staying the two-
hour limit, there were also clear legitimate commercial interests that it was seeking to
protect by imposing the charge. These included preserving the traffic management system and
efficient use of parking space in the surrounding outlets and their users by deterring
long-stay parking. The charge was also relied upon to generate the income needed to run the
scheme. As a result, the charge was held not to be "out of all proportion" to those
interests and therefore not penal. Please note that the Irish Courts have not followed the UK
jurisprudence. The Irish position is as set out in ACC Bank plc v Friends First Management
Pension Funds Limited [2012] IEHC 435. A penalty clause is a clause which normally
provides for the payment of a sum of money in the event of a breach of contract. In deciding
whether or not a commercial provision constitutes a penalty clause, consideration is given
as to whether the payment represents a genuine pre-estimate of loss or probable loss by reason
of the breach. The Irish Courts continue to apply the genuine pre-estimate of loss test.
PENALTY CLAUSES AND LIQUIDATED DAMAGES: ACCELERATION CLAUSES
[21-38]One very significant exception exists to the principle that penalty clauses are
unenforceable, and this relates to so-called “acceleration clauses”: that is, clauses which
provide that on breach of a contractual obligation a pre-existing liability will take effect
immediately.
[21-39]For example, suppose that under a hire-purchase agreement the total sum due
amounts to £3600. The agreement may provide that this sum is payable at the date of entry into
the agreement; while the purchaser will be permitted to pay the sum in instalments,
default in paying any single instalment will revoke this permission, with the result that the entire
balance will become immediately payable.
[21-40]At first glance, this might appear to be a penalty clause, in that it punishes the
purchaser in an amount which is disproportionate to any loss suffered by the vendor. However, a
number of cases have established the principle that clauses of this sort, which merely
accelerate an existing liability, do not amount to penalty clauses. The early case of Protector
Loan Co. v Grice (1880)28 accepted this principle, which has since also been accepted in slightly
different contexts.
[21-41]So, in The Angelic Star (1988)29, a creditor agreed to accept part payment of a debt in
full discharge, provided that certain conditions were met, but specified that if those conditions
were not met, he would be entitled to recover the original debt in full. This provision, although
challenged as a penalty clause, was upheld on the basis that it did no more than accelerate the
payment of a present debt which, by reason of an indulgence given by the creditor, was
payable in a lesser amount.
[21-42]However, for an acceleration clause to be upheld, it is clear that it must do no more than
accelerate the payment of a pre-existing liability. Where the clause purports to create a fresh
liability on default, then it will be a penalty clause. This can be seen from the Northern Ireland
case of UDT v Patterson (1973).30 In that case, a loan of £900 was repayable with
interest in 36 monthly instalments. Default in payment of any instalment would cause the
whole amount to immediately become due and owing. The defendant defaulted, having paid
one instalment, and the plaintiff instituted proceedings for £1,137.50 being the sum lent,
minus one instalment, plus interest over the 36-month loan period at 10 percent per annum.
However, the court took the view that this clause was penal in effect, since it provided for the
payment of interest until the end of the term of the loan, while otherwise no interest would have
been payable had the loan been repaid early. In effect, therefore: “The amount to be repaid on
default is a larger amount than the amount actually due if calculated on the basis of the balance
still outstanding and interest to that date and a larger sum than the amount which would have to
be paid if the borrower had elected to pay at that point in time during the currency of the loan.”
(per McGonigal J.)
In a recent English decision in the case of Edgeworth Captial(Luxemburg) S.A.R.L and
another v Ramblas Investments B.V.31 regarding penalties due on certain financing
agreements for the purchase of land. The defendant defaulted on the loan the claimants
claimed the principle of the loan and claimed to be entitled to a fee due under UFA(Upside Fee
Agreement)and interest. The Court held that the rule against penalties only applies if the
clause in question is triggered by a breach of duty owed by the party claiming relief to
the party seeking to enforce the clause. The clause’s function cannot be deterrence of the breach
if it does not apply to a breach. The Court stated that rule against penalties to be inapplicable.
The fee would be payable under any event not only a breach32.

Compensatory and Non-Compensatory Damages

Personal injury claims are unique from other areas of the law because of the
propensity of the court to award both compensatory and non-compensatory
damages to plaintiffs. These terms can be confusing, and they are not
synonymous. Understanding your claim and the potential damages you can
seek is crucial in your decision to file a lawsuit or when determining if you
should settle out of court. Our lawyers at Rocky Mountain Personal Injury
Center practice exclusively in personal injury law, and we understand how to
maximize recovery for plaintiffs.

Compensatory and Non-Compensatory Damages Explained

Compensatory damages are directly traced to injuries sustained by the
plaintiff. For example, lost wages, medical bills, and medical expenses for
durable medical equipment, rehabilitation or damaged property are
compensatory damages. When the plaintiff makes a demand letter in their
complaint, they state all claims for damages, what they are seeking, and why
the defendant’s negligence was the proximate cause of the plaintiff’s harm.

Non-compensatory damages are not directly attributed to the accident loss

but can nonetheless be awarded as a result of the accident. In other words,
there is a direct bill for medical treatment after the plaintiff’s accident, but
there is no bill for a non-compensatory damage like loss of consortium. In
tort claims, the plaintiff can seek damages for future lost wages, emotional
distress, pain and suffering, and disability.

Punitive Damages
Punitive damages are awarded if the defendant’s behavior or negligence is
deemed especially abhorrent. Often these damages are awarded in class
action cases or when the harm is so damaging, the defendant should be
punished beyond what the plaintiff is asking for in compensatory and non-
compensatory damages. In Idaho, in order for the jury or court to award
punitive damages, the plaintiff must prove that the defendant’s behavior was
malicious or fraudulent. Id. Code. 6-1604 (2020). Rarely does a personal
injury action meet the standard for punitive damages.

Awarding Attorney’s Fees

Sometimes a plaintiff is able to seek an award from the defendant paying for
attorney’s fees. In Idaho, the state follows the American Rule, which dictates
that each party is responsible for their own legal fees regardless of which
party is at fault. However, state statutes also provide for plaintiff recovery of
legal fees if the defendant is sanctioned. Sometimes in family law cases the
plaintiff will request attorney fees paid by the income-producing party
because they do not have the means. This is not the same circumstances as
the negligent party in a personal injury action. In Idaho, the court cannot
unilaterally award attorneys fees to the plaintiff as a result of the
defendant’s negligence. The plaintiff must cite a specific statute in order to
claim the fees. Id. Code § 12-120(1) 2015.

RESTITUTIONARY RELIEF
Generally [21-43]It is quite possible that by using this heading, the syllabus intends to bring
in the notion of quasi-contact: “The law of restitution is the law relating to all claims, quasi
contractual or otherwise, which are founded upon the principle of unjust enrichment.
Restitutionary claims are to be found in equity as well as at law. But the common law of quasi
contract is the most ancient part of restitution”33
[21-44]That said, there is a separate legal concept of unjust enrichment which does not
really seem to be on the syllabus nor fairly up for grabs on a contract exam – it is an
independent cause of action. We will look very briefly, however, that where unjust enrichment
has a role relating to matters we have considered already.
Mistake
[21-45]Where monies are paid over on foot of a contract which is vitiated by mistake, it is
generally the case that the party who would not have handed over such monies if not for the
mistake, can get it back. There are limits on this though (which are controversial). Generally, it
has to be a mistake of fact not law.
Tax
[21-46]As there is debate over the fact/law issue, there was a special rule created in the
early nineties in England to do with tax – i.e. where an lawful demand for tax had been made and
met, the taxpayer may get recovery even though revenue made a mistake of law.
Total Failure of Consideration
[21-47]We have examined this in relation to frustration. It has a wider application though –
there are Irish cases which allow one to argue that anytime a total failure of consideration has
occurred, monies paid out should be handed back. So in Hayes v Stirling (1863)34 monies paid
over for shares in a company which was never set up was re-payable. Money Paid On Foot of an
Illegal Contract
[21-48]Remember the in pari delicto principle? We have already looked at this in illegality – i.e.
sums payable under an illegal contract may be recoverable.
On Foot of Wrongdoing
[21-49]A misrepresentor may have to provide restitution – i.e. he misrepresents ownership over
a car, and sells you the car. If you so elect, you could seek restitution of the purchase price and
not just damages etc. It is also suggested in the duress case law that a valid economic
duress plea entitles one to the money back on the contract which was procured by duress.
Quantum Meruit
[21-50]This is, strictly speaking, not a contractual remedy. Instead, this remedy is available in
circumstances where no contract exists. If there is a contract in existence, but the amount of
payment to be made under the contract is not a fixed sum (eg a contract where the sum to be paid
is “a reasonable amount”), then the plaintiff’s remedy is a claim under the contract for payment
of the contractual consideration. Suppose, however, there is no contract in existence. Suppose
further that, notwithstanding the absence of a contract, one party performs work of value to the
other party, which the other party accepts. In those circumstances, an equitable remedy of
quantum meruit will lie, giving the plaintiff a right to reasonable remuneration for the work
which he has carried out.
[21-51]This will typically be the case where negotiations for a contract are in train, and both
parties decide to proceed with performance notwithstanding the absence of a completed
contract. When, ultimately, no contract is entered into, by definition no claim in contract lies. On
the other hand, one party will have conferred a benefit on the other, for which both parties
ultimately expected that payment would be made. It is, therefore, entirely fair that payment
should be made.
[21-52]An example is the case of British Steel v Cleveland Bridge & Engineering Co.
(1984).35 In that case, the plaintiff delivered steel components for a bridge to the
defendant while negotiations were still in progress over contractual terms. The negotiations
ultimately broke down, presenting the problem of whether payment was to be made to the
plaintiff. It was found by the trial judge that no implied contract existed between the parties in
respect of the components which had been delivered, since there was no agreement between the
parties on what would have been essential terms of such a contract (price and delivery dates
being the prime such terms). Nevertheless, reasonable payment had to be made, on the basis (per
Robert Goff J.) that the law “imposes an obligation on the party who made the request
to pay a reasonable sum for such work as has been done pursuant to that request, such an
obligation.
sounding in quasi-contract or, as we now say, in restitution” (at 510). This statement
also illustrates an important point in this area: the work must have been done at the request or
with the consent of the defendant. Compensation cannot be recovered for work done for a party
without his knowledge or consent.
[21-53]It should also be noted that the doctrine of quantum meruit will stretch, it appears, to the
situation where one party carries out work at the request of another, even where the work carried
out does not confer a benefit on that other party. This principle appears to have been established
in Folens v Minister for Education (1984),36 where the plaintiff was a publisher who
carried out preparatory work on a children’s text at the request of the defendant, who
ultimately decided not to go ahead with the project. The defendant had not benefited from
the work, but the plaintiff had suffered loss thereby. It was held that the plaintiff could
recover in quantum meruit. They had not agreed, either expressly or by implication, to
bear the cost of the work should the project not go ahead, and so were entitled to be compensated
for their costs incurred at the request of the defendant.
[21-54]Being an equitable remedy, it is subject to the principles of equity and as such is
available at the discretion of the court.
SPECIFIC PERFORMANCE
[21-55]The remedy of specific performance is an equitable remedy by which a party to
a contract can be ordered to perform his or her obligations under that contract. Being an
equitable remedy, it is discretionary in its nature. It is, however, awarded or refused on well-
settled principles.
[21-56]The remedy operates in personam which means that provided the person comes within
the jurisdiction of the court the order can be made even if the subject matter of the contract is
outside the jurisdiction of the court. The remedy arises most often in the context of contracts for
the sale of land. The reason for this is that the courts take the view that a piece of land is unique
and therefore damages are not an adequate remedy to compensate a disappointed
purchaser. Would Damages be an Adequate Remedy?
[21-57]In the first place, it will not be awarded where the plaintiff has an adequate remedy at
common law, ie damages. Thus in Bagnell v Edwards (1876) 10 IR Eq 215, specific
performance of a partnership agreement was refused in circumstances where the
plaintiff’s complaint was that the defendant had failed to pay an agreed sum. The complaint
could be met by an award of damages, and so specific performance was refused.
[21-58]However, damages will not be an adequate remedy in circumstances where the subject
matter of the contract is unique, as is the case in contracts for the sale of land; and in such
contracts, specific performance is the ordinary remedy.
[21-59]Damages may also be an insufficient remedy where they would be difficult or
impossible to quantify. For example, where a contract is entered into to pay an annuity, the
damages payable for breach of the contract are necessarily speculative, depending as they do on
the age to which the recipient of the annuity might live. For that reason, the courts have in a
number of cases taken the view that specific performance would be the appropriate remedy: see,
for example, Swift v Swift (1841) 31 IR Eq 267.
[21-60]Equally, damages may not be an adequate remedy where any damages which might be
awarded would necessarily be nominal, as in the case where a contract is entered into between A
and B under which B agrees to pay money to C. If B reneges on this promise, any damages
which A might recover would be nominal. The loss has been sustained not by A but by C. For
that reason, the courts will in these circumstances award specific performance: Beswick v
Beswick [1968]AC 58 (a promise to pay an annuity to a third party.)
[21-61]The Case of AB v CD37 The claimant had sough an interim injunction to prevent the
defendant terminating a lease agreement until arbitration proceedings had been resolved. The
High Court dismissed the application , stating that damages would be an adequate remedy
despite that fact that the licence agreement had a limitation clause. The Court of Appeal held
that a party to a contract which stipulated if there was a breach of obligations then liability would
be limited to damages then the damages he would pay would be capped. The Court
stated that justice favoured the granting of an injunction to prevent the breach.
Specific Performance Difficult to Enforce: Contracts of Personal Service and Other
Situations
[21-62]Specific performance will not be ordered where the subject matter of the order would
give rise to particular difficulty. This is the case with two categories of contract, that is,
contracts of personal service and contracts requiring constant supervision by the court. Personal
Service
[21-63]As regards contracts involving personal service, the courts have taken the view that
they will not intrude on personal relationships by compelling persons to work together
who would otherwise be unwilling to do so. This is felt, it would seem, to be too heavy handed.
This rule extends to contracts of employment, agency, partnership, apprenticeship, and so on.
[21-64]On the other hand, the courts have jurisdiction to grant injunctions preventing a
breach of contract, even where this might obliquely coerce a defendant into performing
the contract in question. This can be seen from Lumley v Wagner (1852) 1 De GM & G
604, a celebrated case in which the defendant contracted to sing at the plaintiff’s theatre
and nowhere else for a specified period. The court refused to decree specific performance
of the contract, but enjoined her from singing elsewhere, notwithstanding that the result
of this would obviously be to tempt her into performing her obligations under the contract.
Constant Supervision
[21-65]Contracts which would require constant court supervision will also not attract specific
performance. This category overlaps to some extent with the category of contracts of personal
service. Contrast a contract for the sale of land with a contract for personal services. In the case
of the former, specific performance can be ordered and enforced without difficulty: the
vendor can be directed to convey the property in question, and once this is done there remains
nothing for the court to oversee. In the case of the latter, however, one could expect a need for
regular recourse to the court, to determine whether the ongoing contract continued to be
performed in accordance with the contractual standards. In short, the latter contract would
require the court to involve itself in overseeing its performance if specific performance were to
be granted
[21-66]So, in the old case of Ryan v Mutual Tontine Association [1893] 1 Ch 116, the court
refused to grant specific enforcement of a term in the lease of a flat which gave the tenant the
right to a porter who was to be “constantly in attendance”; this was, it was held, an ongoing
obligation, which could be expected to give rise to repeated applications to court if difficulties
arose.
[21-67]In Co-operative Insurance Society v Argyll Stores (1998)38 an order of specific
performance was sought by the landlord of a shopping centre against the defendant who were the
anchor supermarket in the shopping centre, requiring them to continue trading. The lease entered
into by the parties contained a covenant which required the supermarket to keep open during the
usual hours of business. The supermarket had been trading at a loss and the lease had 19 years
more to run. The House of Lords rejected the claim for specific performance, despite the
fact that they accepted damages would be difficult to quantify. Lord Hoffman accepted
that the fact that a contract required supervision was not any longer an absolute bar to specific
performance however the principle encapsulated two fundamental considerations. Firstly
specific performance will not be ordered where the obligations of the defendant cannot be
sufficiently precisely defined. Secondly specific performance will not be ordered where
there is a likelihood of repeated and costly applications being made to the courts in order to
ensure the order is complied with. The House of Lords held that in this case the covenant was
not sufficiently certain for an order of specific performance to be made.
Defences to Specific Performance Lack of Mutuality
[21-68]“Mutuality” in this context means that the contract must be specifically
enforceable against both parties. A defendant will be able to rely on a lack of mutuality as a
defence if he can establish that after an order of specific performance is made against him the
only safety net available to him to ensure the plaintiff fulfils his part of the bargain is the
common law remedy of damages. Keane gives the example of a minor seeking a decree
of specific performance in the context of a sale of property.39 The minor cannot obtain an order
for specific performance because if the defendant complied with the order by, for
example, paying the purchase price of the house, he would only have a claim for
damages in the event that the minor failed to execute the deed.
[21-69]One other point to note is that it would appear from the case law that the lack
of mutuality needs to be established at the time of the hearing and not at the time the contract
was entered into. In the past, some commentators believed that the relevant time was the time the
contact was entered into, however in Price v Strange (1978)40 the court held that the
absence of mutuality needs to be established at the time of the hearing. The court in that case
further held that a lack of mutuality will not necessarily preclude the granting of an order for
specific performance. The absence of mutuality is simply a matter to be taken into account in
deciding whether to exercise its discretion in favour of the granting of an order.
Mistake
[21-70]If a mistake is sufficiently serious that no contract has come into existence then clearly
no order of specific performance can be made. There are circumstances however where a
mistake may have been made and either rescission is not available to a defendant or the
defendant has lost the right to rescind. In such circumstances the court can exercise its
discretion and refuse an order for specific performance on grounds of mistake. The key thing to
note is that a mistake that is not sufficiently serious to justify rescission may be relied on to resist
an order for specific performance.
Laches or Delay
[21-71]The general rule in equity is that time is not the essence of a contract and therefore a
claimant may be able to get an order for specific performance even though he has failed
to carry out his contractual obligations by the time specified. This general principle was applied
in Lazard Bros & Co. Ltd. v Fairfield Property Co (Mayfair) Ltd (1977)41. In that case the court
held that the modern approach should be that if between the parties it was just and fair that a
claimant receive a remedy then the court should not withhold it merely because he has
delayed. It may be possible for a defendant to rely on delay where the delay has been
unreasonable. Where the parties have made time of the essence then it is unlikely that
specific performance will be available after the specified date. In Australia a more flexible view
was taken by the courts and it was held that the court could in certain circumstances grant
specific performance after the stipulated date.42 The Privy Council however rejected this
approach in Union Eagle Ltd. v Golden Achievements Ltd (1997).43
Hardship
[21-72]For example, where the order would cause severe hardship to a defendant, the court may
take this factor into account. So in Denne v Light (1857) 8 DM & G 774, the vendor of farmland
sought specific performance as against the purchaser of the contract of sale. The court,
however, refused this remedy when it was shown that to order specific performance
would leave the purchaser with an entirely landlocked piece of land, ie surrounded by
land belonging to others and with no right of way to it. [
21-73]Equally, in Patel v Ali [1984] Ch 238, specific performance of a contract of sale of a
residential house was refused where, after the contract was entered into, a four-year
delay resulted during which time the vendor’s husband went bankrupt while she herself
became disabled.
[21-74]A Court may be willing to take into account unnecessary hardship that may be caused to
third parties. This was recognised in Conlon v Murray (1958),44 a case in which an order of
specific performance was sought against the executors of a vendor’s estate. The vendor
had been an elderly lady who had sold the family farm without taking any independent
legal advice or proper time to consider the transaction. The court noted that if the order of
specific performance was made the brother of the vendor would have nowhere to live. Illegality
and Public Policy
[21-75]A contract based on an illegality will be considered unenforceable and cannot be
specifically enforced. You should refer to your notes on illegality and public policy (and also
void contracts).
Misrepresentation
[21-76]Where there has been a misrepresentation a defendant will generally be able to rely on it
to resist an order for specific performance.
Impossibility and Frustration
[21-77]The court will not grant specific performance where performance of the contract
is impossible. In Ferguson v Wilson (1866)45 specific performance of a contract to allot shares
was refused because the shares had been validly allotted to existing shareholders before equitable
relief was sought.
[21-78]Frustration may render a contract impossible to perform – you should refer to notes on
frustration.
[21-79] In the English Court of Appeal case of De Montfort Fine Art Ltd Acre 1127 Ltd
(formerly know as Castle Galleries Ltd) 46 damages would be reduced due to that fact if it could
be shown not that innocent party was disabled from performance, but that he had no intention of
preforming was relevant in the award of damages.
CHAPTER 9 Privity of Contract
INTRODUCTION
[9-1]As a general rule, a person who is not a party to a contract cannot enforce the terms of that
contract, nor can those terms be enforced against him. This is generally termed the
doctrine of privity of contract.
[9-2]This is somewhat related to the doctrine of consideration. Indeed, in the famous case of
Tweddle v Atkinson (1861)1a son was unable to enforce an agreement made between his
father and his prospective father-in-law that money would be paid to the son on his getting
married. In holding the son could not enforce the contract, great emphasis was placed on the fact
that he did not provide consideration. However, in the later case of Dunlop v Selfridge (1915)2
Viscount Haldane in the House of Lords went one step further noting that in such cases
the third party cannot enforce the contract simply because he was not a party to it
saying “only a person who is a party to a contract may sue upon it”.3
THEORY
[9-3]Consider the following examples: Example A Example B John and James agree that a
third party, Rachel should pay James a sum of €1,000 a year. John and James agree that
James will pay a third party, Rachel, a sum of €1,000 a year. [9-4]It is obvious that contractual
burdens should not be imposed on non-parties without their consent (Example A), but this does
not explain why third parties should not be able to enjoy the benefit of contracts to which they
were not parties (Example B). Why should third parties not be able to invoke the benefit of
a contract in such circumstances? The answer appears to be that it is felt that if the
parties to the contract do not seek to enforce the contract, or compromise it, or otherwise
agree that it should be of no effect, then a person who is “a stranger to the contract” should not
be entitled to intervene in the arrangements made between two (or more) other persons.
[9-5]However, this rationale is no longer accepted by everyone. Look at what Steyn LJ said in
Darlington BC v Wiltshire Northern Ltd (1995)4: “The case for recognising a contract for
the benefit of a third party is simple and straightforward. The autonomy of the will of the
parties should be respected. The law of contract should give effect to the reasonable
expectations of contracting parties. Principle certainly demands that a burden should not
be imposed on a third party without his consent. But there is no doctrinal, logical, or
policy reason why the law
1 (1861) 1 B & S 393 2 [1915] AC 847 3 In that case Dunlop had sold tyres onto one Dew
subject to terms which prevented them being sold below a certain price. Dew sold them on to
Selfridge on the basis of a similar agreement echoing that between Dunlop and Dew but
Selfridge broke it. Dunlop were held not to be entitled to sue Selfridge as the contract relating
to below list price selling to which Selfridge was a party was between it and Dew. 4 [1995] 1
WLR 68 KEY POINT As a general rule only those who are parties to a contract (privy to the
contract) can sue on the contract or be sued under the contract
should deny effectiveness to a contract for the benefit of a third party where that is the expressed
intention of the parties. Moreover, often the parties, and particularly third parties, organise their
affairs on the faith of the contract. It is therefore unjust to deny effectiveness to such a contract. I
will not struggle with the point further since nobody seriously asserts the contrary.”
[9-6]In its recent report Privity of Contract and Third Party Rights (2008)5 the Law Reform
Commission noted: There is…no public policy reason why the courts should refuse to allow a
third party to enforce a contract, or term of a contract, when the contracting parties intended for
the third party to have this right. Rather, the contractual intention of the parties should be
enforced in the most effective way possible by the courts.
[9-7]It pointed out the following: The rule of privity can produce the bizarre result that the
third party who suffers a loss cannot sue, while the contracting party who can sue has not
suffered a loss, and thus may only be entitled to nominal damages.
[9-8]Unless and until the rule is abrogated by statute, however, it remains in place. That said,
the law does provide various mechanisms by which a non-party may enforce the benefit of a
contract. We will look at these in turn.
PRIVITY AND AGENCY
[9-9]An agent is a person with authority to enter into certain transactions on behalf of
another person (termed the principal). Where an agent acting within his authority enters into a
contract on behalf of his principal then the principal becomes a party to the contract, and can sue
and be sued on that contract.
[9-10]This exception has been particularly useful in the context of exclusion clauses.
Consider the following:
[9-11]Thus, the law permits parties to arrange their affairs in this way. This principle was
initially set out, obiter, by the House of Lords in Midlands Silicones Ltd v Scruttons Ltd
(1962).6 This case accepted that a third party could rely on a limitation clause contained in the
parent contract where: The parent contract makes it clear that the third party is to be
protected by its provisions; The parent contract also makes it clear that the contracting
party also contracts as agent for the third party as well as in his own personal capacity.
The contracting party has authority from the third party to act as its agent; There is consideration
moving from the third party.
[9-12]This holding was subsequently applied by the Privy Council in New Zealand Shipping Co
Ltd v AM Satterthwaite & Co. Ltd (The Eurymedon)(1975).7 In this case, the contract of
carriage purported to confer the benefit of a limitation clause on the employees, agents and
subcontractors engaged by the carrier, and provided that the carrier in entering into the
contract acted as agent or trustee for those third parties.8 Stevedores acting for the carrier
negligently damaged the cargo, and on being sued by the shipper sought to rely on the
limitation clause contained in the parent contract. The Privy Council held that the stevedores
were entitled to rely on this limitation clause as the facts satisfied the tests set out in obiter in
Midland Silicones which were approved in this case.
[9-13]A recent example of its use to side-step privity objections is Hearn and Matchroom
Boxing Ltd v Collins (1998).9 Here, the contract of management of the boxer Stephen Collins
was between Stephen Collins himself and Matchroom Boxing, a company operated by Barry
Hearn. The question then arose as to whether Barry Hearn personally could rely on the
contract. It was held by O’Sullivan J. that he could, since the company in making the contract
had acted as agent for Barry Hearn, and Barry Hearn had provided consideration in the form of
agreeing to be bound by the management contract.
[9-14]The LRC pointed out that there may be some doubt over whether this technique is
permissible in Ireland as section 34(1)(b) of the Civil Liability Act, 1961 provides that a
defence “arising under a contract” is available in respect of a negligence action and pointed out
that “it is unclear whether this refers to a defence in any contract, or merely a contract
to which the defendant is privy”. The present author am not sure about this particular argument
and thinks the LRC is missing the point of s.34(1)(b), but it certainly adds to the lack
of clarity.
[9-15]This approach, however, can be criticized. In many cases one may struggle to find any
authority conferred by the third party on the contracting party. Consider the following:
Excel Delivery agrees to transport ABC’s goods to Germany, a new market for Excel.
The contract between the parties has a clause exempting Excel from any damage to ABC’s
goods. However, Excel does not have the infrastructure to get the goods to the delivery
point and intends to use some third party sub-contracted delivery. Excel is not sure how
many third parties it will need and does not have the time to arrange all this well in advance
before taking the goods, believing it can make the arrangements “on the fly” [
9-16]In such a case, Excel will not have the requisite authority. Indeed, in The Eurymedon, the
defendants (who supplied the steveadores) were the parent company of the shipper and
accordingly, the requisite authority was inferred.
[9-17]The Canadian Supreme Court in London Drugs Ltd v Kuehne & Nagel International Ltd
(1992)10 was faced with a somewhat similar set of facts as those in the Eurymedon case.
However, they identified an exception to the doctrine of privity based on the intention of the
parties, fairness, business and insurance without resorting to the legal fictions of the
Eurymedon case. Indeed in Fraser River Pile & Dredge Ltd v Can Dive Services (1999)11 the
Canadian Supreme Court held that it does not matter if the clause does not expressly benefit the
third party so long as two conditions are met:-
[9-18]The parties to the contract must intend to extend the benefit of the clause in question to the
third party seeking to rely on the clause.
[9-19]The activities performed by the third party seeking to rely on the contractual provision
must be the very activities contemplated as coming within the scope of the contract, as
determined by reference to the intention of the parties.
PRIVITY AND CONTRACTUAL TRUSTS
[9-20]Rights under a contract can be the subject of a trust. So, if John and Mick agree to benefit
Kevin under a contract, then John could stand as trustee for Kevin’s rights under the contract.
As John is trustee, Kevin has a special relationship with him in law which would permit him to
sue John as trustee should the benefit intended to be conferred on Kevin not actually accrue.
This is cumbersome, however, and a special rule of law has development whereby equity
permits a beneficiary under a contract to directly enforce that contract.
As was said in Gandy v Gandy (1885)12 by Cotton LJ “[I]f the contract, although in form it is
with A, is intended to secure a benefit to B, so that B is entitled to say that he has a beneficial
right as cestui que trust under that contract; then B would, in a Court of Equity, be allowed to
insist upon and enforce the contract.”
[9-21]There are two principle disadvantages with this approach. First, it means that the
parties (John and Mick in our example) cannot vary the terms of their agreement as there are
vested third party rights protected by trust. Second, absent clear proof that such an
arrangement is intended, the courts are very reluctant to imply it. Indeed, in Vandepitte v
Preferred Accident Insurance Corporation of New York (1933)13 the minority expressed
misgivings about what they called a “legal fiction” on the context of exceptions to the doctrine of
privity of contract. The leading case in Ireland is Cadbury Ireland v Kerry Co-op Creamery
(1982)14. Here, the two defendants were a creamery and a statutory body under the control of
the Minister for Agriculture. The creamery acquired certain other creameries from the
statutory body, on terms that their supply of milk to Cadburys would not be cut off. Cadburys
was not a party to this contract. Some years later, the creamery sought to reduce the supply of
milk to Cadburys. One of the issues presented was whether Cadburys could rely on the terms of
the contract between the statutory body and the creamery. It was held by Barrington J. that they
could not.
[9-22]It was accepted that a party to a contract could constitute himself a trustee so as to entitle a
third party to enforce the contract. However, it was noted that the modern trend was to confine
this device within narrow limits. Barrington J noted that there was certainly an intention
to benefit a third party, in what was perceived to be the public interest. But this did not in itself
show an intention to create a trust in favour of Cadburys, in particular where the statutory body
did not otherwise have any contractual or fiduciary duty to Cadburys. It will, therefore, require
quite strong and specific evidence of intention to create a trust before the doctrine of privity
can be evaded in this way.
KEY POINT Using a contractual trust to benefit a third party is certainly possible. However,
you really have to do it. The Courts seem uninterested in implying the existence of such a trust
simply where it is clear that the contract was intended to benefit a third party.
USING THE LAW OF TORT
[9-23]A person may be liable to another in tort notwithstanding the absence of any
contractual relationship between them: this can be seen from the limitation clause cases cited
above under agency. It is, therefore, possible to side-step the requirement of privity if an
alternative cause of action in tort can be found instead. This evasion of the doctrine of privity is
obviously closely intertwined with the question whether a person can rely on an exclusion clause
contained in a contract to which he is not a party, which question would not arise but for the
existence of concurrent liability in contract and tort.
THE SPECIAL CASE OF COVENANTS CONCERNING LAND
 [9-24]Although more properly dealt with in land law, it should be noted here that certain
agreements concerning land can be enforced against subsequent holders of the land,
notwithstanding that they were not privy to the original agreement. The extent to which these
covenants bind subsequent holders is an exceptionally complicated area of law, but in
summary, where there is no question of privity of estate applying, then the burden of
covenants does not run at law, and runs in equity only in the case of negative covenants. The
benefit of covenants runs at law if four criteria can be met (if it concerns the land of successor;
successor has legal estate; successor has same legal estate as covenantee; intention that
benefit will run), and runs in equity only if the covenant is negative, and either (a) annexed to the
land, (b) assigned to the successor, or (c) the covenant was imposed as part of a scheme of
development.
STATUTORY INTERVENTION
[9-25]Statute can limit the doctrine of privity in certain circumstances. One example is s.76 of
the Road Traffic Act 1961 which allows a victim of a road traffic accident to proceed against an
insurer on the basis of the contract between the insured and the insurer. To do this, the victim
must give notice to the insurer before any proceedings are brought (giving the insurer the ability
to decide whether to defend the action) and can then enforce any unmet judgment against the
insurer. Alternatively, the victim can proceed directly against the insurer in the first place if the
insured is out of the State or otherwise missing, or if it is “just and equitable” that the victim
should be allowed to do so (such as where the insured is dead and no representation is
raised to his estate: Hayes v Legal Insurance Co Ltd (1941).15 A number of other statutes also
provide for enforceability by third parties in specified circumstances. (See for example the
Package Holidays Act 1995, which confers rights on persons apart from the person who actually
booked the holiday.)
ASSIGNMENT
[9-26]Assignment is a complex beast, but suffice it to say that in certain cases, one can
assign contractual rights (not obligations) to another party. So, suppose John agrees to pay Mick
€1,000 a year for house-minding services, Mick could assign the right to receive the sum to
another person.
COLLATERAL CONTRACTS
[9-27]A very simple way around privity is simply to use additional contracts. Going back to the
exclusion clause example above, Excel Delivery could simply contract expressly with Fast
Transit that Fast Transit will be indemnified from any losses claimed by ABC against Fast
Transit. This is not really an exception to the privity rule, just a method by which benefits can be
conferred on parties who are not privy to the original contract. In general, however, this is a
pain in the neck in practice. Look at what the LRC said about this approach to getting
around privity:-
However, large, complex projects may require the individual drafting of hundreds of separate
collateral warranties. The negotiation and signing of so many collateral warranties can be
difficult and time-consuming, and can generate a lot of paperwork. This is all very costly, and
it has been estimated that for a typical development scheme, about a third of the legal fees
can be attributed to the cost of putting collateral warranties in place.
ARE THESE MECHANISMS ENOUGH?
[9-28]One might point that since the main problem with privity as identified by the LRC is that
it cannot allow third parties to enforce benefits they are clearly intended to receive, and since the
common law allows many ways to do this, the case for reform is somewhat less pressing
– i.e. the common law picks up the slack. The LRC commented on this point as
follows: The privity rule is subject to a large number of common law and statutory exceptions.
These exceptions have developed in a piecemeal fashion to deal with specific problems which
were caused by the privity rule. Some of these exceptions are quite complex, and there are
various difficulties associated with them. However, more fundamentally, it is clear that the
current exceptions do not, and will not, cover every situation where an unjust or illogical result is
caused by the privity rule. It could be argued that further specific exceptions could be created
to deal with such situations, but it is the Commission‘s view…that the non
comprehensive nature of an already long list of exceptions supports the need for a more
general rule in favour of third party rights.
DAMAGES FOR LOSS SUFFERED BY THIRD PARTY
[9-29]A more complex (but very examinable) question relates to the circumstances in which the
law will allow a party to a contract to recover damages relating to losses suffered by a
third party. A very simple example will suffice.
Mr. Jones contracts with Holiday Makers Ltd for a package holiday for 7 people (himself, his
wife and his five children) to Florida. The holiday is a disaster and, for one reason or another, it
is clear that he and his whole family have suffered loss which would be otherwise
recoverable. However, Mr. Jones has the contract and there is an argument that the
only losses he can recover are losses he suffered. The rest of his family were not
parties to the contract (and assume no other special technique exists to confer the benefit of the
contract on them) so can Mr. Jones recover a sum reflective of the damages done to his whole
family?
Generally
[9-30]We start with Jackson v Horizon Holidays (1975).16 In this case Lord Denning
MR effectively announced his preference for allowing a party in the position of Mr. Jones (in our
example) to recover for third party loss. In this case, the defendant holiday company
contracted with the plaintiff for a holiday, his wife and their two three year old children. The
accommodation was pretty poor and Jackson recovered damages including £500 for
mental distress. In the Court of Appeal, Denning MR held that this was excessive for
Jackson’s mental distress but he upheld the award on the basis that it compensated the other
parties – i.e. that Jackson had made a contract for the benefit of both himself, his wife, and his
children. You might note that James LJ, on the other hand, seemed to award the £500 purely in
relation to the distress of Jackson himself partly on the basis that a high award was justified
because his distress was amplified by witnessing that of his family. Nevertheless, Denning MR
had planted the seeds.
[9-31]However, in Woodar Investment v Wimpey Construction (1980)17 the House of Lords
disapproved of Denning MR’s approach as a matter of general principle, but reserving its
application for special cases where “special treatment” may be needed for family holidays or, the
House said, ordering meals in restaurants. This was about a contract for the sale of land which
said that the purchaser was to pay the vendor £850K and £150K to a third party. The vendor
claimed damages arguing that the purchased unlawfully repudiated the contract. He lost on this
ground, but had he won, the issue of damages would have arisen. Would the purchaser
have been liable to pay the vendor the £850K and the £150K even though the vendor had
not lost the £150K? Obviously, if the vendor was in someway contractually bound to the third
party to pay it over, he may claim that the purchaser forced a breach of that contract,
but that is not really the issue here.
[9-32]This creates what was referred to in the Darlington Borough Council v Wiltshier
Northern Ltd [1995] 1 WLR 68 case as the “legal black hole”. One can flagrantly breach
a contract which causes loss to a third party but which leaves the third party with no
contractual remedy.
[9-33]Nevertheless, Woodar seems to leave open, as a matter of general principle, the
application of the Jackson logic to “low level” cases such as holiday cases, restaurant
cases, hiring a taxi for a group of people and cases like that. Extension of the Albazero
Exception / Building Contracts [9-34]As a matter of general principle, the House of Lords in
Alfred McAlpine v Panatown (2001) has confirmed that outside the scenarios caught by
Woodar, there is no general rule which allows a contracting party to recover loss on
behalf of a third party. All there is a special rule called the “Albazero exception” after The
Albazero (1977) which, in turn, appeared to follow an old case called Dunlop v Lambert (1839).
[9-35]In Dunlop a carrier transported goods at sea for the consignor. However, at the time the
goods were damaged the property in the goods had passed from the consignor to a third party.
The third party was the one who lost, not Dunlop (the consignor) but the third party had no
contract with the carrier. Nevertheless, Lambert was held liable to Dunlop. The logic of this
exception is that at the time of contract the carrier and consignor/original owner are deemed to
know that the property in goods may be transferred to third parties and hence, the shipper is
treated as having contracted for the benefit of all such third parties acquiring rights. This
was applied in The Albazero.
[9-36]What happened next was that the Albazero exception was applied in the context of
building contracts, but in a somewhat ambiguous manner in the case of Linden Gardens Trust v
Lenesta Sludge Disposals (1994).18 This concerned a building contract whereby the builder was
to develop a site for the “employer”. The site was later transferred to another. The
builder was in breach of contract and the employer, even though it didn’t own the site, sued. The
builder claimed that it suffered no loss as he was no longer the owner of the land. The House of
Lords rejected this argument. This case is generally viewed as being decided on one of two
grounds referred as the “broader” or “narrower” ground.
“The Broader Ground”: On this reading of the case the employers right to damages were
based on the notion that the builder was entitled to be compensated for the sums he had spent in
ensuring that the third party received the intended benefit.
“The Narrower Ground”: Lord Keith and Lord Bridge preferred to hold with Lord
Brown Wilkinson that the loss was really suffered by the third party but comes within a the
Albazero exception.
9-37]Darlington Borough Council v Wiltshier Northern Ltd (1995)19 raises more difficult
situations. Here a local authority wanted to develop land it owned. For particular reasons
relating to restrictions on local authority borrowing, a deal was struck with the bank as
“employer” of the project and the defendant as contractor (builder). A separate contract was
entered into between the bank and the council. The deal here was that the bank would make sure
the project went ahead smoothly etc and would assign any benefit of any rights it had against
the builder to the council. But the second contract said that the bank would not be liable to the
council for any incompleteness in the work done. The work was incomplete. So, when the bank
assigned rights to the council it assigned the rights as against the builder that the bank had – i.e. a
right to sue the builder. The Court of Appeal held that as the bank could have sued the builder
for substantial losses, so too could the local authority. Some say that this extends Linden
Gardens because here there was no transfer of property to the third party.
[9-38]Alfred McAlpine Construction v Panatown (2001)20 is the last case to consider
here. The case was quite like Darlington in that a special triangle contract system was used to
avoid VAT liabilities in the building context. So, instead of employer and contractor we
had a building contract between the contractor and a third party company. The owner of the
site then entered another contract with the builder. The employer (the third party
company) complained that the works were defective. It was argued by the builder that the only
person who suffered loss was the owner and not the employer. The House of Lords held
that this argument was, in essence, correct. It re-stated the general rule as being that one cannot
sue for loss suffered by a third party. The question was whether it came within the principles of
the above case-law. For reasons which are far too complicated, the House of Lords basically
held that for recovery to follow, the Albazero exception had to apply (i.e. that there was no
other general principle governing). What was fatal, however, was that the House noted that the
third party (UIPL) had a right to recover directly against the builder by reason of a duty of care
between those parties.21
[9-39]Effectively, we get to the conclusion that outside of the cases covered by Jackson and
Woodar we have the Albazero exception in maritime law and its extension in building cases. It
means that where a construction contract is made which envisages that the building would be
passed on to subsequent purchasers (and who have no direct right of action themselves against
the wrong-doer) the original customer may be given the right to sue to ensure that the
“wronged” party can receive compensation