You don’t always have to be a party to a contract to enforce it
Privity of contract is the principle that only parties to a contract can enforce or be bound by the terms of that contract.
However, when multiple State Government Agencies collaborate on a particular property transaction, it may be possible to draft the contract in such a way that those agencies, as non-parties to the contract, are also entitled to enforce it.
In this article, we look at the privity principle and exceptions to its rule. We discuss how specifically drafted contract inclusions can provide agencies with enforcement recourse even if they are not a party in the contract.
Is the privity principle without exceptions?
The short answer is – no. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 the High Court indicated that privity of contract may not apply where:
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an offeror who is a party to a contract unequivocally makes a promise in favour of a third party in return for consideration by the offeree
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the third party would suffer loss or damage if the promise is not observed.
While this case related specifically to an insurance contract, it made it clear that exceptions to the principle of privity of contract are possible.
Exceptions in property transactions
In fact, the Conveyancing Act 1919 (NSW) (Act) also provides a statutory exception to the principle of privity of contract. Section 36C of the Act states:
(1) A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant, or agreement over or respecting land or other property, although the person may not be named as a party to the assurance or other instrument.
(2) Such person may sue, and shall be entitled to all rights and remedies in respect thereof as if he or she had been named as a party to the assurance or other instrument.
What does this mean in practice? The exception may apply when:
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a lease under which one government agency is the lessee but another government agency occupies the premises
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a lease under which agencies that are non-parties co-occupy or share the premises with an agency being the lessee
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a licence agreement under which agencies that are non-parties enter the premises to carry out works on behalf of an agency being the licensee
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a positive covenant that requires a non-government covenantor to comply with the terms of the covenant for the benefit of an agency that is not the covenantee.
However, this statutory exception is not without limitations.
In Perpetual Trustee Co Ltd v Willers (1955) 72 WN (NSW) 244 the Supreme Court held that section 36C of the Act cannot benefit an entity that did not exist at the date of an agreement or instrument.
In other words, a non-party agency that did not exist at the date of an agreement, or that did exist at the date of the agreement but later changed its name, cannot rely on section 36C of the Act.
In addition, the Supreme Court’s decision in Australian Mortgage and Properties Pty Ltd v Baclon Pty Ltd [2001] NSWSC 774 indicates that a mere reference to a class or category of non-party is not sufficient for section 36C of the Act to apply.
Contractual recourse
Given the limits of statutory recourse to bypass privity of contract, a deed poll provision may sometimes be included in an agreement to achieve the same end. A deed poll expresses one party’s unilateral intention to be bound by the agreement against a defined category of people or entities who are not parties to the agreement.
The deed poll provision can be agreed with a covenantor and included in an agreement to:
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empower a non-party agency to enforce the covenant
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empower the entity in whose favour the covenant is made (the covenantee) to require the covenantor to observe the promise, and to do so on behalf of a non-party agency.
As long as the provision complies with the standard requirements of a formal deed, it provides contractual (as opposed to statutory) rights on the covenantee and the non-party to enforce the covenant.
In practice
If an agency entering a contract wishes to provide statutory recourse to a specific third party under section 36C of the Act, it should at the very least ensure the third party is ‘specifically identifiable’ within the terms of the contract.
However, given the limitations of this approach, a carefully drafted deed poll provision will often be preferable if there is room for negotiation with the covenantor.
Authors: Edward Choi & Sara Duong
Contributing partner: Melissa Potter