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Can third parties enforce a contract without infringing on the doctrine of privity?

11 August 2020

#Dispute Resolution & Litigation

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Can third parties enforce a contract without infringing on the doctrine of privity?

In the 1990s, the Commonwealth privatised Australia’s federal airports, entering long-term leases with private airport operators. 

A recent Full Federal Court case[1] concerned identical leases for Hobart International Airport and Launceston Airports. Clause 26 said if the tenants did not have to pay rates and taxes, because the land was owned by the Commonwealth, an amount calculated under the leases was payable to the relevant local councils – who were not a party to the leases. A dispute arose over how the amount was calculated, and the councils commenced proceedings seeking declaratory relief interpreting the calculation clause. 

What is declaratory relief?

Declaratory relief is where courts declare or pronounce something to be the case, as opposed to, say ordering one party to pay money to another. In this case, the councils sought declaratory relief or declarations that their approach to calculating payments was correct and that they were entitled to receive payments under the leases. The court can make a declaration ‘as of right’ – that is, even if the plaintiff claims no other relief, such as damages, the court can declare the meaning and effect of a document.

What is the doctrine of privity of contract?

In this dispute, ‘privity of contract’ was also relevant. Privity means that only parties to a contract can enforce it or become bound by it. Because the councils were not parties to the leases, how could they complain about how payments were calculated under clause 26? They seemingly had no ‘standing’.

This case is interesting because declarations can be made ‘as of right’ – like a theoretical question – and the court could ignore or avoid the privity rule – which the councils argued. The counterpoint is the councils were not parties to the leases, therefore the leases’ construction is not their concern. They have no standing even for declaratory relief, which the Commonwealth and tenants contended.

Primary and Full Court judgment

The primary judge agreed with the Commonwealth and tenants – if the declarations were made, the privity rule was being abandoned, which was not the correct approach. The Full Court disagreed and examined the intersection between jurisdiction to hear a matter, the power to make a declaration and privity of contract.

Judicial power, jurisdiction and the requirement of a ‘matter’

It now becomes a bit technical. The Federal Court has jurisdiction if there is a ‘controversy’, also called a ‘matter’, and the party litigating the matter has standing.

A ‘matter’ has two elements: ‘Subject matter’ and ‘justiciability’. The ‘subject matter’ is what the dispute is about – the court will only consider issues within the scope of the controversy.

‘Justiciability’ means “a justiciable controversy, identifiable independently of the proceedings which are brought for determination”. There must be a real world and immediate dispute – or controversy – between litigants, not abstract or hypothetical questions.

Subject to the councils having standing, the Court held there could be a controversy even if a plaintiff was not a party to the contract being complained about. A contractual controversy was not always determined only by all parties being in the relevant contractual relationship.

Historically, payments were made to the councils under the leases. The payments stopped in 2014 when the airport sites were revalued, resulting in a significant increase in the amounts payable. The lessees, Commonwealth and councils disputed the methodology in the leases used to calculate the payments. A matter existed because there was a justiciable controversy between the councils on one hand and the Commonwealth and lessees on the other hand.

Standing for declaratory relief and doctrine of privity

Next is whether the councils had ‘standing to sue’. An applicant, and here for declaratory relief, needs a real interest in the relief being sought. For example, it obtains legally enforceable rights or liabilities. 

Where the applicant is not a party to the contract for which relief is being sought, standing requires it showing:

  • a real interest in the declaration, or what the third party stands to gain. It may be foreseeable legal, commercial, reputational or other practical consequences
  • a proper connection between the party and the contract’s subject matter
  • a proper ‘contradictor’ in the proceedings. That is, an opposing party with a true interest in the declaration not being made.

The Full Court was satisfied that the councils established the above and found that the councils had standing to seek the declaratory relief sought. Third parties can seek declaratory relief on the interpretation or application of a contract without necessarily being a party or having a legally enforceable right to receive benefits under the contract – and this does not cut across the privity doctrine. The Court has its own power to make the declaration, and provided there is a ‘matter’ it may well be appropriate to do so. Whether the declarations will be adhered to is a separate matter.

A way to sidestep the doctrine of privity

The Full Federal Court decision opens the way for third parties to contracts to seek declaratory relief validating their entitlements to benefits under the contracts which they may not be parties to. Privity issues can be avoided.

Having determined that a matter exists and that the councils have standing to seek a declaration, the Full Federal Court has remitted the matter to the primary judge. The primary judge will determine whether the Court will exercise its discretion to grant the declaratory relief sought.

Given the fundamental differences between the judgments, it will be interesting to see whether the Commonwealth or the lessees make an application to the High Court for special leave to appeal.

Author: Kim Nguyen

[1] Clarence City Council v Commonwealth of Australia [2020] FCAFC 134 (6 August 2020)

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