CONSULTATION PAPER
PRIVITY OF CONTRACT: THIRD PARTY
RIGHTS
(LRC CP 40-2006)
IRELAND
The
Law Reform Commission
35-39
Shelbourne Road, Ballsbridge, Dublin 4
© Copyright
The Law Reform Commission 2006
First Published November 2006
THE LAW REFORM COMMISSION
Background
The Law Reform Commission is an independent statutory body
whose main aim is to keep the law under review and to make practical proposals
for its reform. It was established on 20 October 1975, pursuant to
section 3 of the Law Reform Commission Act 1975.
The Commission’s Second Programme for Law Reform, prepared
in consultation with the Attorney General, was approved by the Government and
copies were laid before both Houses of the Oireachtas in December 2000.
The Commission also works on matters which are referred to it on occasion by
the Attorney General under the terms of the Act.
To date the Commission has published 79 Reports containing
proposals for reform of the law; 11 Working Papers; 39 Consultation
Papers; a number of specialised Papers for limited circulation; An Examination
of the Law of Bail; and 26 Annual Reports in accordance with section 6 of the
1975 Act. A full list of its publications is contained on the
Commission’s website at www.lawreform.ie.
Membership
The Law Reform Commission consists of a President, one
full-time Commissioner and three part-time Commissioners.
The Commissioners at present are:
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President: |
The Hon Mrs Justice Catherine McGuinness, Supreme Court |
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Full-time Commissioner: |
Patricia T. Rickard-Clarke, Solicitor |
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Part-time Commissioner: |
Professor Finbarr McAuley |
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Marian Shanley, Solicitor |
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Part-time Commissioner: |
Donal O’Donnell, Senior Counsel |
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Secretary/Head of Administration: |
John Quirke |
Research Staff
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Director of Research: |
Raymond Byrne BCL, LLM, Barrister-at-Law |
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Legal Researchers: |
John P. Byrne BCL, LLM (NUI), Barrister-at-Law |
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Áine Clancy BCL |
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Philip Flaherty BCL |
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Caren Geoghegan BCL, LLM (Cantab), Barrister-at-Law |
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Cliona Kelly BCL |
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Joanne Lynch BCL, LLM (NUI) |
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Margaret Maguire LLB |
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Richard McNamara BCL, LLM (NUI) |
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Jane Mulcahy BCL, LLM (NUI) |
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Tara Murphy BCL, LLM (Essex) |
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Catherine-Ellen O’Keeffe LLB, LLM (NUI) |
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Charles O’Mahony BA, LLB (NUI), LLM (Lond) |
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David Prendergast LLB, Barrister-at-Law |
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Sinéad Ring BCL, LLM (NUI) |
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Keith Spencer BCL, LLM (Dub), BCL (Oxon), Barrister-at-Law |
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Nicola White LLB, Attorney-at-Law (NY) |
Administration Staff
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Pearse Rayel |
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Executive Officer: |
Denis McKenna |
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Legal Information Manager: |
Conor Kennedy BA, H Dip LIS |
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Cataloguer: |
Eithne Boland BA (Hons), HDip Ed, HDip LIS |
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Information Technology |
Liam Dargan |
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Officer: |
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Private Secretary to the President: |
Debbie Murray |
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Clerical Officer: |
Ann Browne |
Principal Legal Researcher on this Consultation
Paper
Claire McAvinchey BCL, LLM (Glasgow)
Contact Details
Further information can be obtained from:
The
Secretary/Head of Administration
The Law Reform
Commission
35-39 Shelbourne
Road Ballsbridge Dublin 4
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+353 1 637 7600 |
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+353 1 637 7601 |
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info@lawreform.ie |
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www.lawreform.ie |
ACKNOWLEDGEMENTS
The Commission would like to thank the following people for
their advice and assistance in the preparation of this Consultation Paper:
Timothy Bird, Office of the Director of Consumer Affairs
Tim Bouchier-Hayes, McCann FitzGerald Solicitors
David Clarke, McCann FitzGerald Solicitors
Professor Robert Clark, School of Law, University College
Dublin
Bill Cox, Office of the Director of Consumer Affairs
Anthony Hussey, Hussey Fraser Solicitors
Cliona Kelly, School of Law, University College Dublin
Lonan McDowell, McCann FitzGerald Solicitors
Peter Osborne, McCann FitzGerald Solicitors
Don O’Sullivan, Director of Main Contracting, Construction
Industry Federation
Professor Colin Scott, School of Law, U niversity College
Dublin
Full responsibility for the content of this publication,
however, lies with the Commission.
TABLE OF CONTENTS
Table of
Legislation
ix
Table of
Cases
xi
CHAPTER 1 DEVELOPMENT OF PRIVITY of
contract aND THE NEED FOR REFORM
C The history
of privity of contract
E Exceptions
to the rule of privity
(2) Statutory exceptions to
the privity of contract rule
F The
problems encountered in practice as a result of the rule of privity
G The
relationship of privity with existing fundamental principles of contract law
(1) Consideration and the
Privity Rule
(2) Freedom of Contract and
the Privity Rule
I The
need for reform of the rule of privity of contract: provisional recommendations
B Judicial
development of the rule of privity
C Reform of
the promisee’s remedies in order to give more protection to a third party
D General
Legislation entitling third parties to enforce contracts for their benefit
F Detailed
legislation creating comprehensive third party contractual rights
G Existing
exceptions to the rule of privity
B When can
the third party enforce their rights under a contract?
C Identification
of a third party beneficiary
D The rights
of the parties to vary or cancel the contract
E General
Defences, Set-off and Counterclaims
CHAPTER 4 summary of provisional
recommendations
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45 & 46 Vic c 61 |
Irl |
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Bills of Lading Act 1855 |
18 & 19 Vict c 111 |
Eng |
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Carriage of Goods by Sea Act 1992 |
c 50 |
Eng |
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Central Bank and Financial Authority of Ireland Act 2004 |
No 21/2004 |
Irl |
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Civil Liability Act 1961 |
No 41/1961 |
Irl |
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Companies Act |
Cap 50, 1994 |
Sing |
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Companies Act 1963 |
No 33/1963 |
Irl |
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Companies Act 1985 |
c 6 |
Eng |
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Companies Ordinance |
Cap 32 |
HK |
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Consumer Credit Act 1995 |
No 24/1995 |
Irl |
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Contracts (Privity) Act 1982 |
1982 No 132 |
NZ |
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Contracts (Rights of Third Parties) Act 1999 |
c 31 |
Eng |
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Contracts (Rights of Third Parties) Act 2001 |
No 39/2001 Cap 53B |
Sing |
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Defective Premises Act 1972 |
c 35 |
Eng |
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Law of Property Act 1925 |
15 & 16 Geo c 20 |
Eng |
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Law of Property Act 2000 |
NT No 46/2000 |
Aus |
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Law Reform Act 1993 |
SNB 1993 c L-1.2 |
Can |
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Liability for Defective Products Act 1991 |
No 28/1991 |
Irl |
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Marine Insurance Act 1906 |
6 Edw 7 c 41 |
Irl |
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Married Women’s Status Act 1957 |
No 5/1957 |
Irl |
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Package Holiday and Travel Trade Act 1995 |
No 17/1995 |
Irl |
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Policies of Assurance Act 1867 |
30 & 31 Vic c 144 |
Irl |
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Property Law Act 1969 |
No 32 of 1969 |
Aus |
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Property Law Act 1974 |
No 76 of 1974 |
Aus |
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Road Traffic Act 1961 |
No 24/1961 |
Irl |
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Sale of Goods and Supply of Services Act 1980 |
No 16/1980 |
Irl |
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Supreme Court of Judicature (Ireland) Act 1877 |
40 & 41 Vic c 57 |
Irl |
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Western Australian Property Law Act 1969 |
W Austl Acts 1969 No 32 |
Aus |
TABLE OF CASES
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Eng |
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Beswick v Beswick |
[1968] AC 581 |
Eng |
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Bourne v Mason |
(1669) 1 Vent 6 |
Eng |
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Burke (a minor) v Dublin Corporation |
Irl |
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Cadbury (Ireland) Ltd v Kerry Co-Operative Creameries Ltd |
[1982] ILRM 77 |
Irl |
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Carnegie v Waugh |
(1823) 2 Dow & Ry KB 277 |
Eng |
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Chancellor Manor v United States |
(2003) 331 F.3d 891 |
USA |
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Choate, Hall & Stewart v SCA Services Inc |
(1979) 378 Mass 535 |
USA |
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Crow v Rogers |
(1724) 1 Str 591 |
Eng |
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Donoghue v Stevenson |
[1932] AC 62 |
Eng |
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Drimmie v Davies |
(1899) 1 IR 176 |
Irl |
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Drive Yourself Hire Co (London) Ltd v Strutt |
[1954] 1 QB 250 |
Eng |
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Dunlop & Co v Selfridge & Co |
Eng |
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Dunne v PJ White |
[1989] ILRM 803 |
Irl |
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Dutton v Poole |
(1677) 3 Keb 786 |
Eng |
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Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd |
[1999] 3 SCR 108 |
Can |
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Glencar Exploration plc v Mayo Co Co (No 2) |
Irl |
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Glow Heating Ltd v Eastern Health Board |
[1988] IR 110 |
Irl |
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In re Application by the Director of Consumer Affairs |
High Court 5 December 2001 |
Irl |
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In re Tout and Finch Ltd |
[1954] 1 All ER 127 |
Eng |
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Karo v San Diego Symphony Orchestra Assoc |
(1985) 762 F 2d 819 |
USA |
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Laemthong International Lines Co Ltd v Artis |
[2005] 2 All ER (Comm) 167 |
Eng |
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Lawrence v Fox |
(1859) 20 NY 268 |
USA |
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Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd |
Eng |
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London Drugs v Kuehne & Nagel International Ltd |
[1992] 3 SCR 299 |
Can |
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Malden Mills Industries Inc v Ilgwu National Retirement Fund |
(1991) 766 F Supp 1202 |
USA |
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Martyn v Hind |
(1776) 2 Cowp 437 |
Eng |
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McCoubray v Thompson |
(1868) 2 IRCL 226 |
Irl |
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McCullough Sales Ltd v Chetham Timber Co Ltd |
High Court 1 February 1983 |
Irl |
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McEvoy v Belfast Banking |
[1935] AC 24 |
Eng |
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McManus v Cable Management (Ireland) Ltd & Ors |
High Court 8 July 1994 |
Irl |
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Midlands Silicones Ltd v Scruttons Ltd |
Eng |
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Morton-Jones v RB & JR Knight Ltd |
[1992] 3 NZLR 582 |
NZ |
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Murphy v Bower |
(1868) IR 2 CL 506 |
Irl |
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National Bank of Sharjah v Dellborg |
Court of Appeal 9 July 1997 |
Eng |
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New Zealand Shipping Co. Ltd. v. A M Satterthwaite & Co Ltd: The Eurymedon |
Eng |
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Nisshin Shipping Co Ltd v Cleaves & Co Ltd and Others |
Eng |
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O & E Telephones Ltd v Alcatel Business Systems |
High Court 17 May 1995 |
Irl |
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Pigott v Thompson |
(1802) 3 Bos & Pul 147 |
Eng |
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Price v Pierce |
(1987) 823 F 2d 1114 |
USA |
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Re Schebsman |
[1944] Ch 83 |
Eng |
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Robertson v Wait |
(1853) 2 Ex 299 |
Eng |
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Saunders & Co v Bank of New Zealand |
[2002] 2 NZLR 270 |
NZ |
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Shanklin Pier Ltd v Detel Products Ltd |
[1959] 2 KB 854 |
Eng |
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Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board |
[1949] 2 KB 500 |
Eng |
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Tomlinson v Gill |
(1756) Amb 330 |
Eng |
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Trident General Insurance Co Ltd v McNeice Bros Pty Ltd |
[1988] 80 ALR 574 |
Aus |
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Tulk v Moxhay |
(1848) 2 Ph 774 |
Eng |
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Tweddle v Atkinson |
(1861) 1 B & S 393 |
Eng |
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Waikato Regional Airport Ltd v Attorney General |
[2001] 2 NZLR 670 |
NZ |
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Wall v Hegarty |
[1980] ILRM 124 |
Irl |
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Ward v McMaster |
[1985] IR 29 |
Irl |
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Westralian Farmers Co-operative Ltd v Southern Meat Packers Ltd |
[1981] WAR 241 |
Aus |
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White v Jones |
Eng |
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Woodar Investment Development Ltd v Wimpey Construction UK Ltd |
Eng |
A
Background
1.
This Consultation Paper on Privity of Contract: Third Party Rights forms
part of the Commission’s Second Programme of Law Reform.[1] The topic was included in the
Minister for Justice’s Programme of Law Reform in 1962,[2] but this is the first time it has been
examined in depth in the State with a view to its reform.
2.
A contract is usually described as an agreement between two parties,
whether corporate entities or individuals. The agreement is legally
enforceable if it is based on genuine consent and involves an exchange of
economic value, usually called consideration. For example, if A and B
agree that A will paint B’s fence and that in return B will pay A €100, both
parties have provided consideration and the agreement will be enforced by the
courts.
3.
Closely related to the requirement of consideration is the concept of
privity of contract. In essence, privity means that only the parties to a
contract – those “privy” to it – have enforceable rights and obligations under
that contract.
4.
This Consultation Paper is concerned with identifying the role of
privity of contract in the modern law of contract. Its purpose is to
analyse whether the needs of those affected by privity would be best served by
its reform.
B
Outline of the Consultation Paper
5.
Chapter 1 examines the historical origins and the development of privity
of contract. It discusses the numerous exceptions that have developed in
the common law and in legislation. The chapter examines the relationship
of privity with other fundamental principles of contract law, for example, the
requirement of consideration and freedom of contract. In addition, Chapter 1
highlights the problems that have been encountered in practice as a result of
privity. The Commission focuses on a number of key areas, such as
construction contracts, shipping contracts, insurance contracts, consumer law
and exemption clauses.
6.
In Chapter 2 the Commission reviews the options for reform. These
include judicial development of privity and possible legislative reform.
The advantages and disadvantages of each method are examined, together with a
comparative analysis. In addition, the relationship between any proposed
reform and the existing exceptions to the rule of privity is examined.
7.
Chapter 3 examines the detailed issues that would need to be addressed
in any legislation creating enforceable rights for third parties. The
Commission discusses the test of enforceability; identification of the third
party; the rights of the parties to vary the terms of the contract; and the
separate and distinct rights of the parties involved in a contract. At
all stages the Commission draws from a comparative analysis of the approaches
in different jurisdictions.
8.
Chapter 4 contains a summary of the provisional recommendations.
9.
As will become clear from the material referred to in this Consultation
Paper, the primary and secondary literature in this area is vast. The
Commission has benefited in particular from the work of leading writers[3] and from the reform proposals made in
many jurisdictions, in particular by comparable law reform bodies.
10.
This Consultation Paper is intended to form the basis for discussion and
accordingly the recommendations made are provisional in nature. Following
further consideration of the issues and consultation with interested parties,
the Commission will make its final recommendations. Submissions on the
provisional recommendations contained in this Consultation Paper are welcome.
In order that the Commission’s final Report may be made available as soon as
possible, those who wish to do so are requested to send their submissions in
writing by post to the Commission or by email to info@lawreform.ie by 31
March 2007.
1
CHAPTER 1
DEVELOPMENT OF PRIVITY of contract aND THE NEED FOR
REFORM
A
Introduction
1.01
The purpose of this chapter is to examine the history and development of
privity; the current law in relation to third party rights; the exceptions to
the rule of privity; the relationship of the rule of privity with other
principles of contract law; and the problems encountered in practice as a result
of privity of contract.
B
Privity: an overview
1.02
The concept of privity of contract involves two ideas. First, a
corporate entity or an individual who is not a party to a contract can not have
any burdens from that contract enforced on them. For example, if A and B
agree that A is to paint B’s fence, and that a third party, C, is to pay A
€100, C is not bound by this contract. It would be unfair to force C to pay the
€100 as C has not agreed to do so and has not received anything in
return. Second, a corporate entity or an individual who is not a party to
a contract can not enforce the contract, even if the contract was one which was
intentionally made for their benefit. For example, if A and B agree that
A will paint the fence of a third party, C, and B will pay A €100, C can not
enforce the contract between A and B. C was not privy to the contract
between A and B.
1.03
Several reasons have been given for this rule. First, it would
clearly be unfair if two parties could impose contractual obligations on a
third party without their consent. Second, the courts view contracts as
private arrangements. A third party cannot interfere in that contract, or
enforce that contract, as it is “none of their business”. In particular,
parties to a contract are free, if they both clearly so agree, to abandon a
contract or vary its terms. For example, A and B may agree that A will paint
B’s fence red and that B will pay A €100. However, later the parties might
agree that in fact A will paint B’s fence green. A and B are free to
change their minds in this way, and C, a neighbour of B who is particularly
fond of the colour red, cannot enforce the contract on its original terms.
Finally, privity of contract is closely linked to the traditional rule
that a party who wishes to enforce a contract must have provided some
consideration. A third party will not have provided consideration under the
contract and so cannot enforce the contract.
1.04
The decisions in which the rule of privity was developed in the 19th
century involved relatively simple transactions. The rule was based on the
industrial conditions and business arrangements which existed at that
time. However, the situations in which the privity rule has an impact in
modern Ireland are generally more complex than the example given above
in relation to the painting of a fence. Business arrangements will today
rarely involve only two parties, and detailed standard form contracts are in common
use. Globalisation and the development of international trade have resulted in
an increase in transnational contracts. It is important to be aware of
the modern context in which the privity rule is applied.
1.05
The adverse impact of the privity rule can be seen in modern
construction projects. A large scale construction project, such as the
building of a motorway, the construction of a tunnel, or the development of
houses, will generally involve many different parties. A main contractor may be
appointed with overall responsibility for the project, but various elements of
the project, from the supply of concrete to the provision of professional
design services and legal advice, will be sub-contracted to other companies,
firms and individuals. In this complex and interdependent contractual
context, the rule of privity may mean that each of these contracts has, in
effect, nothing to do with each other. However, it would be impossible to
ensure the completion of such projects unless some mechanism was put in place
to ensure that the various contracts were connected in some
way. To get around the privity rule, professional bodies
(representing architects, engineers, lawyers and others) have developed a
complex web of collateral agreements, warranties, and chains of assignment,
usually in the form of standard agreements.[4] In major projects the amount of
paperwork and the cost of legal services can be quite significant. However,
arguably such mechanisms would be less complicated if a modern rule of third
party rights was in place, which reflected commercial needs in the 21st
century. The Commission accepts that major projects will still require complex
contractual arrangements, but notes that some simplification may arise.[5]
1.06
Privity of contract can also cause some strange and unfair results in
smaller projects. For example, a person (employer) may contract with a
builder for the construction of an extension to their elderly parent’s
home. The contract is clearly intended to benefit the employer’s elderly
parent. However, if the builder refuses to complete the building, or
provides a defective service, the parent is not entitled to sue the builder for
a breach of contract. The employer may themselves sue, but, under the
rules on damages, unless they can prove that they suffered a loss themselves,
they will be entitled only to nominal damages. It is also unlikely that
the employer could get a court order to compel the builder to finish the
job. Courts are unwilling to make such orders when the contract is for
the provision of a service. As a result of the privity rule, the parties
may be left in a bizarre situation where the person who has suffered loss as a
result of the builder’s breach of contract cannot enforce the contract.
1.07
Another typical example in which the rule of privity may cause
difficulties is where a person agrees to buy an item, for example, a car,
through a finance package involving a loan from a finance company. In
this context, the finance house is clearly an important party to the agreement.
In some instances, the written loan agreement may describe the financial
institution as simply the loan provider. But in other agreements it may be
described as the seller, because the car dealer will have sold the car to the
financial institution, which will then have sold it on to the consumer.
1.08
If the financial institution is merely providing finance, problems can
arise if the car turns out to be defective and the car dealer has now gone out
of business. Does the buyer have any claim against the financial institution?
Under the rule of privity of contract, the answer is clearly no, because the requirement
that the car should be fit for the purpose of use is a term of the contract
between the seller and the buyer – it has nothing to do with the financial
institution. The buyer is left without a remedy.
1.09
If the financial institution is described as the seller and the car
turns out to be defective – and the car dealer is still in business – can the
buyer go back the garage to have it replaced? The privity of contract
rule would indicate no, because the car dealer can say in this instance:
“sorry, you did not buy the car from me, get it fixed at the finance
company”.
1.10
Neither of these outcomes seems satisfactory, and many parliaments have
legislated exceptions to the privity rule to provide protection to the buyer in
this situation. In Ireland, section 14 of the Sale of Goods and Supply
of Services Act 1980 provides that in this type of scenario a
consumer car buyer can choose to enforce his or her rights against either the
car dealer or the financial institution.[6]
1.11
Other situations where the privity rule has caused problems have
similarly been dealt with by specific legislation. For example, there has
been legislative intervention in the areas of insurance and consumer
protection.[7]
In addition, the courts have used concepts such as trusts, agency and
assignment to develop exceptions to the rule.[8] While such exceptions are
necessary, they have left the law on third party rights in a complicated state.
They are also indicative of a general dissatisfaction with the privity rule.
1.12
Rigid adherence to the rule can give rise to commercial inconvenience
and expense, not to mention injustice for the third party with no rights to
enforce an agreement made for their benefit. The methods used in
attempting to alleviate this unfairness and inconvenience are complicated, and
do not cover all situations where privity has an impact. For these
reasons, many common law states have reformed the law in relation to third
party beneficiaries, and have greatly limited the privity rule. This has
happened in New Zealand,[9]
Australia,[10] Canada,[11]
England and Wales,[12]
the
United States of America,[13]
and Singapore.[14]
By reforming the rule it was acknowledged that the situation
was unsatisfactory and that if contracting parties intended to benefit and
create enforceable rights in a third party, this intention should not be
thwarted.[15]
1.13
Nonetheless, the implications of allowing a third party to enforce
rights under a contract go to the very core of the common law understanding of
contract law and the well settled principle that a gratuitous promise is not
enforceable at law. For this reason, the Commission considers that before
considering whether the course taken in other jurisdictions should be followed
in Ireland, it is necessary to discuss the historical basis for the privity
rule and to determine whether it remains valid in the 21st
century.
C
The
history of privity of contract
1.14
The 1861 case of Tweddle v Atkinson[16]
is usually cited as the origin of the rule of privity of contract. In this case
a son-in-law failed in his action to recover a sum of money promised to him in
a marriage agreement between his father-in-law and his own father, as he was
not a party to the original contract. The court decided that “it is now well
established that at law no stranger to the consideration can take advantage of
the contract though made for his benefit”.
1.15
The decision in Tweddle v Atkinson was applied by the House of
Lords in Dunlop & Co v Selfridge & Co.[17] In this case
Dunlop had agreed with a wholesaler that the wholesaler would not sell Dunlop
tyres below the recommended retail price. The wholesaler sold the tyres
on to a retailer, Selfridge, who in turn sold the tyres at a price below that
recommended. The House of Lords decided that Dunlop had no case against
Selfridge, because Selfridge was not a party to the original agreement.
1.16
Despite this line of authority, prior to Tweddle v Atkinson there
had been a number of cases which allowed a third party beneficiary to enforce a
promise made for their benefit. There was a series of cases prior to 1669 which
confirmed the view that a third party could take an action to enforce such a
promise.[18]
This trend was reversed by the decision in Bourne v Mason,[19]
in which it was decided that a third party could not recover under a contract
as he had provided no consideration, but the matter was by no means
settled. The later case of Dutton v Poole,[20]
for example, was consistent with the recognition of the rights of the
beneficiary who has not provided consideration. The case involved an
agreement between a father and son, in which the father agreed with his son not
to cut down and sell trees on his land. The son would have use of the trees,
and would pay his sister a sum of Ł1000 for her share. The father did not
cut down the trees, but the son refused to pay his sister any money. The
sister brought an action claiming what was owed to her under the contract
between her father and brother. The court decided that there was no need
for the sister to provide consideration. The fact that her father had provided
the consideration was enough to allow his daughter a right of action. The
case is an early example of the concept of a “joint promisee”.[21] The
court held that the justice of the case required that the daughter be allowed
to claim as a joint promisee.
1.17
Subsequently there were conflicting statements of the law. In Crow
v Rogers[22]
it was decided that the third party plaintiff could not bring a case. However,
in Martyn v Hind[23]
Lord Mansfield commented on the correctness of the outcome in Dutton v Poole,
and in Pigott v Thompson[24]
and Carnegie v Waugh[25] it was held that a third party could
bring an action on a contract made for his benefit.
1.18
Although it may appear that matters were settled by the decision in Tweddle
v Atkinson the situation was far from clear-cut. Even after Tweddle
v Atkinson there was harsh criticism of the effect of privity from some
judges in England and Wales. In Smith and Snipes Hall Farm Ltd v River
Douglas Catchment Board[26] Denning LJ in the English Court of
Appeal said that privity of contract was “not nearly as fundamental as it is
sometimes supposed to be”.[27]
He stated that it was more important, and a deeper rooted principle, that a
person who makes a deliberate promise which is intended to be binding must keep
his promise, and that the court will hold him to it. A third party would be
entitled to enforce that promise, provided he was a beneficiary of that promise
and had a sufficient interest in it. In Drive Yourself Hire Co
(London) Ltd v Strutt[28] he repeated these views, and questioned
the historical basis of privity. He stated that the rule was based on
shaky foundations, and that taking into account the numerous exceptions to it, it
had in effect been abolished. In
Woodar Investment Development Ltd v Wimpey Construction UK Ltd[29] Lord Scarman urged that the rule be
reformed, stating that the time for reform of this “unjust rule” was “now, and
not 40 years on”.[30]
1.19
Despite this unease with privity, it was confirmed as part of the law of
England and Wales in a number of cases. In Midland Silicones
Ltd v Scruttons Ltd[31]
a third party was not entitled to rely on an exclusion clause, purportedly for
his benefit, in a contract. In Beswick v Beswick,[32] a coal
merchant entered into a contract with his nephew in which he transferred the
business to him. In return the nephew was to employ him as a consultant
for the rest of his life, and, after his death, was to pay an annuity of Ł5 a
week to his widow. Upon the death of the coal merchant, the nephew paid
one instalment of the annuity and refused to pay any more. The widow
brought an action for breach of contract, both in her capacity as
administratrix of her husband’s estate and in her own right as a third party
beneficiary. The House of Lords held that she was entitled to enforce the
contract as administratrix, but not in her own capacity as she was not privy to
the contract. This was re-affirmed in Woodar Investment Development Ltd
v Wimpey Construction UK Ltd[33] - although not without reluctance, as mentioned above.
The House of Lords confirmed the existence of the privity rule in 1993 in Linden
Gardens Trust Ltd v Lenesta Sludge Disposals Ltd,[34] although in that case one of the many exceptions to the
rule was applied.
D
The current law in Ireland
1.20
Privity of contract is one of the core principles of contract law in Ireland.
The Irish courts applied the rule of privity in 1868 in Murphy
v Bower.[35] There, a
contractor agreed to perform certain work for a railway company. The
contractor was to be paid when an engineer certified that the work had been
completed. The engineer subsequently refused to certify that the contractor had
completed the work. The court decided that the contractor could not bring
a case against the engineer in contract, as the engineer was not a party to the
contract between the contractor and the railway company.
1.21
There are not many modern decisions of the courts where the privity rule
has been applied. This may indicate uneasiness with the rule and the courts’
reluctance to apply the privity rule. Alternatively, it may indicate that the
rule is circumvented in practice. The Commission now turns to discuss two
cases which illustrate the problems which may arise as a result of the privity
rule.
1.22
A possible instance of judicial reluctance to deal directly with the
privity issue in Ireland is Cadbury (Ireland) Ltd v Kerry Co-Operative
Creameries Ltd.[36] The second defendant, Dairy Disposals Co
Ltd, owned by the Minister for Agriculture on behalf of the State, owned a
number of creameries which supplied milk to the Cadburys chocolate
factory. In 1964, Dairy Disposals undertook to supply Cadburys with milk
should they decide to expand their operations. In 1973, Dairy Disposals
sold its creameries to Kerry Co-Op. Clause 19 of the sale agreement
contained an undertaking from Kerry Co-Op to Dairy Disposals that adequate milk
supplies would continue to Cadburys. Cadburys was not a party to this
agreement, though they had lobbied the Minister for Agriculture to have the
clause included in the contract. No collateral agreement was entered into
between Kerry Co-Op and Cadburys.
1.23
Later, as a result of a fall in the total output of milk in the area,
Kerry Co-Op wrote to Cadburys suggesting either a reduction of the milk
supplies or an increase in price. Cadburys rejected this proposal and
sued, claiming that under clause 19 of the sale agreement between Kerry Co-Op
and Dairy Disposals it was entitled to adequate milk supplies. Kerry Co-Op
argued that, as Cadburys was not a party to that agreement, they had no rights
under it, particularly in relation to clause 19.
1.24
Cadburys was clearly not a party to the contract containing the clause
and under the rule of privity would not have been entitled to enforce it, even
though they were benefiting from it. The High Court could have rejected
Cadburys’ claim using the privity rule. However, the Court only briefly dealt
with the privity issue. Instead, the Court rejected Cadburys’ claim by deciding
that clause 19 was not sufficiently clear and precise to be legally
enforceable. The Commission considers that the failure to deal with the privity
issue in a seemingly straightforward case is a possible example of judicial
uneasiness to deal with privity directly.
1.25
Another example of the application of the rule of privity is Glow
Heating Ltd v Eastern Health Board.[37]
In this case there was a standard form construction contract between
the employer and the main contractor, and another contract between the main
contractor and a sub-contractor. The main contractor was in liquidation.
The sub-contract contained a clause allowing the sub-contractor to apply to the
employer for direct payment in the event that the main contractor could not pay
up. The main contract contained a mandatory clause requiring the employer
to make the direct payment in the event that the main contractor could not or
would not do so. Costello J remarked that “the privity of contract rules
should not bar a court from granting a sub-contractor relief in the
circumstances like the present one”.[38]
He noted that, correctly, in his view, the privity point had not been
argued. This shows judicial recognition, at least in certain
circumstances, that a third party beneficiary of the terms in the main contract
should not be barred from enforcing their rights under the contract.
1.26
The Commission has concluded that the decisions in Ireland indicate some
uneasiness with the application of the concept of privity of contract.
The Commission considers that it ought to be examined further to determine the
need for its continued existence, if any, and ultimately the options for its
reform.
E
Exceptions to the rule of privity
1.27
The problems associated with the rule of privity have not gone
unnoticed. The courts and the legislature have been active in creating
instances where third parties can enforce their rights. There are also
practical methods for circumventing the rule.
1.28
One of the main arguments for reform of privity of contract is that the
current system of third party rights has become far too complex as a result of
the many exceptions to the privity rule that have developed over time.
These exceptions have their roots both in the common law and in the statute
book, and are dealt with below.
(1)
Common Law exceptions
(a)
Assignment
1.29
A party to a contract is generally free to assign their contractual
rights to a third party.[39]
The assignment is effected through a contract concluded between the promisee in
the original contract (the assignor) and a third party (the assignee).
The effect of the assignment of rights is that a third party to the original
contract is given rights as though they had been a party to the contract.
There is no need for the consent of the promisor in order for there to be a
valid assignment, although notice to the promisor is often desirable to prevent
the promisor paying the assignor, and to give the assignee priority over other
assignees.
1.30
Chains of assignment are often used in the construction industry as an
alternative to, or to supplement, a warranty package. Arrangements are
often made whereby all the available rights in relation to construction are
assigned to a subsequent purchaser.
1.31
However, the rules on assignment are quite complex. For example, in many
cases the assignor must be involved in any litigation to enforce the rights,
and this can be time consuming and costly. It is not always possible to
assign contractual rights. For example, it is not possible to assign rights
under a contract that involves a personal confidence.[40] Nor is it possible to assign a
contractual obligation, as opposed to a benefit, to a third party without the
consent of all parties involved.[41]
1.32
Legislation exists which accommodates the assignment of contractual
rights in certain situations.[42]
(b)
Trusts
1.33
The law of equity, developed by the courts over many centuries, allows a
third party to enforce a contract where it can be shown that a completely
constituted trust was created in their favour by the contract.[43] A trust can be defined as an
equitable obligation to hold property, be it real property, money, or a chose
in action, on behalf of another person. The effect of the trust is that a
third party beneficiary may sue for the money or property that the contract
party had promised to pay or transfer to him.
1.34
Since Tomlinson v Gill,[44] equity has recognised situations in
which a trust can be inferred from a contract. In that case, the
defendant promised a widow that if he were permitted to administer her deceased
husband’s estate, he would make up any deficiency in the estate to the
creditors. This was sufficient to allow a creditor to sue to enforce this
promise, as the court inferred that a trust had been created in favour of the
creditors. Likewise in Drimmie v Davies[45] a
father and son agreed that the son would take over a dental practice on the
father’s death. The arrangement was subject to annuities payable to the
other members of the family. The agreement was held to be
enforceable by the father’s wife even though she was not a party to the
contract. The decision was on the basis that the promise constituted a
trust in their favour.
1.35
The contractual trust remains part of the common law, but the courts are
reluctant to infer a trust where it has not been expressly provided for in the
agreement. For example, in Cadbury (Ireland) Ltd v Kerry Co-op
Creameries Ltd[46]
Barrington J held that in order for there to be a contractual trust, the
parties must have had the intention to create a trust. He concluded that
in this case Dairy Disposal and Kerry Co-op had no intention to create a trust
in favour of Cadburys.[47]
Thus, Cadbury’s could not make use of this exception to the privity rule.
1.36
There are several reasons for the courts’ reluctance to use the
contractual trust.[48]
Using the contractual trust as a means of granting third parties rights was
described by Lord Wright as a “cumbrous fiction”.[49] If the parties have not
intentionally created a trust, it is not the place of the courts to infer that
they have. If the courts imply trusts in this manner, it could cause much
uncertainty. It could lead to the unfair situation whereby third party
beneficiaries obtain equitable rights that the parties may not have intended
they should have. The parties may become burdened with the responsibilities
arising from a trust. For example, the contractual parties would not be
able to vary or cancel the terms of the contract without the consent of the
beneficiary.[50]
1.37
The Commission considers that the caselaw relating to the contractual
trust demonstrates the problems that can be created by the rule of
privity. Judges have attempted to achieve a balance between the interests
of the parties to a contract and those of the third party. In doing so,
the courts have recognised that there are situations where the third party
beneficiary should have enforceable rights. But granting an equitable
trust through the courts is an uncertain, not to mention cumbersome, method of
doing this that may not result in fairness for all the parties.
(c)
Agency
1.38
Agency describes the relationship that exists when one person (the
agent) is appointed by another person (the principal) to act as their
representative. The agent is authorised to make a contract between the
principal and a third party.
1.39
When the agent acts on behalf of the principal, any transactions within
the scope of the agent’s authority will be legally binding on the
principal. Thus, the principal acquires rights and liabilities under
contracts made between the agent and a third party: the principal can sue, and
be sued by, the third party.
1.40
In some cases the principal may not be known to the third party, who may
assume that the agent is contracting on its own behalf. Such a principal
is known as an undisclosed principal. The principal will still acquire rights
and liabilities under the contract between the agent and a third party. The
privity rule is particularly evident in contracts entered into in this
manner. The principal obtains rights of enforcement under the contract
that was made for his/her benefit. The third party may enforce the
contract against the undisclosed principal in the same manner as if they had
negotiated the contract with them. However, in most cases involving agency, the
link between the agent and the principal will be apparent or established
through a long line of custom and usage.
1.41
The law of agency is a commercially convenient way of conducting
business, particularly where the principal is unable to attend the negotiation
and conclusion of contracts entered into in the course of their business.
Given that the privity of contract rule provides that only those party to the
contract have enforceable rights under the contract, the law of agency was a
necessary development in the context of modern commercial transactions.
1.42
The agency exception has been used by third parties seeking to rely upon
exclusion clauses in a contract. This application of the exception is
discussed below.[51]
(d)
Collateral
contracts
1.43
The privity of contract rule has been circumvented in certain instances
by the use of collateral contracts. As with all contracts there must be
consideration between the parties to the contract and the parties must intend
to be contractually bound. Collateral contracts were relied upon to avoid
the privity rule in Shanklin Pier Ltd v Detel Products Ltd.[52]
There, contractors were employed by Shanklin Pier to paint a pier. Detel
Products, who were suppliers of paint, assured Shanklin Pier of the quality and
duration of their paint. On foot of this assurance, Shanklin Pier
instructed the contractors to buy and use this paint. In fact, the paint
only lasted 3 months and Shanklin Pier brought an action for breach of contract
against Detel Products. The problem was that the paint was bought under a
contract of sale between Detel Products and the contractors. The plaintiffs
were not a party to this contract. However, the court decided that there was a
collateral contract between the Shanklin Pier and Detel Products, under which
Detel Products had promised that the paint would last 7 years. Shanklin
Pier had provided consideration for this promise by instructing the contractors
to buy the paint.
1.44
This decision was followed in Ireland in McCullough Sales Ltd v
Chetham Timber Co Ltd.[53] As will be discussed later on,
collateral contracts and warranties are used extensively in the construction
industry as a way of avoiding the effects of the rule of privity.[54]
(e)
Covenants
running with land
1.45
Conveyancing law in Ireland, as it currently stands, provides that
covenants that “touch and concern” real property may be enforced against
persons that were not a party to the original transaction.[55] This rule, known as the rule in Tulk
v Moxhay,[56] states that a negative covenant will run
with the land to which it relates.[57]
It can thus be enforced against subsequent owners of the land, except a bona
fide third party purchaser without notice of the covenant. In this
way, a third party gains rights and responsibilities under the original
covenant.
1.46
The Commission has recommended the abolition of the rule in Tulk v
Moxhay by way of legislative intervention.[58] The Land and Conveyancing Law
Reform Bill 2006,[59]
which is currently before the Oireachtas, would implement this recommendation.
Section 47 would abolish the rule in Tulk v Moxhay and instead make
freehold covenants fully enforceable by and against successors in title. The
central principle, that a third party will be affected by covenants that run
with the land, would be given a statutory basis.
(f)
Tort of
negligence
1.47
Since the decision in Donoghue v Stevenson,[60]
if a person suffers a loss
as a result of another person’s negligence, that person is entitled to sue for
damages, regardless of whether or not there was a contract between the two
parties. It can thus be seen as a rather large exception to the privity
rule. However, in order to recover under the law of torts, negligence
must be established. It is not enough to show merely that a promise was
broken, which would be the case in an action under contract law.
1.48
In addition to the common law development of the law of tort, the Liability
for Defective Products Act 1991 gives
statutory rights to buyers of products, and gives third parties rights of
action in tort.
(2)
Statutory exceptions to the privity of contract rule
1.49
There are a number of statutory provisions in Ireland designed to
circumvent the privity of contract rule in specific situations where it was
obviously causing injustice. The main statutory provisions are outlined
below.
(a)
Married Women’s
Status Act 1957
1.50
Section 7 of the Married Women’s Status Act 1957 gives the surviving spouse and children of a deceased
person the right to sue upon a policy of life insurance or an endowment policy
which had been entered into by that person. Under the common law rule of
privity, the spouse and children would not have been able to sue on the policy,
even if the policy was designed to benefit them.
1.51
Section 8 of the Married Women’s Status Act 1957 provides that
any contract entered into by a married person that confers a benefit on their
spouse and/or their children shall be enforceable by the spouse and/or the
children. Section 8 permits the contract to be rescinded by the
contracting parties at any time before the beneficiary adopts it and the third
party is bound by any defences the defendant may have against the other
contracting party.
1.52
The exception in Section 8 of the Married Women’s Status Act 1957 is
quite wide, in that it applies to every day contracts and not just life
insurance or endowment policies. However, it only confers third party rights on
the spouse and children of the contracting party, and not, for example, on
other cohabitants or relatives, and it only does so where the contract
expressly confers a benefit on the spouse or children. For example, the
exception did not apply in Burke (a minor) v Dublin Corporation.[61]
There, a minor’s asthma condition was aggravated due to his unfit living
conditions, and he attempted to sue for breach of the tenancy agreement entered
into between his parents and Dublin Corporation. The minor claimed that
because the rent was calculated by reference to the number of children living
in the premises, the contract was expressed to be for the benefit of those
children. The Supreme Court rejected this argument, and decided that the
minor could not rely on section 8 of the Married Women’s Status Act 1957
as the contract did not expressly confer a benefit on the minor. The case
was thus decided on the basis of housing legislation and negligence principles,
rather than on contract.
(b)
Insurance
1.53
Section 76(1) of the Road Traffic Act 1961 provides
that a person who is claiming against an insured motorist will have certain
remedies against the motorist’s insurer.
1.54
Section 62 of the Civil Liability Act 1961 provides that if a person has effected a policy
of insurance in respect of liability for a wrong, and that insured person
becomes bankrupt, dies, or in the case of a company, is wound up, the moneys
payable to an insured person or company under the policy are only applicable in
discharging valid claims against the insured. No part of the moneys is
considered an asset of the insured or applicable to the payment of debts of the
insured in the bankruptcy, administration of the estate, or the winding-up or
dissolution. The Act thus recognises the rights of third parties who have
valid claims against the insured in those specific situations. The
section is simply indicative of a policy decision not to allow insurance
pay-outs to be used by the liquidator in an insolvency situation.
1.55
Section 62 does not expressly confer a positive right of action on
those entitled to the award of damages against the insured. However, in Dunne
v PJ White[62]
it was held that there was an entitlement on the part of an injured party
to sue the insurers of a bankrupt party to ensure compliance with Section 62 of
the Civil Liability Act 1962. This decision therefore arguably goes some
way toward providing a third party with rights against the
insurer.
(c)
Consumer
Protection
1.56
Section 13(2) of the Sale of Goods and Supply of Services Act 1980
contains an implied condition in the sale of a motor vehicle that at the time
of delivery the vehicle is free from any defect that would render it a danger
to the public and to people travelling in the vehicle. Section 13(7) of
the 1980 Act goes further by providing that if a person using the vehicle with
the consent of the buyer suffers a loss because of a breach of section 13(2),
they may maintain an action for damages against the seller as if they were the
buyer. Section 82 of the Consumer Credit Act 1995 extends the
condition contained in section 13(2) of the 1980 Act to hire purchase
agreements.
1.57
Section 2 of the Package Holiday and Travel Trade Act 1995 defines a consumer as including any person on
whose behalf the principal contractor agrees to purchase the package, or any
person to whom the principal contractor (the buyer) or another beneficiary
transfers the package.
(d)
Consumer
protection in Credit and Finance Arrangements
1.58
Section 80 of the Consumer Credit Act 1995 provides
that where a consumer[63]
enters into a hire purchase agreement, the consumer has a remedy against both
the seller and the hire purchase company in the event of a breach of the hire
purchase agreement or a misrepresentation made by either the seller or the hire
purchase company. At common law, the consumer could not have sued the
seller of goods for any breach or misrepresentation, as the consumer’s contract
was with the hire purchase company and not the seller of the goods.[64]
1.59
Section 14 of the Sale of Goods and Supply of Services Act
1980, mentioned above,[65]
similarly provides that where goods are sold to a consumer under an arrangement
with a finance house, the finance house shall be deemed to be a party to the
sale of goods to a consumer. The finance house and the seller are jointly
answerable to the buyer for breach of the contract of sale and for any misrepresentations
made by the seller with respect to the goods.
(e)
Negotiable
instruments
1.60
Cheques, bills of exchange and promissory notes are examples of
negotiable instruments. Cheques and bills of exchange order the payment
of money, whereas promissory notes contain a promise to pay money.
Ownership of the rights and obligations contained in the instrument can be
transferred to and enforced by a third party, referred to as the “holder in due
course”. This makes negotiable instruments an
important exception to the privity of contract rule. Section 38(2) of the
Bills of Exchange Act 1882 provides that the holder in due course may
take an action against not only the original debtor on the instrument if he
fails to pay, but also against any other previous signatories of the instrument
who have had the debt negotiated to them.
(f)
Shipping
Contracts
1.61
Section 1 of the Bills of Lading Act 1855 provides
that every consigner of goods named in a bill of lading, and every endorsee of
it to whom the ownership of the goods described in it shall pass, will have
transferred to them all rights of action, and be subject to the same
liabilities, in respect of such goods as if the contract contained in the bill
of lading had been made with them.
(g)
Company law
1.62
Section 25 of the Companies Act 1963 provides that the memorandum
and articles of association form a contract between the company and its shareholders
and also between the individual shareholders. As a result, one
shareholder can sue another shareholder on the basis of, for example, the
articles of association.
(h)
Assignment
1.63
It could be argued that the legislative provisions which provide that an
assignee of a contractual right can bring an action in their own name are
indirect circumventions of the privity rule. These legislative provisions
include the following:
i)
Section 28(6) of the Supreme Court of Judicature (Ireland) Act 1877 provides that any debt or legal chose in action
can be assigned, provided certain conditions are fulfilled. The section
did not abolish the equitable rules on assignment, which can still be used if
the conditions for a statutory assignment are not met.
ii)
The Policies of Assurance Act 1867 allows
for the voluntary assignment of life policies. It allows the assignees to
sue in their own name without the need to join the assignor as a party in the
action.
iii)
Sections 79 to 86 of the Companies Act 1963 set out the procedure
to be followed for formally transferring shares.
iv)
Section 50 of the Marine Insurance Act 1906 provides
that a marine insurance policy is assignable unless it contains a term
expressly prohibiting assignment. Generally, marine policies covering
cargo are freely assignable. Section 50(2) empowers the assignee to sue
in their own name. It preserves any defences that the insurer might have
against the original assured. Section 14 of the 1906 Act permits any
person having an interest in the subject matter insured to insure on behalf of
and for the benefit of other persons interested as well as for their own benefit.
(i)
Employment Contracts
1.64
Several European Directives[66]
which have been implemented in Irish law provide that where an employer
transfers his undertaking, the firm taking over the business enters into all
the employment contracts subsisting at the time of the takeover.
(3)
Discussion
1.65
The Commission considers that the current law on third party rights is
unnecessarily complex. The common law exceptions may also cause
uncertainty, as it is not always clear when the courts will apply the privity
rule and when they will apply an exception to the rule. Attempting
to avoid the rule, for example by drafting the contract so that it comes under
an exception to the rule, creates extra expense and paperwork that could be
avoided.
1.66
The Commission considers that the numerous exceptions to the privity
rule are indicative of an underlying unease with the rule itself. There are
sound policy reasons for reforming the rule of privity in order to give a third
party enforceable rights.
1.67
The Commission has therefore concluded that justice and commercial
necessity dictate that the privity rule would benefit from reform.
F
The problems encountered in practice as a result of the rule
of privity
1.68
In the course of the Commission’s preliminary discussions with legal
practitioners, representative organisations and other experts, a number of
areas were identified that are particularly affected by privity of
contract. It became clear to the Commission that reform of the privity
rule would have a real effect on how transactions are concluded in the ordinary
course of business. It also became evident that there were definite
benefits to be obtained from allowing third parties to enforce rights under
contracts, once appropriate safeguards were in place. The main areas
identified are dealt with below.
(1)
Construction contracts
(a)
Introduction
1.69
The construction industry in Ireland is, by any standards,
enormous. In 2005 construction output was over 22% of the Gross National
Product, amounting to an estimated €30 billion. The housing output in
2005 reached a new record level of over 80,000 units, almost four times higher
than the average in Western Europe. There has also been significant
growth in the civil engineering sector, where the overall output for 2005 in
productive infrastructure (such as roads, energy, water services, airports and
transport) and social infrastructure (including education, health and public
buildings) amounted to an estimated €7.3 billion.[67]
1.70
Over the past 20 years there has been a change in how the construction
industry is structured. Instead of large companies with direct employees,
there has been a shift towards contract managers, with the bulk of the work
being carried out by sub-contractors. A large proportion of the work
carried out in the construction sector is now done by smaller firms, with 5 or
fewer employees, and sole traders. However, large firms are still
important: a 2002 census of private sector construction firms with 20 or more
employees showed that these firms had a total turnover of almost €9 billion.
1.71
In the construction sector the privity rule comes into play in quite
different ways, depending on whether the project is large or small.
(i)
Larger
construction projects
1.72
It is rare in the larger construction projects for one construction
company to undertake all the work from design to completion. Many smaller
firms will become involved as contractors, sub-contractors, individual
specialists and advisors. As a result of the privity rule, these
different contributors are not contractually bound to each other, or to
subsequent owners and tenants. This is despite the fact that all actors
are contributing towards the same project and the end result will be a
culmination of all of their expertise. Completion would be impossible if
the actors were not connected to each other in some way. As a result,
complex legal techniques have developed to deal with the privity rule.
These include:
·
collateral contracts and direct agreements;
·
guarantees and warranties;
·
chains of assignment and trusts;
·
nomination of sub-contractors;
·
direct payment provisions;
·
name-borrowing provisions, under which the main contractor allows the
sub-contractor to use its name in proceedings against its
employer/commissioning client;
·
retention trusts.
1.73
These techniques have been formalised in the standard form contracts
developed for the construction sector. Many of these contracts are drafted in
the context of major public procurement and public infrastructure projects commissioned
by a client such as a Government Department, though others are drafted between
private undertakings in the context of property development. Traditionally,
these contracts were based on a project commissioned and designed by the client
– commonly referred to as the “employer” – and the work was then carried out by
a main contractor, and numerous sub-contractors, on the basis of this design.
More recently, the standard contracts involve “design and build”, in which the
commissioning client will request the main contractor to develop the design and
also execute the work – again, using many sub-contractors in the process.
1.74
The standard form contracts currently in
use can be traced to those used at the end of the 19th Century by
representative bodies such as the Royal Institute of British Architects (RIBA).[68]
In the context of building contracts, the RIBA Form of Contract was later
developed by the Joint Contracts Tribunal (JCT) into the JCT Form of Contract.
In most instances, the traditional RIBA and JCT Forms of Contract involved
building contracts under the overall supervision of an architect. The RIBA Form
was followed in Ireland by the Royal Institute of Architects in Ireland (RIAI)
in its Articles of Agreement and Schedule of Building Conditions. In the wider
context of civil engineering contracts, the ICE Form of Contract was developed
after World War II by the Institute of Civil Engineers and the Federation of
Civil Engineering Contractors. In Ireland, this was adapted as the IEI Form,
developed by the Institute of Engineers in Ireland.[69] The original ICE/IEI Forms of Contract
involved civil engineering contracts under the overall supervision of an
engineer. In that respect, they mirrored the RIBA and JCT Forms of Contract. In
the 1990s, the British Institution of Civil Engineers developed a new civil
engineering contract, the New Engineering Contract, the NEC Contract, later
renamed the Engineering Construction Contract, the ECC Contract.[70]
1.75
Ultimately, these national contracts have formed the basis for
transnational standard contracts. Thus, for building contracts between UK based
building companies and companies based outside the UK, the ICE Form was adapted
to become the ACE Form, agreed by the Institute of Civil Engineers, the
Association of Consulting Engineers and the Export Group for the Construction
Industries. For major infrastructure contracts, the FIDIC Form (the “Red Book”)
was developed by FIDIC, the International Federation of Consulting Engineers.
1.76
It is important to note that, in Ireland, a large proportion of
construction contracts, including civil engineering and infrastructure
projects, are funded by central and local government. It is not surprising,
therefore, that the Government has developed variations of the standard
contracts already mentioned. Much of this has, in recent years, been done under
the aegis of the Government Contracts Committee (GCC) in the Department of
Finance.[71]
Until very recently, building contracts funded by government have been subject
to Conditions of Contract for Government Departments and Local Government
(GDLA). Civil engineering contracts, including infrastructure contracts, have
been based largely on the IEI and ECC Forms, subject to amendments approved by
the Department of Finance. In recent years, some major public infrastructure
projects have been subjected to criticism for not being completed on time and
within original budgets. As a result, a move towards fixed price contracts -
usually based on “design and build” - has occurred in recent years. In this
context, the Government Contracts Committee (GCC) has been involved in the
development of new standard form contracts, which appear to represent a
significant shift from the previous GDLA and IEI contracts already mentioned,
in particular by transferring the cost risk from the client to the contractors.[72] These new contracts will also constitute
the “framework agreements” for the purposes of the European Communities
(Award of Public Authorities Contracts) Regulations 2006,[73] which implemented the most recent 2004
EC Public Contracts Directive.[74]
1.77
It is thus clear that standard form contracts are constantly being
developed and revised to accommodate changes in the law and in the way business
is regulated.
1.78
The detailed terms associated with these standard form contracts extend
to issues well beyond the scope of this Consultation Paper. Nonetheless, many
terms can be traced directly to the privity rule, notably, the development of
complex collateral contracts, guarantees and warranties, chains of assignment,
the nomination of sub-contractors and name borrowing provisions. If the privity
rule was reformed, it is possible that these standard form contracts could be
less complex and the rights of all parties concerned clearly outlined.
(ii)
Smaller scale projects
1.79
The privity rule also applies, though quite differently, in smaller
construction projects, for example the construction of a single dwelling or the
extension of a house. Although less complex, potentially unjust
situations can arise, such as the example given of the extension built for an
elderly relative.[75]
1.80
Problems can also arise when there is no such obvious third party, for
example, where a contractor is employed by a landowner to carry out certain
building works and the contractor in turns hires a sub-contractor to carry out
a specific part of the work. Although the sub-contractor is liable to the
main contractor for any defect or breach, the rule of privity means the
sub-contractor is not directly liable to the landowner. In the course of
discussions in the preparation of this Consultation Paper, it became clear to
the Commission that, although this situation is favourable to the
sub-contractor, it may be in the interests of justice that the landowner should
have direct access to the sub-contractor in these circumstances. This is particularly
the case where the main contractor is unable or unwilling to pursue that
sub-contractor.
1.81
Any agreements between builders and consumers would be subject to the European
Communities (Unfair Terms in Consumer Contracts) Regulations 1995.[76] The 1995 Regulations take into account
the fact that a contract is not always a stand-alone instrument, but instead
will often be entered into in the context of other contracts or
agreements. Regulation 3(2) provides that for the purpose of the
Regulations a contractual term is unfair if
“contrary to the requirement of good faith, it causes a
significant imbalance in the parties’ rights and obligations under the contract
to the detriment of the consumer, taking into account the nature of the goods
or services for which the contract was concluded and all circumstances
attending the conclusion of the contract and all other terms of the contract or
of another contract on which it is dependent.”[77]
The italicised words are of particular relevance to the
privity rule and third party rights.
1.82
Standard form contracts have been developed in the context of the
consumer building contract, between a builder and a purchaser. Notably, a
standard Building Agreement was negotiated by representatives of the Law
Society of Ireland and the Construction Industry Federation (CIF), which both
bodies recommended to their respective members as the basis for individual
contracts between builders and purchasers. When both bodies became aware in the
late 1990s that a number of building agreements were departing from the
standard Building Agreement – to the disadvantage of purchasers – they
approached the Director of Consumer Affairs with a view to initiating
declaratory proceedings seeking to have a sample of 15 specific examples of
these departures declared in breach of the 1995 Regulations. In In re
Application by the Director of Consumer Affairs,[78] Kearns J in the High Court declared the
15 sample terms in breach of the 1995 Regulations.[79]
1.83
Some of the terms which were declared invalid by Kearns J involved
privity and third party rights. For example, Term 1 was an “entire agreement”
clause, which attempted to limit the possibility of any preliminary
representation made by the builder or his agents to the consumer from being
taken into account. This term was held to be invalid under the
Regulations. Hence, it is not now possible for the builder to avoid
liability for statements made by his agents by use of an “entire agreement”
clause. Term 10 provided that the consumer could not assign the benefit
of the agreement without the previous consent of the contractor, but that the
contractor could do so. This was said to be unfair in that it created an
imbalance in the agreement. It would however most likely be enforceable if it
provided that neither party could assign benefits in the contract without the
prior written consent of the other party.
(b)
The experience in England and Wales
1.84
In its 1996 Report on privity of contract, the Law Commission for England
and Wales identified the construction industry as benefiting from reform of the
rule of privity.[80]
They described as an “unfortunate result” that parties in the main contract
could not simply extend the benefits of, for example, the architects’ and
engineers’ duties of care and skill in the main contract to subsequent
purchasers or tenants. The Law Commission viewed as unfortunate the
amount of legal documentation needed, and the potential lack of accountability
if this legal documentation was not in place. The enactment of the
Contracts (Rights of Third Parties) Act 1999, on foot of the Law Commission
Report, potentially meant that contracting parties would have no need
for collateral warranties. Third party rights could be laid out in the
main contract.
1.85
Naturally with a change as fundamental as the one proposed in the 1999
Act, there was a certain amount of scepticism and a general reluctance to alter
commercial practices in the few years after the Act came into force. In
many contracts, particularly the larger construction contracts, the Act was
excluded from operating in particular transactions.
1.86
However, it would appear that the tide is now turning, with some of the
standard form contracts used in multi-party transactions being altered to
include the 1999 Act. In general these contracts have provided for the
optional incorporation of the 1999 Act in construction contracts. In 2003, the
Joint Contracts Tribunal (JCT) produced a Major Project Form (MPF), based on
the NEC/ECC form of contract, with a view to dealing with the specific demands
of commissioning clients/employers who have in-house contractual procedures and
regularly undertake major projects.[81] One of the most notable aspects of
this new standard form contract is that it uses the 1999 Act as a means of
avoiding an abundance of separate warranties and other collateral agreements
between the contractor and any funder or purchaser.
1.87
Likewise, in 2005 the British Property Federation issued its own
standard form Consultancy Agreement, which is also based on the JCT Major
Project Form 2003. The agreement encompasses all the main disciplines –
architects, structural engineers, building services engineers, quantity
surveyors and planning supervisors – in the same document. The form
enables specified categories of third parties to enforce the terms set out in a
third party rights schedule for their benefit, in accordance with the 1999
Act. It has been welcomed by some who see the standard form agreement as
achieving the same result as collateral warranties but without the need for a
multitude of separate agreements.[82]
(c)
Discussion
1.88
The Commission considers that there are good reasons for reform of the
privity rule to the extent that it has had an effect in the construction
sector. For all those involved, the rule of privity is likely to slow
down and complicate transactions. From this perspective, it would be
hugely beneficial to have a single contractual arrangement in place, rather
than a network of different agreements (sometimes numbering in the hundreds for
the larger transactions) specific to each contractor and sub-contractor.
The main contract would set out all the rights and responsibilities of the
actors in the transaction, and state when and by whom the rights would be
enforceable. This type of “convention-style” document allows a contractor
or sub-contractor who signs up to a transaction to take on the central terms
and conditions, but the Commission acknowledges that, in the current state of
the law, it is the exception rather than the norm. Legislative reform of
the privity doctrine could make the completion of these types of transactions a
lot easier. It could reduce the significant costs arising from the volume of
documents currently in use.
1.89
Reform of the rule of privity could mean that sub-contractors and the
commissioning client / employer could sue each other directly without having to
involve the main contractor. This has its obvious advantages both in the
context of the smaller and larger scale projects. The commissioning
client would especially benefit in cases where the sub-contractor has only
partly completed the work, and the builder has become insolvent, or cannot be
found. Ordinarily the rule of privity means that the commissioning client
will have no direct contractual rights against the sub-contractor.
Likewise, the sub-contractor would be able to sue on the main contract for
direct payment from the commissioning client in situations where the main
contractor is unwilling or unable to do so.
1.90
The Commission is mindful that, given current practice, it is unlikely
that a commissioning client will leave themselves so open to direct liability
from the main contract. Nevertheless, it is the view of the Commission
that if the privity rule was reformed, a central regime could be put in place
in which the rights and obligations of the parties and third parties are
clearly set out. This would result in clarity, less complexity, and ultimately
less expense.
(2)
Exemption clauses
(a)
Introduction and
current law
1.91
An exemption clause seeks to exclude or limit the liability of the
parties to a contract. This can include liability for breach of contract
as well as liability in tort or under statute. The rule of privity
becomes relevant when a party to the contract seeks to extend the benefit of an
exemption clause to a third party, typically employees, sub-contractors, or
their agents. However, under the normal rules of privity, these third parties
are not entitled to rely on these exemption clauses, as they were not party to
the contract in which they are contained.[83] The Commission notes that these cases
arise primarily as tort actions. Such cases illustrate the overlap
between privity of contract and the law of tort.[84]
1.92
In the course of negotiating contracts parties are concerned with the
allocation of risks. For example, a developer may assume the risk of a
premises being damaged by fire, or the main contractor may assume
responsibility for defects in the work caused by negligence. By assuming
these risks the contractors will ensure that they have an appropriate insurance
policy that will indemnify them should the event occur. The cost of
taking out this insurance policy will be reflected in the cost of the
contract.
1.93
In most cases it will be intended that a large proportion of the work
being carried out under the main contract will be done by sub-contractors or
employees. Because of the rule of privity, the sub-contractor or employee
will have no direct contractual relationship with the promisor in the main
contract, be it a developer in the context of a building project, or a
shipowner in the case of a contract for the carriage of goods. As such,
any exemption from liability that the main contractor had included in the main
contract will not apply to them. Nor will the assumption of the risks of
the employer contained in the main contract apply to the sub-contractors.
1.94
The situation becomes more pressing because of the right of subrogation
which allows the insurer to exercise the rights of the insured once they have
been fully indemnified. An insurer can step into the shoes of the insured
after paying out under the insurance policy and sue the negligent wrongdoer in
tort.[85]
This means that sub-contractors or employees who were not party to the main
contract, and thus do not benefit from the exemption clause, are open to being
sued by the insurance company, even though the main contractor had assumed the
responsibility and been compensated.
1.95
As a result of the rule of privity, each sub-contractor will be forced
to insure themselves against liability for breach of contract, in tort or under
statute. This too will be reflected in the cost of their services.
In many cases, sub-contractors and employees will not be in the financial
position to insure against risks such as this, particularly when the value of
the transactions is in the millions.
1.96
Further anomalies that result from the application of privity in this
context are illustrated by two English cases. In the first of these, Adler
v Dickson,[86] a
cruise ship passenger was injured when a gangway fell. The passenger
ticket contained a clause exempting the cruise ship company from liability in
negligence. Because of this the claimant chose not to sue the ship
company but the master of the ship and the boatswain directly. The master
of the ship and the boatswain chose to rely on the exemption clause in the main
contract.
1.97
The English Court of Appeal decided that the exemption clause was not
available to an employee of the shipping company as they were not within its
scope either expressly or impliedly. The reasons given by the judges in
the Court varied, however. Jenkins LJ decided the case on the ground that the
employees were not privy to the contract, and said that even if the words
contained in the exclusion clause had been more explicit they would still not
have been allowed to rely on the clause. Morris LJ concluded that, if it
could have been demonstrated that the shipowners had been acting as agents for
its employees, they would have been entitled to rely on the clause.
Denning LJ decided that if the correct stipulation was made in favour of the
employees that they would be able to rely on the exclusion clause, but that on
the facts of the case, the clause was not sufficient to afford the immunity
from suit.
1.98
In Midlands Silicones Ltd v Scruttons Ltd[87] the same
conclusion was reached. There, in a contract between the owner of goods and the
carriers of goods, the carriers limited their liability for damage to the goods
transported by them. The goods were damaged by stevedores[88] engaged by them, and the owner of the
goods sued the stevedores. The stevedores were not entitled to rely on an
exemption clause contained in the contract between the owner of the cargo and
the carrier. The English House of Lords decided that there was nothing in
the contract that stated or even implied that the limitation of liability was
to extend to the stevedores.
1.99
As the cruise ship in Adler v Dickson was called “The Himalaya”
any exemption clause which was used to exclude or limit the liability of third
parties later became known as a “Himalaya Clause”. Drafters of shipping
contracts began to include specially formulated “Himalaya Clauses” that would
expressly benefit stevedores and others in bills of lading. These clauses were
upheld in subsequent cases, such as New Zealand Shipping Co. Ltd v A M
Satterthwaite & Co Ltd: The Eurymedon[89] in which
it was decided that if the exemption clause is appropriately worded and both
parties to the contract intended that it was to benefit the stevedores, the
third party was entitled to rely upon it.
1.100
In that case Lord Wilberforce recognised that this decision was based on
general policy reasons and reflected commercial realities:
“[T]o give the [stevedores] the benefit of the exemptions and
limitations contained in the bill of lading is to give effect to the clear
intentions of a commercial document, and can be given within existing
principles. … It should not be overlooked that the effect of denying validity
to the clause would be to encourage actions against servants, agents and
independent contractors in order to get round exemptions (which are almost
invariable and often compulsory) accepted by shippers against carriers, the
existence, and presumed efficacy, of which is reflected in the rates of
freight.”[90]
1.101
The Supreme Court of Canada has allowed third parties to rely on
exemption clauses even when the clause was not a “Himalaya clause” which
expressly benefited the third party. It has developed what has become known as
the “principled exception” to privity in Canadian law. In London Drugs v
Kuehne & Nagel International Ltd[91] the plaintiff delivered a transformer to
a warehouse company for storage under a contract which limited the company’s
liability to $40. The company’s employees negligently caused extensive
damage to the transformer when they tried to move it with forklifts. The
Supreme Court of Canada allowed the employees to rely on the exemption clause,
even though they were not parties to the contract and the clause did not
expressly benefit the employees.
1.102
In Fraser River Pile & Dredge Ltd v Can-Dive Services
Ltd[92] the Supreme Court of Canada allowed a
third party to rely on an exclusion clause where the third party was not an
employee of one of the contractual parties. A shipowner took out a marine
insurance policy, which included a waiver of the insurer’s right of subrogation
against any charterer. It was decided that the charterer could rely on
this term of the insurance contract, even though it was not a party to the
contract, as the term was clearly intended to benefit the charterer. The
Supreme Court of Canada evidently considered that a third party’s right to
enforce an exemption clause was, on balance, preferable to the application of
the conventional privity rule.
1.103
In England and Wales, the Contracts (Rights of Third Parties) Act
1999 allows third parties to enforce rights under contract where such was
the intentions of the contracting parties. This Act applies equally
to provisions in contracts that seek to exclude liability of a third party as
it does to provisions that confer a specific benefit. This is clear from
section 1(6), which provides that:
“Where a term of contract excludes or limits liability in
relation to any matters, references in this Act to the third party enforcing
the term shall be construed as references to his availing himself of the
exclusion or limitation.”
(b)
Discussion
1.104
The Commission notes that the courts have allowed third parties to
enforce exemption clauses contained in main contracts. It is clear that
this case law has developed to reflect commercial realities. However, the
circumstances in which a third party may enforce these clauses are far from
clear-cut. “Himalaya clauses” have been described “an ingenious,
short-term solution to a difficult problem”, but they may raise more problems
than they solve.[93]
In the Commission’s view, third party reliance on exemption and limitation
clauses need not be this complicated. The Commission therefore considers
that the privity rule should be reformed to allow third parties to rely on
exemption and limitation clauses included in a contract for their
benefit.
(3)
Insurance law
(a)
Introduction
1.105
There are a number of ways in which a third party can be affected by a
contract of insurance. The Commission has already noted how the
legislature has intervened in some of these situations in order to grant a
third party enforceable rights. For example, section 7 of the Married
Women’s Status Act 1957 provides that the spouse and children of an assured
person can enforce a life assurance policy made for their benefit.
Similarly, section 76 of the Road Traffic Act 1961 provides that persons
claiming against an insured motorist can obtain certain remedies from the
insurer, even though they are not a party to the insurance contract between the
motorist and the insurance company.
1.106
However, there are still a number of situations where the privity rule
can operate so as to prevent a third party from enforcing an insurance
contract. For example, the Married Women’s Status Act 1957 does
not deal with the rights of a cohabitant, or another relative under a contract
of insurance. In this section the Commission examines some of the
instances of insurance which are adversely affected by the rule of privity.
(i)
Insurance for
employees
1.107
It is not uncommon for an employer to take out an insurance policy on behalf
of its employees, to cover the employees in case of a workplace accident.
This kind of scheme can become problematic particularly where the employer
becomes insolvent or is unable or unwilling to claim under the insurance
contract on behalf of the injured employee. Generally, the employee has
no right to claim the insurance money directly from the insurance company as
they are not a party to the insurance contract.[94] This can cause unfair results, as
shown in the High Court decision of McManus v Cable Management (Ireland) Ltd
& Ors.[95] There, owing to an accident at
work caused by the negligence of his employer, an employee was injured.
The insurance company refused to indemnify the employer in the case, and the
employee sought a declaration that such refusal was unlawful. The Court
decided that the plaintiff could not bring this case as he was not a party to
the insurance contract.
(ii)
Contracts for
the sale of property
1.108
Another problem occurs in contracts for the sale of property, when
damage is done to a property after the contract of sale, but before the land is
conveyed to the purchaser. The purchaser will not be covered by the
vendor’s insurance, as they are not a party to the insurance contract.[96] In its 1981 Report on the privity
rule, the Contracts and Commercial Law Reform Committee of New Zealand noted
that even if the insurance contract does extend the benefit of its terms to the
purchaser, the privity rule will defeat the purchaser’s expectation if they are
not a party to the insurance.[97]
It is therefore imperative that a purchaser obtains their own insurance from
the moment the contract is completed, even though they may not have taken
possession of the property. Reform of privity of contract would enable
insurers to give effective cover to purchasers while the property is still in
the possession of the vendor, and would avoid the current situation where
property may be insured by both the vendor and the purchaser.
(iii)
Leased premises: insurance arrangements for landlords
and tenants
1.109
Landlords and tenants have to be particularly careful that they are both
covered adequately by an insurance policy. Both parties have an insurable
interest in the property, but it is normal for one of the parties, usually the
landlord, to take out a policy of insurance for the property. A
difficulty may arise for the tenant if the landlord’s insurance company
exercises its right of subrogation, which allows it to take over all the rights
of the landlord with regard to the claim. Thus, the insurance company might
bring an action against the tenant if, for example, the damage to the property
was caused by the tenant’s negligence, or the tenant had not maintained the
property in the manner envisaged by a repair and maintenance covenant in the
lease. To avoid this situation, the landlord could include the tenant’s
name in the insurance policy, so that the tenant becomes “the insured”, or the
insurance company could release its rights of subrogation in the policy.
Failing agreement on these issues, the tenant may choose to take out their own
policy of insurance.[98]
1.110
The situation would not arise if the privity rule were reformed so as to
allow the tenant to enforce their rights under the policy between the landlord
and the insurance company.
(b)
Discussion
1.111
The difficulties created by privity of contract in insurance situations
are not limited to the examples above. For example, problems can arise in
situations where a retailer insures against liability to consumers.
Should the customer injure themselves on the premises, they have no basis for
an action against the insurance company to indemnify the shop owner.
1.112
It is the view of the Commission that appropriate and careful reform of
privity of contract could create a situation whereby the parties to an
insurance contract could decide who they wanted to benefit from its terms and
who ought to be able to enforce the contract. A third party would not be
denied rights in situations where it was clear that the contractual parties
intended that they should be able to enforce them.
(4)
Shipping contracts
1.113
The operation of the rule of privity in shipping contracts has led to
the creation of a number of devices designed to give third parties enforceable
rights.[99]
The Commission has already outlined the introduction and upholding of “Himalaya
clauses” in the context of exemption clauses designed to be enforceable by
third parties.[100]
1.114
There are a number of other instances in shipping contracts where the
privity rule has caused inconvenience. For example, a difficulty arises
in relation to the commission payable to shipbrokers. [101] A shipbroker operates as the
personal representative of the shipowner when negotiating things such as ship
management, liner and port agency and the chartering or selling of sea
vessels. They operate on a commission basis, and many standard form
charterparties contain a clause providing for the payment of this commission.[102]
The operation of the rule of privity means that the shipbroker has had to use
complicated methods to enforce this clause providing for payment. In
appropriate cases, the shipbroker can invoke agency principles based on their
relationship with the paying party in order to enforce the clause. It was
decided in Robertson v Wait[103] that the charterers themselves could
recover as a trustee on behalf of the shipbrokers.
1.115
It is the Commission’s view that these solutions are not commercially
convenient. In order to enforce the commission clause, the broker must
involve the charterer in the action. The charterer may be unwilling to be
involved for whatever reason, and in such a case the broker must join the
charterer as a second defendant for failure to enforce the trust.
1.116
The England and Wales Contracts (Rights of Third Parties) Act 1999 has
been tested in the courts in relation to shipping contracts. Nisshin
Shipping Co Ltd v Cleaves & Co Ltd and Others[104] involved the refusal of the charterer
to pay commission to the shipbroker, Cleaves, on the grounds that Cleaves was
in repudiatory breach of the agency agreement between them. Cleaves
relied on the 1999 Act and claimed that it was entitled to be paid its
commission under the terms of the charterparty. In the English High
Court, Coleman J decided that, as the charterparty was neutral as to whether
the broker could enforce the term, it was to be assumed that the parties had
intended that the term would be enforceable by him. The decision is
significant, as prior to the 1999 Act coming into force Cleaves would have had
to have joined the principals as trustees and /or co-claimants in order to
recover its commission.
1.117
Reform of the rule of privity would remove the need for the brokers to
invoke equitable remedies. Instead, the brokers could maintain an action
in their own names, under the charterparty provisions themselves. This
method of enforcing terms in a contract designed to benefit a third party is
much more commercially convenient.
(5)
Professional
negligence
1.118
There are a number of ways in which a third party may be affected by a
contract entered into with a professional. A person may retain a
solicitor to draft a will in order to benefit third parties. A
construction professional, such as an architect or engineer, can undertake
contractual duties to a person other than their immediate client. For example,
a warranty against defective work may be intended to benefit subsequent
purchasers. Financial practitioners, such as auditors, engaged to report
on the accounts of a client company may in certain circumstances affect third
parties who rely on the information provided.
1.119
To date, the duty owed by professionals to third party beneficiaries has
been governed by the tort of negligence.[105] In Wall v Hegarty[106] the
High Court found that a person expecting a legacy in a will that turned out to
be invalid could sue the solicitor who negligently drew up the will. In White
v Jones[107] the English House of Lords decided that
a solicitor who failed to draft a new will within a reasonable period, despite
being instructed to do so by his client, was liable to his client’s daughters
who missed out on Ł9,000 inheritance as a result of his failure. In Ward
v McMaster[108] the High Court
held that a builder was liable in negligence to subsequent owners of a house
for defective premises.[109]
1.120
The law in relation to professional negligence has been described as
“complex, fluid and at times unpredictable”.[110] Depending on the profession and
the nature of the engagement, different outcomes are likely.
1.121
Reform of the privity rule so that a third party could claim under a
contract made for their benefit could potentially alter the manner in which
these cases are dealt with. A third party could bring an action in
contract, rather than in tort. There are differences between liability in
contract and liability in tort, and these would be of relevance if the
liability of professionals to a third party was contractual rather than
tortious.[111]
For example, if an action is taken in contract, a professional person will be
liable if they breach a term of the contract. In contrast, in tort it is
necessary to show that the professional was under a duty of care and that they
were negligent. Also, if a professional person is liable in contract, they will
be liable in damages for any pure economic loss of the third party, whereas in
tort, recovery for pure economic loss is limited.[112] The issue
of contractual liability to non-clients would become a very live one for both
litigators and draftsmen.[113]
1.122
The Commission recognises that there are arguments for and against using
contractual rather than tortious liability in order to resolve the problems
that can arise when a third party is affected by a contract entered into with a
professional and a client. One major advantage with taking the
contractual route is certainty. Each of the contractual parties is aware
from the outset of their rights and responsibilities under the contract.
The Commission considers that if the privity rule was reformed in a structured
manner giving a third party enforceable rights based on the intention of the
contracting parties, the unpredictable nature of the law of professional
negligence could possibly be avoided. It is of course possible that
professional persons will exclude such contractual liability to third parties,
but at least then, too, the situation may be clearer than it is at present.
1.123
It is notable that the Law Commission for England and Wales concluded
that cases such as White v Jones[114] did not come within the sphere
of their proposed legislation because a contract between a testator and his
solicitor does not confer a benefit on a third party as such.[115]
The solicitor’s obligation is to exercise reasonable care and skill in
the drafting of the will to enable the testator to confer the benefit.
1.124
The Commission considers that the opposite conclusion could also be
reached. Indeed, the Law Commission for England and Wales accepted
that, at one level, they preferred the view that the right of the prospective
beneficiaries belonged within the realm of contract rather than tort law.[116]
Since both parties are contracting in order that the beneficiaries under the
will would be provided for in the event of the testator’s death, it could be
argued that the contract is entered into to benefit these third parties.
The third party beneficiaries are undoubtedly affected by it.
1.125
The Commission notes that the timing of the Law Commission’s 1996 Report
on privity of contract is relevant, as the decision of the House of Lords in White
v Jones was still very fresh. The Law Commission was happy to let
issues concerning negligent will drafting remain for determination within the
context of the tort of negligence. In White v Jones Lord Goff
noted that the problems created by consideration and privity of contract led the
House of Lords to seek solutions in the law of torts. However, it is
arguable that there would not be the same need to resort to the law of tort if
the restrictions of the privity rule no longer applied.
1.126
The Commission is of the opinion that it is at least arguable that
reform of privity of contract could be applied to cases involving the drafting
of wills and analogous situations, if this was the intention of the contracting
parties. The Commission recognises however, that such reform would need
to take an appropriate form so that third parties could only claim under the
contract if that was the intention of the original contracting parties.
(6)
Consumer law issues
1.127
In consumer contracts, the Commission notes that there were two main
scenarios causing possible injustice. The first was where a consumer
bought faulty goods from a retailer. If the privity rule applied, the
consumer had no redress against the manufacturer, because they would not have a
contract with the manufacturer. The second situation would arise where a
person bought goods for someone else. This person receiving the gift
would be unable to sue the seller if they were not satisfied with its quality,
as they were not a party to the contract. These kinds of situation have
been resolved in most cases by the enactment of consumer protection
legislation. These include the Sale of Goods and Supply of Services Act 1980,
the Liability for Defective Products Act 1991, the Consumer Credit
Act 1995, the European Communities (Unfair Terms in Consumer Contracts)
Regulations 1995 and the Package Holiday and Travel Trade Act 1995.
Many of these involved the implementation of EC consumer protection Directives,
and the EC continues to play an important role in consumer protection.
1.128
In addition to the legislative intervention in the area, the Commission
is conscious that, in the majority of cases, traders generally operate good
customer services standards in Ireland. It is often the case that
consumers returning goods will be reimbursed, or given some kind of store
credit, without too much concern about who the original parties to the contract
were.
1.129
Nevertheless, it is the Commission’s view that any potential reform of
privity will have implications for the consumer. If reforms allow third
parties to bring an action in contract, this could supplement the existing
scheme of consumer protection legislation. For example, reforms might deal with
whether a third party falls under the definition of a consumer for the purposes
of protection.[117]
1.130
The Commission is conscious that any reforms in this area must take
account of the increasing protection afforded consumers by existing legislative
measures, many of which are influenced by EC Directives. The Commission is also
conscious that this is an area in which national legislative activity is set to
increase, with the publication of the draft Consumer Protection (National
Consumer Agency) Bill 2006.[118]
1.131
The Commission considers that any reform granting third parties
enforceable rights under a contract made for their benefit would only have a
positive impact on the rights of the consumer. The Commission is
concerned with the conferring of benefits, not burdens on the third party, and
it is therefore not likely that the consumer will be placed at a disadvantage.
G
The relationship of privity with existing fundamental
principles of contract law
1.132
There are certain fundamental principles of the law of contract which
are inherently linked with the rule of privity. The rule is associated
with the requirement of consideration and concepts such as freedom of contract,
and mutuality and reciprocity between contracting parties.
1.133
The Commission considers it appropriate to examine these fundamental
concepts with a view to assessing how they could affect, or be affected by,
reform of the rule of privity.
(1)
Consideration and the Privity Rule
(a)
The Requirement of Consideration
1.134
The general rule of consideration is that a party wishing to enforce a
promise must have provided some benefit or incurred some detriment. In
other words, the consideration must “move from the promisee”. The leading
Irish case on the point is McCoubray v Thompson.[119]
There, a contract provided
that a farm would be transferred to Thompson if he agreed to pay half the value
of the farm to McCoubray (a third party). After the land was transferred
to Thompson, he refused to pay the amount promised in the contract to
McCoubray. The court decided that as McCoubray had not provided any
consideration he could not recover the amount owed to him.
1.135
Third parties are not entitled to enforce rights under a contract because
they have not provided any consideration for that promise. The rule of
privity of contract and the requirement of consideration are so entwined that
some commentators have argued that they are two different ways of saying the
same thing.[120]
1.136
The Commission is therefore of the view that any reform of privity of
contract, giving third parties rights of enforcement, would undoubtedly have an
effect on the rule of consideration.
1.137
In its 1996 Report on privity of contract,[121] the Law Commission for England and
Wales noted that any reform of the privity rule was necessarily going to
involve a departure from the rule that the consideration must come from the
promisee. The Law Commission recommended that its proposed legislation
should ensure that the rule that consideration must move from the promisee be
reformed to the extent necessary to avoid nullifying their proposed reform of
the rule of privity.[122]
1.138
The Commission considers that the argument could be made that as
long as a valid contract has been entered into and consideration for the
performance of the contract has been provided, there are good reasons why a
third party, whom the contractual parties intended should benefit, should be
entitled to enforce the contracts. This reasoning is resonant of the pre-Tweddle
v Atkinson decisions, particularly Dutton v Poole.[123]
1.139
While rights for third party beneficiaries may be acknowledged by reform
of the rule of privity, consideration will still be required in order to make
an agreement legally binding. The only change to the rule of consideration
would be that the consideration need not have moved from the promisee.
The Commission considers that to facilitate reform of the rule of privity, it
may be advantageous to clarify that the absence of consideration moving from
the third party would not prevent the third party from enforcing the
contract.
(b)
Bargain theory and the Enforceability of Promises
1.140
Contract law is concerned with the question of what type of promise
should be enforced by the courts. As mentioned already, the requirement of
consideration places some legal limits on the enforceability of promises.
It is premised on the idea of reciprocity or exchange: a person who has made a
promise to provide goods or services should be bound by that promise if they
have received, or have been promised, valuable compensation in return for that
promise. The parties have the right to sue for breach, but can also be sued
themselves if they do not uphold their part of the bargain. This is
sometimes referred to as the “bargain theory” of contract. [124]
1.141
It could be argued that any reform of the privity rule would infringe
this basic principle of contract law. A third party could sue on the
contract, even though they have not provided anything in exchange and cannot
themselves be sued under the contract. The third party would acquire all
of the benefits and none of the burdens in the contract.
1.142
However, the Commission considers that the law has developed, and the
bargain theory of contract is not the only theory used to enforce
promises. Traditionally, contracts would be enforced where the promise
was written in a deed under seal. The courts have developed concepts such
as unjust enrichment, detrimental reliance and legitimate expectations, and
have used these concepts to enforce promises even where the parties do not have
a traditional two-sided bargain or exchange of promises. Public policy
has an important role to play in determining when a promise can be enforced and
by whom it can be enforced. [125]
1.143
It is the Commission’s view that public policy may favour the
enforcement of third party rights, even though it could be argued that
enforcement of such rights is not possible under traditional contract law
rules. If the parties to a contract intend to benefit a third party, the
third party may reasonably rely on that intention and may suffer a detriment if
there is a breach of contract. Public policy may dictate that the third party
should not be without a remedy in this situation.
(2)
Freedom
of Contract and the Privity Rule
1.144
The idea of freedom of contract means that the parties are free to enter
into whatever kind of contract they like, provided it is legal. The
courts will not interfere with the bargains that have been struck between the
parties. If the parties freely and voluntarily entered into a contract, the courts’
only function is to enforce that contract. Thus, the courts will not add
to any agreement, or imply terms merely because it is reasonable to do so.
1.145
One aspect of freedom of contract is that the parties should be free to
agree to vary or cancel an arrangement into which they have entered. It could
be argued that giving third parties rights of enforcement infringes the
contracting parties’ freedom to contract.
1.146
However, the Commission considers that granting a third party
enforceable rights need not infringe the parties’ freedom of contract. It is
possible to contemplate reforms which allow a third party to enforce their
rights whilst protecting the right of the contracting parties to vary or cancel
their agreement.
1.147
The Commission assumes that contracting parties who have intentionally
entered into an agreement to confer a benefit on a third party have in mind
that the contract will be carried out, and that the third party will
benefit. If the rule of privity operated so that this intention could not
be seen through to completion, the parties’ intentions would be thwarted and
the contract’s purpose would be nullified. It could be argued that the
concept of freedom of contract supports the enforcement of third party rights
in this situation, and that the contractual intention of the parties should be
enforced in the most effective way possible by the courts.
H
Comparative
analysis
(a)
Civil Law Systems and Third Party Rights
1.148
The concepts of consideration and privity of contract are unique to
common law legal systems, that is, the Anglophone legal systems. One of
the arguments for reform of privity of contract is that it would bring Irish
contract law more in line with the Civil Law systems of most European
countries. This becomes increasingly important with the globalisation of
international trade, and the increase in cross-border transactions. For
the sake of commercial convenience and clarity it makes sense that the same
fundamental principles should underpin contracts. It has already been
mentioned that many of the other common law countries have reformed the rule of
privity, and the specifics of these reforms will be examined in detail later.[126]
1.149
The following sections outline the approach taken in civil law
jurisdictions to third party beneficiaries.[127]
(i)
France
1.150
In France there is no requirement of consideration as such, but in order
for a contract to be valid it must have a lawful “cause”. In
essence, this means that a contract must contain reciprocal obligations between
the parties in order to be legally binding. The cause need not be
valuable consideration in the sense of the common law interpretation of this,
but instead can be the overall benefit that the promisor receives by entering
into the contract.
1.151
As regards third party rights, Article 1165 of the Civil Code provides
that contracts only affect the parties to it. However, Article 1121
qualifies this by providing that a person can contract for the benefit of a
third party (stipulation pour autrui) and such a contract is directly
enforceable by that third party. The Civil Code does lay down the further
requirements that such a contract is only valid if the promisee made a gift to
the promisor, or requested some performance to themselves. However, the Cour
de Cassation has ignored these requirements finding that it is enough that
the promisee gains some kind of moral profit from the arrangement. The
result is that any contract which is intended to benefit a third party is
enforceable by that third party.
(ii)
Germany
1.152
There is no rule of consideration in German contract law. A
contract is valid and enforceable as soon as the parties to the contract agree
on all the provisions that they wish to have included. Furthermore,
Article 328 of the Civil Code provides that contracts may be made for the
benefit of third parties so that the third party has the right to demand
performance of that contract. However, contracts concluded to the
detriment of third parties are not enforceable against them.
(iii)
Denmark
1.153
In Denmark there is no requirement of consideration and contracts made
for the benefit of third parties are readily enforceable by those third
parties. The parties’ freedom of contract is preserved by allowing
contracting parties to vary and cancel the terms of the contract at any time,
except where the promise is made directly to the third party and where it would
be unjust to do so.
(iv)
The Netherlands
1.154
There is no requirement of consideration in Dutch law. Articles
6.253-4 of the Civil Code expressly recognise contracts for the benefit of
third parties, and allow the third party to enforce the terms of those
contracts. These contracts are recognised as soon as the third party
beneficiary has accepted the terms.
(v)
Principles of European Contract Law
1.155
Article 6:110 of the Principles of European Contract Law deals with a
stipulation in favour of a third party. It provides that a third party
may require performance of a contractual obligation when such a right has been
expressly agreed upon between the contracting parties, or when such agreement is
to be inferred from the purpose of the contract or the circumstances of the
case. The promisee may by notice deprive the third party of the right to
performance unless the third party gives notice that they have accepted that
right or the third party receives notice from the promisee that the right has
been made irrevocable.
1.156
The Principles of European Contract Law do not have the status of law
and are not binding. Should contracting parties adopt the Principles, they
would operate only as terms of the contract, not an effective choice of
law. However, the Principles are designed to reflect basic principles of
contract law across the European Community (EC) and thus may provide the
foundation for measures taken in the future by institutions in the EC and for
the harmonisation of contract law across Europe. Importantly, the
Principles indicate that the favoured approach in EC Member States is to
enforce the rights of third parties to a contract.
(vi)
UNIDROIT Principles of International Commercial
Contracts
1.157
Articles 5.2.1 – 5.2.6 of the UNIDROIT Principles of International
Commercial Contracts deal with third party rights. They provide that
parties can confer enforceable rights on a third party beneficiary either
expressly or by implication, provided the beneficiary is identifiable with
adequate certainty. The third party’s rights are determined by the
agreement of the parties and are subject to any conditions or other limitations
under the agreement.
1.158
The UNIDROIT Principles were formulated as a Restatement of the law on
international commercial contracts. It should be noted that, like the
Principles of European Contract Law, the UNIDROIT Principles are neither a
complete legal system nor a Convention to which Ireland is a party. As a
result, should the parties adopt the Principles, they would operate only as
terms of the contract, not an effective choice of law. But the Commission
is of the view that they are a further indication that in international
commercial transactions there is a trend towards facilitating the
enforceability of third party rights where to do so will give effect to the
clear intentions of the contracting parties.
(b)
Discussion
1.159
The fact that the majority of other EU Member States recognise that
contracts for the benefit of third parties should be enforceable by those third
parties offers a compelling reason for the Commission to examine the
fundamental reasons why the rule of privity has such a strong foothold in Irish
law. It is clear from the above discussion that there are forceful public
policy reasons which favour its reform.
1.160
However, the Commission acknowledges that the argument is not as straightforward
as it would seem. The absence of rules relating to privity and
consideration in the civil law systems is not the only difference between them
and the common law systems. For example, the civil law system has a
general principle of good faith, which is absent from the traditional common
law of contract.
1.161
In some instances, the divergence in the approach to third party rights
arises because the common law has developed techniques that are not recognised
in civil law countries.[128]
For example, in France and Germany, liability for injury caused to third
parties by defective products has been imposed through contract, whereas in
Ireland it is dealt with through the law of tort. Similarly, in France
and Germany losses to third parties caused by negligent misstatements are
brought in contract, when these would be brought in tort here. Civil law does
not allow an undisclosed principal to acquire rights in a contract entered into
by an agent, whereas this is possible in the Irish law of agency. Nor do
the Civil law legal systems make similar use of the concept of the trust.
It is clear that different legal systems can attempt to achieve the same
result in different ways.
1.162
The Commission recognises that, given the fundamental differences
between common law and civil law in this area, direct “cutting and pasting” of
ideas from civil law into common law is a complicated venture, and not
necessarily appropriate. The harmonisation of international contract law
rules is not a simple process and is not always a welcome one. However,
the difference in approach shows that the rule of privity of contract is not
universal and indicates that it may be appropriate to review the continued existence
of the rule in Irish law.
I
The need for reform of the rule of privity of contract: provisional
recommendations
1.163
In this Chapter, the Commission has examined the evolution of the
privity rule and found that its roots are not as deeply entrenched as might
have been assumed. Before the rule was recognised in Tweddle v
Atkinson, there were significant contradictory judgments which point to the
recognition of third party rights.
1.164
The Commission outlined the current impact of privity of contract.
The examples given concerning construction contracts, exemption clauses,
insurance law, shipping contracts, professional negligence and consumer law
have highlighted the negative impact that the privity rule can have in
practice.
1.165
The Commission highlighted the various methods used to circumvent the
rule. These included statutory exceptions, exceptions developed by the
courts, and methods used by drafters and practitioners to allow third parties
to enforce rights under a contract for their benefit.
1.166
The Commission detailed how the legislature has intervened to protect
third parties. The approach of the legislature to date has been to
identify problems occurring in specific instances and deal with them
directly.
1.167
The privity rule has clearly been recognised as a problem in contractual
arrangements for quite some time. As far as is practicable, the problems
that are encountered in practice have been dealt with in a piecemeal way.
It is clear that the rule of privity has not prevented parties from entering
into contractual arrangements. A brief glance at the current economic
climate in Ireland would indicate that this is certainly not the case. Nevertheless,
the procedural difficulties and the expense of these transactions are
heightened by the privity rule. These, coupled with the confusion and
complexity that can surround even the simplest of transactions, make a strong
argument for reform of the privity rule.
1.168
The complex and varying methods used to grant rights to third parties
are confusing and unnecessary. Reform of the privity rule, and the
creation of a general right of enforcement for third parties, would ensure that
there is clarity in contractual relations involving third parties. This
will in turn prevent injustice arising in cases where the parties to a contract
and the third party have relied on the benefit that the third party is to have
from a particular transaction.
1.169
The Commission is of the opinion that the current methods of
granting rights to third parties are not sufficient to deal with the problems
created by the privity rule. There is still potential for injustice,
inconvenience, and expense.
1.170
The Commission also recognises that the privity rule has been
reformed in many other common law jurisdictions, and does not exist in many
civil law countries. Ireland has the advantage of being able to learn
from the experiences of these other jurisdictions in drafting the most
appropriate and effective manner of reform.
1.171
The Commission therefore provisionally recommends that the privity of
contract rule should be reformed to allow third parties to enforce rights under
contracts made for their benefit.
1.172
The Commission provisionally recommends that the privity of contract
rule should be reformed to allow third parties to enforce rights under
contracts made for their benefit.
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2
CHAPTER 2
options for reform
A
Introduction
2.01
In Chapter 1, the Commission outlined the main reasons why the rule of
privity should be reformed. It is the aim of this chapter to analyse how
best this reform might be achieved. The ultimate object is to find a
suitable method of reforming the rule of privity so that the problems outlined
in Chapter 1 can be resolved. It is important in this respect to consider
how any proposed reform would impact on existing methods of allowing third
party rights.
B
Judicial development of the rule of privity
(1)
Introduction
2.02
In this section the Commission places in context the role of the courts
in the development of third party rights. It has already been noted that
the courts have developed methods to grant rights to third parties.
Concepts such as trusts, the law of agency, assignment, collateral warranties
and the circumstances in which an exemption clause in shipping contracts can be
enforced, have all originated from situations in which the courts recognised an
injustice and sought to remedy the wrong.
2.03
However, it is important to note that the role of the courts is limited
to deciding cases on the facts presented before them. It is rare that
well established principles such as the privity rule would be abolished
outright through judicial decisions. An analysis of the approach in other
jurisdictions is useful as it can be seen that in some jurisdictions the
privity rule has been limited in a number of important respects through
judicial decision making. In the majority of cases, however, reform has
taken the legislative route.
(2)
Comparative analysis
(a)
United States of
America
2.04
In the United States of America third parties have been able to
enforce contracts made for their benefit since the mid-19th
century. All States have accepted this third party beneficiary rule, with
the last of these, Massachusetts, finally adopting it as a general rule, rather
than an exception, in 1979.[129]
The Restatement (Second) of Contracts now contains a statement of the
third party beneficiary rule as it stands. Section 304 states:
“A promise in a contract creates a duty in the promisor to
any intended beneficiary to perform the promise, and the intended beneficiary
may enforce the duty”
2.05
It has been said that one of the reasons the privity rule was limited in
the United States is that the judges seemed to be primarily concerned with
promoting certain social standards rather than strict legal formalism.[130]
2.06
The most important decision in the area is Lawrence v Fox.[131] There the New York Court of
Appeals decided that Lawrence could recover as a third party beneficiary
because any other result would go against “manifest justice”. The
theoretical basis for this decision was that there was a moral obligation to
fulfil a promise which benefited a third party.
2.07
In Choate, Hall & Stewart v SCA Services Inc[132] the Supreme Judicial Court of
Massachusetts adopted the general rule of allowing third parties to recover
under contracts concluded for their benefit. The Court referred to the
existing system of law whereby the privity rule was limited and
circumvented by many exceptions, and stated that:
“The rather confusing patchwork should be supplanted by the general
rule now prevalent, which avoids circuity of action and is calculated to accord
with the probable intentions of the contracting parties and to respond to the
reasonable reliance of the third-party creditor.”[133]
The Court stated that the rule of privity was a reflection
of “simple, neighbourly society”,[134] in which people were concerned not to
involve a contracting party in litigation with a third party. The Court
considered that such an approach was not reflective of modern standards.
2.08
The general principle that third party beneficiaries are entitled to
enforce their rights under contract has been refined since the mid-19th
century. The finer details of the rule were left to be teased out in subsequent
cases. Questions worked out over time included: when a third party was
entitled to benefit; the kinds of contracts covered by the rule; the position
of the parties in relation to varying or cancelling the terms of the
contract. Although this had the effect that specific injustices were
tested before the courts and appropriate solutions reached, it is also clear
that this method takes time.
2.09
It is for this reason that although judicial reform of the rule worked
well in the United States, the Commission considers that it may not be the most
appropriate method of reform in the Irish context.
(b)
Canada
2.10
The Canadian courts have also been very pro-active in the creation of
enforceable rights for third parties. Although reform by way of
legislative intervention was advocated by some of the Canadian Law Reform
Commissions,[135] the courts established a general exception
to the rule of privity that allows a third party beneficiary to bring an action
in contract.
2.11
In London Drugs v Kuehne & Nagel International Ltd,[136]
the plaintiff stored an electrical transformer with the defendant. The
contract contained a clause that limited the liability of the defendant to $40
in the event that the transformer was damaged. The transformer was
damaged through the negligence of the defendant’s employees as they were carrying
out their duties. The plaintiff sued the defendant and the individual
employees involved. The Supreme Court decided that under the
circumstances it was intended by both the plaintiff and the defendant that the
contractual allocation of risk would extend to the employees in the performance
of their duties. The employees could rely on the exclusion clause in the
contract, even though they were not party to the contract.
2.12
Iacobucci J delivered the main judgment in the case, and the language
used indicated that the consequences of the decision of the Court would be far
reaching. He elected to “deal head-on with the rule of privity and to
relax its ambit” and stated that:
“Except for a rigid adherence to the rule of privity of
contract, I do not see any compelling reason based on principle, authority or
policy demonstrating that this Court, or any other, must embark upon a complex
and somewhat uncertain "tort analysis" in order to allow third
parties such as the respondents to obtain the benefit of a contractual
limitation of liability clause, once it has been established that they breached
a recognized duty of care. In my view, apart from privity of contract, it is
contrary to neither principle nor authority to allow such a party, in appropriate
circumstances, to obtain the benefit directly from the contract (i.e. in the
same manner as would the contracting party) by resorting to what may be
referred to as a ‘contract analysis’.”[137]
2.13
The Supreme Court of Canada chose to modify the rule of privity of
contract so as to reflect commercial reality and common sense. This
became known as the “principled exception” to the rule of privity.[138]
2.14
The Supreme Court of Canada decision in Fraser River Pile &
Dredge Ltd v Can Dive Services Ltd[139] gave the
exception to the privity rule a coherent definition. It was held that
third party rights are dependent on the intention of the parties to the
contract. In this regard, the intention of the parties is determined by
reference to a two prong test:
i)
The parties to the contract must intend to extend the activities
performed by the third party seeking to rely on the contractual provision and
ii)
The activities performed by the third party seeking to rely on the
contractual provision must be the very activities contemplated as coming within
the scope of the contract, as determined by reference to the intention of the
parties.[140]
2.15
It is evident from the experience in Canada that the courts were willing
to develop substantial exceptions to the privity rule. However, in the Fraser
River case, Iacobucci J had the following to say on judicial reform of the
privity rule:
“Privity of contract is an established rule of contract law,
and should not be lightly discarded through the process of judicial decree.
Wholesale abolition of the rule would result in complex repercussions that
exceed the ability of the courts to anticipate and address. It is by now a
well-established principle that courts will not undertake judicial reform of
this magnitude, recognizing instead that the legislature is better placed to
appreciate and accommodate the economic and policy issues involved in
introducing sweeping legal reforms.
That being said, the corollary principle is equally
compelling, which is that in appropriate circumstances, courts must not
abdicate their judicial duty to decide on incremental changes to the common law
necessary to address emerging needs and values in society.”[141]
2.16
It is clear that judicial reform of the privity rule has its
merits. However, as Iacobucci J noted, judicial reform is necessarily
limited. It is often the case that the legislature is better placed to
gauge the precise needs and values of a changing society. Legislation can
be drafted to include many of the potential nuances that reform of the rule of
privity can present. Hence, the majority of common law jurisdictions have
altered the privity rule by means of legislation. Even within Canada, the
Law Reform Commission of Nova Scotia, despite the decisions in London Drugs
v Kuehne & Nagel International Ltd and Fraser River Pile &
Dredge Ltd v Can Dive Services Ltd, recommended that the privity rule
should be relaxed by legislation to allow a third party beneficiary to enforce
rights under a contract.[142]
It was their view, as suggested by Iacobucci J in the Fraser River case,
that a total abolition of the privity rule was a matter for the legislature.[143]
In New Brunswick, legislation has been enacted with the effect that a third
party can enforce a claim under a contract made for their benefit.
Section 47 of the Law Reform Act 1993 provides that:
“a person who is not a party to a contract but who is
identified by or under the contract as being intended to receive some
performance or forbearance under it may, unless the contract provides
otherwise, enforce that performance or forbearance by a claim for damages or
otherwise.”
2.17
There is also a revised provision in the Québec Civil Code along the
lines of the French stipulation pour autrui which “entitles the third
person beneficiary the right to exact performance of the promised obligation
directly from the promisor”.[144]
(c)
England and Wales
2.18
In its 1996 Report on privity of contract, the Law Commission for
England and Wales considered that the role of the judiciary in the development
of third party rights was important.[145] It was acknowledged, however, that the
House of Lords had been given a number of opportunities to reconsider the third
party rule, and had declined to do so. The Law Commission was
particularly aware that the House of Lords may have to wait a long time before
another suitable case reached them. The Law Commission concluded that
legislation was the best option and had the advantage that many of the
difficulties of which they had become aware through their consultation could be
addressed. It was their opinion, however, that any proposed legislation
ought not to hamper judicial development of the law in specific
instances.
2.19
The details of the Law Commission’s 1996 Report and the subsequent 1999
Act will be examined in further detail in Chapter 3.
(3)
Discussion
2.20
Judicial development of the law can be a slow process. The common
law system of precedent generally requires the courts to follow previous
decisions of the higher courts. For the rule of privity to be reformed in
a general way, the higher courts would need to be presented with a case which
highlights the injustices of the rule. It is by no means certain that an
appropriate case will come before the Supreme Court any time in the near future
and there is no guarantee that the judges sitting would choose to pronounce on
the soundness of the rule. The Commission has already noted the
reluctance of Irish judges to deal directly with the privity rule.[146]
2.21
Judicial development is an uncertain route to take, because it is
dependent on the “pendulum of judicial opinion”.[147] Judicial opinion can fluctuate
over time, leaving those that are affected by the rule of privity unsure of
where they stand in relation to their rights under a contract. Positive
legislative intervention is often necessary in order to address all of the
salient issues and problems.
2.22
As already mentioned, in the Fraser River case, Iacobucci J
noted that it is not the place of the courts to carry out major reforms of the
law, but that rather this is a matter for the legislature. As Dawson J in
Trident General Insurance Co Ltd v McNeice Bros Pty Ltd[148]
stated, the court “is neither a legislature nor a law reform agency. It
would do more harm than good to attempt to reach a right result by a wrong
means.”[149]
It was his view that the role of the court was limited to the adaptation of
existing principles rather than the creation of new ones.
2.23
The Commission nonetheless considers that the role of the judiciary will
be vital when it comes to determining the application of any proposed
legislation. In particular, no legislation could hope to cover every
conceivable problem that might be faced. The judiciary will have an
essential role to play in any further development of third party rights beyond
the scope of the proposed legislation.
2.24
The Commission provisionally recommends that the development of third
party contractual rights should take the form of legislation, which is most
suited to address the injustices and inconveniences associated with the current
privity of contract rule. The
Commission also provisionally recommends that legislative reform of the privity
rule should not constrain judicial development of third party rights.
C
Reform of the promisee’s remedies in order to give more
protection to a third party
(1)
Introduction
2.25
One of the reasons advanced for reform of the privity rule is that the
promisee, who is a party to the contract, cannot obtain adequate redress for
the loss of a third party beneficiary. For example, in an action for
damages, a party is only entitled an award which reflects their own personal
loss as a result of the other party’s breach. The courts will only award
a nominal amount to a promisee who has not borne the loss themselves.[150]
2.26
There are exceptions to this rule of damages. For example, in the
context of the carriage of goods by sea, the goods may be lost in transit after
ownership in the goods has passed from the seller of the goods to the
buyer. The buyer of the goods is not a party to the contract for the
carriage of the goods and cannot sue on it. The seller of the goods is a party
to the contract for the carriage of goods, but if they sue on this contract
they cannot prove that they have suffered a loss. In this situation, the
courts have developed an exception to the normal rule of damages so that the
seller of the goods can recover substantial damages.[151]
2.27
Another exception may exist in the context of certain everyday
transactions, for example, contracts for family holidays, ordering meals in
restaurants or hiring a taxi for a group. In the Supreme Court, Finlay CJ
has stated that these cases may call for “special treatment” in relation to the
measure of damages.[152]
2.28
In certain instances, where the award of damages does not offer adequate
compensation, the promisee may seek an order of specific performance.[153]
In such a case, the promisor will be compelled to perform their end of the
bargain. If the object of the contract was to confer a benefit on a third
party, then specific performance will be of use to the third party. However, an
order for specific performance is at the discretion of the court, and will not
always be available. For example, an order for specific performance will not be
given to compel the performance of personal services.
2.29
It is the Commission’s view that the extension of the promisee’s
remedies would not be sufficient to cure the problems associated with the rule
of privity. It would not assist the third party if the promisee is unable
or unwilling to sue on the contract. Nor would it cover the situation where a
third party is seeking to rely on an exemption clause contained in a contract
to which they are not a party.
2.30
In its 1996 Report on the privity rule, the Law Commission for England
and Wales accepted that the advantage of this method of law reform was that it
avoided the need to address several difficult questions which arise if third
parties are given enforceable rights, such as the test for enforceability for a
third party.[154]
However, the Law Commission concluded that reform of the remedies of the
promisee would not be an adequate method of reform, because the promisee may be
unwilling or unable to enforce a contract made for a third party. In this
situation, the third party is still without a remedy. The Law Commission
also recommended that the general issue of remedies available to the promisee
in a contract enforceable by a third party should be left to the common law.[155]
2.31
In 1993, the Manitoba Law Reform Commission recognised that reform of
the promisee’s remedies was attractive for a number of reasons. It
involves very little dislocation of basic contractual principles and avoids the
necessity of resolving the numerous issues that arise in drafting a detailed
legislative scheme.[156]
However ultimately they chose not to recommend this method as to do so would be
an incomplete solution to the problem of third party rights. It is
entirely dependent on the situation of the promisee and the third party would
still have no remedy if the promisee was unable or unwilling to sue on the
contract.
(2)
Discussion
2.32
The Commission notes that none of the jurisdictions that have reformed
the privity rule have done so by reforming the remedies available to the
promisee. The Commission agrees that this method of reform does not
address the real issues that are presented by the privity rule.
2.33
Nevertheless, some argue that the most appropriate and legally
acceptable method of reforming the rule of privity is to focus on the
promisee’s remedies.[157] As
to the potential unwillingness or the lack of ability of the promisee to sue,
it is argued that this is the nature of litigation, and that it is just as
likely that the third party beneficiary will be unable or unwilling to sue.
2.34
The Commission is not convinced by such arguments as they fail to
address the injustice and the commercial inconvenience that the rule of privity
can cause. Reform of the promisee’s remedies will only assist in a
limited number of cases and could not possibly hope to achieve all of the aims
of this reform.
2.35
However, the Commission acknowledges that reform of the rule of privity
should not in any way hamper judicial development of principles relating to the
award of damages.
2.36
The Commission provisionally recommends that reform of the promisee’s
remedies should not form part of the proposals to reform the privity rule.
D
General Legislation entitling third parties to enforce contracts for
their benefit
(1)
Introduction
2.37
One of the possible means of legislative reform would be to introduce a
general all-encompassing legislative provision creating enforceable rights for
third party beneficiaries. This method has the advantage of simplicity.
Many of the civil jurisdictions examined in Chapter 1 take this general
approach. There are inherent difficulties, however, in applying this to a
common law jurisdiction which has developed a myriad of complicated exceptions
to the privity rule. Without further legislative guidance these issues
would be left to be teased out by the judiciary and indeed in general
practice. While this has the advantage of keeping in line with modern
commercial practice and retaining a degree of flexibility, it may lead to
further complexity and confusion as to third party rights.
(2)
Comparative analysis
(a)
Ontario
2.38
The Law Reform Commission of Ontario examined the merits of reform of
the privity rule by means of a general enabling provision in legislation.
It was their opinion that a general clause would have the effect of permitting
the courts to enforce third party rights where the justice of the case so
required. There would be an element of flexibility and the judiciary would still
have an important role to play. Such a clause would simply abolish the
impediment to a third party enforcing rights under a contract, leaving the
courts free to fashion principles in favour of the third party.[158]
2.39
The Law Reform Commission of Ontario considered that an attempt at a
detailed legislative scheme was far too complex and difficult a task. It
expressed concern about the legislature’s ability to classify the kinds of
third party beneficiary and the types of agreement that would be covered by any
legislation. It concluded that no legislature could possibly foresee all of the
potential problems that might arise in the future. It would therefore be
futile to attempt such an endeavour.
2.40
Ultimately, the Law Reform Commission of Ontario recommended that:
“There should be enacted a legislative provision to the
effect that contracts for the benefit of third parties should not be
unenforceable for the lack of consideration or want of privity”.[159]
2.41
The recommendations of the Law Reform Commission of Ontario have not as
yet been implemented. This is probably because the Supreme Court of
Canada has already intervened in cases such as London Drugs and Fraser
Pile Dredge Co.[160]
The result is that a third party may generally enforce terms in a contract made
for their benefit. As there is now no bar to the enforcement of third
party rights in Canada, perhaps the need for legislative intervention is
lessened, particularly when the form of legislation contemplated was general.
(b)
England and
Wales
2.42
In its 1996 Report on privity of contract, the Law Commission for
England and Wales examined the approach advocated by the Ontario Law Reform
Commission and rejected it for a number of reasons.[161] Although the Law Commission
recognised that it had the advantage of making the change of principle a
legislative matter, while leaving it to the courts to handle subsequent
developments, it was ultimately of the opinion that the problems associated
with the rule of privity were far too complex to be dealt with in an incremental
way. It was the Law Commission’s view that to introduce a general clause
abolishing the need for privity certainly achieved flexibility, but that it
does so at the expense of clarity and certainty. The Law Commission was
also of the view that to leave such issues to the courts without any
legislative guidance would be an abdication of responsibility. This was
particularly so when it is known that these difficult issues will have to be
faced at some stage if the reform is to have any meaningful effect.
(c)
Hong Kong
2.43
The Law Reform Commission of Hong Kong also examined reform by means of
a general enabling clause.[162]
It was felt that while this kind of “broad brush” method had the
advantage of being simple to implement, it would be difficult to apply.
While such a clause would ensure the removal of the general bar to a
third party enforcing rights under a contract, lawyers would still find it very
difficult to advise a client on their position until all of the other problems
were teased out in the courts. It concluded that such a general approach
was not appropriate when dealing with issues as complex as those presented by
privity of contract.
(3)
Discussion
2.44
All common law jurisdictions that have implemented legislation to create
third party rights have opted for a more detailed approach to reform.
There is a concern that while a general clause might be easier to enact initially,
it does not properly address the complex issues that arise in relation to
privity. For this reason, it is not likely that the tools of the
common law can match the precision that legislation can provide.[163]
2.45
It is the Commission’s view that, while a general clause removing the
bar to third party enforcement has the advantage of simplicity, it does not
adequately deal with the difficulties that arise in practice. If
anything, legislation such as the England and Wales Contracts (Rights of
Third Parties) Act 1999 has been criticised for not being detailed enough.[164]
2.46
For these reasons, the Commission believes that a general enabling clause
would result in further confusion and complexity in an already perplexing
area.
2.47
The Commission provisionally recommends that reform of the privity
rule should not take the form of a general provision enabling a third party to
claim the benefit of contractual provisions for the third party’s
benefit. The Commission provisionally recommends that a more detailed
scheme of third party rights is necessary.
E
Legislative reform of the rule of privity to include further
exceptions to the rule in specific instances
(1)
Introduction
2.48
In Chapter 1 the Commission identified a number of instances where the
rule of privity created injustice to the third party, and inconvenience to a
large number of commercial actors. The Commission noted how privity can
affect each of these different areas in diverse ways. The Commission is
concerned that any proposed legislation should in some way address these
issues. For this reason, the Commission now turns to consider to what
extent reform of privity should only involve the creation of further exceptions
to the rule in specific instances.
(2)
Comparative analysis
(a)
England and
Wales
2.49
In its 1996 Report on privity of contract, the Law Commission for
England and Wales considered the option of reforming the rule of privity by
creating further exceptions in specific instances.[165] They noted that this would
have the advantage that particular needs of the parties in particular
situations could be directly addressed in detail. There is also the added
advantage that there would be little room for debate as to whether or not it
was intended that a third party would have enforceable rights in these specific
instances.
2.50
However, the Law Commission ultimately rejected the approach as they
considered that it ignores the fact that the rule of privity is fundamentally
flawed. It was the Law Commission’s view that creating further exceptions to
the rule within a legislative scheme would result in increasing complexity
while leaving unacceptable gaps in a third party’s rights. Reform along
these lines would achieve positive results in very specific instances, but
overall the third party beneficiary would be in no better position than before.
(b)
Other common law
jurisdictions
2.51
The general consensus among law reform agencies and the legislatures of
other common law countries is that introducing further exceptions to the
privity rule in specific instances would not achieve the clarity or remove the
confusion surrounding privity in its traditional form. The Law Reform
Commission of Hong Kong agreed that reform along these lines ignored the
underlying anomalies of the rule and that a failure to deal with these
anomalies would only lead to further complexity.[166]
2.52
The Manitoba Law Reform Commission was also of the view that this
approach to reform would be likely to increase complexity by adding further
exceptions to a rule that is fundamentally flawed. It was also noted that
it could have the effect of impeding any chance of further judicial reform.[167]
2.53
None of the states where legislation has been introduced have adopted
this incremental approach to third party rights.
(3)
Discussion
2.54
The Commission is aware that, to date, matters affecting third parties
have been dealt with by creating further exceptions in specific instances, for
example in sections 7 and 8 of the Married Women’s Status Act 1957; the Road
Traffic Act 1961; the Sale of Goods Act and Supply of Services Act 1980;
and the Consumer Credit Act 1995.[168] This
method of reform has worked well, in that it has tackled pressing needs in
specific instances.
2.55
However, the Commission notes that despite legislative intervention in a
variety of different areas there remain injustices and commercial inconvenience
and expense arising from the privity rule. The Commission agrees with the
views expressed in other common law jurisdictions that the privity rule is
flawed.
2.56
Reforming the rule in a piecemeal fashion would lead to increased
complexity rather than provide for a straightforward scheme of third party
rights. In addition to this, the Commission is mindful of the length of
time that would be needed to address the specific problems by means of separate
legislative provisions. In addition, the law would need to be kept under
constant review, analysing when and how the privity rule continues to affect
transactions and the rights of third party beneficiaries.
2.57
To reform the rule in this way would be to ignore the unfairness
underlying the privity rule.
2.58
For these reasons, the Commission has concluded that reform of the
privity rule cannot be achieved by creating further exceptions to the privity
rule in specific instances.
2.59
The Commission provisionally recommends that reform of the privity
rule should not be by means of creating further exceptions to the privity rule
in specific instances.
F
Detailed legislation creating comprehensive third party contractual rights
(1)
Introduction
2.60
The Commission begins this section by noting that the enactment of
detailed legislation creating comprehensive third party rights is the favoured
method of reform in the other common law jurisdictions. However, the
exact form of the legislation and the aims of such reforms have varied.
After consideration of the alternatives the Commission’s provisional view is
that in order for reform of the privity rule to have any real effect, a
detailed scheme of third party rights should be introduced by statute.
The Commission’s aim in this section is to set out in general terms the
different approaches taken in various common law jurisdictions. The
detailed content of the reforms will be discussed in further detail in Chapter
3.
(2)
Comparative analysis
(a)
Australia
(i)
Western
Australia
2.61
In 1969 Western Australia became the first common law jurisdiction to
legislate for third party rights. Section 11(2) of the Western Australian
Property Law Act 1969 provides that:
“where a contract expressly in its terms purports to confer a
benefit directly on a person who is not named as a party to the contract, the
contract is, subject to subsection (3), enforceable by that person in his own
name”
2.62
This general clause is followed by provisions limiting the rights of the
third party in certain instances. For example, the Act provides that the
promisor will be able to avail of all of the defences that would have been
available against the promisee in any proceedings brought by a third party
beneficiary.[169]
The Act also provides that the contract can be cancelled or modified by the
parties to the contract up to the time that the third party beneficiary has
adopted it, either expressly or impliedly.[170]
2.63
The 1969 Act has been criticised for not going far enough. For
example the Contracts and Commercial Law Reform Committee of New Zealand
criticised it on a number of grounds:
i)
It does not appear to allow a third party which was not in existence at
the time the contract was made to enforce any rights.
ii)
It appears to allow only those third parties named in the contract to
benefit. The New Zealand Committee was concerned that this was too
restrictive as class descriptions are common in contracts.
iii)
It seems to exclude implied terms in favour of third parties.
iv)
The requirement that each person named as a party has to be joined to
the proceedings is overly restrictive.
v)
It does not seem to require that the contracting parties ought to have
had the intention to create legal obligations as regards the third party.[171]
2.64
This reaction is indicative of the calls for a detailed scheme of
accessible third party rights based on the intentions of the contracting
parties.
(ii)
Queensland
2.65
The reform in Western Australia was followed in Queensland by the Property
Law Act 1974. The 1974 Act is more detailed than the Western
Australia Act. Section 55(1) states that:
“A promisor who, for a valuable consideration moving from the
promisee, promises to do or to refrain from doing an act or acts for the
benefit of a beneficiary shall, upon acceptance by the beneficiary, be subject
to a duty enforceable by the beneficiary to perform that promise.”
2.66
The Act also allows the contracting parties to vary or discharge the
contract until the third party beneficiary accepts them.[172] Upon acceptance of the benefits
in the contract, the beneficiary is entitled to remedies and relief in their
own right against the promisor.[173] Furthermore upon acceptance of
the benefits in the promise, the beneficiary is bound by the promise and
subject to a duty enforceable against them.[174] Any defences that would have been
available to the promisor in an action by a promisee can be raised against the
beneficiary in a like manner.[175]
2.67
The legislation in Queensland does not require that the contract
expressly purport to benefit the third party. Nor is there an obligation
to join all parties to the proceedings. The New Zealand Contracts and
Commercial Law Reform Committee had difficulty with the definition of
“acceptance” and lack of provision for the third party beneficiary in respect
of deeds and other covenants.
(iii)
The Northern Territory
2.68
In the Northern Territory, section 56 of the Law of Property Act 2000 emulates the
provisions of the Queensland Property Law Act 1974.
(b)
New Zealand
2.69
With the benefit of the experience in the Australian States, the Contracts
(Privity) Act 1982 was enacted in New Zealand following the recommendations
of the 1981 Report of the New Zealand Contracts and Commercial Law Reform
Committee.[176]
After a review of the existing law on third parties, the Committee recommended
that the privity rule should be amended, as they had “looked in vain for a
solid basis of policy justifying the frustration of contractual intentions”.
2.70
The New Zealand Contracts (Privity) Act 1982 is more detailed
again than its counterparts in Australia. Section 4 of the Act provides
that:
“Where a promise contained in a deed or contract confers, or
purports to confer, a benefit on a person, designated by name, description, or
reference to a class, who is not a party to the deed or contract (whether or
not the person is in existence at the time when the deed or contract is made),
the promisor shall be under an obligation, enforceable at the suit of that
person, to perform that promise:
Provided that this section shall not apply to a promise
which, on the proper construction of the deed or contract, is not intended to
create, in respect of the benefit, an obligation enforceable at the suit of
that person.”
2.71
The Act thus lays particular emphasis on the intentions of the
parties. The intention has two elements: the parties must have intended
to benefit the third party, but also they must have had the intention to create
enforceable rights in that third party.
2.72
The Act also provides for the circumstances in which the contract may be
varied or altered.[177]
It does not prevent the parties from making express provision in the contract
for their rights to vary the contract at any time.[178] Furthermore the court is given
the power to authorise variation or discharge in certain circumstances.[179]
The Act also provides that the promisor will have any defence that would
normally have been available to them in any proceedings.[180]
2.73
The detailed provisions of the Act will be examined in Chapter 3.
But it is worth noting at this point the comments of the New Zealand Law
Commission who in 1993, over 10 years after its enactment, said that no serious
problems posed by the terms of the Act had yet come to light.[181]
(c)
Canada
2.74
The Commission has already highlighted the important role that the
Canadian courts had in the development of third party rights in Canada.[182]
In addition, a number of Canadian provinces have legislated to create a more
comprehensive scheme of third party rights. This indicates the advantages
of having a detailed scheme of third party rights.
(i)
New Brunswick
2.75
Section 4 of the New Brunswick Law Reform Act 1993, which deals with privity
of contract, is less detailed than the New Zealand 1982 Act. It provides
that:
“A person who is not a party to a contract but who is
identified by or under the contract as being intended to receive some
performance or forbearance under it may, unless the contract provides
otherwise, enforce that performance or forbearance by a claim for damages or
otherwise.”
2.76
The section goes on to provide that any defence may be raised that could
have been raised in proceedings between the parties.[183] It also provides that the
contracting parties can amend or terminate the contract at any time, but that
if by doing so they cause loss to the third party beneficiary they are liable
for that loss.[184]
2.77
The Act could be criticised for not making clear what the test of
enforceability ought to be. Nor does it deal with the questions of the
third party’s existing rights under common law or statute. At best the
Act could be said to give a third party a statutory right of enforcement, but
the New Brunswick legislature have left the finer details to be worked out in
the caselaw. It can be compared with the legislation in Western Aust
ralia in this regard.
(ii)
Québec
2.78
The Québec Civil Code was amended in 1991 to provide for a more detailed
scheme of third party rights. Although Québec law has its origins in the
civil law tradition, the move from a general enabling clause in the original
Code to a more detailed approach is suggestive of the trend towards detailed
statutory rights for third parties. Article 1444 of the Civil Code
provides that:
“A person may make a stipulation in a contract for the
benefit of a third person.
The stipulation gives the third person beneficiary the right
to exact performance of the promised obligation directly from the promisor.”
2.79
The Code states that the third party beneficiary need not be in
existence at the time the contract was concluded.[185] The parties to the contract may
revoke the stipulation in favour of the third party as long as the third party
beneficiary has not advised the stipulator of his will to accept it.[186]
The Code also makes provision for stipulations in wills and states that third
party beneficiaries and their heirs may validly accept the stipulation even
after the death of the promisor.[187] The Code also provides that the
promisor may invoke any of the defences that would have been available to
him/her should the action have been brought by a party to the contract.[188]
(iii)
Manitoba
2.80
The Law Reform Commission of Manitoba attached a draft Bill to their
1993 proposals for reform of the rule of privity.[189] The Bill sets out a detailed
scheme of third party rights. Section 3(1) of the Draft Bill provides
that:
“where a promise contained in a contract confers or purports
to confer a benefit on a person who is not a party to the contract (whether or
not the person is in existence at the time the contract is made), the promisor
shall be under an obligation to perform that promise.”
Section 4 of the Draft Act goes further and states that:
“the obligation imposed on a promisor… shall be enforceable
by the beneficiary as if he or she were a party to the contract and relief in
respect of the promise shall not be refused on the ground that the beneficiary
was not a party to the contract.”
2.81
The Manitoba Law Reform Commission’s Draft Act also provides that it
must have been the intention of the contracting parties to create enforceable
obligations in respect of the benefit.[190] The Law Reform Commission
recommended that detailed legislation be introduced outlining the rights of the
parties to vary or cancel the terms of the contract; the power of the courts to
vary or cancel the terms of the contract and the defences available to the
promisor. Furthermore they recommended that the draft Act should be just
one method available to the third party beneficiary to enforce their
rights. As such they recommended that any existing rights or rights that
might develop over time should not be affected.
(d)
United States of America
2.82
As was seen above in relation to the judicial development of third party
rights, there has been a third party beneficiary rule in place in the United
States since the mid 19th century.[191] The law in this respect was authoritatively
summarised in the American Law Institute’s Restatement (Second) of Contracts
in 1981. The Restatement recognises the power of the promisor and promisee to
create enforceable rights in a beneficiary, by manifesting an intention to do
so. Paragraph 304 is the central provision in relation to third
parties. It provides that:
“A promise in a contract creates a duty in the promisor to
any intended beneficiary to perform the promise and the intended beneficiary
may enforce the duty.”
2.83
The Restatement deals with most of the issues affecting third party
rights. It defines “beneficiary” by dividing potential beneficiaries into
2 categories: intended and incidental. Only intended beneficiaries have
enforceable rights.[192]
It deals with issues such as overlapping duties to the beneficiary and the
promisee.[193]
And the defences available to the promisor are laid down,[194] as are the rights of the parties to
vary or cancel the contract.[195]
2.84
The Restatements do not of course have the force of law, but they have
been cited in some courts as reflecting the law and have formed the basis for
statutory reform in a number of States.
(e)
England and
Wales
2.85
The Contracts (Rights of Third Parties) Act 1999 was
introduced following the recommendations of the Law Commission in their 1996
Report on privity of contract.[196] The 1999 Act brought to a
close a long line of recommendations for reform, dating back to a report of the
Law Revision Committee in 1937 which had recommended that the law in relation
to third party rights should be reformed in order to frame a rule that would be
more easily understood.[197]
2.86
The Law Commission’s 1996 Report recommended reform by means of
detailed legislation as to do so would introduce certainty to a complex and
confusing area of law. They commented that detailed legislation would
allow the legislature to provide for such matters as the contractual provisions
that are enforceable by third parties, the rights of third parties to vary or
discharge the contract, and the promisor’s defences.[198] They concluded that detailed
legislation could address all of the issues raised in the 1991 Consultation
Paper[199]
and the 1996 Report in a manner not open to the judiciary.[200]
2.87
Section 1 of the 1999 Act provides that:
“(1) Subject to the provisions of this Act, a person who is
not a party to a contract (a “third party”) may in his own right enforce a term
of the contract if –
(a) the contract expressly
provides that he may, or
(b) subject to subsection (2), the term
purports to confer a benefit on him.
(2) Subsection 1(b) does not apply if on a proper
construction of the contract it appears that the parties did not intend the
term to be enforceable by the third party.”
2.88
This general enabling clause is followed by provisions allowing for a
broad definition of a third party. It allows a third party who is identified
expressly in the contract by name, as a member of a class, or answering a
particular description to enforce the terms.[201] It deals specifically with the
third party’s right to enforce an exemption clause in their favour.[202]
The Act deals with the defences available to the promisor[203], and allows the parties to vary or
cancel the contract up until the time that the third parties’ rights have
crystallised.[204]
The Act expressly lays out the exceptions to the general rule,[205]
and deals with arbitration clauses.[206] The Act expressly states that it
shall not affect any of the existing exceptions available to the third party
beneficiary.[207]
2.89
Reaction to the 1999 Act has in general been positive, with most
commentators seeing its enactment as inevitable because England and Wales were
one of the few remaining common law jurisdictions that had yet to create a
system of general third party rights. Commentators have also welcomed the
approach to third party beneficiaries by means of a detailed legislative scheme
as such a method achieves the precision that “the tools of the common law
cannot match”.[208]
2.90
The Act has also been welcomed because not only does it provide
precision and clarity on third party rights, it also allows the contracting
parties to maintain their contractual freedom. The general approach means
that the “largesse of the gift is entirely dependent upon the contracting
parties”.[209]
Since its enactment, the law reform bodies in at least two other jurisdictions
have based their proposals for reform on the 1999 Act.[210]
2.91
The detailed nature of the rights conferred by the 1999 Act will be
discussed in Chapter 3.
(3)
Discussion
2.92
The Commission is aware that the complexities and problems associated
with the privity rule will mean that any reform proposals require careful
thought. However, in this respect, the Commission’s review leads us to
the conclusion that it is appropriate to recommend the enactment of detailed
legislation conferring rights on third parties. While there may be shortcomings
with some of the legislation that has been introduced in other jurisdictions,
these can be addressed in the Irish context through the enactment of detailed
legislation. Ireland now remains in the very small minority of common law
jurisdictions that have not limited the privity rule in some way. It is
the Commission’s view that in light of the experience of other jurisdictions,
and the nature of the law in relation to third parties, reform by means of
detailed legislation is an appropriate option, and therefore provisionally
recommends this approach.
2.93
The Commission provisionally recommends that the privity of contract
rule should be reformed by means of detailed legislation.
G
Existing exceptions to the rule of privity
(1)
Introduction
2.94
It is crucial to consider the continuing role, if any, of the existing
exceptions, in light of any reform introduced. These exceptions, set out
in Chapter 1, were introduced to remedy specific unfair or inconvenient results
arising from the application of the privity rule. Reform of the rule in
its entirety could negate the need for these exceptions. One option is to
amalgamate the existing exceptions under one all-encompassing scheme of third
party rights. Another option is to maintain existing exceptions alongside
any proposed general reform. This would have the potential effect of
offering dual protection to the third party beneficiary.
2.95
The Commission emphasises that, at the centre of any proposed reform,
there must be clear and easily accessible rights available to third party
beneficiaries. The object of reform is clarification and correction of
injustice. It is the Commission’s view that the issue of existing
exceptions and how these will interact with a new scheme of third party rights
is one that could test the overall effectiveness of the reform.
(2)
Comparative analysis
(a)
Australia
2.96
The Western Australian Property Law Act 1969 is silent as to the
existing exceptions. It can be assumed that the Act does not alter the
third party rights available outside of the remits of that Act.
2.97
In Queensland, section 55(7) of the Property Law Act 1974 provides explicitly
that:
“Nothing in this section affects any right or remedy which
exists or is available apart from this section”
Section 56(7) of the Northern Territory Law of Property Act
2000 is to the same effect. These provisions allow the courts the
freedom to apply the existing exceptions to the rule of privity where to do so
would be in the best interests of all involved. By keeping the existing
exceptions in place, practitioners are allowed the time to adapt practices and
advise clients on the best way to afford third parties enforceable
rights.
(b)
New Zealand
2.98
Section 14 of the Contracts (Privity) Act 1982 states:
“Subject to section 13 of this Act, nothing in this Act
limits or affects—
(a)Any right or remedy which exists or is available apart
from this Act; or
(b)The Contracts Enforcement Act 1956 or any other enactment
that requires any contract to be in writing or to be evidenced by writing;
or
(c)Section 49A of the Property Law Act 1952; or
(d)The law of agency; or
(e)The law of trusts.”
2.99
The section is more detailed than those in Australia, listing some of
the existing exceptions to the rule of privity.
(c)
England and
Wales
2.100
Section 7(1) of the Contracts (Rights of Third Parties) Act 1999
provides that:
“Section 1 does not affect any right or remedy of a third
party that exists or is available apart from this Act”
2.101
In its 1996 Report, the Law Commission for England and Wales was of the
view that the existing statutory exceptions to the rule of privity should be
preserved. They concluded that this could be achieved by enacting a
general provision rather than a more elaborate statutory listing. They
came to the same conclusion in relation to the common law exceptions. It
was the view of the Law Commission that there was no merit in attempting to
abolish the common law exceptions, particularly as some of these exceptions
would give a third party more secure rights than those envisaged by the 1999
Act.[211]
Similarly, it recommended that the common law exceptions should not be codified
or listed. To do so would deprive the judiciary of flexibility in the
development of the law.
(d)
Singapore
2.102
The Contracts (Rights of Third Parties) Act 2001 was
enacted following the recommendations of the Law Reform and Revision Division
of the Attorney General’s Chambers in Singapore.[212] Section 8(1) of the Act provides
that:
“Section 2 shall not affect any right or remedy of a third
party that exists or is available apart from this Act.”
(e)
Hong Kong
2.103
The Law Reform Commission of Hong Kong published a report on privity of
contract in 2005. It recommended that nothing in the Commission’s
proposed legislation should affect any right or remedy of a third party that
exists or is available apart from the recommended legislation.[213]
(3)
Discussion
2.104
It can be seen from this comparative analysis that most jurisdictions,
in one form or another, have elected to allow their new legislation to co-exist
with the general principles of common law and statutory provisions relating to
third party rights.
2.105
Treitel, while welcoming the reform of the law in England and Wales in
relation to privity of contract, has doubts as to whether the stated aims of
clarity and comprehension are achieved by the approach taken in relation to
these exceptions in England and Wales. He says: “the 1999 Act may have
improved, but it has scarcely simplified, the law on this topic”.[214]
2.106
In particular Treitel highlights the problems that could potentially
arise from the complex structure of the 1999 Act (and similar provisions in
other jurisdictions) in relation to these existing exceptions. He contrasts
four different situations which could arise.
First, where the third
party acquires rights under the Act but not under the common law as they do not
fall under any of the existing exceptions, the third party takes the rights
subject to the provisions of the Act. Such provisions include the contracting
parties’ right to vary the contract and the defences available to the promisor
against the third party, as these sections only apply to rights that have
accrued by virtue of section 1 of the Act.
Second, where the third
party acquires no rights under the Act but does acquire rights under one of the
existing exceptions, the third party’s rights are clearly not subject to the
provisions of the Act.
Third, where the third
party acquires rights under both the Act and under one or more of the existing
exceptions, it seems that the third party can choose between making a claim
under the Act or under the existing exception.
Fourth, where the third
party acquires no rights under either the Act or the existing exceptions, the
third party is no better off than before, and must rely on the court to create
a new exception to the rule of privity.[215]
2.107
The law has thus been left in a somewhat confused state, with several
different options available to the third party. The third scenario has
particular potential for difficulty. If an action is brought under the
Act, the promisor may avail of the defences, set off and counterclaims
available to them. If an action is brought under an existing statutory or
common law exception, a quite different set of rules apply.
2.108
There is a danger that adding a major statutory change to a well
established regime dealing with third party rights will generate more
uncertainty than is removed, especially if the old rules are kept in place.[216]
By choosing not to deal with the existing exceptions and their role
within any new scheme, there could be the danger of litigants picking and
choosing when and how to enforce rights, adding to the complexity involved.
2.109
The Commission considers, however, that a review of the existing rules,
particularly the statutory regimes, might be better left to a general
consideration of the law in their respective subjects. The Law Commission
for England and Wales envisaged that at least some of the existing exceptions
would become redundant once the 1999 Act came into force, but this remains to
be seen.[217]
2.110
In the Irish context, the Commission considers that some of the existing
statutory provisions could be superseded by reform of the privity rule along
the lines of the 1999 Act, for example, sections 7 and 8 of the Married
Women’s Status Act 1957, which allow the surviving spouse or
children to enforce the benefits owed to them under contract or a life
insurance policy. A similar view applies to section 80 of the Consumer
Credit Act 1995, which allows for a remedy against both the seller
and the hire purchase company in the event of a breach of the hire purchase
agreement, and section 14 of the Sale of Goods and Supply of Services Act
1980, which provides that the finance party becomes a party to the sale of
goods to consumer so that the end result is that the finance house and the
seller are joint and severally answerable to the buyer.
2.111
The Commission considers that provisions such as these may become
redundant if new legislation is introduced allowing for a general third party
right of enforcement. As a result of the analysis of the approaches in
other jurisdictions, the Commission considers that there are three main options
available to deal with the current statutory and common law exceptions.
(a)
The legislation
could contain a codification of the existing common law exceptions and a
listing of the statutory exceptions
2.112
A codification of existing common law exceptions and a listing of the
statutory exceptions would have the advantage of clarity in that all of the
third party beneficiary’s rights of enforcement will be contained in a single
document. The interplay of the existing rules with the proposed reform
could be set out clearly and the provisions of the reforming legislation would
clearly apply to all equally. The reforming legislation could be used as
a method of clarifying and simplifying the law in certain areas. For
example, the law of assignment is currently in a very complex state, with rules
of common law and equity overlapping with statute. To lay down these
rules in a statute on third party rights could be extremely beneficial.
2.113
Likewise in relation to the current statutory provisions, it may be
appropriate to decide what relationship they would have with a new
regime. It could be decided from the outset which methods of allowing
third party rights most fits the underlying policy behind the third party right
and make clear which set of rules would apply.
2.114
The disadvantage of such an approach is that the resulting legislation
may become quite long and complex. It is the Commission’s view that the
aim of reform of the privity rule is to remove the injustice and the complexity
associated with it. The underlying basis for granting third party rights
is to give effect to the intentions of the contracting parties. In other
jurisdictions it was felt that simplicity was the key, and they could see no
merit in attempting to abolish the common law exceptions, or repeal statutory
exceptions, as some of these give third parties more secure rights than would
be given by any proposed reform.[218]
(b)
A general clause
could be introduced preserving the existing exceptions and providing that third
parties will not be denied remedies already available to them
2.115
The option favoured by most law reform bodies was the introduction of a
general clause stating that the new regime of third party rights was without
prejudice to the existing rights and remedies available. The advantage of
this approach is that, rather than seeking to abolish common law and statutory
rights that have operated for centuries in many cases, the exceptions
considered to be artificial and overly complex will fall into disuse and will
eventually become redundant. It is not necessary for the legislation to
predict what will happen eventually and over time, a task which would be
extremely difficult given the vague and changing nature of some of the existing
exceptions.
(c)
The legislation
could be silent as to the existing exceptions, leaving the courts the
flexibility fashion how they will interplay with new legislation.
2.116
An approach which is silent as to the effect on the existing exceptions,
while it would allow the courts the flexibility to develop the area on a case
by case basis, ignores the fundamental basis and policy reasoning behind the
reform of the privity rule. The Commission considers that at the heart of
reform must be simplicity, clarity and accessibility. Avoiding the issue
of existing exceptions would not achieve this result.
(d)
Conclusion
2.117
The Commission considers that the issue of the existing rules and
remedies available to third party rights will be a crucial one if the proposed
reform is to have its intended effect. The Commission is mindful that a
comprehensive treatment of these exceptions in the proposed legislation will be
a complex task. Of course, the Commission is aware that the issues will
need to be addressed at some stage following the enactment of reform and
therefore should not be ignored. Certainly the relationship with the new
reform and existing legislation ought to be examined. For the purposes of this
Consultation Paper the Commission provisionally recommends that a general
clause should be introduced which would preserve the existing exceptions and
that third parties will not be denied existing remedies available to
them. Nonetheless, the Commission also sees merit in a codification of
the existing common law and statutory exceptions. The Commission is aware that
this approach would affect numerous interests, and invites submissions on this
issue.
2.118
The Commission provisionally recommends that a general clause should be
included in the legislation which would preserve the existing exceptions to the
privity rule and provide that third parties will not be denied existing
remedies available to them. The Commission also invites submissions on
whether the proposed legislation should include a comprehensive codification of
the existing common law and statutory exceptions to the privity rule.
3
CHAPTER 3
specific issues
A
Introduction
3.01
In Chapter 2 the Commission provisionally recommended that reform of the
privity rule should take the form of detailed legislation. In this Chapter the
Commission examines the specific issues that must be addressed in order to
formulate a comprehensive scheme of third party rights.
3.02
The Commission is conscious of the need for clarity on the circumstances
in which a third party will be entitled to enforceable rights. The
reforms choices to be made must reflect the actual injustices and
inconveniences caused by the privity rule.
3.03
In Part B, the Commission outlines the circumstances in which a third
party can enforce their rights under a contract. In Part C, the
Commission examines how the third party is to be identified. In Part D,
the rights of the parties to vary or cancel the contract is explored. In
Parts E and F, the rights of the promisor and promisee, and their effect on
third parties, are discussed. In Part G the Commission examines
whether certain types of contracts should be excluded from any reforming
legislation.
B
When can the third party enforce their rights under a
contract?
(1)
Introduction
3.04
The Commission considers that the question of the circumstances under
which the third party can enforce their rights under a contract is clearly of
central importance. While this Consultation Paper proposes to reform the
privity rule so that contracts made for the benefit of a third party are
enforceable by the third party, it is equally clear that it would not be
appropriate if all third parties had enforceable rights.
3.05
To give an example, a contract between the Department of Education and a
developer to build a school would clearly benefit the students who will attend
the school once it is finished. It is another matter to say that the
students could sue the developers if there was an inordinate delay in
completing the school. Clearly there must be limits to when and how a
contract can be enforced by a third party, and, in general, any test of
enforceability will be based on the intentions of the parties to the
contract. However, the extent to which reliance can be placed on the parties’
intentions will be relative to the underlying policy of enabling a third party
to enforce their rights under a contract.
3.06
The Commission now proceeds to discuss this issue from a comparative
point of view.
(2)
Comparative Analysis
(a)
Western
Australia
3.07
Section 11(2) of the Western Australia Property Law Act 1969 states
simply that where a contract “expressly in its terms purports to confer a
benefit directly on a person who is not named as a party to the contract the
contract is… enforceable by that person in his own name”.
3.08
The Western Australian Property Law Act 1969 does not clearly
express the necessity of the parties to have intended that the third party
should have enforceable rights, but merely states that they most have intended
to confer a benefit on the third party.[219]
(b)
Queensland
3.09
Section 55(6) of the Property Law Act 1974 defines “promise” as:
“ a promise –
(a) which is or appears to be
intended to be legally binding; and
(b) which creates or appears to be
intended to create a duty enforceable by a beneficiary;”
3.10
This creates a dual intention test which first requires that the promise
is in general intended to be legally binding, and second that it must have been
intended to be enforceable by the third party beneficiary. In this way,
the parties remain in control of their transactions. While the Act lays
greater emphasis on the dual intentions of the contracting parties, it does not
require that the intention to benefit be expressly stated in the
contract. Thus such an intention may be implied from the terms of the
contract.
(c)
New Zealand
3.11
The New Zealand Contracts and Commercial Law Reform Committee emphasised
that the kind of promise that is enforceable is one of the most important
issues in any review of the privity rule. They were also of the
opinion that the Australian legislation mentioned above left unclear the nature
of the benefit which can be enforced. [220]
3.12
The Committee was of the view that the intention of the parties,
ascertained by the normal rules of interpreting contractual language should
have the decisive effect in determining whether the third party would have
enforceable rights. They therefore recommended that reform should relate
to those terms of the contract that, correctly interpreted, were intended by
the parties to benefit the third party, and to be enforceable by the third
party.[221]
Thus section 4 of the New Zealand Contracts (Privity) Act 1982 contains
the proviso that a contract that purports to confer a benefit on a third party
will be enforceable by that third party:
“Provided that this section shall not apply to a promise
which, on the proper construction of the deed or contract, is not intended to
create, in respect of the benefit, an obligation enforceable at the suit of
that person.”
3.13
The 1982 Act thus applies to promises to confer benefits on sufficiently
designated third parties, whether or not the parties intended that they be
enforceable, but with the proviso allowing the contracting parties to show that
the beneficiary was not intended to have an action.[222] The decision in Waikato
Regional Airport Ltd v Attorney General[223]
shows how the proviso operates in practice. The Ministry of Agriculture and
Forestry was named as a third party beneficiary of a promise from South Pacific
Air Charters Ltd that they were prepared to pay for border control
services. However, on examination of the facts, the New Zealand High
Court upheld Smith Pacific’s defence that they had never intended the promise
to have the effect that the Ministry could recover directly from them.
Similarly, in Saunders & Co v Bank of New Zealand[224] the New Zealand High Court decided that
the statutory appointment by the District Law Society of a solicitor to
investigate the affairs of a law firm was a regulatory matter and did not
confer a benefit on the law firm. However, even if the contract had
conferred a benefit on the law firm, the proviso in section 4 would have
applied, as on the proper construction of the contract, it was not intended
that the contract would be legally enforceable by the law firm.[225]
3.14
Another aspect of section 4 of the 1982 Act is that the promise must be
contained in a deed or a contract between the promisor and promisee. For
example, in Morton-Jones v RB & JR Knight Ltd[226] it was held that a solicitor’s letter
purporting to designate a third party as the beneficiary of an existing
agreement was not covered by the 1982 Act.
3.15
Thus it can be seen that the formula used in section 4 of the 1982 Act,
based on the intentions of the parties, can be used to prevent a third party
from maintaining an action on that contract. In this way the autonomy of
the parties is maintained.
(d)
United States
3.16
Section 304 of the American Law Institute’s Restatement (Second) of
Contracts provides that:
“a promise in a contract creates a duty in the promisor to
any intended beneficiary to perform the promise and the intended beneficiary
may enforce the duty”
This view of third party rights is based on the
categorisation of beneficiaries into two groups: intended beneficiaries and
incidental beneficiaries. Section 302 of the Restatement defines these as
follows:
“(1) Unless otherwise agreed between promisor and promisee, a
beneficiary of a promise is an intended beneficiary if recognition of a right
to performance in the beneficiary is appropriate to effectuate the intentions
of the parties and either
(a) the performance of the promise
will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate
that the promisee intends to give the beneficiary the benefit of the promised
performance.
(2) An incidental beneficiary is a beneficiary who is not an
intended beneficiary.”
3.17
Under this analysis, the granting of enforceable rights to a third party
is entirely dependent on the intentions of the contracting parties. The
third party will have enforceable rights where it was intended that the
contract would benefit them. Where this analysis has been used, the
courts have applied a direct benefit test, which means that they insist on
proof of the contracting parties’ intention to confer a benefit directly on the
third party.[227]
3.18
In Chancellor Manor v United States[228] the United States Federal Court of
Appeals stated that:
“in order to prove third-party beneficiary status, Appellants
must demonstrate that the contract not only reflects an express or implied
intention to benefit the party, but that it reflects an intent to benefit the
party directly…This direct benefit requirement reflects the reality that
third-party beneficiary status is an ‘exceptional privilege.’”[229]
3.19
This analysis places considerable emphasis on a clearly-stated intention
by the parties to benefit third parties.
(e)
Canada
3.20
As already discussed,[230]
the courts in Canada have developed a “principled exception” approach to the
rule of privity. This was first formulated in London Drugs Ltd v
Kuehne & Nagel International Ltd[231] and
later developed in Fraser River Pile & Dredge Ltd v Can-Dive Services
Ltd,[232] and is also based upon the intentions of the contracting
parties. The principled exception approach involves two elements:
i)
Did the parties to the contract intend to extend the benefit in question
to the third party seeking to rely on the contractual provision? and
ii)
Are the activities performed by the third party seeking to rely on the
contractual provision the very activities contemplated as coming within the
scope of the contract in general, or the provision in particular, again as
determined by reference to the intentions of the parties?[233]
3.21
The Manitoba Law Reform Commission[234] also recommended a dual intention test
that would require both an intention to benefit and the normal contractual
requirement of an intention to create an enforceable right. They were of
the opinion that to simply require an intention to benefit, or an expressed
intention in favour of a third party, was too broad in scope and could lead to
situations in which “incidental” beneficiaries would get enforceable rights
where this was not the intention of the parties.
(f)
England and
Wales
3.22
The Contract (Rights of Third Parties) Act 1999 adopted the dual
intention test recommended by the Law Commission for England and Wales in their
1996 Report.[235]
Section 1 of the 1999 Act provides:
“(1) subject to the provisions of this Act, a person who is
not a party to a contract (a “third party”) may in his own right enforce a term
in the contract if –
(a) the contract expressly
provides that he may or
(b) subject to subsection (2), the
term purports to confer a benefit on him.
(2) Subsection 1(b) does not apply if on a proper
construction of the contract it appears that the parties did not intend the
term to be enforceable by the third party.”[236]
3.23
The Law Commission analysed the test of enforceability in terms of two
separate and distinct limbs. The first limb would be satisfied with the
use of words such as “and C shall have the right to enforce the
contract”. It also includes exclusion or limitation of liability clauses,
as the Law Commission felt that such clauses had no legal meaning unless they
were intended to affect legal rights. The Law Commission was of the view
that where a third party is expressly designated as a person whose liability is
excluded, this third party should be able to rely on the exclusion clause in
their own right.[237]
3.24
The second limb of the test of enforceability is designed to deal with
situations where the parties do not expressly state that they are conferring
legal rights on a third party. The Law Commission described it in the
following manner:
“In general terms it establishes a rebuttable presumption in
favour of there being a third party right where a contractual provision
purports to confer a benefit on an expressly designated third party. But
that presumption is rebutted where on the proper construction of the contract
the parties did not intend to confer a right of enforceability on the third
party.”[238]
The provision is similar to the test of enforceability in
the New Zealand Contracts (Privity) Act 1982.
3.25
Therefore the second limb of the test of enforceability is not dependent
on the contracting parties expressly giving the third party a right of
action. It instead renders a term that “purports to confer a benefit”
enforceable. However, section 1(2) of the 1999 Act allows this
presumption to be rebutted where it can be shown that, on the correct
interpretation of the contract, the parties actually did not intend the term to
have this effect. The 1999 Act does not specify where the onus of proof
lies, but the Law Commission stated that the onus is on the person who contends
that the parties did not have that intention, so doubts as to the parties’
intentions will be resolved in the third party’s favour.[239]
3.26
In Nisshin Shipping Co Ltd v Cleaves & Co Ltd[240]
an arbitration clause in a charterparty was neutral as to whether the parties
had intended it to be enforceable by the third party. There was no
expression to the contrary contained in the document, and as there is a strong
presumption in favour of enforcement of rights, it was held that the third
party was entitled to enforce the arbitration clause. In Laemthong
International Lines Co Ltd v Artis[241] clause 1 of an indemnity, given
by the receiver of cargo to the charterers, referred to indemnifying the
charterers’ “servants and agents”, and Clause 3 referred to security being
provided to the vessel owners. It was decided that the owner came within
the definition of agents. As the security was deemed to be primarily of benefit
to the owners, the contract was one that purported to benefit the owners (third
parties) within the meaning of the 1999 Act and they were entitled to enforce
the indemnity.
3.27
A potential difficulty with the second limb of enforcement, and section
1(2) of the 1999 Act on the rebuttal of the presumption, is that while the Law
Commission’s proposals advocate a subjective test of what the parties intended
should be the outcome of their agreement, ordinarily, courts will try to
establish the contracting parties’ intention, as expressed in the language used
in the contract itself.[242]
The use of the words “on a proper construction of the contract” in the 1999 Act
indicates that the court will use ordinary rules of construction in order to
gauge the intentions of the parties.
3.28
In National Bank of Sharjah v Dellborg[243] Saville LJ in
the English Court of Appeal highlighted difficulties with both the subjective
and objective approaches to interpreting contracts for the benefit of third
parties:
“[Third parties] are unlikely in the nature of things to be
aware of the surrounding circumstances. Where the words of the agreement have
only one meaning, and that meaning is not self evidently nonsensical, is the
third party justified in taking that to be the agreement that was made, or
unable to rely on the words used without examining (which it is likely to be
difficult or impossible for third parties to do) all the surrounding
circumstances? If the former is the case, the law would have to treat the
agreement as meaning one thing to the parties and another to third parties,
hardly a satisfactory state of affairs. If the latter is the case, then unless
third parties can discover all the surrounding circumstances and are satisfied
that they make no difference, they cannot safely proceed to act on the basis of
what the agreement actually says. This again would seem to be highly
unsatisfactory.”[244]
3.29
It is the Commission’s view that in the interests of fairness, the
appropriate test ought to be an objective one. In this way, the
contracting parties will not be able to produce evidence of surrounding
circumstances to show that they did not intend the meaning that the ordinary
interpretation of the words of the contract would indicate. This is
important because the third party may have no knowledge of these surrounding
circumstances.
3.30
The Commission considers that this issue should be dealt with in a clear
way in any reforming legislation.
3.31
Burrows, who was involved in the Law Commission’s 1996 Report on privity
of contract, mentions some of the justifications for the inclusion of the
second limb of enforceability in the 1999 Act.[245] The first is that contractual rights
between two parties are not merely a matter of express rights, they also
include implied rights through the concept of implied terms. Just as
normal contract law would be unduly restricted by ignoring these implied terms,
third party rights would suffer the same artificial confinement. The
parties to a contract may not express all of their intentions for the contract
in words, but that is not to say that they did not intend a certain outcome.
3.32
Secondly, Burrows states that examination of the cases where privity had
caused problems indicates that reform which was confined to contracts which
expressly confer rights on a third party would not remedy the problems.
He refers to Beswick v Beswick[246] where
although it was obvious that the agreement entered into was designed to benefit
the widow through the payment of an annuity, there was no express right of
enforcement contained in the contract. Under a strict test of expressed
intention, he thought that the 1999 Act would not have assisted the
widow.
3.33
Thirdly, Burrows noted that only well-drafted and thought through
contracts would expressly provide for third party enforceable rights.
Such contracts do not reflect modern and day to day transactions where such
careful legal advice may not be sought out.
(3)
Discussion
3.34
If a third party could enforce the terms of a contract where they have
justifiably and reasonably relied on them regardless of the intentions of the
contracting parties, it could seriously infringe on the contracting parties’
freedom of contract. The parties would never be entirely sure how a third party
might rely on a contract they have entered into. It would lead to an
indeterminate class of incidental beneficiaries gaining enforceable rights and
could serve to undermine the overall policy objectives behind reform of the
rule of privity. The Commission considers that a third party should not
be able to enforce a contract term simply because they have relied on it.
Instead, whether a third party can enforce a term of the contract should be
ascertained from the intentions of the contracting parties. The Commission now
turns to examine the options for the test of enforceability of third party
rights.
(a)
The parties must have expressly conferred a benefit
directly on a third party.
3.35
This approach has the advantage of excluding from the outset incidental
and implied beneficiaries. As a result only the beneficiaries that the
parties have expressly provided for in the contract will be included and given
a right of enforcement.
3.36
However, this approach seems to ignore the reality that it is normal in
the law of contract for terms to be implied when interpreting the intentions of
parties. The Commission has concluded that this form of test, while
certainly clear, is overly restrictive and will not help to resolve a lot of
the problems created by the privity rule.
(b)
The third party would have enforceable rights where
the parties intended that they should receive the benefit of the contract,
regardless of whether they intended that the third party should have
enforceable rights.
3.37
This broad approach would provide that any third party intended to
benefit under the contract could enforce its terms. The Commission
considers that this approach would not be sufficient to exclude merely
“incidental” beneficiaries from maintaining an action. It would not be
appropriate, for example, for a large class of persons to each have enforceable
rights in their own names merely because they were to benefit from the
contract. To take an example already mentioned, while an agreement
between the Department of Education and a developer to build a school may
benefit students in the local area, it would be inappropriate for the students
to have the right to sue the developer under this contract.[247]
(c)
The third party could have enforceable rights where
the parties intended to benefit them and also intended that they should be
entitled to enforce the contract
3.38
This “dual intention test” has been the favoured approach since the New
Zealand Contracts (Privity) Act 1982. It requires not only that the
contractual parties intended to benefit from a particular term in a contract,
but also that the contracting parties intended that the third party should have
enforceable rights. This approach has the advantage of being consistent with
the ordinary contractual requirement of an intention to create legal
obligations.
3.39
The problem with this test is that it is often difficult to gauge
accurately the intentions of contracting parties if they are not expressed in
the contract. As a result, the application of this kind of test could be
overly restrictive.
3.40
The Commission recommends that the normal rules of contractual
interpretation be used in order to gauge the intentions of the parties to the
contract. This means that first and foremost the courts will look to the
actual wording of the contract. Where these are ambiguous, or where it is
unclear whether the parties intended to confer enforceable rights on a third
party, Lord Wilberforce’s “matrix of facts”[248] pertaining to the background of the
contract may be drawn from. This essentially means looking at the
surrounding circumstances known to both parties. Thirdly, if the ordinary
meaning of the words of the contract would lead to an absurd result, the court
can consider whether they can reasonably bear some other meaning, in light of
the surrounding circumstances. If all else fails, the courts can also
then look at evidence as to how the market itself works.[249]
3.41
In addition, the Commission considers that the onus should be on
contracting parties to show that they did not intend the promise to be
enforceable by the third party. Third parties would be entitled to assume that
a contract made for their benefit was enforceable by them, and it would be for
the contracting parties to prove that that was not their intention.
3.42
The Commission provisionally recommends that the test of whether a third
party may enforce terms under a contract made for their benefit should satisfy
two criteria:
1. The parties intend that the
third party is to receive the benefit of the contract or a term of the
contract; and
2. The parties intend that the term
benefiting the third party should be enforceable by the third party in their
own name.
C
Identification of a third party beneficiary
(1)
Introduction
3.43
The Commission is concerned with remedying the unfair situation where a
third party beneficiary does not, but should have, enforceable rights under a
contract. However, the Commission is equally concerned not to impose too
restrictive a burden on the parties to a contract. In this respect the
Commission considers that there must be a line drawn concerning the
identification of the third party beneficiary. Another related issue is
whether the third party needs to be in existence at the time the contract is
entered into.
3.44
One of the obvious ways of identifying a third party is to name them in
the contract. However, contracts purporting to confer a benefit on a
third party are not necessarily that straightforward. Take the example of
an employer who wishes to extend the benefit of a health insurance scheme to
their employees. It would be absurd to require that the contract name all
employees, present and future, who they intend should benefit and have
enforceable rights.
3.45
The Commission turns to examine the approaches to the designation,
ascertainability and existence of third parties in other jurisdictions.
(2)
Comparative Analysis
(a)
Australia
3.46
Section 11(2) of the Western Australian Property Law Act 1969 uses
the terms “named as a party in the contract” to define a party to the
contract. The New Zealand Contracts and Commercial Law Reform Committee
viewed this as overly restrictive.[250] It appears to import that it
would only be when a person was named in a contract that they would have
enforceable rights. In light of the fact that class descriptions are
common this is unnecessarily restrictive.
3.47
The Queensland Property Law Act 1974 defines a beneficiary as:
“a person other than the promisor or promisee, and includes a
person who, at the time of acceptance is identified and in existence, although
that person may not have been identified or in existence at the time when the
promise was given.”[251]
The Northern Territory Law of Property Act 2000 emulates
this approach. The definition appears much less restrictive than the
Western Australian legislation allowing as it does, those people that are
identified in the contract but have not yet come into existence. This
kind of situation could be found in contracts providing for as yet unborn
children, or future employees or tenants.
(b)
New Zealand
3.48
Section 4 of the Contracts (Privity) Act 1982 allows those third
parties designated by “name, description or reference to a class (whether or
not that person is in existence at the time when the deed or contract is made)”
to enforce a promise made for their benefit. This reflects the fact that
third parties are often identified by class description rather than by name. It
also provides for persons who have not yet come into existence.
(c)
United States
3.49
Section 308 of the American Law Institute’s Restatement (Second) of
Contracts states that:
“It is not essential to the creation of a right in an
intended beneficiary that he be identified when a contract containing the
promise is made.”
The commentary on the Restatement notes that the inability
to identify a beneficiary at the time the contract is made may be an indication
that the parties did not intend to benefit them. If this is the case then
it could be used as a means of determining if a beneficiary is an incidental or
intended one. However, there is no rule against a beneficiary who
subsequently comes into existence and falls into the category of intended
beneficiary from maintaining an action on the contract.
3.50
Furthermore United States case law indicates that it is enough that the
third party is identifiable as a member of a class or group of persons.[252]
It is also unnecessary that the third party is identifiable at the time the
contract is entered into, provided that when the time comes for the performance
of the promise they are clearly identifiable as an intended beneficiary.[253]
(d)
England and
Wales
3.51
Section 1(3) of the Contracts (Rights of Third Parties) Act 1999 provides
that:
“The third party must be expressly identified in the contract
by name, as a member of a class or as answering a particular description but
need not be in existence when the contract is entered into.”
Identification is a necessary, but not a sufficient,
condition for the application of the 1999 Act. In other words, it is
necessary that the third party be identified adequately in the contract, but
they must also satisfy the other requirements of the Act, notably in relation
to the test of enforceability before they can bring an action on the contract.
3.52
The Law Commission for England and Wales concluded that to confine
identification to where a third party is specifically named was too restrictive
a test. They recommended that the third party should be identifiable by
name, description or as a member of a class[254] and that the third party need not be in
existence at the time of the contract.[255]
3.53
Identification of a third party by name is the most obvious method
and can provide relatively few problems. However, difficulties may arise
where there is an error in the contract as the name, or where the third party
beneficiary changes their name for whatever reason (for example following a company
merger or acquisition).[256]
3.54
Identification as a member of a class or by description means that
identification by name is not necessary. This would apply to specific
groups, such as present and future tenants or employees of a company. It
could also apply to members of a general group such as nominees of the
promisor, or those persons that enter into contracts in the future with the
promisor (for example, sub-contractors).
3.55
The Law Commission departed from the position in New Zealand where it
has been held that the description “his/her nominee” is not a sufficient
identification of a third party beneficiary for the purposes of the Contracts
(Privity) Act 1982. It was the Law Commission’s view that the
description “B’s nominee” was a sufficient description for the purposes of
their proposed reform.[257]
3.56
The Law Commission for England and Wales recommended that that there
should be no requirement that the third party be in existence at the time of
acceptance by another third party.[258] Thus, for example, an agreement
entered into by an employer for the benefit of employees could be enforced not
only by employees who accepted it at its inception, but also those who
subsequently joined the company. Section 1(3) of the 1999 Act is unclear
on this issue. There is no express requirement that the third party be in
existence at the time of acceptance by another third party, but the Act does
not state that the third party need not be in existence at this
time.
3.57
Third party issues can be raised in relation to pre-incorporation
companies. Because of the privity rule, when a contract is entered into
by a company that has yet to be incorporated, the post-incorporation company is
not a party to the contract and can therefore not enforce it. To remedy
this situation, a system of agency and principal was developed in the common
law, and eventually dealt with in England under section 36C of the Companies
Act 1985. This provides that the purported agent for the
unincorporated company is liable on the contract. The Law Commission
concluded that contracts on behalf of a third party were different to contracts
for the benefit of a third party. Because of this, they recommended that
no special provision for pre-incorporation companies ought to be made and that
general reform of pre-incorporation contract law should be left to specialist
legislation. Having said that, the Law Commission also stated that there
should be no restriction on a corporate third party’s right to enforce an
otherwise enforceable contract simply because it was entered into before the
third party’s incorporation.
3.58
In Ireland, section 37(1) of the Companies Act 1963 provides
that a contract entered into by a pre-incorporation company may be ratified by
the company once it is formed. The effect of this is that all rights and
obligations arising from the transaction are enforceable by and against the
newly formed company.
3.59
The Commission agrees with the view expressed by the Law Commission
that any further reform of this area should be within the context of the
general review of company law, currently being concluded by the Company Law
Review Group.[259]
(3)
Discussion
3.60
The Commission notes that the importance of being able to identify the
third party with a degree of certainty. However the Commission is
conscious of the commercial and every-day reality that those persons who may be
the intended beneficiaries of a contract may not exist or may not necessarily
be identifiable at the time the contract is made. For these reasons the
Commission is of the opinion that the requirement that a third party should be
named in the contract is overly restrictive. In the same vein, requiring
the third party to be in existence at the time the contract is entered into is
equally narrow. The Commission invites views on whether there should be an
express provision that there is no requirement that a third party who wishes to
enforce the contract be in existence at the time of acceptance by another third
party.
3.61
It is the Commission’s view that the important matter is that at the
time that the promise is being executed, it is in the minds of the contracting
parties that the third party ought to benefit and, importantly, be entitled to
enforce the promise. In this respect, the Commission provisionally
recommends that the approach taken by the Law Commission for England and Wales
in the 1996 Report should be adopted.
3.62
The Commission provisionally recommends that the third party should be
identified in the contract either by name or description. Such a
description should include being a member of a class or group of persons.
The Commission provisionally recommends that there should be an express
provision that there is no requirement that the third party be in existence at
the time of entering into the contract. The Commission invites views on
whether there should be an express provision that there is no requirement that
a third party who wishes to enforce the contract be in existence at the time of
acceptance by another third party.
D
The rights of the parties to vary or cancel the contract
(1)
Introduction
3.63
A key feature of contractual freedom is the right of parties to modify
or alter the terms of any contract by mutual agreement.[260] One of the objections to creating
third party rights is that it would deprive the contracting parties of the
right to vary or rescind their contract. This is one of the reasons why,
for example, restrictions were placed on the use of trusts in this context.[261]
On the other hand, a third party beneficiary may rely on the contract, or alter
their position because of the contract and their legitimate expectation of what
they will gain from it. Consequently, reform of the privity rule must
achieve a balance between the sometimes conflicting notions of the parties’
freedom of contract and the third parties’ anticipatory reliance.
3.64
This balance is usually achieved by the formulation of a test for the
crystallisation of the third party’s rights, after which the contracting
parties’ freedom will necessarily be limited. This means that the
contracting parties are free to modify or cancel the terms of the contract
until a certain determinable point. In the context of a contract designed
to benefit a third party, this is usually reached when the third party either
accepts, relies on, adopts or becomes aware of the contract and how they stand
to benefit.
3.65
The exact form of this test has varied in the different jurisdictions in
which reform has occurred, and the Commission turns now to examine these.
(2)
Comparative Analysis
(a)
Australia
3.66
Section 11(3) of the Western Australian Property Law Act 1969 provides
that:
“Unless the contract referred to in subsection (2) otherwise
provides, the contract may be cancelled or modified by the mutual consent of
the persons named as parties thereto at any time before the person referred to
in that subsection has adopted it either expressly or by conduct.”
3.67
Similarly section 55(2) of the Queensland Property Law Act 1974 and
section 56(2) of the Northern Territory Law of Property Act 2000 provide
that:
“Prior to acceptance the promisor and the promisee may,
without the consent of the beneficiary, vary or discharge the terms of the
promise and any duty arising from it”
“Acceptance” is defined in section 55(6) of the Queensland
Act and section 56(6) of the Northern Territory Act as:
“an assent by words or conduct communicated by or on behalf
of the beneficiary to the promisor, or to some person authorised on the
promisor’s behalf, in the manner (if any), and within the time, specified in
the promise or, if no time is specified, within a reasonable time of the
promise coming to the notice of the beneficiary.”
3.68
In Westralian Farmers Co-operative Ltd v Southern Meat Packers Ltd[262] the 1969 Act was examined, but the
exact meaning of adoption as a test for crystallisation was not made clear.
While the word “adoption” is not defined in the 1969 Act, the definition
of acceptance in the 1974 and 2000 Acts as “assent by words or conduct” would
appear to mean the same thing. The statutes may use different terms, but
they appear to have a similar effect. However, the Commission considers
that any test of crystallisation should be clear and not leave room for
uncertainty.
(b)
New Zealand
3.69
In their 1981 Report on privity of contract, the Contracts and
Commercial Law Reform Committee of New Zealand examined the option of allowing
variation of the contract until the time of judgment against the promisor, but
concluded that the rights of parties to vary or cancel the terms of the
contract should be more limited.[263]
3.70
Ultimately, section 5(1) of the New Zealand Contracts (Privity) Act
1982 states:
“(1) Subject to sections 6 and 7 of this Act, where, in
respect of a promise to which section 4 of this Act applies,—
(a) The position of a beneficiary
has been materially altered by the reliance of that beneficiary or any other
person on the promise (whether or not that beneficiary or that other person has
knowledge of the precise terms of the promise); or
(b) A beneficiary has obtained
against the promisor judgment upon the promise; or
(c) A beneficiary has obtained
against the promisor the award of an [arbitral tribunal] upon a submission
relating to the promise,—
the promise and the obligation imposed by that section may
not be varied or discharged without the consent of that beneficiary.”
Thus, once the third party beneficiary has “materially altered”
their position in reliance on the promise made, the parties are no longer
entitled to vary or cancel the terms of the contract that affect the third
party.
3.71
Section 6 of the Act contains a method by which the contracting parties
can vary or rescind the contract at any time in the following circumstances:
“Nothing in this Act prevents a promise to which section 4 of
this Act applies or any obligation imposed by that section from being varied or
discharged at any time—
(a) By agreement between the parties to the deed or contract
and the beneficiary; or
(b) By any party or parties to the deed or contract if—
(i) The deed or contract
contained, when the promise was made, an express provision to that effect;
and
(ii) The provision is known to the
beneficiary (whether or not the beneficiary has knowledge of the precise terms
of the provision); and
(iii) The beneficiary had not
materially altered his position in reliance on the promise before the provision
became known to him; and
(iv) The variation or discharge is
in accordance with the provision.”
3.72
There is little by way of interpretation of the exact meaning of
“materially altering” one’s position, but from a reading of section 6, it
appears to involve some kind of reliance on the promise made. Whether
this reliance needs to be detrimental is not made clear. Once it has been found
that the third party beneficiary has materially altered their position in
reliance on the promise, the contracting parties, unless they have expressly
provided for a power of variation or rescission in the contract, cannot alter
the contract without the consent of the beneficiary.
3.73
Section 7 of the 1982 Act gives the court a discretion to vary or
discharge the contract on application by the promisor or promisee, and if it
does so, to order the payment of compensation to the third party
beneficiary.
(c)
Canada
3.74
Section 4(3) of the New Brunswick’s Law Reform Act 1993 provides
that the contracting parties are free to amend or cancel the terms of the
contract at any time. However, where by doing so they cause loss (either
by way of expense or by carrying out an obligation in expectation that the
contract is performed) to the third party beneficiary, they must compensate the
third party for this loss.
3.75
Article 1146 of the Civil Code of Québec provides that the stipulation
in favour of a third party may be revoked provided the third person beneficiary
has not advised the stipulator or the promisor of his will to accept the
promise.
3.76
The Manitoba Law Reform Commission was of the opinion that a reasonable
and fair balance must be found between the interests of the contracting parties
to vary and terminate third party rights and the interest of the beneficiary in
securing the promised benefit.[264] The Manitoba Law Reform
Commission concluded that there were two options available in relation to the
appropriate crystallisation test. The first was the “trust” model based
on the acceptance of the beneficiary, while the second was the “contract” model
based on reliance. In the end it favoured the contract model, as it was
consistent with general contracting principles. The Manitoba Law Reform
Commission concluded that the right of the contracting parties to vary or
terminate the contract should not be excluded except where the position of the
third party had been materially altered by his/her own, or another’s,
reliance.
3.77
The Ontario Law Reform Commission was, however, aware of the opinion
that the situation in respect of the right of parties to vary or cancel a
contract which purports to benefit a third party was exactly the kind of one
that illustrates the difficulties of trying to create specific and detailed
legislation. In their opinion, such questions were best left to the
courts to tease out on a case by case basis.
(d)
United States of America
3.78
Section 311 of the American Law Institute’s Restatement (Second) of
Contracts provides that the parties to a contract are free to discharge or
modify the terms of a contract at any time, provided the contract itself does
not contain any provision forbidding such changes being made. However
section 311(3) goes on to provide that:
“Such power terminates when the beneficiary, before he
receives notification of the discharge or modification, materially changes his
position in justifiable reliance on the promise or brings suit on it or
manifests assent to it at the request of the promisor or promisee.”
3.79
In Karo v San Diego Symphony Orchestra Association[265] the United States Court of Appeals
interpreted the rights of the parties to modify or discharge their agreement in
the following way:
“The Restatement (Second) of Contracts provides that in the
absence of terms in a third party beneficiary contract prohibiting change or
modification of a duty to an intended beneficiary, the promisor and promisee
retain power to discharge or modify the duty by subsequent agreement... The power
to modify terminates when the beneficiary materially changes position in
justifiable reliance on the promise before receiving notification of the
modification.”[266]
This decision was cited with approval in subsequent cases such as
Price v Pierce[267]
and Malden Mills Industries Inc v Ilgwu National Retirement Fund.[268]
3.80
Thus it is evident that there is a strong emphasis in the United States
on the parties’ freedom to contract and their right to modify their
contract. At the same time, their freedom is restrained once the third
party has materially altered their position in justifiable reliance on the
promise. It is clear that the courts will look at the particular
facts of the case and determine if on balance, the third party beneficiary
would be unjustifiably placed at a disadvantage if the parties were given free
reign to modify the contract at any time.
(e)
England and Wales
3.81
The Law Commission for England and Wales gave extensive consideration to
the issue of the right of contracting parties to discharge or vary a contract.
The Commission considered the options from one end of the scale - permitting
the parties the right to vary the contract at any time - to the other end of
the scale - not allowing the parties to vary the terms in a contract at any
time without the consent of the third party. They rejected both extremes
as being overly lenient and overly restrictive respectively. In the end
they narrowed the options down to three possible tests: reliance by the third
party, detrimental reliance by the third party, or acceptance of the terms.[269]
3.82
As to reliance and detrimental reliance, the Law Commission accepted
that reliance was more consistent with the basic notion that the law of
contract will seek to protect expectation interest.[270] The Law Commission sought to
address the basic injustice that was caused by the operation of the privity
rule. In their view, this was that the third party has reasonable
expectations that the promise will be performed and that they will benefit.
Reliance indicates that expectations have been engendered in the third
party. The Law Commission’s opinion was that to require the reliance to
be detrimental shifts the focus away from protecting the third party’s
expectation interest to protect the third party’s reliance interest.[271]
Such a shift would require too much from the third party seeking enforcement of
the promise in their own name.
3.83
On the other hand, acceptance is a much clearer way in which the third
party can communicate their assent to the terms of the contract. A third
party who has done this should be secure in the knowledge that they will obtain
what they are entitled to. In the same way, the contractual parties are clear
as to the position of the third party. Should the contracting parties
wish to vary or discharge the contract, they will be aware of the effect this
would have on the third party, and whether they will need to get consent from
the third party.
3.84
The Commission ultimately recommended a two-fold test based on reliance
and acceptance as alternatives, and this is reflected in section 2 of the Contracts
(Rights of Third Parties) Act 1999 which provides:
“(1) Subject to the provisions of this section, where a third
party has a right under section 1 to enforce a term of the contract, the
parties to the contract may not, by agreement, rescind the contract, or vary it
in such a way as to extinguish or alter his entitlement under that right, without
his consent if-
(a) the third
party has communicated his assent to the term to the promisor,
(b) the promisor is aware that the
third party has relied on the term, or
(c) the promisor can reasonably be
expected to have foreseen that the third party would rely on the term and the
third party has in fact relied on it.”
3.85
The parties are also given the option of including in their contract a
provision relating to the variation or rescission of the contract. The
1999 Act allows the parties to include express provisions in the contract
permitting the parties to vary or rescind at any time without consent of the
third party,[272]
or indeed, to provide their own circumstances in which the consent of the third
party may be required.[273]
Allowing this re-affirms the central importance of the parties’ intention
behind the reform of the rule.
(3)
Discussion
(a)
The options
available
3.86
As already discussed, reform of the privity rule should give effect to
the intentions of the parties, while also protecting the legitimate
expectations of the third party. The question that must be asked is
whether the law should protect the parties’, now changed, intentions, or
whether it should protect the reasonable expectations of the third party
beneficiary.[274]
The Commission considers that reform of the privity rule must achieve a balance
between these two equally compelling reasons for reform.
3.87
From an analysis of the issues and of the approach taken in other
jurisdictions, three main options for a crystallisation test emerge.
(i)
Awareness of the
third party beneficiary of the terms of the contract
3.88
This is the test of crystallisation that is most favourable to the third
party beneficiary. Essentially the test would mean that once the third
party becomes aware of the terms of a contract made to benefit them, the
contracting parties are restricted to varying the contract only with the
consent of the third party. This test was rejected in many jurisdictions
as it encroaches too much on the freedom of contracting parties. In addition,
if the third party was aware of a contract but did not rely on it, or
materially alter their position because of it, the third party may not even
wish to take advantage of the contract for whatever reason. In such a
case, they would not be affected by its variation, or even its rescission.
3.89
However, it might be argued that, if the protection of legitimate
expectations is one of the cornerstones on which reform of the privity rule
should be based, greater protection ought to be given to the third party.[275]
If contracting parties have freely chosen to enter into a contract intended to
benefit a third party and the purpose of the contract is to benefit that third
party, there should be no reason why the third party should have to take any
extra steps themselves in order to protect the legitimate expectation.
3.90
While this argument certainly favours the third party beneficiary, the
Commission considers that it does so at too great a price in terms of the
rights of the contracting parties themselves. It is the Commission’s view
that the expectations of the third party can be protected by less restrictive
means.
(ii)
Reliance on the
promise that the promise will be performed by the parties
3.91
The Commission agrees with the approach taken in other jurisdictions
such as New Zealand and England and Wales, that justifiable reliance by the
third party on the promise should affect the parties’ rights of variation and
rescission. The Law Commission for England and Wales defined reliance as
“conduct induced by the belief (or expectation) that the promise will be
performed or, at least, that one is legally entitled to performance of the promise”.[276]
The Commission considers that once a contract is entered into for the
benefit of a third party, that third party is justifiably entitled to rely on
that promise. The Commission therefore agrees that the reliance need not
necessarily be detrimental reliance and that a third party should be able to
rely on a promise made in their favour even where they have not incurred any
expense in reliance on the promise, or placed themselves at some kind of
disadvantage. In the Commission’s view, it would not be appropriate for
the contracting parties to modify and even cancel terms of a contract at any
time, merely because the third party had not incurred any loss.
(iii)
Acceptance or
adoption by the third party of the terms drafted for their benefit.
3.92
The Commission considers that a positive act of acceptance of the terms
of the contract by the third party should be sufficient notice of the third
party’s legitimate expectation. The Commission considers that acceptance
- defined in the Queensland Property Law Act 1974 as “an assent
by words or conduct communicated by or on behalf of the beneficiary to the
promisor” - should be an alternative means of crystallising the third party’s
claim. To confine the test to acceptance alone would, in the Commission’s
view, be overly narrow. The Commission therefore provisionally recommends
that reliance and acceptance should be used as alternatives in establishing the
point at which the contracting parties will have to seek consent of the third
party before modifying the contract.
(b)
The parties’
right to formulate their own test
3.93
The Commission considers that, in light of the fundamental importance of
the contracting parties’ freedom of contract, they should be free to include in
their contract an express term providing for variation or termination.
Such provisions are, for example, common in construction contracts, where the
specification of the works can be altered as the project progresses.[277]
(c)
Conclusion
3.94
On the issue of variation and rescission of third party rights by the
contracting parties, the Commission is provisionally inclined towards the
option of reliance on and acceptance by the third party as a suitable gauge for
determining when a third party will be affected by changes made to the
contractual arrangements. Aware that this is quite a complex issue, the
Commission welcomes views on this matter.
3.95
The Commission provisionally recommends that reliance and acceptance
should be used as alternative methods of determining when a third party’s
rights have crystallised. After reliance or acceptance by the third
party, the contractual parties will be unable to modify or terminate the
contract without the consent of the third party. The Commission also provisionally recommends that the
contracting parties should remain free to include in the contract an express
provision for the variation or termination of third party rights. The
Commission welcomes views on this matter.
E
General Defences, Set-off and Counterclaims
(1)
Introduction
3.96
When an action for breach of contract is taken by one contracting party
against another contracting party, various defences can be used. For
example, it can be argued that the contract was based on a fundamental mistake,
misrepresentation, duress or undue influence, which could render a contract
void or voidable. The defendant may claim that performance of the
contract has become impossible, or that the plaintiff had seriously breached
the contract.
3.97
Set-off and counterclaims both involve cross-claims for monetary
compensation. Set-off is limited to situations that arise out of the same
transaction and cannot exceed the amount of the plaintiff’s claim.
Counterclaims, on the other hand, are not limited in this way. Both are
available when an action is brought under a contract by the other contracting
party.
3.98
If a third party is to be given enforceable rights, it is important that
the third party should not be placed in a better position than either of the
contracting parties. The third party’s rights should be enforceable
subject to the usual defences available to the contracting parties. At the same
time, it is important to decide the scope of defences, set-off and
counterclaims available to the contracting parties, as some of these may not be
appropriate in the context of a third party claim.
3.99
There are different levels of protection which might be available to the
contracting parties. At one end of the spectrum, only defences that
affect the validity or existence of the contract, or the particular contractual
provision which benefits the third party, could be made available to the third
party. At the other end, all defences, as well as set-off and
counterclaims, that would have been available between the contracting parties
could be made available.
(2)
Comparative Analysis
(a)
Australia
3.100
Section 11(2)(a) of the Western Australian Property Law Act 1969 provides
that
“all defences that would have been available to the defendant
in an action or proceeding in a court of competent jurisdiction to enforce the
contract had the plaintiff in the action or proceeding been named as a party to
the contract shall be so available.”
3.101
Section 55(4) of the Queensland Property Law Act 1974 and section
56(4) of the Northern Territory Law of Property Act provide that:
“subject to subsection (1), any matter which would in
proceedings not brought in reliance on this section render a promise void,
voidable or unenforceable, whether wholly or in part, or which in proceedings
(not brought in reliance on this section) to enforce a promissory duty arising
from a promise is available by way of defence shall, in a like manner and to
the like extent, render void, voidable or unenforceable or be available by way
of defence in proceedings for the enforcement of a duty to which this section
gives effect.”
3.102
Thus the Australian legislation allows any defence to be raised against
the third party. The defences are not limited to those that arise
directly from the contract or the particular provision that purports to benefit
the third party. Although it is not explicitly stated, such defences may
include set-off, but could not be said to include counterclaims.[278]
(b)
New Zealand
3.103
The Contracts and Commercial Law Reform Committee of New Zealand
examined the approach taken in the Australian jurisdictions and agreed that all
the defences which would have been available in an action between the
contracting parties should be available in an action by the third party.
This was subject this to one condition: that the defences and cross-claims
should be limited to those arising out of the contract in question.
3.104
Section 9 of the Contracts (Privity) Act 1982 provides that:
“(2) Subject to subsections (3) and (4) of this section, the promisor
shall have available to him, by way of defence, counterclaim, set-off, or
otherwise, any matter which would have been available to him—
(a) If the beneficiary had been a party to the deed or
contract in which the promise is contained; or
(b) If—
(i)The
beneficiary were the promisee; and
(ii)The promise to which the
proceedings relate had been made for the benefit of the promisee; and
(iii)The proceedings had been
brought by the promisee.
(3) The promisor may, in the case of a set-off or
counterclaim arising by virtue of subsection (2) of this section against the
promisee, avail himself of that set-off or counterclaim against the beneficiary
only if the subject-matter of that set-off or counterclaim arises out of or in
connection with the deed or contract in which the promise is
contained.
(4) Notwithstanding subsections (2) and (3) of this section,
in the case of a counterclaim brought under either of those subsections against
a beneficiary,—
(a) The beneficiary shall not be
liable on the counterclaim, unless the beneficiary elects, with full knowledge
of the counterclaim, to proceed with his claim against the promisor; and
(b) If the
beneficiary so elects to proceed, his liability on the counterclaim shall not
in any event exceed the value of the benefit conferred on him by the promise.”
3.105
The Contracts (Privity) Act 1982 went further than the
recommendation of the Law Reform Committee. Section 9(4) provides some additional
protection for the third party by stating that any counterclaim will not be
available against them if they decide not to proceed with the claim against the
promisor and that any counterclaim that does proceed cannot exceed the value of
the benefit. However, this arguably does not provide as much protection
for the third party as the Australian legislation, which does not seem to allow
any counterclaims against the third party.
(c)
Canada
3.106
Section 4 of the New Brunswick Law Reform Act 1993 allows the
promisor in an action brought by a third party “any defence … that could have
been raised in proceedings between the parties”.[279] Similarly, the Law Reform
Commission of Nova Scotia recommended that “in legal proceedings involving a
third party beneficiary, any defence should be available that could have been
raised in proceedings between the parties”.[280]
3.107
The Manitoba Law Reform Commission recognised the widespread view that
third party rights are essentially derivative and not independent and
direct. Therefore, as a general rule, the promisor should have the same
defences available that would have been available as against the
promisee. However the Manitoba Law Reform Commission accepted that in
relation to third parties, there ought to be some qualification in respect of
set-off and counterclaims. They recommended that such claims should be
limited to those that arise in connection with the contract. In line with
the approach taken in New Zealand they also recommended that the beneficiary
should be protected from counterclaims and set-off where they discontinue their
own claim. [281]
(d)
United States of America
3.108
Section 309 of the Restatement (Second) of Contracts provides
that the rights of the third party are subject to the normal constraints that
would arise as between the promisor and the promisee. Thus the absence of
mutual assent or consideration, lack of capacity, fraud, and mistake may be
asserted against the third party. If a contract ceases to be binding by
reason of, for example, public policy, non-occurrence of a condition or failure
of performance, the rights of the third party are discharged. A third party’s
right is also subject to any claim or defence arising from the third party’s
own conduct or agreement. However, the rights of the third party are not
subject to the promisor’s claims against the promisee, or even the promisee’s
claims against the third party beneficiary.
(e)
England and Wales
3.109
Section 3(2) of the Contracts (Rights of Third Parties) Act 1999
provides that:
“The promisor shall have available to him by way of defence
or set-off any matter that--
(a) arises from or in connection
with the contract and is relevant to the term, and
(b) would have been available to
him by way of defence or set-off if the proceedings had been brought by the
promisee.”
3.110
The 1999 Act allows the promisor to raise defences that question the
validity or enforceability of the contract if they could have done so against
the promisee. However, the defence must be relevant to the term of the contract
the third party is seeking to enforce. In this way, the promisor cannot
rely on wholly extraneous matters in their defence of the third party’s
claim. Section 3(2) would also seem to allow set-off only, and not allow
the promisor to counter-claim against the third party.
3.111
The wording of the 1999 Act differs slightly from the wording of the
Draft Bill attached to the Law Commission’s 1996 Report. While the Draft
Bill provided that the defence or set-off had to arise from or be in connection
with the contract, the 1999 Act narrows the application of the defences further
by requiring that it must also be relevant to the term that the third party is
seeking to enforce. This appears to be because section 1 of the 1999 Act
refers to the enforceability of a “term” in a contract, rather than the
contract as a whole, by the third party beneficiary.[282]
3.112
Section 3(3) of the 1999 Act allows the contracting parties to
include express provisions in the contract making other defences or set-off
available to them, provided they would have been available to them in an action
brought by a promisee. Section 3(5) of the 1999 Act provides that the
contracting parties may provide by an express term of the contract that certain
matters are not to available to the promisor by way of defence, set-off or
counterclaim.
3.113
Section 3(4) states
The promisor shall also have available to him-
(a) by way of defence or set-off any matter, and
(b) by way of counterclaim any matter not arising from the
contract,
that would have been available to him by way of defence or
set-off or, as the case may be, by way of counterclaim against the third party
if the third party had been a party to the contract.
This section seems to provide that a third party’s right is
subject to any defence, set-off or, within limits, counterclaim arising from
the third party’s own conduct. This could include a claim that a contracting
party was induced to enter into the contract on foot of a misrepresentation by
the third party.
3.114
Finally, the 1999 Act makes special provision where the third party is
seeking to enforce an exclusion or limitation of liability clause. The
third party can only enforce the clause to the extent that they could have done
if they were a party to the contract. In this way, the validity of the
exclusion or limitation clause depends on the position between the contracting
parties, as well as that between the contracting parties and the third party.
(3)
Discussion
3.115
It is clear from this discussion that there are a number of different
ways of approaching the rights of the contracting parties to defend an action
brought by a third party. One approach would be to simply allow the
promisor to raise all defences that would have been available to them in an
action brought by the promisee. A second option is to allow all defences
that would have been available, subject to the qualification that only those
defences that arise from the contract can be used. A third option would
to be to restrict the defences to those arising from the term that is being
enforced, subject to detailed rules so that the contracting parties are left in
no doubt.
3.116
Whatever method is chosen, the Commission considers that the contracting
parties should not be placed in a worse position than they would have been in
had the action been between them. At the same time, the third party
should not be subjected to defences relating to extraneous matters unknown to
them, that do not arise in connection with the terms of the contract that they
are seeking to enforce.
3.117
For these reasons, the Commission recognises that any defences available
to the contracting parties must be restricted to those that arise from or in
connection with the contract, and which are relevant to the term being
enforced. The Commission also accepts that if there are other factors
particular to the conduct of the third party which would affect the term being
enforced, the contracting parties should be able to rely on these
factors. The Commission is fully aware however, that in the interest of
the rights of the third parties, any provision in relation to defences should
not exceed those that would have been available between the contractual
parties.
3.118
In relation to set-off and counterclaims, the Commission is aware that
any reform of the privity rule will be concerned with conferring benefits, and
not burdens, on the third party. The Commission sees merits in an
approach which allows the contracting party to avail of the remedy of set-off,
which is limited in scope. However, the Commission recognises that it may be
necessary to exclude or limit counterclaims by the contracting party. Any
such provision will require careful consideration, and the Commission invites
views on this issue.
3.119
The Commission provisionally recommends that in an action
brought by a third party, the promisor should have available by way of defence
or set-off, all matters that arise from or in connection with the contract,
that are relevant to the term that the third party is seeking to enforce.
In addition, the Commission provisionally recommends that the promisor should
be able to rely on any other issues relevant to the conduct of the third party,
that would have been available had the third party been a party to the
contract. The Commission provisionally recommends that the contracting parties
should be free to include an express provision restricting or expanding the
scope of the defences or set-off. The Commission invites views on
whether the promisor’s ability to counterclaim against the third party should
be limited.
F
Overlapping
claims
(1)
Introduction
3.120
In the previous section the Commission examined the rights of the
promisor in a contract for the benefit of a third party. The Commission
is conscious, however, that the rights of the promisee will also be affected by
the granting of enforceable rights to a third party. The two are
connected because while the promisee normally has certain remedies against the
promisor in a contract that purports to benefit a third party, the promisor
should not be subjected to a double liability.
3.121
The rights of the third party and the promisee are independent from each
other. It is not suggested here that, by giving the third party the right
to enforce a term in a contract that purports to benefit them, this right of
enforcement is automatically taken from the promisee. Rather, the rights
are concurrent. The duties of the promisor are owed to both the promisee
and the third party. The duties may also differ as to the promisee and
the third party.
3.122
The Commission has already provisionally recommended that the remedies
available to the promisee, although not an adequate means of protecting third
party rights, should be preserved and left to the development of the courts.[283]
By the same reasoning, the rights of the promisee to enforce the contract
should remain as a valid means of enforcing a contract for the benefit of a
third party. It is the Commission’s view, however, that the proposed
reform should not expose the promisor to the risk of double liability.
(2)
Comparative Analysis
(a)
Australia
3.123
Section 55(7) of the Queensland Property Law Act 1974 provides
that nothing in the section affects any rights or remedy that exists or is
available apart from the section. Section 56(7) of the Northern Territory
Law of Property Act 2000 contains an equivalent provision. As a
result, the promisee retains their rights against the promisor. The
Western Australian Property Law Act 1969 is silent on this point.
(b)
New Zealand
3.124
Section 14(1)(a) of the Contracts (Privity) Act 1982 provides
that nothing in the 1982 Act limits or affects any right or remedy existing
apart from the Act.
(c)
United States of
America
3.125
The American Law Institute’s Restatement (Second) of Contracts
contains provision for the overlapping duties owed by the promisor to the
beneficiary and the promisee. Section 305 states that:
(1) A promise in a contract creates a duty in the promisor to
the promisee to perform the promise even though he also has a similar duty to
an intended beneficiary
(2) Whole or partial satisfaction of the promisor’s duty to
the beneficiary satisfies to that extent the promisor’s duty to the promisee.
3.126
This acknowledges that while the promisee has the same right to
performance as any other promisee, the promisor is entitled to protection
against double liability.
(d)
England and
Wales
3.127
Section 4 of the Contracts (Rights of Third Parties) Act 1999 provides
that third party rights do “not affect any right of the promisee to enforce any
term of the contract”. The Law Commission for England and Wales was
convinced that there was no reason to remove a contractual right from the
promisee merely because the contract gives rights of enforcement to the third
party.[284]
They also recommended that although no legislative provision was required, a
promisor that had fulfilled their duty to the third party, whether wholly or
partly, should to that extent be discharged from its duty to the promisee.[285]
3.128
The Law Commission also addressed the issue of priority of action. It
was acknowledged that potentially there could be problems if the promisor was
faced with the costs and inconvenience of two actions brought by the third
party and the promisee at the same time. However, they regarded the
promisee and the third party as having separate rights, and concluded that it would
be wrong to bar one claim over another.
3.129
The Law Commission addressed the issue of the promisee’s rights where a
promisor has been released by the third party. It considered that this
should not discharge the promisor’s obligation to the promisee. This is
because the performance of a single promise might benefit both promisee and
third party. Therefore in that kind of situation the promisee should not
be denied their right of action. The simple solution to this is to
require the promisor to seek release of their duties from the promisee.
However, again it was felt that no legislative provision on this matter was
necessary.
3.130
Section 5 of the 1999 Act contains further provisions designed to
protect the promisor from double liability, by stating that:
“Where under section 1 a term of a contract is enforceable by
a third party, and the promisee has recovered from the promisor a sum in
respect of -
(a) the third party's loss in
respect of the term, or
(b) the expense to the promisee of
making good to the third party the default of the promisor,
then, in any proceedings brought in reliance on that section
by the third party, the court or arbitral tribunal shall reduce any award to
the third party to such extent as it thinks appropriate to take account of the
sum recovered by the promisee.”
(3)
Discussion
3.131
The Commission has concluded that, provided the promisor is protected
from double liability, there is no reason why the promisee should not maintain
their right of action on a contract to benefit a third party. In other
words, the fact that a third party has a right to enforce an agreement directly
should not be a bar to a promisee maintaining their own action directly.
3.132
In order to safeguard the rights of the promisor, the Commission has
also concluded that once a promisor has fulfilled their duty to the third party
they should discharged from their duty, to the extent that it has been
fulfilled, to the promisee. Likewise, although it is
unlikely to occur under existing law,[286] if the promisee has recovered
substantial damages representing the third party’s loss, the third party should
not be entitled to maintain their own action against the promisor for the same
loss.
3.133
The Commission provisionally recommends that, unless otherwise agreed
between the parties, the promisee should retain the right to enforce a contract
even if the contract is also enforceable by the third party. The
Commission provisionally recommends that, in order to prevent double recovery,
where a promisor has fully or partially fulfilled their duty to the third party
they should be proportionately discharged from their duty to the promisee.
G
Exceptions
(1)
Introduction
3.134
Although there is a need for reform of the privity rule, it is possible
that not every type of contract should be subject to any reforming
legislation. Sometimes, the granting of third party rights may be
contrary to public policy or may cause uncertainty. It is possible,
therefore, that certain types of contracts should be excluded from any
reforming legislation.
3.135
The Commission now turns to examine whether certain types of contracts
should be excluded from any reforming legislation.
(2)
Comparative
Analysis
(a)
England and Wales
3.136
The Contracts (Rights of Third Parties) Act 1999 does not apply
to every type of contract. Section 6(2) of the 1999 Act provides that it
confers no rights on a third party in the case of any contract binding on a
company and its members under section 14 of the Companies Act 1985.
3.137
Section 6(3) provides that the 1999 Act confers no right on a third
party to enforce any term of a contract of employment or worker’s contract
against, respectively, an employee or worker. Contracts of employment are
not excluded entirely, and it is still possible, for example, for a third party
to enforce a term of an employment contract against an employer.
3.138
Section 6(1) of the 1999 Act provides that it “confers no rights on a
third party in the case of a contract on a bill of exchange, promissory note or
other negotiable instrument”. In this group of exceptions third parties can
acquire rights under other rules of law and it is not the purpose of the 1999
Act to extend these rights.
3.139
Likewise, section 6(5) provides that:
“Section 1 confers no rights on a third party in the case
of-
(a) a contract for the carriage of goods by sea, or
(b) a contract for the carriage of goods by rail or road, or
for the carriage of cargo by air, which is subject to the rules of the
appropriate international transport convention,
except that a third party may in reliance on that section
avail himself of an exclusion or limitation of liability in such a contract.”
3.140
The 1999 Act excludes this group of contracts as they are governed by
separate regimes. Contracts for the carriage of goods are governed by the
Carriage of Goods by Sea Act 1992.
Contracts for the international carriage of goods by road, rail or air are
governed by international conventions which have the force of law in the United
Kingdom. Such schemes are carefully regulated, and it could cause
uncertainty if third parties could acquire additional rights under the 1999
Act. However, a third party can still rely on an exemption and limitation
clause contained in these kinds of contracts, provided the normal requirements
for such reliance are fulfilled.[287]
(b)
Singapore
3.141
Like the 1999 Act in England and Wales, the Singapore Contracts
(Rights of Third Parties) Act 2001 excludes contracts for the carriage of
goods by sea, contracts for the carriage of goods by road, rail, or air, and
negotiable instruments.[288]
Nor does it apply to contracts that are binding on a company and its members
under section 39 of the Singapore Companies Act.[289]
(c)
Hong Kong
3.142
Similarly, the Hong Kong Law Reform Commission identified two categories
of contract that their proposed reform should not apply to. The first is
where a third party already has an enforceable right under existing rules or
reflecting international conventions: such as bills of exchange, contracts for
the carriage of goods by sea, contracts for the carriage of goods by air and
letters of credit.[290]
3.143
The second category is where a third party has no rights of
enforceability under existing rules, but there are sound policy reasons for
maintaining this position. Such contracts include contracts under section
23 of the Hong Kong Companies Ordinance which creates a
contract between the company and its members.
(3)
Discussion
3.144
It is common for legislation affecting contracts to exclude different
types of contracts from its remit.[291] In other jurisdictions,
legislation reforming the privity rule has excluded different types of
contracts from its remit, because to include them would upset the existing
regulation of those types of contracts. For example, it may be important
that the contract between a company and its members is only dealt with under
company law, and not affected by any general contract reforms. Similarly,
the law of negotiable instruments and the carriage of goods by sea is carefully
regulated, and any changes may cause uncertainty. It could be argued that any
changes to these types of regimes should be dealt with separately, and not as
part of a general reform of contract law.
3.145
However, it is important to consider what kinds of contracts should be
excluded and to what extent they should be excluded. For example, it
could be suggested that contracts of employment should be entirely excluded and
instead governed by general employment law. However, it is clear from
some of the decisions mentioned in this Paper that the privity rule can have an
adverse effect in the employment context.[292] Indeed, the development of a
third party rule in the Canadian Supreme Court originated in a case involving
third party employees.[293]
Thus, the England and Wales Contracts (Rights of Third Parties) Act 1999 does
not entirely exclude employment contracts from its remit, but provides that a
third party cannot enforce a term of a contract of employment against an
employee. Such distinctions may be of vital importance in any reforming
legislation.
3.146
The Commission is of the view that although it is possible that any
reforming legislation should not apply to every type of contract, it is
important to consider carefully what types of contracts should be excluded from
its remit, and to what extent they should be excluded. The Commission
welcomes views on this matter.
3.147
The Commission provisionally recommends that certain types of
contracts should be excluded from any reforming legislation and invites views
on this matter.
4
CHAPTER 4
summary of provisional recommendations
4.01
The provisional recommendations of this Consultation Paper may be
summarised as follows:
4.02
The Commission provisionally recommends that the rule of privity be
reformed to allow third parties to enforce rights under contracts made for
their benefit. [Paragraph 1.172]
4.03
The Commission provisionally recommends that the development of third
party contractual rights should take the form of legislation, which is most
suited to address the injustices and inconveniences associated with the current
privity of contract rule. The Commission provisionally recommends that
legislative reform of the privity rule should not constrain judicial
development of third party rights. [Paragraph 2.24]
4.04
The Commission provisionally recommends that reform of the promisee’s
remedies should not form part of the proposals to reform the privity rule.
[Paragraph 2.36]
4.05
The Commission provisionally recommends that reform of the privity rule
should not take the form of a general provision enabling a third party to claim
the benefit of contractual provisions for the third party’s benefit. The
Commission provisionally recommends that a more detailed scheme of third party
rights is necessary. [Paragraph 2.47]
4.06
The Commission provisionally recommends that reform of the privity rule
should not be by means of creating further exceptions to the privity rule in
specific instances. [Paragraph 2.59]
4.07
The Commission provisionally recommends that the rule of privity be
reformed by means of detailed legislation. [Paragraph 2.93]
4.08
The Commission provisionally recommends that a general clause should be
included in the legislation which would preserve the existing exceptions to the
privity rule and provide that third parties will not be denied existing
remedies available to them. The Commission also invites submissions on
whether the proposed legislation should include a comprehensive codification of
the existing common law and statutory exceptions to the privity rule.
[Paragraph 2.118]
4.09
The Commission provisionally recommends that the test of whether a third
party may enforce terms under a contract made for their benefit should satisfy
two criteria:
1. The parties intend that the third
party is to receive the benefit of the contract or a term of the contract; and
2. The parties intend that the term
benefiting the third party should be enforceable by the third party in their
own name.
The Commission also provisionally recommends that the contracting
parties should be given the opportunity to rebut any presumption in favour of
enforceable third party rights. The intentions of the parties should be
determined using the normal principles of interpretation in contract law.
[Paragraph 3.42]
4.10
The Commission provisionally recommends that the third party should be
identified in the contract either by name or description. Such a
description should include being a member of a class or group of persons.
The Commission provisionally recommends that there should be an express
provision that there is no requirement that the third party be in existence at
the time of entering into the contract. The Commission invites views on
whether there should be an express provision that there is no requirement that
a third party who wishes to enforce the contract be in existence at the time of
acceptance by another third party. [Paragraph 3.62]
4.11
The Commission provisionally recommends that reliance and acceptance
should be used as alternative methods of determining when a third party’s
rights have crystallised. After reliance or acceptance by the third
party, the contractual parties will be unable to modify or terminate the
contract without the consent of the third party. The Commission also
provisionally recommends that the contracting parties should remain free to
include in the contract an express provision for the variation or termination
of third party rights. The Commission invites views on this matter. [Paragraph
3.95]
4.12
The Commission provisionally recommends that in an action brought by a
third party, the promisor should have available by way of defence or set-off,
all matters that arise from or in connection with the contract, that are
relevant to the term that the third party is seeking to enforce. In
addition, the Commission provisionally recommends that the promisor should be
able to rely on any other outside issues relevant to the conduct of the third
party, that would have been available had the third party been a party to the
contract. The Commission provisionally recommends that the contracting parties
should be free to include an express provision restricting or expanding the
scope of the defences or set-off. The Commission invites views on whether
the promisor’s ability to counterclaim against the third party should be
limited. [Paragraph 3.119]
4.13
The Commission provisionally recommends that, unless otherwise agreed
between the parties, the promisee should retain the right to enforce a contract
even if the contract is also enforceable by the third party. The Commission
provisionally recommends that, in order to prevent double recovery, where a
promisor has fully or partially fulfilled their duty to the third party they
should be proportionately discharged from their duty to the promisee.
[Paragraph 3.133]
4.14
The Commission provisionally recommends that certain types of contracts
should be excluded from any reforming legislation and invites views on this
matter. [Paragraph 3.147]
[1]
Second Programme for
Examination of Certain Branches of the Law with a View to their Reform: 2000 –
2007 (PN 9459) (December 2000). Available at www.lawreform.ie
[2]
Programme of Law
Reform (The Stationery Office, Dublin, 1962, Pr.6379) paragraph 16(7).
[3]
For example, Clark Contract
Law in Ireland (5th ed Thomson Round Hall 2004) and McDermott Contract
Law (Butterworths 2001).
[4]
See paragraph 1.72ff,
below.
[5]
See for example the
changes to the JCT Standard Form Contract in England after the enactment of the
Contracts (Rights of Third Parties) Act 1999. See paragraph 1.86, below.
[6]
See paragraph 1.59,
below.
[7]
See paragraph 1.49ff,
below.
[8]
See paragraph 1.27ff,
below.
[9]
New Zealand Contracts
(Privity) Act 1982.
[10]
Section 11 Western
Australian Property Law Act 1969, section 55 Queensland Property Law Act
1974, section 56 Northern Territory Law of Property Act 2000.
[11]
London Drugs v Kuehne
& Nagel International Ltd [1992] 3 SCR 299, Fraser River Pile &
Dredge Ltd v Can-Dive Services Ltd [1999] 3 SCR 108.
[12]
Contracts (Rights of
Third Parties) Act 1999.
[13]
Section 304 of the Restatement
(Second) of Contracts states that “intended beneficiaries” have enforceable
rights. The Restatements are published by the American Law Institute, a
voluntary body of legal practitioners and leading academics. Although
they are not binding and do not have legislative status, the various
Restatements have been hugely influential in the adoption of statutory reform
in many States of the United States of America, and have been cited in cases as
persuasive precedents. See paragraph 2.04ff and paragraph 2.82ff, below.
[14]
Contracts (Rights of Third
Parties) Act 2001.
[15]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 3.28.
[16]
(1861) 1 B&S 393.
[18]
Flannigan “Privity of contract
– the end of an era (error)” (1987) 103 LQR 564, at 565.
[19]
(1669) 1 Vent 6.
[20]
(1677) 3 Keb 786.
[21]
If A makes a promise to both B
and C, but only B (and not C) provides consideration for this promise, B and C
are “joint promisees”. The contract may be enforceable by A, B or C, provided
they are all parties to the contract. See McEvoy v Belfast Banking [1935]
AC 24.
[22]
(1724) 1 Str 591.
[23]
(1776) 2 Cowp 437.
[24]
(1802) 3 Bos & Pul 147.
[25]
(1823) 2 Dow & Ry KB 277.
[26]
[1949] 2 KB 500.
[27]
Ibid at 514.
[28]
[1954] 1 QB 250.
[30]
Ibid at 590.
[35]
(1868) 2 IRCL 506. See also McCoubray
v Thompson (1868) 2 IRCL 226, discussed at paragraph 1.134, below.
[36]
[1982] ILRM 77.
[37]
[1988] IR 110.
[38]
[1988] IR 110, 117.
[39] See
McDermott Contract Law (Butterworths 2001) at 965-974, Treitel The
Law of Contract (11th ed Thomson Sweet & Maxwell 2003)
Chapter 16.
[40]
For example, the owner of a
house who hires a cleaner cannot assign their contractual rights to another
party so that the cleaner must clean for a different owner.
[41]
This is referred to as
“novation”. See O & E Telephones Ltd v Alcatel Business Systems High
Court 17 May 1995.
[42]
This legislation is discussed
in paragraph 1.63, below.
[43]
See Clark Contract Law in
Ireland (5th ed Thomson Round Hall 2004) at 475-478, McDermott Contract
Law (Butterworths 2001) at 925-932, Treitel The Law of Contract (11th
ed Thomson Sweet & Maxwell 2003) at 646-651.
[44]
(1756) Amb 330.
[45]
(1899) 1 IR 176.
[46]
[1982] ILRM 77. See paragraph
1.21ff above.
[47]
[1982] ILRM 77, 80–81.
[48]
See Clark Contract Law in
Ireland (5th ed Thomson Roundhall 2004) at 477–478.
[49]
Williston on Contracts (1939)
55 LQR 189, at 208.
[50]
Re Schebsman [1944] Ch
83.
[51]
See paragraph 1.91ff, below.
[52]
[1959] 2 KB 854.
[53]
High Court 1 February 1983.
[54]
See paragraph 1.72, below.
[55]
See Wylie Irish Land Law (3rd
ed Butterworths 1997) Chapter 19; Lyall Land Law in Ireland (2nd
ed Round Hall Sweet & Maxwell 2000) Chapter 21.
[56]
(1848) 2 Ph 774.
[57]
A positive covenant, for
example, a covenant to carry out repairs is not enforceable against successors
in title under the rule in Tulk v Moxhay.
[58]
See Report
on the Reform and Modernisation of Land Law and Conveyancing Law (LRC
74-2005) pp154 – 157 and Report on Land Law and Conveyancing Law: (7)
Positive Covenants over Freehold Land and other Proposals (LRC 70-2003)
paragraph 1.20.
[59]
Bill No. 31 of 2006. Available
at www.oireachtas.ie
[60]
[1932] AC 62.
[62]
[1989] ILRM 803
[63] Section 2
of the Consumer Credit Act 1995 defines a consumer as “a natural person
acting outside his trade, business or profession”. However, section 33 of the Central
Bank and Financial Authority of Ireland Act 2004 provides that the Minister
for Finance can declare any specified person or specified class of persons to
be a consumer for the purposes of the 1995 Act.
[64]
Dunphy v Blackhall Motors (1953)
87 ILTR 128.
[65]
See paragraph 1.07ff above.
[66]
See, for example, Directive
2001/23/EC Transfer of Undertakings and the Safeguarding of Employees’
Rights, implemented by the European Communities (Protection of Employees
on Transfer of Undertakings) Regulations 2003 (SI No 131 of 2003).
[67]
Statistics from Review of
the Construction Industry 2004 and Outlook 2005-2007 (Department of
Environment, Heritage and Local Government, and DKM Economic Consultants,
September 2005). Available at www.environ.ie
[68]
See generally, Bunni The
FIDIC Forms of Contract (Blackwell 2005).
[69]
The IEI is now known as
Engineers Ireland.
[70]
For more recent developments,
see paragraphs 1.86ff, below
[71]
See generally
www.finance.gov.ie.
[72]
The precise form of these
contracts has been the subject of intense discussion between the GCC and
relevant stakeholders. In April 2006, the most recent drafts of the proposed
new forms were circulated to interested parties. It is understood that the new
contracts deal with: Building Works with Employer Design; Building Works with
Contractor Design; Engineering Works with Employer Design; and Engineering
Works with Contractor Design. Other associated contracts deal with design
consultancies and sub-contract works. The Commission understands that the new
standard form contracts may be finalised in late 2006 or early 2007.
[73] SI No 329
of 2006.
[74]
Directive 2004/18/EC, which
replaced a number of previous Directives in this area.
[75]
See paragraph 1.06, above.
[76]
SI No.27 of 1995, which
implemented the 1993 EC Directive on Unfair Contracts Terms, 93/13/EEC.
[77]
Emphasis added.
[78]
High Court 5 December 2001.
[79]
See Dorgan “Safe as Houses?”
(2002) Law Society of Ireland Gazette January 2002, 12. The details of
the case are also available on the website of the Director of Consumer Affairs,
www.odca.ie. The proposed National Consumer Agency, to be established under the
Consumer Protection (National Consumer Agency) Bill (a draft of which
was published by the Department of Enterprise, Trade and Employment in 2006:
see www.entemp.ie), will incorporate the functions of the Director of Consumer
Affairs.
[80]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996).
[81]
On the JCT and NEC/ECC
Contracts, see paragraph 1.74, above.
[82]
See Erwin “An Ambitious
Attempt” Estates Gazette October 2005, 131.
[83]
See generally Merkin “Third
Party Immunity Granted Under Contract” in Merkin (ed) Privity of Contract:
The Impact of the Contracts (Rights of Third Parties) Act 1999 (LLP 2000).
[84]
See paragraph 1.47ff, above,
and paragraph 1.118ff, below.
[85]
See O’Regan Cazabon Insurance
Law in Ireland (Round Hall Sweet & Maxwell) 1999) at 20-24.
[88]
A stevedore loads goods on and
off a ship.
[90]
[1975] AC 154 at 169.
[91]
[1992] 3 SCR 299.
[92]
[1999] 3 SCR 108. This
decision is discussed in paragraph 2.13, below.
[93]
Tetley “The Himalaya Clause –
revisited” (2003) 9 JIML 40.
[94]
See Green v Russell [1959]
2 QB 226.
[95]
High Court 8 July 1994.
[96]
Rayner v Preston [1879]
18 Ch 1.
[97]
New Zealand Contracts and
Commercial Law Reform Committee Privity of Contract (1981) at 17.
[98]
See Wylie Landlord and
Tenant (2nd ed Butterworths 1998) at 349-362.
[99]
See generally Jamieson “Shipping
Contracts” in Merkin (ed) Privity of Contract: The Impact of the
Contracts (Rights of Third Parties) Act 1999 (LLP 2000).
[100]
See paragraph 1.96ff, above.
[101]
See Jamieson “Shipping
Contracts” in Merkin (ed) Privity of Contract: The Impact of the
Contracts (Rights of Third Parties) Act 1999 (LLP 2000) at 144 - 148.
[102]
For example, the Gencon,
Baltime and NYPE (New York Produce Exchange) standard forms contracts all
contain such clauses.
[103]
(1853) 2 Ex 299.
[105]
See generally, McMahon & Binchy Law
of Torts (3rd ed Butterworths 2000) Chapter 13, Jackson &
Powell Professional Negligence (5th ed Sweet & Maxwell
2002).
[106]
[1989] ILRM 124.
[108]
[1985] IR 29.
[109]
In its Report on Defective
Premises (LRC 3–1982) the Commission recommended a statutory regime of
liability for defective premises comparable to the England and Wales Defective
Premises Act 1972. To date, this Report has not been implemented, but a
non-statutory scheme, Home Bond, is operated by the Construction Industry
Federation, the Irish Home Builders Association and the Department of the
Environment, Heritage and Local Government.
[110]
Tettenborn “Professional Negligence”
in Merkin (ed) Privity of Contract: The Impact of the Contracts (Rights
of Third Parties) Act 1999 (LLP 2000) at 164.
[111]
See generally, Jackson & Powell
Professional Negligence (5th ed Sweet & Maxwell 2002) paragraph
2-007ff.
[112]
See Glencar Explorations plc v
Mayo Co Co (No2) [2002] 1 IR 84.
[113]
See Tettenborn “Professional
Negligence” in Merkin (ed) Privity of Contract: The Impact of the
Contracts (Rights of Third Parties) Act 1999 (LLP 2000) at 163.
[114]
[1995] 2 AC 207. See paragraph 1.119,
above.
[115]
Law Commission for England and Wales
Privity of Contract: Contracts for the Benefit of Third Parties (Law Com
No 242, 1996) at paragraphs 7.19ff.
[116]
Ibid at paragraph 7.27.
[117]
See Bird “Dealing as Consumer”
(1999) 6 CLP 10.
[118]
The Draft Bill proposes to establish
a Consumer Protection Agency to replace the Office of the Director of Consumer
Affairs. It also proposes to implement the EC Directive on Unfair Commercial
Practices, 2005/29/EC. The Draft Bill is available at www.entemp.ie.
[119]
(1868) 2 IRCL 226.
[120]
See for example: Furmston
“Return to Dunlop v Selfridge” (1960) 23 MLR 373; Flannigan “Privity – end of
an era (error)” (1987) 103 LQR 564, at 568. However, Clark has
stated that “the weight of authority is in favour of regarding the law as
having two distinct rules”: Clark Contract Law in Ireland (5th
ed Thomson Round Hall 2004) p.473.
[121]
Law Commission for England and Wales
Privity of Contract: Contracts for the Benefit of Third Parties (Law Com
No 242, 1996)
[122]
Law Commission for England and Wales
Privity of Contract: Contracts for the Benefit of Third Parties (Law Com
No 242, 1996) at paragraphs 6.3-6.7.
[123]
(1677) 3 Keb 786.
[124]
See Clark Contract Law in Ireland
(5th Ed Thomson Round Hall 2004) p.47 – 51.
[125]
See Kincaid “Privity Reform in
England” (2000) 114 LQR 43.
[126]
See Chapters 2 and 3 below.
[127]
See generally: Whincup Contract
Law and Practice: The English System and Continental Comparisons (4th
ed Kluwer Law International 2001) Chapter 3; Kötz & Flessner European
Contract Law, Volume One: Formation, Validity, and Content of Contracts;
Contracts and Third Parties (Clarendon Press Oxford 1997) Chapter 13;
Zweigert & Kötz An Introduction to Comparative Law 3rd Ed
(Clarendon Press Oxford 1998) at 456 – 469.
[128]
See Stevens “The Contracts (Rights
of Third Parties) Act 1999” (2004) 120 LQR 292.
[129]
Choate, Hall &
Stewart v SCA Services Inc (1979) 378 Mass 535.
[130]
De Cruz “Privity in
America: A study in judicial and statutory innovation” (1985) 14 Anglo-American
L Rev 265, at 266.
[131]
(1859) 20 NY 268.
[132]
(1979) 378 Mass 535.
[133]
(1979) 378 Mass 535 at
545.
[134]
(1979) 378 Mass 535 at
543.
[135]
For example, the Ontario
Law Reform Commission Report on the Amendment of the Law of Contract 1987;
the Law Reform Commission of Nova Scotia Final Report on Privity of Contract
(Third Party Rights) August 2004, the Manitoba Law Reform Commission Report
on Privity of Contract Report No 80 October 1993.
[136]
[1992] 3 SCR 299,
discussed in paragraph 1.101, below.
[137]
[1992] 3 SCR 299 at 413-414.
[138]
See Brock “A ‘principled’
exception to Privity of Contract: Fraser River Pile & Dredge Ltd v
Can-Dive Services Ltd” (2000) 58 UT Fac L Rev 53.
[139]
[1999] 3 SCR 108.
[140]
[1999] 3 SCR 108 at 126.
[141]
[1999] 3 SCR 108 at 131-132.
[142]
Law Reform Commission of Nova
Scotia Final Report on Privity of Contract (Third Party Rights) 2004.
[143]
Ibid at 7.
[144]
Article 1444 of the Québec
Civil Code (1991, c. 64, a. 1444).
[145]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraphs 5.8 – 5.10.
[146]
See paragraph 1.20ff, above.
[147]
Per Lord Goff in The
Mahkutai [1996] AC 650 at 658.
[148]
[1988] 80 ALR 574.
[149]
[1988] 80 ALR 574 at para 14.
[150] See the
comments of Finlay CJ in Burke (a minor) v Dublin Corporation [1991] 1 IR 341 at 353 in this regard.
[151]
Dunlop v Lambert (1839)
6 Cl & F 600; The Albazero [1977] AC 774.
[152]
Burke v Dublin Corporation [1991] 1 IR 341, 353. This case is discussed
in paragraph 1.52, above.
[153]
Such an order was granted in
this context in Beswick v Beswick [1968] AC 58. The Court in that case
said that if nominal damages were the only remedy available it would be
“grossly unjust”: per Lord Reid [1968] AC 58 at 73.
[154]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 5.4.
[155]
Ibid at paragraph 5.17.
[156]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80) October 1993 at 56.
[157]
Stevens “The Contracts (Rights
of Third Parties) Act 1999” (2004) 120 LQR 292 at 293.
[158]
Ontario Law Reform Commission Report
on the Amendment of the Law of Contract (1987) at 69.
[159]
Ibid at 71.
[160]
See paragraph 2.10ff, above.
[161] Law
Commission for England and Wales Privity of Contract: Contracts for the
Benefit of Third Parties (Law Com No 242, 1996) at paragraph 5.6.
[162]
Law Reform Commission of Hong
Kong Report on Privity of Contract September 2005 at paragraph 3.9.
[163]
Andrews “Strangers to justice
no longer: The reversal of the privity rule under the Contracts (Rights of
Third Parties) Act 1999” [2001] CLJ 353.
[164]
Stevens “The Contracts (Rights
of Third Parties) Act 1999” (2004) 120 LQR 292.
[165]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 5.3.
[166]
Law Reform Commission of Hong
Kong Report on Privity of Contract September 2005 at paragraphs 3.4 –
3.6.
[167]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80) October 1993 at p 56.
[168]
See paragraph 1.27ff, above.
[169]
Section 11(2)(a) Property
Law Act 1969.
[170]
Ibid at section 11(3).
[171]
New Zealand Contracts and
Commercial Law Reform Committee Privity of Contract (1981) at 49 – 50.
[172]
Section 55(2) Property Law
Act 1974
[173]
Section 55 (3)(a).
[174]
Section 55 (3)(b).
[175]
Section 55 (4).
[176]
New Zealand Contracts and
Commercial Law Reform Committee Privity of Contract (1981)
[177]
Section 5 Contracts
(Privity) Act 1982.
[178]
Section 6.
[179]
Section 7.
[180]
Section 9.
[181]
New Zealand Law Commission Contract
Statutes Review (Report No 25, 1993) at 228.
[182]
See paragraph 2.10, above.
[183] Section 4(2) Law
Reform Act 1993.
[184]
Ibid at section 4(3).
[185]
Article 1445.
[186]
Article 1446.
[187]
Article 1449.
[188]
Article 1450.
[189]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80) October 1993.
[190]
Section 3(2).
[191]
See paragraph 2.04.
[192]
Restatement (Second) of
Contracts Section 302.
[193]
Section 305.
[194]
Section 309.
[195]
Section 311.
[196] Law
Commission for England and Wales Privity of Contract: Contracts for the
Benefit of Third Parties (Law Com No 242, 1996).
[197]
Law Revision Committee Sixth
Interim Report Statute of Frauds and the Rule of Consideration (1937)
Cmd 5449.
[198]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties
(Law Com No 242, 1996) at paragraph 5.7.
[199]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Consultation
Paper No 121) 1991.
[200]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties
(Law Com No 242, 1996) at paragraph 5.8.
[201]
Section 1(3) Contracts
(Rights of Third Parties) Act 1999.
[202]
Section 1(6).
[203]
Section 3.
[204]
Section 2.
[205]
Section 6.
[206]
Section 8.
[207]
Section 7(1).
[208]
Andrews “Strangers to justice
no longer: The reversal of the privity rule under the Contracts (Rights of
Third Parties Act) 1999” [2001] CLJ 353 at 355.
[209]
MacMillan “A birthday present
for Lord Denning: The Contracts (Rights of Third Parties) Act 1999” (2000) 63
MLR 721.
[210]
See the Singapore Contracts
(Rights of Third Parties) Act 2001 and the Law Reform Commission of Hong
Kong Report on Privity of Contract (September 2005).
[211]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties
(Law Com No 242, 1996) at paragraph 12.1.
[212]
Law Reform and Revision
Division of the Attorney General’s Chambers in Singapore The Contracts
(Rights of Third Parties) Bill 2001 (LRRD No 2/2001).
[213]
The Law Reform Commission of
Hong Kong Report on Privity of Contract (September 2005) at
paragraph 4.168.
[214]
Treitel The Law of Contract
(11th ed Sweet & Maxwell 2003) at 581.
[215]
See Treitel The Law of
Contract (11th ed Sweet & Maxwell 2003) at 663.
[216]
Stevens “The Contracts (Rights
of Third Parties) Act 1999” (2004) 120 LQR 292, at 306.
[217]
See Tettenborn “Third party
contracts – pragmatism from the Law Commission” (1996) JBL 602.
[218]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties
(Law Com No 242, 1996) at paragraph 12.1.
[219]
See the comment of Mason
CJ and Wilson J in the High Court of Australia in Trident General Insurance
Co Ltd v McNiece Brothers Ltd (1988) 165 CLR 107, at paragraph 30.
[220] New
Zealand Contracts and Commercial Law Reform Committee Privity of Contract
(1981) at 54.
[221]
Ibid at 55.
[222]
Law Commission of New
Zealand Contract Statutes Review (Report No 25) at 219.
[223]
[2001] 2 NZLR 670.
[224]
[2002] 2 NZLR 270.
[225]
Ibid at paragraph
21.
[226]
[1992] 3 NZLR 582.
[227]
De Cruz “Privity in
America: a study in judicial and statutory innovation” (1985) 14 Anglo-American
L Rev 265 at 275.
[228]
(2003) 331 F.3d 891 (Fed. Cir.
2003).
[229]
(2003) 331 F.3d 891 at 901.
[230]
See paragraph 2.10ff, above.
[231]
[1992] 3 SCR 299.
[232]
[1999] 3 SCR 108.
[233]
Ibid at 126.
[234]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80) 1993 at 58-59.
[235]
Law Commission for England and
Wales Report on Privity of Contract: Contracts for the Benefit of Third
Parties (Law Com No 242, 1996) at paragraphs 7.1ff.
[236]
It should be noted that the
text of the Act differs slightly from the Draft Bill annexed to the Report by
the Law Commission. The 1999 Act provides that a term in a contract can
be enforced by a third party beneficiary, while the Draft Bill had provided for
the enforcement of the contract itself.
[237]
Law Commission for England and
Wales Report on Privity of Contract: Contracts for the Benefit of Third
Parties (Law Com No 242, 1996) at paragraph 7.10.
[238]
Law Commission for England and
Wales Report on Privity of Contract: Contracts for the Benefit of Third
Parties (Law Com No 242, 1996) at paragraph 7.17.
[239]
Ibid at paragraph 7.18.
[241]
[2005] 2 All ER (Comm) 167.
[242]
See Roe “Contractual Intention
under Section 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act
1999” (2000) 65 MLR 887 at 888.
[243]
Unreported 9 July 1997, at
paragraph 25. Cited in Roe “Contractual Intention under Section 1(1)(b)
and 1(2) of the Contracts (Rights of Third Parties) Act 1999” (2000) 65 MLR 887
at 891.
[244]
Unreported Court of Appeal 9
July 1997 at paragraph 25, also cited in Roe “Contractual Intention under
Section 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act 1999”
(2000) 65 MLR 887 at 891.
[245]
Burrows “The Contracts (Rights
of Third Parties) Act 1999 and its implications for commercial contracts”
[2000] LMCLQ 540.
[246]
[1968] AC 58. Discussed at paragraph 1.19,
above.
[247]
See paragraph 3.05 above.
[248]
Prenn v Simmonds [1971]
1 WLR 1381 at 1384-1385.
[249]
See Roe “Contractual Intention
under Section 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act
1999” (2000) 65 MLR 887 at 889; and McDermott Contract Law (Butterworths
2001) Chapter 9.
[250]
New Zealand Contracts and
Commercial Law Reform Committee Privity of Contract (1981) at 49.
[251]
Section 55(6).
[252]
Guardianship Depositors
Corporation v Brown (1939) 290 Mich 433, cited with approval in Jachim
v. Coussens (1979) 88 Mich. App. 648.
[253]
Levy v Daniel’s U Drive
Auto Renting Co (1928) 108 Conn 333. See also De Cruz “Privity in
America: a study in judicial and statutory innovation” (1985) 14 Anglo-American
L Rev 265.
[254]
Law Commission for England and
Wales Report on Privity of Contract: Contracts for the Benefit of Third
Parties (Law Com No 242, 1996) at paragraph 8.1.
[255]
Ibid at paragraph 8.6.
[256]
See Merkin “Contracts (Rights
of Third Parties) Act 1999” in Merkin (ed) Privity of Contract: The Impact
of the Contracts (Rights of Third Parties) Act 1999 (LLP 2000) at 103.
[257]
Law Commission for England and
Wales Report on Privity of Contract: Contracts for the Benefit of Third
Parties (Law Com No 242, 1996) at paragraph 8.3.
[258]
Ibid at paragraph 8.8.
[259]
See www.clrg.org
[260]
See generally, Chitty on
Contracts Volume 1: General Principles 29th ed (London Sweet
& Maxwell 2004) from paragraph 22-032.
[261]
See Treitel The Law of
Contract 11th Ed (Thompson: London 2003) at 657.
[262]
[1981] WAR 241; noted in 57
ALJ 640.
[263]
New Zealand Contracts and
Commercial Law Reform Committee Privity of Contract (1981) at 59.
[264]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80) October 1993 at 62.
[265]
(1985) 762 F 2d 819.
[266]
Ibid at 822.
[267]
(1987) 823 F.2d 1114.
[268]
(1991) 766 F Supp 1202.
[269]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraphs 9.18 – 926.
[270]
See Chapter 5 Merkin (ed) Privity
of Contract: The Impact of the Contracts (Rights of Third Parties) Act 1999 (LLP
2000) at 119.
[271]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 9.19.
[272]
Section 2(3)(a).
[273]
Section 2(3)(b).
[274]
MacMillan “A birthday present
for Lord Denning: The Contracts (Rights of Third Parties) Act 1999” (2000) 63
MLR 721 at 727.
[275]
See Adams, Beyleveld &
Brownsword “Privity of Contract – the benefits and burdens of law reform”
(1997) 60 MLR 238 at 257.
[276]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 9.14.
[277]
See Merkin “Contracts (Rights
of Third Parties) Act 1999 in Merkin (ed) Privity of Contract: The Impact of
the Contracts (Rights of Third Parties) Act 1999 (LLP 2000) at 120.
[278]
See Law Commission for England
and Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 10.5
[279]
Section 4(2).
[280]
Law Reform Commission of Nova
Scotia Final Report on Privity of Contract (Third Party Rights) (2004)
at 20-22.
[281]
Manitoba Law Reform Commission
Report on Privity of Contract (Report #80, 1993) at 63.
[282]
See MacMillan “A birthday
present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999”
(2000) 63 MLR 721 at 728.
[283]
See paragraph 2.36
[284]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 11.2.
[285]
Law Commission for England and
Wales Privity of Contract: Contracts for the Benefit of Third Parties (Law
Com No 242, 1996) at paragraph 11.6.
[286]
See paragraph 2.25ff, above.
[287]
Section 6(5) of the Contracts
(Rights of Third Parties) Act 1999.
[288]
Section 7(4) of the Contracts
(Rights of Third Parties) Act 2001.
[289]
Section 7(2) of the Contracts
(Rights of Third Parties) Act 2001.
[290]
The Law Reform Commission of
Hong Kong Report on Privity of Contract (2005) at paragraph
4.174.
[291]
For example, the European
Communities (Unfair Terms in Consumer Contracts) Regulations 1995 (SI No27
of 1995) as amended by the European Communities (Unfair Terms in Consumer
Contracts) (Amendment) Regulations 2000 (SI No307 of 2000) does not
apply to contracts of employment, contracts relating to succession rights,
contracts relating to rights under family law, or contracts relating to the
incorporation and organisation of companies or partnerships.
[292]
See for example, paragraphs
1.96, 1.107 and 2.11, above.
[293]
London Drugs v Kuehne &
Nagel International Ltd [1992] 3 SCR 299. See the discussion at paragraphs
1.101 and 2.11ff, above.