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Covenants, Privity of Contract, and the Purchaser of Personal Property
Published online by Cambridge University Press: 16 January 2009
Extract
This article discusses an old but vexed question in the law of obligations: to what extent can a purchaser of personal property find himself bound to observe covenants relating to that property to which he was not party? Put shortly, how far can covenants bind personal property?
This question can, of course, arise in many guises. The issue may be whether a purchaser of shares in a private company is bound by a right of pre-emption in respect of those shares held by other shareholders in the same company; whether the seller of goods can impose restrictions on the price at which remote purchasers may resell those goods; whether the mortgagee of a ship can be prevented from using the vessel inconsistently with the rights of one who has booked space in her: issues whose sheer diversity makes it most difficult to achieve the aim in this article of developing general principles in this area of the law.
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References
1 Previous treatments include the classic English and American discussions by Wade, E. C. S. (Restrictions on User (1928) 44 L.Q.R. 51)Google Scholar and Chafee, Z. (Equitable Servitudes on Chattels (1928) 41 Harv.L.R. 945)Google Scholar respectively; see too McCormack, (1952) 3 Sydney L.R. 295.Google Scholar There is brief but perceptive coverage en passant in Vaines, Personal Property, 5th ed., Chap. 8 and Palmer, N. E., Bailment, pp. 972et seq.Google Scholar
2 (1858) 4 DeG. & J. 276.
3 (1848) 2 Ph. 774.
4 Ibid., at p. 777.
5 Which give the charterer the right to have his goods carried in the vessel but not possession of it. See (1858) 4 De G. & J. at p. 295; Scrulton on Charterparlies, 18th ed., p. 45.Google Scholar
6 (1858) 4 De G. & J. 276, 282.
7 See per Knight Bruce L.J. (1858) 4 De G. & J. 276, 283; per Lord Chelmsford L.C. ibid., at p. 287.
8 Ibid., at p. 299, following Lumley v. Wagner (1852) 1 De G.M. & G. 604.Google Scholar
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11 Including, where appropriate, a mortgagee.
12 On notice, see below, pp. 79–80.
13 On the other hand, Scots law accepts that a purchaser of personal property may be treated as though he were a party to contracts concerning that property. See M'Cosh v. Crowe (1903) 5 F. 670Google Scholar; Wm. Morton & Co. v. Muir, 1907 S.C. 1211Google Scholar (the latter accepted as good law in D. M. Walker, Contracts and Related Obligations in Scotland, s. 29.57). cfThough, Melrose v. Aitken Motors, 1918, 1 S.L.T. 109.Google Scholar
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15 Or, for that matter, specifically enforceable rights. The parallel is explored below, pp. 63–64.
16 Cf. Bridge, J. 's reasoning in Esso Petroleum Co. Ltd. v. Kingswood Motors (Addlestone) Ltd. [1974] Q.B. 142, 156. A transferred land to B in breach of covenant with C: on the ground that otherwise equitable remedies would be ineffective C obtained an injunction ordering a reconveyance of the land to A.Google Scholar
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31 l.e., as not in restraint of trade. See Elliman v. Carrington [1901] 2 Ch. 275.Google Scholar
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34 [1904] 2 Ch. 306.
35 As argued, for instance by Scrutton, L. J. in Barker v. Stichney [1919] 1 K.B. 121.Google Scholar
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42 Thus reversing Elliman v. Carrington, n. 31 above.
43 (1848) 2 Ph. 774.
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49 [1916] 2 A.C. 54.
50 Since the charterparty was not specifically enforceable.
51 Though not quite all. Restrictions on the transfer of shares in a private company may exist to protect the value of the major shareholdings. See, e.g. the facts of Greenhalgh v. Mallard [1943] 2 AH E.R. 234.Google Scholar
52 [1919] 1 K.B. 121 (more fully covered below, pp. 75–77).
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54 E.C.S. Wade (1928) 44 L.Q.R. 51, 62.
55 Thus in overruling Catt v. Tourle (1869) L.R. 4 Ch.App. 654Google Scholar and Luker v. Dennis (1877) 7 Ch.D. 227, L.C.C. v. Allen denied that brewery ties could be enforced against a purchaser of land; yet such ties clearly were for the benefit of the brewers' business interests, not their land holdings.Google Scholar
56 Cf. Re Waterson, Berlin & Snyder, 48 F. 2d 704, 708 (1931) (C.A. 2nd Circuit).Google Scholar
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65 Except of course that the plaintiffs were not, as in De Mattos, unable to carry out their side of the bargain.
66 [1926] A.C. 108, 119.
67 Ibid., at p. 125.
68 Ibid., at p. 121.
69 A conclusion supported by Lord Shaw's discussion only a few lines previously of the implications of L.C.C. v. Allen.
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85 l.e., the shareholder may be enjoined from abstaining as much as from voting inconsistently. See Puddephatt v. Leith [1916] 1 Ch. 200.Google Scholar
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88 [1919] 1 K.B. 121.
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1 Under, e.g., the. Restrictive Practices Act 1976, Resale Prices Act 1976, or art. 86 of the Treaty of Rome.
2 See Ontario lockey Club v. McBride [1927] S.C.R. 84Google Scholar, affirmed on other grounds [1927] A.C. 916 (P.C.). Contra, I.C.I, v. SussmanGoogle Scholar (Oliver, J., unreported, 28 May 1976, cited in Pritchard v. Briggs [1980] Ch. 338). It is submitted that decision is wrong and should not be followed.Google Scholar
3 Cf. Greenhalgh v. Mallard [1943] 2 All E.R. 234, above, n. 87.Google Scholar
4 Thus the Massachusetts court in Clairol v. Cody's Inc. above, n. 99, only allowed distribution to the general public of bottles of hair dye marked “For Professional use only” on condition that suitable warnings for the home user were included.
5 For instance, dangerous chemicals, perhaps?
6 141 Cal. 203, 346 P. 2d 505 (1959).
7 194 Atl. 631 (1937). Cf. Jefferys V. Boosey (1854) 4 H.L.C. 815, 963, per Brougham, Lord.Google Scholar
8 Ibid., at p. 637.
9 See per Knight, Bruce L.J. in De Mattos's case itself; (1858) 4 De G. & J. 276, 282.Google Scholar
10 Quaere if the defendant is a volunteer without notice, actual or constructive? On the analogy of equitable proprietary interests, it is submitted that a De Maitps v. Gibson claim will lie against him. But any injunction should be conditional on the plaintiff reimbursing the defendant his innocent expenditure on the property itself, and possibly any other loss he suffers through having in good faith changed his position.
11 Joseph v. Lyons (1884) 15 Q.B.D. 280Google Scholar; Maitland, , Equity, 2nd ed., ed. Brunyate, , p. 146.Google Scholar
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13 [1979] Ch. 548, 575. This assertion however loses much of its force because Browne, Wilkinson J. in Swiss Bank wrongly identified the rule in De Mattos v. Gibson with the tort of inducing breach of contract, for which actual notice of the contract is indubitably necessary.Google Scholar
14 The Celtic King [1894] P. 175.Google ScholarCf. Wilkes v. Spponer [1911] 2 K.B. 473 for an analogous rule concerning equitable interests in land.Google Scholar
15 The trial judge apparently awarded damages against the defendant in the Strathcona case (see [1926] A.C. 108). It is submitted that this award, which was accepted without question or comment by the Privy Council, can only be justified on the basis of Lord Cairns' Act. Quaere incidentally whether damages should be available where, had the defendant's predecessor in title still been in possession of the property concerned, no injunction would have issued against him. In such cases the unjust enrichment of the defendant, which lies behind De Mattos v. Gibson, might be difficult to prove.
16 As observed with some trepidation by Coleridge, J. in his dissenting judgment in Lumley v. Gye (1853) 2 E. & B. 216, 246.Google Scholar
17 [1949] Ch. 556.
18 Even where the customer and not the defendant makes the first approach. The tort is really one of knowing participation in a breach of contract. See Salvadori's case [1949] Ch. at p. 563; Sefton v. Tophams Ltd. [1965] Ch. 1140, 1160, per Stamp, J. (reversed on other grounds [1967] 1 A.C. 50).Google Scholar
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20 Ibid., at pp. 571–572.
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23 See B.M.T.A. v. Salvadori, n. 17, above.
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25 Compare the rule that an equitable assignee of a chose in action, despite the rule in Dearie v. Hail, always takes subject to previous equitable assignments (which may include promises to assign) of which he has notice. See Spencer v. Clarke (1878) 9 Ch.D. 137.Google Scholar
26 [1980] 3 W.L.R. 457.
27 Ibid., at p. 470.
28 This was quite apart from the question of notice, where the court agreed with Browne-Wilkinson J.
29 [1981] 2 W.L.R. 893.
30 See now the Patents Act 1977, s. 60 (1) (a). But sale of goods without overt restriction implies permission to use—e.g., Betti v. Willmott (1871) L.R. 6 Ch.App. 239 (esp. per Lord Hatherley at p. 245).Google Scholar
31 (1895) 12 R.P.C. 262.
32 See now the Patents Act 1977, s. 60 (1) (a).
33 (stc) (1922) 39 R.P.C. 239.
34 This is the effect of the Resale Prices Act 1976, ss. 9–10.
35 Patents Act 1977, s. 44 (re-enacting the Patents Act 1949, s. 57).
36 See, e.g.. Sterling Drug Co. v. C. H. Beck [1972] F.S.R. 529.Google Scholar
37 American courts have reached the same result even in the absence of specific provision—Coca-Cola Bottling Co. v. Bennett, 238 F. 513 (1916).Google Scholar
38 See Goode, R. M., Hire Purchase Law and Practice, 2nd ed. p. 35Google Scholar; Thornely, J. W. A. (1974) 13 J.S.P.T.L. 150, 151Google Scholar; Palmer, N. E., Bailment, p. 973.Google Scholar
39 As lucidly argued in Goode, R. M., Hire Purchase Law and Practice, n. 38 above.Google Scholar
40 Interestingly enough, cases in land law concerning whether licences are binding on third parties have normally involved licensees in possession: e.g., Erringlon v. Erringlon & Woods [1952] 1 K.B. 290Google Scholar; Binions v. Evans [1972] Ch. 359.Google Scholar Furthermore, the more notorious cases where such licensees have not prevailed over purchasers have often involved licensees without possession—see, e.g., Clore v. Theatrical Properties [1936] 3 All E.R. 483Google Scholar; King v. David Allen (Billposting) Ltd. [1916] 2 A.C. 54.Google Scholar
41 Cf. the rule in conversion, that a hire-purchaser who converts goods is liable to the owner only for the unpaid balance of the price; to the extent that he has paid, he had an interest in the goods. See Wickham Holdings v. Brooke House Motors [1967] 1 W.L.R. 295.Google Scholar
42 Compare the parallel question, raised in cases such as Britain & Overseas Trading (Bristles) Ltd. v. Brooks Wharf [1967] 2 Lloyd's Rep. 51Google Scholar, whether a purchaser of goods bailed to a third party is bound by any terms in the original contract limiting the bailee's liability. The present author has suggested that he is, on analogous reasoning to that in the text: see (1978) 29 N.I.L.Q. 40.