Topic 11 - Third Parties.docx

Topic 11 – Third parties Thus far in this guide we have been concerned with three areas of contract law: the formative elements necessary to create a binding contract; the content of a contract; and those elements which vitiate an apparent contract. We turn now to the question of who can enforce the...

Topic 11 – Third parties Thus far in this guide we have been concerned with three areas of contract law: the formative elements necessary to create a binding contract; the content of a contract; and those elements which vitiate an apparent contract. We turn now to the question of who can enforce the contract. Privity of contract determines who can enforce a contract. This doctrine is easily stated: in general terms only one who is a party to a contract can enforce it. In Topic 3 we looked, briefly, at Tweddle v Atkinson (1861). In this case, two fathers had entered into a contract, each promising the other to pay their children £100 when they got married. The bride’s father died without paying the money to the couple. The groom sued his estate for the money. Figure 11.1: Who can enforce the contract? The court held that the Groom could not sue as he was not party to the contract (also he had not provided consideration for the promise to pay £100). Clearly privity of contract defeated the intentions of the parties to this contract and can lead to substantial injustices. For these reasons many methods have been devised at common law to provide third parties to a contract with a means of circumventing a strict application of the doctrine of privity. The interpretation and employment of these methods and devices has given rise to much complication in English law. It was thus recommended by academics, lawyers and judges that privity of contract should be reformed. The result is the Contracts (Rights of Third Parties) Act 1999 which provides parties to a contract with a method of circumventing the doctrine of privity of contract to provide third parties to the contract with a right to enforce contractual terms. It is the breadth of this exception, which justifies the title of this topic as ‘Third parties’. (Mini Lecture 1) , what we're going to try to do today is to explain the doctrine of privity of contract, and more particularly, two distinct aspects of that doctrine, and introduce a statutory reform or statutory exception to that doctrine called the Contracts (Rights of Third Parties) Act 1999. Key is obviously us knowing what do we mean by privity of contract. Well, at common law, the doctrine of privity provides that only those who are parties to a contract, only those who are privy to the contract can enforce it for their benefit or be subject to burdens created by it. We have two distinct aspects contained to this rule. Firstly, that third parties cannot enforce a contract made for their benefit. Secondly, that third parties are not obligated by a contract. If A enters a contract with B in exchange for a consideration supplied by B, A promises to confer a benefit on a third party C, then C cannot sue to enforce that benefit because C is not a party to the contract between A and B that generated that benefit. That's the first part of the doctrine of privity, sometimes called the benefit rule. Third parties cannot enforce a benefit in a contract to which they're not a party. The other part of the rule, sometimes called the burden side, is that if A promises for a consideration provided by B, that C will perform some service for him, then C is not obliged to do so. C is not a party, is not privy to the contract that sought to create a burden for him. Now, I hope you can see that one part of this doctrine is far more intuitively appealing and obvious than the other. There is no reason whatsoever why A and B should be able to contract in a way that generates a burden for C. C is not consented to providing any service. Why should A be able to oblige him to do so. But it is far less obvious why, if for good consideration, supplied by one party to a contract, the other agrees to confer a benefit on a third party. It is far less obvious why that third party should not be able to enforce that benefit. It is because the benefit rule seems far less obvious that a broad statutory exception to it was created in the Contracts (Rights of Third Parties) Act 1999. If we look at the exception here, a third party is given a right to enforce a term of the contract where the contract expressly provides that he can enforce it or purports to confer a benefit on him. Either the contract can say, we expressly provide that a third party can enforce this benefit, or if the contract merely purports to confer a benefit on the third party, he will get an enforceable right unless the parties did not intend the term to be enforceable by the third party. Either you can enforce the right if you expressly provide that you can, or there will be a presumption that the third party can enforce this right if the contract between A and B confers it the benefit on the third party, unless A and B make it clear that they don't want that third party to have an enforceable right. This is a very significant thing, but there is a further requirement, which is that Page 2 of 2 the third party must be identified either expressly by name or as a member of a particular class or as answering a particular description. This is a very wide-ranging exception. I've included here some extra cases for you to look at. A particular case, Dunlop v Selfridge, which is one of the cases that established the doctrine and all also one of the modern cases applying the new act 11.1 The doctrine of privity The doctrine of privity of contract is primarily concerned with the question of who can enforce a contract. There are two aspects to the doctrine of privity of contract. The first is that only parties to a contract are bound by it; A and B cannot, by their contract, compel C (a third party to the contract) to do something or to refrain from doing something (see Figure 11.2). Figure 11.2: The obligation on C to pay B £100 is unenforceable because C is not a party to the A/B contract. The second is that only the parties to a contract can derive rights and benefits from their contract; A and B cannot, by their contract, confer an enforceable benefit upon C even if A and B clearly intend to confer a benefit upon C (see Figure 11.3). Figure 11.3: The obligation on B to pay C £100 is also unenforceable because C is not a party to the A/B contract.  At common law the parties to a contract cannot impose a burden on a third party, nor can they confer a benefit on a third party. See Tweddle v Atkinson (1861). A number of decisions of the House of Lords illustrate the problems created by the doctrine. Dunlop Pneumatic Tyre v Selfridge & Co (1915). Dunlop sold tyres to Dew, subject to a retail price maintenance scheme. Dew resold the tyres to Selfridge & Co and sought to impose the same retail price maintenance scheme. Selfridge & Co sold the tyres for a price less than the scheme allowed. Dunlop sued Selfridge & Co on the basis that Dew had contracted with Selfridge & Co as Dunlop’s agent. The House of Lords rejected this argument. In the words of Lord Haldane ‘only a person who is a party to a contract can sue on it’. Lord Haldane also observed that consideration must be provided if a person is to be able to enforce a contract. Scruttons Ltd v Midland Silicones Ltd (1962). The House of Lords, Lord Denning dissenting, refused to allow stevedores the benefit of an exemption of a liability clause entered into between the carrier (who hired the stevedores to unload the vessel) and the owner of goods. As a general rule, a stranger to a contract cannot take advantage of its provisions even where the provisions were intended to benefit him. Beswick v Beswick (1968). An uncle contracted with his nephew whereby the nephew would receive the uncle’s coal business. In exchange, the nephew agreed to pay a weekly sum to the uncle and, upon the uncle’s death, to the uncle’s widow. After his uncle’s death, the nephew refused to make the payments to his aunt. The House of Lords held that the aunt was not entitled to sue to enforce the obligation to make the payments to her. The aunt was, however, able to succeed in her capacity as the personal representative of her deceased husband’s estate. The first aspect of privity, that the parties cannot by their contract impose liabilities or burdens upon a third party, is intuitively unobjectionable. The circumstances in which justice calls for such a result are very limited. The second aspect, that the parties cannot benefit a third party to the contract, is objectionable. There are many situations in which the parties to the contract clearly intend to confer an enforceable benefit upon a third party. The denial of the benefit to the third party defeated the intention of the contracting parties and often produced manifest injustice and commercial inconvenience. As a result, the common law created a number of devices to overcome the rigorous application of the doctrine of privity. Without these devices, it is doubtful that the doctrine of privity would have survived as long as it did. There were numerous calls for the reform or abolition of the doctrine. After a period of thorough consultation and consideration, the Law Commission recommended a legislative reform of the doctrine of privity (see Law Com No 242, Privity of Contract: Contracts for the Benefit of Third Parties). These recommendations were implemented by the Contracts (Rights of Third Parties) Act 1999. The Act allows the parties to a contract to provide the third party with an enforceable benefit. Study task 1 In his speech in Scruttons Ltd v Midland Silicones Ltd (1962) Lord Reid stated that the argument that the carriers had acted as the stevedore’s agent in obtaining for them an exemption clause could be successful if a number of conditions were met. What are these conditions? Were they met in the case before him? Show feedback Lord Reid stated that the agency argument might be successful if: the contract made it clear that the stevedores were intended to receive the protection of the exemption clause the contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on behalf of the stevedores the carrier had authority from the stevedore to enter into the contract on his behalf (or, possibly, a later ratification of the contract by the stevedores would suffice) and any difficulties about how the stevedores would provide consideration for this contract were overcome. The agency argument was not successful in the case before Lord Reid. The stevedores were not named or described in the class of people to whom the limitation of liability was to extend nor was there any evidence that the carrier was acting on their behalf. Consequently the first two criteria were not satisfied. Study task 2 Consider the arguments in favour of privity of contract and the arguments against privity of contract. Show feedback The principal arguments in favour of privity of contract are: the doctrine clearly defines the ambit and enforceability of contractual obligations it can ensure that courts do not create a contractual obligation it operates in tandem with the requirement that consideration must move from the promisee and the third party has not provided any consideration it would not be desirable for a promisor to face actions for breach of contract from both the promisee and the third party if the third party could enforce the contract, this would affect the ability of the parties to vary or rescind the contract. The point here is that Lord Reid is indicating how parties can establish a collateral contract between the owner of the goods and the stevedores in order to provide the stevedores with the benefit of the exclusion clause. Because it is a separate contract, it requires consideration. The principal arguments against privity of contract are: it leads to commercial inconvenience it can operate to create great injustices it defeats the intentions of the parties to the contract it puts English contract law in an anomalous position in that the contract law of other countries does recognise third party rights it creates uncertainty in contractual relationships given the number of devices which exist to circumvent the application of the doctrine. Study task 3 Why do you think privity of contract has survived in the common law for so long? Show feedback The survival of privity of contract illustrates some of the limitations of the common law. Courts were hesitant to overrule the doctrine (existing contractual relationships would be upset if the doctrine was abolished) and expressed disapproval of it. Steyn LJ, in Darlington BC v Wiltshier Northern Ltd (1995) pointed out that common law courts ‘are the hostages of the arguments deployed by counsel’ – if counsel did not seek to challenge the doctrine, it was difficult for the court to do so. Legislative action was difficult to achieve, in large part because of the difficulty in finding parliamentary time to deal with the matter. Summary The doctrine of privity of contract provides that the parties to a contract cannot confer a benefit upon a third party nor can they impose a burden on the third party. 11.2 The Contracts (Rights of Third Parties) Act 1999 The Act implements the recommendations of the Law Commission. It reforms the doctrine of privity; it does not abolish the doctrine. The common law devices which circumvented the effects of privity are, therefore, still effective. The primary reason for reform of the doctrine of privity was to give effect to the intention of the contracting parties. The Act allows contracting parties to provide an enforceable benefit to a third party; the contracting parties cannot impose a burden upon a third party. Two kinds of benefit are available to a third party. The first is a positive benefit and the second is a negative benefit (the protection of an exclusion or limitation of liability clause) (s.1(6)). The Act applies generally to all contracts entered into after 11 May 2000, although certain types of contracts are excluded from its application (s.6). Under the Act, a third party to a contract can enforce a term of the contract in his own right in two circumstances. Where the contract expressly provides that he may (s.1(1)(a)). Where the terms of the contract purport to confer a benefit upon him and nothing else in the contract denies the purported benefit (s.1(1)(b), s.1(2)). The second circumstance is more limited than the first because it is possible, on a true construction of the contract, to rebut the presumption of an enforceable benefit. The right of the third party to enforce a term of the contract is subject to the terms of the contract (s.1(4)). This means that the parties to the contract can impose conditions upon the third party’s ability to exercise his rights under the contract – they could, for example, stipulate that the third party could receive a benefit under the contract only if he applied for it within a certain time period. In Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003) the Court of Appeal found that a chartering broker was entitled to recover his commission by enforcing a clause under the charterparty between a shipowner and charterer by reason of s.1(1) of the Contracts (Rights of Third Parties) Act 1999. There was no evidence to conclude that the contracting parties intended that the charterer should not be entitled to rely upon the Act. In Prudential Assurance Co Ltd v Ayres (2007) the High Court held that if, on a true construction of the term, it purports to confer a benefit upon a third party, the third party can enforce that term in their own right. The Act does not require that the sole purpose of the term be to confer a benefit upon the third party; in addition it is possible for a term to confer an enforceable benefit upon a third party and some other party. Note the distinction drawn between a contract that purports to confer a benefit upon a party and one which simply improves the position of a third party if the contract is performed – only in the former case will the third party be able to rely upon the Act. For s.1(1)(b) of the Act to apply, it must be one of the purposes of the bargain between the parties to benefit a third party, rather than an incidental effect of contractual performance (see Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening (2009)). The application of s.1(3) of the Act was considered in Chudley v Clydesdale Bank  EWCA Civ 344 where a contract between a bank and an investment company specified how investors’ funds were to be held. In these circumstances, the Court of Appeal held that the investors were entitled to sue the bank for breach of contract in their own right under the 1999 Act. The purpose of the contract was to protect investors who, although not expressly named, were sufficiently identified as a member of a class. In contrast, in Bates v Post Office (No 3)  EWHC 606 (QB) assistants working in post offices were not able to bring an action in their own right under the Act. It could not be said that contracts to which sub-postmasters and the Post Office were parties were entered into for the purpose of training assistants. It seems that the training of assistants was an incidental effect of the contractual performance of the sub-postmasters. The right of the third party is additional to any right that the promisee might have to enforce any term of the contract (s.4). However, where the promisee has recovered money from the promisor in respect of the third party’s loss or the promisee’s expense in making good that loss, the court shall reduce any award to the third party to the extent it finds appropriate (s.5). The third party enforces the contract by receiving any remedy that would have been available to him as a party to the contract. The rules relating to that remedy apply accordingly, be it damages, injunctions, specific performance or other relief (s.1(5)). Generally, the parties to a contract cannot rescind the contract or vary it in such a way as to either: deny the right of the third party, or alter the entitlement of the third party once the third party has acquired a right to enforce a term of the contract. In Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP  EWCA Civ 367 the Court of Appeal overturned the lower court’s decision in relation to ss.1 and 8 of the Contracts (Rights of Third Parties) Act 1999. In so doing it held that s.1(6) of the 1999 Act established no distinction between a right of action and a contractual defence. The right to take the benefit of an exclusion clause might be subject to a term providing for the arbitration of any disputes. The application of s.8(1) was such that the parties to the contract positively intended that third parties would be bound to the result of arbitration proceedings even if they had not initiated the proceedings in order to secure a benefit apparently conferred upon the third party by the contract. Very clear language was required, however, to bring about the result that for a third party to avail themselves of an exclusion clause in a contract between other parties was, in turn, subject to an arbitration clause in this contract. The third party receives protection from such later changes to the contract in two instances. The first is where the third party has communicated his assent to the term to the promisor. The second is where the promisor is either aware that the third party has relied upon the term or the promisor can reasonably be expected to have foreseen that the third party would rely upon the term and the third party has relied upon the term (s.2(1)). The Act provides that the contracting parties can provide otherwise in their contract. They can contract to allow a rescission or variation of the contract without the third party’s consent or they can obtain the consent in a different manner than that set out in the Act (s.2(3)). Where a third party seeks to enforce his right and brings a claim against the promisor, the promisor can rely on any defence or set-off in the contract and relevant to the term being enforced as if the claim had been brought by the promisee (s.3(2)). In studying the Act, you should keep in mind that it only applies if the contracting parties intend it to provide the third party with the right to enforce a term of the contract. In addition, if the contracting parties intend the Act to apply, they may vary the extent of its application (and thus the extent of the benefit provided to the third party) by a number of means. First, they could provide that the contract could be later varied or rescinded by the contracting parties (s.2(3)). Second, the contract could provide that the promisor could avail himself of any and all defences and set-offs available in any action brought by the third party (s.3(3)). Third, the promisor can limit or exclude any liability for negligence (other than death or personal injury) in the performance of his obligation to the third party (s.7(2)). The Act provides an enforceable right to third parties that is given in addition to any right or remedy available at common law (s.7(1)). This means that the various devices developed by the common law to evade the consequences of privity still exist. The Act also allows the common law to develop new devices. Self-assessment questions When is a third party given the right to enforce a term of the contract? What rights are given to a third party? What defences are available to the promisee in an action brought by the third party? To what extent can the parties to the contract vary or rescind the contract? How can the parties to a contract exclude the rights of a third party? Summary The Contracts (Rights of Third Parties) Act 1999 represents an enormous change to the common law doctrine of privity because it allows contracting parties to confer an enforceable benefit upon a third party. The intentions of the parties to a contract can prevail, rather than being thwarted by legal doctrine. It is important to remember, however, that the parties must bring themselves within the ambit of the Act and that they can exclude its operation from their contract. In addition, the Act provides the parties with the ability to determine the extent of the benefit conferred upon the third party. (Mini Lecture 2) s. In the first lecture, you'll recall that we looked at the doctrine of privity of contract, that is the doctrine which excludes third parties from either receiving benefits under a contract to which they're not a party or by being subject to burdens by them. We looked at the major statutory exception which allows a third party to receive a benefit under a contract to which they're not a party, which was introduced by the Contracts Rights of Third Parties Act 1999. Today, we're going to look at the common law exceptions to the doctrine of Privity. Effectively, the techniques the courts used to get round the doctrine of Privity prior to the introduction of the 1999 statute. We also are going to understand the connection between the statutory exception introduced in 1999 and the previous common law exceptions. There are our learning objectives, understanding the common law exceptions, and also understanding the relationship between those common law exceptions and the 1999 Act. Following on from our first lecture, our focus will be upon what we call the benefit side of the doctrine of Privity of Contract, because you'll recall that we concluded that it is not at all obvious why if A undertakes to confer a benefit on C for good consideration provided in a contract between A and B by B. It is not in any way obvious why A should not be obliged to confer that benefit. The benefit rule is the one we think is wrong, so the common law exceptions are all concentrated around the benefit side of the doctrine of Privity of Contract. First, looking at the relationship between the new act and the common law of exceptions, this relationship is explicitly laid out in the act. In section 7, the act clearly says that all existing exceptions to the Privity Doctrine are retained. The right of action introduced for third parties in the 1999 act is supplemental, is extra to the previous common law exceptions. In section 4, it says that the act will not affect any right of the promisee, which, if exercised, might effectively secure a benefit for the third party, because one way the common law got round this rule is that even if a third party cannot bring an action in their own name for a benefit, they can sometimes get the contracting party to do something which would effectively secure for the third party the benefit to which they would otherwise not be entitled. We can see that the act preserves these common law exceptions, and so we need to know what they are. There is another reason why the common law exceptions retain their importance, because the right of action created by the act is itself excludable. If in a commercial contract, as is often the case, parties say no rights of action under the 1999 Contracts Rights of Third Parties Act shall be created by this contract. The act's effect is excluded. So, if a third party wants to get a benefit, they have to use the old common law of exceptions. Why would parties exclude it? In commercial contracts, there's a tendency to always want certainty. When a new act is created, which potentially creates a new right of action, which contractors are unfamiliar with, they tend to prefer to stick with the law they knew. They will often exclude new provisions where they're able to do so. That is because in commercial contracts, if it's intended to give a third party a right, then probably a separate contractual document will be created to which the third party is a party to give them that right. Where they merely have a commercial contract between A and B, commercial entities often do not wish that to generate rights for third parties. Let's have a look at these common law exceptions. There can be a bit of a debate as to what is a true exception. What are the circumstances when a third party can get a benefit, or what really are subterfuges or ways round? Because the first is more of a subterfuge or way round because the third party might be able to do a couple of things which allow it to effectively get the benefit of a clause in a contract to which they're not a party by getting the person who is a party, the promisee, to do something for them. A simple illustration of this is the case of Jackson v Horizon Holidays. One of those cases where one family member makes a contract for a holiday on behalf of other family members. In such cases, we will see when we do damages, holiday cases are one of the typical cases when unusually in the law of contract, damages for non-pecuniary losses are awarded. Because what is it you expect from a holiday? You expect a happy time, a good time. If you do not get one, your loss is measured by your disappointment. Your loss is non-pecuniary. Holidays are one of the contracts where damages for non-pecuniary losses are awarded in an action for breach of contract. The key point to us is that in these informal contracts where one family member contracts typically for a number of other family members, then the damages which can be recovered by the contracting party extend not only to his or her disappointment, but also to the disappointment of the other members of the family. If it falls within one of these informal situations where it's usual for one person to contract on behalf of others, then they may recover damages by bringing the action themselves, but those damages will extend beyond their own losses to include the losses of the others. Now, this principle of getting the promisee to do something to effectively secure for the third party the benefit of a clause in a contract towards then not a party arose on unusual facts in the case of Beswick v Beswick because what happened in Beswick v Beswick was that Uncle Beswick died and his business, his coal merchant's business, went to his nephew, but he wanted his widow to be entitled to some benefits under the contract under which the business was transferred to the nephew but the widow, of course, was a third party to that contract. How could she secure the benefit? In the Court of Appeal, Lord Denning tried to give her the benefit directly. In the House of Lords, they found a way of giving the widow the benefit under the contract to which she was not a party. That was actually a subterfuge because the widow had two capacities. She was, on the one hand, her personal capacity, the widow, but she was also the personal representative of her dead husband. If you die leaving a will then the personal representative is called an executor if it's a man, or as an executrix if it's a woman. If you die intestate i.e. not leaving a will then the personal representative is called the administrator if it's a man, the administratrix if a woman. That personal representative no matter how ghoulish it sounds stands in the dead person's shoes because they represent the deceased person and can enforce obligations as if they were the deceased person. As the deceased man's personal representative, Mrs. Beswick could enforce the contract. What she did was she got an order of specific performance that is, the court order that the contract be actually literally performed. By acting as a contracting party, that is in the capacity of the personal representative of her husband she obtained specific performance which secured for her in her personal capacity the benefit of the clause in the contract to which she was not a party. Jackson illustrates getting the contracting party to bring in action for damages. Beswick indicates how getting the contracting party to bring in action for specific performance will effectively secure for the third party the benefit of a clause in a contract to which they're not a party. A different route is if despite looking like someone is a third party to a contract, they can show a collateral contract to which they are the party. If in a contract between A and B, there's a benefit conferred on C if you can somehow prove an extra collateral. By collateral, we mean a contract running beside the main contract whereby A undertook directly to C to confer a benefit on them. Then of course C can enforce that because they are then enforcing a contract to which they are a party. This problem arose in a case called the Eurymedon like many shipping cases known by the name of the ship involved the full name being NZ Shipping Co Ltd v A M Satterthwaite. This is a factual pattern that is the same as the pattern in the next case. We have a goods owner who entered a contract with a shipowner and then the shipowner, who was moving the goods for the goods owner employed dock staff called stevedores to unload or load of cargo. The stevedores' carelessness caused damage to the goods. In this case, the stevedores wanted to obtain the benefit of a clause in the contract between the goods owner and the stevedore that exempted them from liability. The goods owner was trying to get the benefit of a clause in a contract to which they're not a party, but it was an exemption clause in the contract between the goods owner and the ship owner that the stevedore wanted the benefit of. It was said that they could get the benefit of this exemption clause because although the clause was written out in a contract between the goods owner and the shipowner. There was actually a collateral contract between the goods owner and the stevedore. This was a collateral and unilateral contract because the clause in the contract between the goods owner and the shipowner was regarded as a unilateral offer. It was an offer by the goods owner to hold exempt from liability anyone who assisted in the movement of their goods. It was a promise in exchange for an act, I promise as goods owner to hold you exempt from liability for damage to my goods if you do an act, help in their movement. It was collateral because it was not the main contract between the goods owner and the ship owner, or the main contract between the shipowner and the stevedore. It ran beside those contracts. That is a situation where the stevedore got the benefit of an exclusion clause in a contract to which they were not a party by effectively demonstrating a direct link between them and the goods owner by showing a collateral contract existed. The final exception is agency. Even though someone looks like they are not a party to the contract, if they can show that a party to the contract entered that contract as their agent, they effectively become a party to the contract. In the similar factual circumstance, goods owner, shipowner, stevedore, same factual scenario as the Eurymedon, a different route was considered in Scruttons v Midland Silicones to effectively give the stevedore the benefit of the clause in the contract to which they were not a party. Although it wasn't proven on the facts it was said that stevedore would be able to get the benefit if they could show that the shipowner had entered the contract with the goods owner which contained the exemption or limitation clause as the agent of the stevedore. Because the moment someone is regarded as a principal operating through an agent it's as if they become one party. Before we leave this topic, you might just have nagging in your mind why should stevedore be getting the benefit of clauses excluding them from liability for negligence. It's a point that I've made several times in these lectures that despite our intuitions, when it comes to commercial contracts the highest value pursued is often not fairness but is certainty because in the end, so long as there is certainty, so long as we know that any attempt to exclude liability is effective that is a clear signal to the parties as to who needs to go and insure against that damage. If it is absolutely clear that a clause in a contract between goods owner and shipowner will be effective, then the stevedore knows he doesn't have to insure against liability for damage to the goods and it's only the goods owner that needs to do it. If there is doubt about its effectiveness then the stevedore would also have to insure against the cost of the risk of damaging the goods. The stevedore would then pass on this cost to the goods shipowner in the cost of his stevedoring services and the shipowner would then pass on that extra cost to the goods owner in the cost of carriage contract. The goods owner would then effectively be paying twice for the insurance of his goods, once directly in the policy that he takes out and secondly through the enhanced price he pays for the contractor carriage. When there is a clause seeking to exclude for liability the courts have tried their very best to give effect to that clause. 11.3 Rights conferred on third parties at common law As already noted, the Contracts (Rights of Third Parties) Act 1999 did not abolish privity. In addition, the Act preserved any rights the third party would have at common law (s.7(1)). This section examines the nature of these rights, most of which derive from various ‘devices’ or methods created in a number of cases for the purpose of circumventing the doctrine of privity of contract. The breadth and utility of these devices varies greatly. 11.3.1 Enforcement by the promisee This is an obvious proposition. It is, essentially, what occurred in Beswick v Beswick. The estate of the promisee was able to enforce the promise. Thus, if A (the promisor) promises B (the promisee) to pay C (the third party) £100, B can sue to enforce this promise. The 1999 Act, s.4, retains the promisee’s right to enforce the contract. While this method eliminates many problems presented by privity it is not without difficulty. Figure 11.4 Enforcement by the promisee A (the promisor) contracts with B (the promisee) to pay C (the third party) £100. B can sue A to enforce the promise because of the A/B contract. Two difficulties can arise when the enforcement is to be made by the promisee. The promisee may be unwilling, or unable, to enforce the contract (in these circumstances, there is little C can do to compel B to enforce the contract). The second difficulty is to find an appropriate remedy for B. As we will see in Topic 14, the general purpose of an award of damages is to put the party where they would have been but for the breach of contract. The problem in these circumstances is that B would never have received the money in the first place. She is thus no worse off when the contract is breached by A than if it were performed by A. Another possible view of this problem is that B has a ‘performance interest’ in the contract and that damages should be awarded to B because this interest has not been realised. Courts are reluctant to recognise such an interest (see Panatown v Alfred McAlpine Construction Ltd (2000)). The problem of an adequate remedy was considered in Beswick v Beswick. Where the promise was made solely for the benefit of the third party, the House of Lords had difficulty in awarding damages. In that case, an order was made for specific performance. This result was agreed, in obiter, by the House of Lords in Woodar v Wimpey Construction (1980). In Radford v DeFroberville (1977), however, the Court held that B’s claim against A for damages was not reduced by the fact that the contract between A and B also conferred a benefit upon C. There are a number of circumstances in which the promisee has been able to receive an award of damages. These are considered below. Multiple bookings In Jackson v Horizon Holidays (1975), Lord Denning recognised that a person who booked a holiday on behalf of himself and family members was able to recover damages on behalf of the family members where the contract was breached. The House of Lords later restricted the ambit of this decision in Woodar v Wimpey Construction (1980). Sellers’ contracts with carriers to take buyers’ goods for delivery In The Albazero (1977), Lord Diplock recognised a limited ability on the part of one party to recover damages on behalf of another. This can occur where, for example, a seller of goods contracts with a carrier to deliver the goods to a buyer. After this first contract has been entered into, the seller enters a second contract of sale with the buyer and sells the goods to the buyer. The buyer has no contract with the carrier. The seller has a contract with the carrier, but because he has transferred the goods to the buyer, he is no worse off if the contract is breached and the goods are in some way damaged. The Albazero recognised that when the seller and carrier contract in contemplation of a second contract with the buyer, the seller can recover substantial damages on behalf of the buyer where the goods are lost or damaged. Contracts where the subject matter will be acquired by a third party The decision in The Albazero was subsequently extended in two cases. First in Linden Gardens Trust v Lenesta Sludge (1993) to cover the situation where A and B contract on the basis that the property which is the subject matter of A’s obligations may at some point be acquired by a third party, C, and on the footing that B should be able to enforce the contract to its full extent for the benefit of C. Second, in Darlington BC v Wilshier Northern (1995), to the situation where it is contemplated that the third party was (as opposed to will become, as in Linden Gardens) the owner of the property. While these extensions initially met with judicial approval, its application has been subsequently limited by the House of Lords’ decision in Panatown v Alfred McAlpine Construction Ltd (2000). Following this case, where the third party has a direct remedy of some sort against the promisor, the exception(s) will not be applied. An order for the promisor to perform In some situations it may be possible for the court to make an order for the specific performance of the contract, as in Beswick v Beswick. In other situations, it may be possible for a court to enforce a promise not to do something. Thus, if the promisor A contracts with promisee B not to sue third party C, B can ask the court to stay the proceedings against C: see Snelling v John G Snelling (1973). This approach is not without difficulty: see Gore v Van Der Lann (1967). In that case, B was said not to have an ‘interest’ unless he had a legal liability to C. Study task 4 What is the relationship between the 1999 Act and the common law with regard to the provision of exceptions to privity? Show feedback The 1999 Act preserves existing exceptions to privity (subsection 7(1)) and the Law Commission, in its report on privity, ‘Privity of Contract, Contracts for the Benefit of Third Parties’ (Law Com No. 242 Cm 3329 July 1996), expressed the hope that legislation would not hamper the further judicial development of third party rights. The result is that any situation concerning privity of contract and a third party beneficiary will fall within one of four scenarios. In the first scenario, the problem will be dealt with by the 1999 Act alone. In the second scenario, the problem will be dealt with by an existing common law device and does not fall within the 1999 Act. In the third scenario, the problem can be dealt with by both the 1999 Act and an existing common law device. In the fourth scenario, the problem does not come within either the existing common law devices or the 1999 Act. Study Task 5 Is it likely that courts will accept a ‘performance interest’ on the part of a promisee and allow the promisee to recover substantial damages for a breach which deprives the third party of his intended benefit? Show feedback There are two opposing arguments as to the future development of a ‘performance interest’. It is possible to view cases which appear to accept such a performance interest as situations where, in the absence of such recognition, there would be no effective sanction for a breach of contract. The 1999 Act, however, provides parties with the opportunity to confer a benefit on a third party. If they have chosen not to, the court can view the lack of this conferment as indication that there is no performance interest. See, for example, the approach taken in Panatown v Alfred McAlpine Construction Ltd (2000). This may, however, cause harsh results in circumstances where the parties have not, by accident, brought themselves within the ambit of the Act. In such a circumstance, the lack of a ‘performance interest’ which entitles the promisee to substantial damages allows a promisor to breach a contract with impunity. 11.3.2 Agency Agency is not so much an exception to privity as a general commercial necessity. If A cannot, or does not choose to, negotiate directly with C he may authorise B to do so on his behalf. As a general rule, the resulting contract creates privity between A and C, with B dropping out of the picture. See Shanklin Pier Ltd v Detel Products Ltd (1951). Occasionally legislation uses agency to avoid the difficulties caused by privity. Figure 11.5 Agency As illustrated in Figure 11.5, A contracts with B as C’s agent. The result is that A has a contract with C and thus C can enforce the contract. 11.3.3 Exemptions and limitations of liability Where A and B contract for B to perform a service, it may be intended that B will render part of his performance through C, a third party to the contract. For example, if A (the owner of goods) contracts with B (the carrier) to deliver goods from Port 1 to Port 2, B may subcontract the unloading of the goods at Port 2 to C, a third party (the stevedores). B has two contracts in this example: the first is with A for the carriage of goods and the second is with C for the unloading of the goods. It is common practice for B to seek to limit or exclude his liability for breach of contract through the inclusion of a clause to this effect. B may also seek to extend the benefit of this clause to C. It is at this point that a problem arises because C is not a party to this first contract. The lack of a contract between A and C is no bar to A suing C in tort should C damage A’s goods. Figure 11.6 Exemption of liability for third party As it is illustrated in Figure 11.6, by contract 1, A contracts with B to carry A’s goods and a clause is included which limits or exempts the liability of B and C. By contract 2, B contracts with C to unload A’s goods. Should C damage the goods, A may bring an action in tort against C. C is unable to protect himself using the exemption clause in contract 1 since he is not a party to that contract. Courts have stretched the agency concept in one particular situation to provide the third party with the benefit of the exclusion clause in contract 1. This was established in The Eurymedon, New Zealand Shipping v Satterthwaite (1975) and applied again in Port Jackson Stevedoring v Salmond and Spraggon (1980). In The Eurymedon, the Privy Council established that in the situation outlined above, it may be possible for B to contract with A as C’s agent. Through B, A offered an exemption of liability to C. C, in performing their contract with B and unloading the vessel, accepted this offer and a contract between C and A was formed such that C could rely on the exemption clause. Figure 11.7 The Eurymedon case In Figure 11.7 the following chain of events takes place: A offers immunity to C through B (C's agent) C unloads the ship and performs contract 2 the result is a contract between A and C whereby C is given some form of immunity from action by A the final result is that should A sue C in tort for any damage, C can defend the action on the grounds of the exemption clause in contract 3. An excellent summary of the development of the law in this area is provided by Lord Goff in The Mahkutai (1996). Lord Goff observed that in the late 20th century the pendulum of the law swung away from Scruttons Ltd v Midland Silicones Ltd. The effect of the 1999 Act upon this pendulum is, as yet, uncertain. Following the 1999 Act, the third party can, however, still take advantage of an exception clause in a contract for the carriage of goods by sea: s.6(5). It remains to be seen whether it would be possible to use the device in The Eurymedon to confer other benefits (see The Makuta (1996)). Study task 6 What conditions must be met in order for the exemption clause to protect the third party through The Eurymedon device? Show feedback The conditions were those set out by Lord Reid in Scruttons Ltd v Midland Silicones Ltd (1962) that: the contract made it clear that the stevedores were intended to receive the protection of the exemption clause the contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on behalf of the stevedores the carrier had authority from the stevedore to enter into the contract on his behalf (or, possibly, a later ratification of the contract by the stevedores would suffice), and any difficulties about consideration moving from the stevedores were overcome. Study task 7 What was the consideration provided by C to A for the contract of immunity in The Eurymedon? Show feedback C’s consideration was the performance of the contract with B; that is to say, the unloading of the ship. It was good consideration because their performance thus provided A with the benefit of a direct obligation which they could enforce. Study task 8 A contracts with B for B to carry goods between Dover and Calais by sea. Included in this contract is a clause that exempts B and B’s agents, employees and subcontractors from liability for any damage, howsoever caused. B contracts with C for C to unload the ship. The ship carries several cargoes besides A’s goods. In unloading goods belonging to Z, C accidentally destroys A’s goods. What advice do you give to C as to his liability to A for the damage? Show feedback To answer this question, you need to consider what C’s potential liability is and what defence they could use to meet this liability. They have no contract with A and thus are not liable for a breach of contract in causing the damage. Where their liability probably arises is for the tort of negligence. The issue then becomes whether or not they have a contractual defence to this action based upon the exemption clause negotiated by B. To determine this, you need to apply the criteria (noted in Section 11.3.3) set out in The Eurymedon to see if they are met. It is likely that criteria (a), (b) and (c) are met; thus the problem is concentrated on (d). The consideration in The Eurymedon was the stevedores’ performance of the contract between the carriers and the stevedores. Here, the damage occurs before the B/C contract is performed. In the circumstances, it would appear that no consideration has been provided such that a contract of immunity can arise between A and C. If there is no such contract, then C cannot raise a contractual defence of immunity. See Raymond Burke Motors Ltd v Mersey Docks & Harbour Co  1 Lloyd’s Rep 155 for an example of this problem. 11.3.4 Collateral contracts Occasionally a third party may be made liable on the basis that he has made some promise in consideration of the promisee’s entry into the ‘main contract’. See, for example, Andrews v Hopkinson (1957). 11.3.5 Trusts It is possible for the promisee as ‘owner’ of the promise to constitute a trust of the promise (i.e. B holds A’s promise on trust for C). Where this happens, B may recover from A the whole of the loss suffered by C because of A’s non-performance: Lloyd’s v Harper (1880) 16 Ch D 290. Taken to its furthest extent, a trust of a promise negates privity altogether, for the third party must simply assert that B is the trustee of the promise and that the benefit of the promise is the third party’s. Possibly for this reason, this device has not met with favour. There have been few successful decisions since the 1930s. Thus in the case of Re Schebsman  Ch 43 a company promised a retiring employee to pay an annuity to his widow and to his daughter if she (the widow) died within the annuity period. The court held that there was no trust in favour of the widow or daughter. The reason for refusing to find a trust is usually a failure to prove any positive intention to create a trust. This intention to create a trust was originally a fiction in this context: its strict requirement means that there are very few cases where the trust concept will circumvent the doctrine of privity. In Darlington BC v Wiltshier, two members of the Court of Appeal found in obiter that the case could have been resolved on the basis that Morgan Grenfell could, before any assignment to the Council, have sued for damages for the breaches and recovered substantial damages as constructive trustee for the council. This flowed from the particular wording of the covenant. 11.3.6 Other legislation For the sake of completeness, you should be aware that in some specific instances, a statute may overcome the problems that would otherwise be posed by privity. Examples of this can be seen in the Third Parties (Rights Against Insurers) Act 1930 s.56, s.75 Consumer Credit Act 1974 and s.56 Law of Property Act 1925. While you do not need to know the specific details of the operation of these provisions, you should be aware that in particular circumstances the difficulty created by privity may have been overcome by legislation. Study task 9 Would the widow in Re Schebsman have been better off if there had been a trust? In what way, if at all, does the decision in Beswick v Beswick form an exception to privity? How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in Beswick v Beswick? How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in New Zealand Shipping v AM Satterthwaite? Following the enactment of the 1999 Act, is it likely that courts will continue to devise exceptions to the doctrine of privity? Note: See, for example, Parkinson v College of Ambulance Ltd & Harrison (1925), Kiriri Cotton Co Ltd v Dewani (1960) and Ashmore, Benson, Pease & Co Ltd v A v Dawson Ltd (1973). Summary The harshness caused by a strict application of privity led to the judicial development of a number of devices and approaches to circumvent the application of privity. The application, or the lack of an available application, of these devices and approaches could itself cause injustices to arise. Following the 1999 Act, these devices and approaches continue to exist. Their further development, in situations where the parties have expressly chosen not to avail themselves of the 1999 Act, is questionable. 11.4 Liability imposed upon third parties The question here is the extent to which the burden of contracts relating to things other than land can ‘run’ with them in the same way that the burden of restrictive covenants can run with land. The answer is far from clear. See Lord Strathcona Steamship v Dominion Coal (1926), which was not followed in Port Line v Ben Line Steamers (1958). See also Swiss Bank v Lloyds Bank (1979, at first instance). It is the case that in instances where a bailment has occurred that there may be a sub-bailment on terms. In The Pioneer Container (KH Enterprise v Pioneer Container) (1994) the Privy Council applied principles of bailment to hold that the owner of the cargo was bound by the agreement between the bailee and the sub-bailee, although the owner was not a party to the agreement. The liability upon the owner is imposed as a result of the sub-bailment on terms rather than by contract. Self-assessment questions What are the two aspects of the doctrine of privity? Name three devices used in common law to give enforceable benefits to third parties. What is the main test of whether third parties should be given rights under contract? In relation to the doctrine of privity, what is a ‘performance interest’? Outline the Eurymedon case and when the device created in this decision can be utilised by contracting parties. Can a contract impose a liability on a third party? Summary The number of situations in which liability is imposed upon third parties is limited and is usually dependent upon the knowledge or implied consent of the third party. Examination tips The material considered in this topic has frequently come up in examination papers on contract as a question on its own. The questions have taken the form of either: an essay question a problem question. Examples of both are set out in the Sample examination questions of this Topic. Because the material in this topic goes to the very essence of the nature of contract law, it could be combined with issues from many other areas of contract law in an examination question. Sample examination question 1 Question Last year C entered the employment of D Ltd for a fixed period of six years, his contract providing that, if he should die before the end of the six years, D Ltd would pay his widow £2,000 a year for three years from his death. C died in January this year, but D Ltd has refused to make any payment to his widow (E). Feedback The widow E is a third party beneficiary to the contract between C and D Ltd. As such, privity of contract prevents her from enforcing the contract (Tweddle v Atkinson, Dunlop v Selfridge & Co). There are, however, two possible ways in which she could overcome the problem posed by privity. The first is that she may be able to utilise the device employed in Beswick v Beswick. That is to say, if she is the executrix or administratrix of her husband’s estate she could apply in that capacity for an order for the specific performance of the contract. In this instance, the representative of the promisee’s estate would seek to enforce the contract. The second possible way is if E can bring herself within s.1 of the Contracts (Rights of Third Parties) Act 1999. She would need to establish that she could enforce a term of the contract (that regarding the payment of the annuity to her) because either the contract expressly provided that she could (s.1(1)(a)), or because the term purported to confer a legally enforceable benefit upon her (s.1(1)(b)) and this was not refuted upon a proper construction of the contract (s.1(2)). If this right is given to E, she can receive any remedy which would have been available to her if she had been a party to the contract in question. In this instance, this is likely to be damages, although an order for specific performance might be made instead. Sample examination question 2 Question F lives alone in his own house. His house suffers badly from rising damp. Living conditions have become unpleasant. Unfortunately, F does not have sufficient funds to pay for a course of damp proofing. His daughter, G, offers to pay for the damp proofing. F gratefully accepts this offer. G hires Hopeless Builders Ltd to carry out the damp proofing. Hopeless agree to undertake the task for £10,000. G pays Hopeless in advance. Hopeless estimate that it will cost between £7,000 and £10,000 to undertake the damp proofing. They agree to refund any difference between the £10,000 paid and the actual cost. The refund is to be given directly to F. The damp proofing is badly conducted and F’s house is damaged as a result. The actual cost of the damp proofing and related repairs was only £8,000. Hopeless refuse to provide F with any refund. Advise F. Feedback There are a number of issues present in this problem. F is a third party beneficiary to the contract between G and Hopeless. F is the intended beneficiary not only of the work to be conducted (the damp proofing) but is also to receive any refund that exists. As discussed above, F will need to bring himself within s.1 of the 1999 Act to sue upon the contract with regard to the deficient work and the damage caused. The likely remedy in this case will be damages. With regard to the payment of the refund, it could be argued that there is not a term of the contract which is intended to confer a benefit upon F. See, for example, White v Jones (1995). Another possible course of action is for G to sue Hopeless and to recover the refund for the benefit of F. The difficulty with this course of action is that it would appear that under the original terms of the contract the money was to go to F – is G, therefore, any worse off when F does not receive the money? See Jackson v Horizon Holidays and Linden Gardens Trust v Lenesta Sludge. Sample examination question 3 Question ‘The doctrine of privity has become largely irrelevant as a result of recent changes.’ Discuss. Feedback A good knowledge of the Contracts (Rights of Third Parties) Act 1999 is essential in answering this question. You need to consider that the doctrine of privity has not been abolished but merely reformed by the Act. In particular, you would have to consider when the Act applied (s.1(1)) because, in absence of the application of the Act, all the old problems associated with privity of contract would remain. A good answer might also consider the decision of the House of Lords in Panatown v Alfred McAlpine Construction Ltd as an instance of the difficulties which could arise if the Act did not apply.