Author: Saumya Khandelwal, 2nd year student at Campus Law Centre, University Of Delhi.
CITATION:  AC 847
COURT: House Of Lords
COUNTRY: United Kingdom
JUDGES: Viscount Haldane Lc And Lord Dunedin, Lord Atkinson, Pakker Of Waddington, Sumner, And Parmoor
ORIGINAL COPY: N/A
AREA OF LAW: Doctrine Of Privity, Consideration, Agency
IS it lawful for one party to sue another even though no contractual relationship exists between them?
A contract is an agreement between two or more parties creating mutual rights and obligations enforceable by law. The doctrine of privity of contract is a common law principle based on the underlying premise that only parties to a contract can sue or be sued under it, no stranger or third party to a contract can either enforce the contract or be liable for any obligation under the contract to which they are not a party. The rationale behind this is that a contract is only binding on the parties to the contract and therefore only the parties to a contract should be able to confer rights or impose obligations. For example, If A and B enter into a contract and B commits breach of contract then only A can sue B, not C or D.
Dunlop tyres V. Selfridge is a landmark case on the doctrine of privity. It analyzed the concept of the doctrine of privity in detail and other important elements of a contract including the doctrine of consideration and agency agreement.
STATEMENT OF FACTS
- Dunlop, a tyre manufacturing company, entered into a contract with Dew, a trade distributor, for the sale of tyres on a condition that they would not resell the tyres at less than the listed price, and that any reseller who wanted to buy the tyres from Dew also had to agree to maintain the same listed sale price, therefore imposing obligations on both- the distributor and the retailer.
- Dew then entered into a contract with Selfridge (a retailer) for the sale of tyres on the same Price Maintenance terms, but Selfridge contravened the condition by selling the tyres at a price lower than the listed price.
- Dunlop then sued Selfridge for breach of contract and claimed damages and an injunction to prevent Selfridge from selling the tyres below the listed price. Selfridge argued that Dunlop can neither impose obligations nor claim damages as there was no contractual relationship between Selfridge and Dunlop.
ISSUES OF CONTENTION
- Whether Dunlop has the right to sue Selfridge even though no contractual relationship exists between them?
- And, whether Dunlop can impose obligations on the retailer without sharing any contractual relationship?
- Whether Dew acting as an agent of Dunlop Pneumatic Tyres & co.?
- The Court held that Dunlop had no right to sue Selfridge for selling the tyres at a price lower than the listed price and therefore it had no claim to damages and injunction. The judgement was pronounced on the two common law principles: Doctrine of Privity and Doctrine of Consideration.
- The doctrine of privity, as discussed above, states that only parties to the contract can sue or be sued for the breach of contract and in this case, since Dunlop and Selfridge shared no contractual relationship hence there was no breach of contract.
- One of the important elements of a contract is Consideration. Consideration is crucial in all contracts, and an agreement shall be deemed legally enforceable only with its presence. As defined by Sir Frederick Pollock,” consideration is an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise is thus given for value is enforceable.”
- The Doctrine of consideration is based on this idea of reciprocity which ensures that both the parties benefit from the contract and that there is a lower possibility of one party taking advantage of the other.
- In this case, the doctrine of consideration required the promisee ( Dunlop) to give consideration to the promiser ( Selfridge) for a contract to be binding and legally enforceable, however, the court unanimously observed the absence of consideration between Dunlop and Selfridge, making this a nudum pactum.
- The court further observed that the only way that a principal not named in a contract can be sued is if he acted as an agent on behalf of one of the parties privy to the contract and since Dew was not an agent of Dunlop, therefore the agency agreement does not apply in this case.
- In an agency agreement, the contract is between the principal (Dunlop) and the third party ( Selfridge) and the agent disappears. But since Dew was not an agent of Dunlop, the two deals cannot be seen as one. There existed two separate contracts. Selfridge shared a contractual relationship with Dew & Co. and not Dunlop Pneumatic Tyres and Co.
- In application of facts, the court held that Dunlop had no right to sue or claim damages from Selfridge as there was no contractual relationship between the two parties and therefore Dunlop’s claim for damages and injunction stands defeated.
- On account of the Doctrine of Privity, a stranger to a contract cannot sue or be sued.
- Consideration is crucial for all contracts to be deemed legally enforceable. The absence of consideration makes an agreement nudum pactum.
- A person cannot contract as a principal and agent at the same time. The Court held in this case that Dunlop was not acting as an undisclosed principal of Dew and therefore had no right to sue Selfridge for the breach of Price Maintenance Terms.