Understanding Privity of Contract

DUNLOP PNEUMATIC TYRE COMPANY LIMITED v. SELFRIDGE AND COMPANY LIMITED [1915] A.C. 847,[1915] UKHL 1

The Concept

Privity of contract means that only parties to a contract can sue each other. A third party or a stranger to the contract, cannot sue the parties for breach of contract.

There are certain exceptions to this rule such as Trusts, third-party beneficiaries, family arrangements etc.

Facts 

Dunlop was a reputed tyre manufacturing company in England. They entered into a contract with Dew who was a trade purchaser. They offered them a discount for the tyres on a condition that they wouldn’t sell them below the listed price.

They also demanded that  any reseller who bought Dunlop tyres from Dew also couldn’t lower the prices. Dew sold the Dunlop tyres to Selfridge at the listed price and made Selfridge agree not to sell at a lower price either. Dew extended the same discount as it had received from Dunlop to Selfridge as well.

Selfridge to show their sincerity,  agreed that they would pay £5 in liquidated damages if they violated this agreement. Selfridge proceeded to sell the tires below the price they promised initially.  Dunlop sued Selfridge for damages.

Issues

Given that Dunlop was not party to the contract between Selfridge and Dew, can Dunlop sue Selfridge?

Arguments by the Plaintiff

1. The contract entered into between Dew and Selfridge had all the same terms and conditions (including the discount) as the original contract between Dunlop and Dew. This means that Dunlop expressly consented to this particular contract between Dew and Selfridge. Hence, this consent which led to Selfridge availing the discount would constitute the consideration flowing from Dunlop to Selfridge. 
2. Dew, while entering into a contract with Selfridge, was acting as an agent for an undisclosed principal, which was Dunlop. Dew acted upon Dunlop’s express leave and licence and hence that makes Dunlop party to the contract.

Arguments by the Respondent

1. Only a party to the contract can sue for damages for breach of a contract. A stranger to the contract cannot sue.
2. No consideration passed between Dunlop and Selfridge.
3. A principal not named in the contract can still sue the promisor if the promisee is actually his agent. However, for this to be true, some consideration must be given by the undisclosed principal to the promisor, either directly or through the promisee and that is not the case here. 

Judgment

The House of Lords held that Dunlop could not claim damages from Selfridge for selling below its resale price because it was not party to the contract between Selfridge and Dew. The Hon’ble Court relied on the following reasons:

1. Dunlop was not a party to the contract and hence could not sue Selfridge for breach of the said contract. 
2. No consideration was given by Dunlop to Selfridge, hence there could not be any binding contract between Dunlop and Selfridge.
3. Dunlop was not a named principal in the contract between Dew and Selfridge. In order to sue, there had to be some consideration which either directly or indirectly passed between Dunlop and Selfridge. As no consideration had been given, there was no privity of contract and Dunlop could not sue Selfridge. 
4. The terms of the contract between Dew and Selfridge were decided by them without any interference by Dunlop. 
5. Dew held the title to goods manufactured by Dunlop independent of any contract with Selfridge. They were free to sell the tyres to anyone they wished. Dunlop did not give any consideration directly to Selfridge nor through Dew as his agent.

Reflective question

1. Could Dunlop sue Selfridge, if in the contract between Dew and Selfridge, Dunlop was a named principal? or
2. If a relationship of agency had been proved to exist between Dunlop and Avey Dew and Co.?