Contract Reading Session 4

Chen-Wishart chapter 16
 2 basic rules: a contract cannot confer enforceable rights on 3rd parties nor
confer obligations on 3rd parties.
 CW says the one about rights is unfair, since it restricts parties’ freedom to
contract and removed 3rd party’s legitimate expectation that he would
have rights.
 The rules are partly based on the doctrine of consideration: consideration
can only be given in return for the promise sought i.e. given upon request,
which obviously a 3rd party cant do. However this can cause confusion:
Treitel gives the example where A promises his daughter, B, that he will
pay £1000 to any man that marries her, C. C provides consideration, while
B is the promisee. Not clear which, if any, can sue.
 Justifications of privity rules: (1) Exclusivity- contracts must be voluntary
and therefore not include 3rd parties; (2) Priority of Buyers- consideration
is not just an evidentiary thing but a way of ensuring that there is an
exchange rather than a gift/exploitation and therefore those who give
consideration (the pomisee) should get the enforceable rights/duties; (3)
Floodgates- if anyone who benefited could sue then there would be
unlimited claims
 Criticisms of the Contracts Act 1999: the scope of 1.1(b) is broad and
uncertain- the law says that White v Jones falls outside it but it’s not clear
that in reality it would. “Purport” is a vague terms and it would be better to
use the surer footing of whether the parties intended the 3rd party to gain
enforceable benefits from the contract. The problem with the term
“purport” is that where a benefit appears to be conferred, but nothing is
stated about the parties’ intentions, there is a strong presumption that the
parties intended there to be an enforceable right, which reverses the
burden of proof.
 She says that the law should uphold the parties’ intentions not by
conferring rights on third parties but by giving greater rights to the
promisee- LC says no because promisee might be dead or unwilling to
sue. CW rejects both as valid reasons, the second because it undermines
the main parties’ intentions. Counter-argument is that this will produce
uncertainty since TP wont know whether they can rely on the right and
make plans based on it or not.
 The presumption in s.2 that the main contracting parties (MCP) forego
their usual rights in terms of modifying the contract wont necessarily
correspond to their intentions.
 It also undermines the doctrine of consideration and makes gifts
enforceable e.g. If A contracts B to to landscape C’s gardens as a present
and then A calls it off due to hardship, and B agrees, C can still enforce
the promise.
 There are (and before the new act were) various ways for a 3rd party to
benefit from a contract: (1) where one of the three parties is an agent, the
 principal is not considered a 3rd party but can sue in his own right; (2) The
collateral contract approach of Shanklin; (3) Sometimes sub contractees
have been able to use the exemption clauses conferred on their masters,
though judicial opinion has changed several times on the matter; (4)
ability of 3rd party to bring a tortious claim in certain circumstances will
enable them to sue principal, but the rules on this are complex; (5) if the
court construes the promisee as holding his right to sue promisor as “on
trust” for TP then the court may assign him the right; (6) One party can
assign his rights over to TP except where TP has no genuine interest in
taking them or contract forbids it or where it is personal i.e. assignment
only allowed where it makes no difference to the promisee who he
performs for; (7) negotiable instruments can be used e.g. a cheque which
involves the drawer, the bank and the payee; (7) statutory exceptions.

1. Passing Benefit to a Third Party

i) Privity doctrine
Tweddle v Atkinson (1861) 1 B&S 393: P was engaged and D (wife’s father) and X (P’s
father) contracted to pay P some money each upon marriage. P sued D for non-payment,
but the court held that even though the contract explicitly stated that he should have the
power to sue either of the parties to the contract, as a TP he could not enforce this right.

Blackburn J: in general no action can be maintained upon a promise unless consideration

moves from the party to whom it was made. In this case P gave no consideration so the
promise was unenforceable.

Dunlop Pneumatic Tyre Co Ltd v Selfridge [1915] AC 847: Dunlop sold goods to Dew
on the condition that Dew wouldn’t sue below the list price and would ensure that anyone
to whom they sold the goods would not sell below the list price. S bought from Dew and
sold below the list price, but the court refused Dunlop an injunction against S since (1)
Dunlop was not a party to the agreement between S and Dew, and so couldn’t impose or
enforce terms on their agreement, and (2) Dunlop had not given consideration in return
for S’s promise as to selling price.

Viscount Haldane: There are certain fundamental principles of contract law: “only a
person who is a party to a contract can sue on it” and consideration is another.

Lord Atkinson: in the absence of consideration, this is a nudum pactum

Smith & Snipes Hall Farm Ltd v River Douglas Catchment Bd [1949] 2 KB 500 (Lord
Denning only): P owned land and paid D to build a barrier by the river so that his land
wouldn’t get flooded. When it did flood, X, a tenant of P’s, sued D for the loss of his
crops caused by the flood. CA allowed his action, the majority on the grounds that
property is an exception to the privity rule since the covenant of D “runs with the land”.
Lord Denning criticised the privity rule itself:
Lord Denning: The privity rule only entered the law in Tweddle and before this it did not
exist: the actual rule was that “one who was not a party to the contract, provided that it
was made for his benefit and that he has a sufficient interest to entitle him to enforce it
[can enforce it]”.

Scruttons v Midland Silicones [1962] AC 446: P contracted for X to transport its goods
and X employed D, stevedores, who dropped some packages. In the contract was a term
limiting the amount for which the “carrier” would be liable in the event of damage to the
packages. HL held that D could not rely on the limitation of liability since the contract
was between P and X and therefore D was not entitled to its protection. I.e. there is no
vicarious protection from contracts.

Lord Reid: There is a “general rule that a stranger to a contract cannot in a question with
either of the contracting parties take advantage of provisions of the contract, even where
it is clear from the contract that some provision in it was intended to benefit him.” This is
demonstrated by Tweddle.

Beswick v Beswick [1968] AC 58: See Week 3

ii) The Promisee’s Remedies in a Contract for the Benefit of a Third Party

Gore v Van der Lahn [1967] 2 QB 31: P was given a free bus pass by the council, one of
the terms for which was that neither the council nor its employees would be liable to P
for injuries caused by driving, conducting etc. P was injured by, D, a conductor’s
negligence and D sought to rely on the term. CA ruled that the Road Traffic Act rendered
such clauses illegal AND that the clause was to vague to stay the action.

Beswick v Beswick [1968] AC 58: see week 3

Snelling v Snelling [1973] QB 87: P and Ds were directors of a company and were all
owed a lot of money by the company. They signed a contract saying that if one of the
directors resigned, they would forfeit the money owed to them by the company. P then
sued for the money owed to him by the company. Court sad that although normally an
agreement not to sue a 3rd party was unenforceable, it could be enforced (i.e declaration
was given that P had forfeited money owed to him) where the promisee had a sufficient
interest in TP not being sued. In this case the other directors were also owed money and
therefore they had a sufficient interest to enforce the agreement. Van der lahn’s correct
interpretation is that a stay on an agreement not to sue is unenforceable unless it is
precise. However the company itself could not itself stay the action since it cannot
enforce someone else’s agreement.

Jackson v Horizon Holidays [1975] 1 WLR 1468: P contracted D for a family holiday
which went wrong for all members of the family and p was entitled to damages. It was
accepted that only P could sue (he paid and contracted the whole holiday for his own and
his family’s benefit, NOT as an agent for the family) but it was disputed whether he
could claim damages for all the family or only for himself. CA upheld the damages
awarded, but Denning LJ did it on the basis that it was to compensate for damages to the
whole family, whereas James LJ said it was solely to compensate for damages to P. Orr
LJ said “I agree” but it wasn’t clear with whom he agreed (McKendrick). Hence this isn’t
an authority for the proposition that a principal can sue for the loss suffered by TP
beneficiary from the contract.

Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR

277: P sold land to D and payment was partly to be made to P + a sum was to be paid to
X. HL in fact found that there had been no breach of contract but speculated as to
whether P could claim for the money pledged to X:

Lord Wilberforce/Salmon/Russell: Lord Denning was wrong in Jackson, though P might

have been able to recover for the family if he had been proven to be their agent/trustee.

Lord Keith: Lord Denning’s reliance for his claim on a case to do with agency is
obviously flawed. However there might be cases where the contracting party will have to
benefit TP in another way if the contract is unfulfilled and in that case it may be proper to
take into account the money not paid to TP which was pledged under contract. This does
NOT apply merely where TP indirectly derives a benefit from the contract.

Lord Scarman: the courts should treat a clause to pay TP as prima facie evidence that P
will benefit from D’s payment to TP (i.e, that non-payment will cause P loss) which is
written into the contract.

Linden Gardens BC v Wiltshier Northern Ltd [1994] 1 AC 85: X contracted with D for D
to remove asbestos in its buildings, and it did the job badly i.e there was remaining
asbestos even after performance. IN X and D’s contract, X undertook not to assign its
rights on the properties to another party. In fact X assigned its interests and rights to the
properties concerned to P, who then sued D for breach of contract in failing to remove all
the asbestos. Issue was whether the assignment in breach of contract was valid and hence
whether P was a party to the contract and could sue. HL held that for legal and policy
reasons, the contractual prohibition on assignment was valid, therefore the assignment
was invalid, and therefore P had no ability to claim damages from D. However in the
second case, where P had contracted D to remove the asbestos, which it had failed to do,
P also tried to assign its rights. The assignment was held ineffective, but P was still
entitled to substantial damages on behalf of the loss suffered by the 3rd parties who now
occupied the buildings.

Lord Browne-Wilkinson: There is a policy argument for allowing such clauses to be

effective: some people might prefer only to deal with a particular party and might want to
avoid a relationship with a party that they find unreasonable to work with etc. On P’s
claim for TP’s damages in the second case, he said that the Dunlop principle no longer
applied to cases of goods conferred under a “bill of lading” and it is to be extended here
to construction contracts since, when the non-assignment clauses apply, there would be
no other remedy (why is this not true of all types of contracts?).

Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68: X contracted D to build stuff
for local council P. X assigned rights to P and P later sued D for damages for bad
performance. CA held that (1) since the parties knew that the contract was for P’s benefit
and (2) it was foreseeable that damage caused by a breach of the contracts would cause
loss to the council, P could claim as though it was the employer and principal to the
contract from the outset. In this case there could have been, but was no need for, an
application of the Linden exception, there being contractual clause that allowed
assignment to the council.

Lord Griffiths: having a proprietary interest in a project is NOT a requirement for

claiming damages from its failure to be performed. E.g. if the wife owns the house and
the husband contracts to have the roof repaired, he should not be barred from claiming
damages on the grounds that it isn’t his house. He also said it is no objection to say that
another party is paying the repairs so that P doesn’t suffer loss, since it is not for the
guilty party to consider who will pay.

Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518: P constructed a

building for X (a company within the same business group as P) on X’s land, and
employed D as a subcontractor. In breach of their contract, D built a disastrous structure
that required large amounts of money to be paid in repairs. D had also entered a separate
“duty of care” contract with X in case D’s work should be defective. However for
procedural reasons, it was P that sued D to recover the cost of repairs. HL denied P’s
claim: The majority approach (Clyde, Jauncey and Browne-Wilkinson) on the grounds
that (1) P had suffered no loss itself and had no intention/had incurred no costs in
repairing the building, and (2) could not apply the Albazero/Linden Gardens exception
because X (TP) had its own “direct contractual right” and therefore there was “no legal
black hole”. The minority approach (dissenting) (Goff and Millett) said that (1) the
Albazero exception did not apply in cases of no transfer of ownership being contemplated
by the parties (as here), but that (2) although P had suffered no loss personally, he still
had an interest in performance, prima facie evidence of which is that he contracted D to
build the thing.

Lord Clyde: He challenges Lord Griffith’s “broad view” in Darlington that failure to
obtain the deal is itself a loss and no evidence of further damage is necessary. He dislikes
it because (1) it is a contradiction to say that the loss is the disappointment at the non-
performance and yet the damages to be awarded is the cost of repair, since to award such
damages would be to say that the value disappointment necessarily = the value of repair.
Furthermore, if this were true, then P would at least intend to do the repairs upon the
award being made since repair would cure the “disappointment” loss. A better way of
valuing disappointment would be the difference in value between what was delivered and
what was promised. (2) the disappointment value may be less than the economic
consequence of breach. (3) There is no compulsion for P to account to the person who
has suffered the actual loss e.g. give them the damage money (True, but deterrence is a
consideration, + the “disappointment” factor IS actual loss). (4) There is no difference
between loss of expectation and breach of contract i.e. Lord Griffiths’ “broad view”
would mean that all breaches of contract lead to substantial compensation. He would
prefer to take an attitude that a party should be able to recover provided it has to account
and pass over the money to TP who actually suffered the loss, while the fact that P didn’t
suffer the loss shouldn’t be a ground for escaping liability. However “each case has to be
judged on its own circumstances” and because there was an alternative method of
claiming (the “duty of care” document with UIPA) the claim by P should be dismissed.

Lord BW: Doesn’t actually say whether the “broader ground” is valid. He says on a
“narrower” ground the appeal failed since the party with the proprietary interest here
CAN bring an action, but even on Lord Griffith’s broader ground the claim fails. He says
that the objection to allowing a party who hasn’t suffered loss to claim damages is that,
since D can’t be made liable twice, it would prevent the party that actually has suffered
loss from claiming! (this doesn’t go against the broad ground per se since all that doctrine
recognises is that it is possible for those without proprietary interests to suffer loss as in
Lord Griffith’s example of the husband and wife).

Lord Jauncey: Lord Griffith’s example was only meant to apply to cases where P
intended to repair the damage- not in cases here where P had no such intention.

Lord Goff (dissenting): The “broader ground” argument is valid- see husband-wife
scenario. Because P is suing on the grounds of his own interest, not in the interest of TP,
the fact that another party has a different remedy for a different liability is irrelevant.
(Firstly, as Clyde said, “expectation interest”, to which Goff is referring is in reality no
different to breach itself and secondly, the breach of duty document that UIPA have
covers the same project and it is unfair to D to make it liable twice for one breach of
contract.)

Lord Millett: The broader ground would be useful for commerce. Radford (see week 3)
established that a “performance interest/expectation interest” existed which could be sued
on despite no apparent loss. It was held by Oliver J that the agreement spoke for itself in
terms of showing that there was loss caused to P by not having the agreement enforced
(else why would P be suing).

McKendrick says that Lord Millett and Lord Goff are right in saying that “expectation
interest” is a valid and compensable interest: if A orders a kitchen to be fitted but the
wrong one, of equal value, is fitted, it would seem unfair to grant no remedy + it would
contradict Parke B’s dictum (see week 3 reading). He says that Ruxley is susceptible of
various interpretations and, due to the uncertain position of Lord BW there is no clarity
as to what the state of the law actually is regarding the proposition that P can claim
despite having suffered no physical or financial loss (merely a loss of expectations). In
this type of scenario principle must decide.
iii) Exceptions to the Privity Doctrine

(a) Agency

It would cause great commercial hardship if a businessman who appointed an agent to

enter into a contract on his behalf was prevented by the doctrine of privity from suing
upon that contract himself….so the doctrine of agency exists to give businessmen such
rights of action

(b) Assignment
Law of Property Act 1925, s 136(1): A person can in writing assign in absoluteness to
another his legal rights to a thing, legal remedies and provide discharge, provided that the
debtor, trustee etc has been given notice in writing

If A & B enter into a contract under which, in return for some act to be performed by B,
A agrees to pay £50 to C, C was, prior to the 1999 Act, prevented by the doctrine of
privity from suing to enforce the right to payment. However, irrespective of the Act, if B
validly assigns to C his contractual rights against A, then C may sue A for the money.

The principal disadvantage of assignment from the perspective of the assignee is that any
defence which would have succeeded against the assignor will also succeed against the
assignee; the assignee takes ‘subject to equities’. See Darlington v Wiltshier [1995]

(c) Trust of the Promise

Lloyds v Harper (1880) 16 Ch D 290:

Les Affreteurs Societe Anonyme v Leopold Walford (London) Ltd [1919] AC 801: R
brokered a deal whereby A chartered a ship from C and R was to receive 3 per cent of the
amount paid. R was trying to claim from the C (owners of the boat) their commission and
the A joined R as plaintiffs. It was held by HL that a charterer can contract on behalf of
the brokerer. Hence the charterer can sue as the trustee of the brokerer. This is for
commercial convenience.

Re Schebsman [1944] Ch 83: S agreed to terminate his contract in return for 6 payments
to be made to himself and, on his death, to his widow and daughter. However when S was
declared bankrupt and died, the official made the trustee of his estate tried to claim the
money owed to the wife and daughter as part of S’s estate to pay back S’s creditors and to
do so, attempted to claim that it was a trust fund (which would have entitled S/S’ estate to
intercept money otherwise directly payable to the wife and daughter). The court denied
this claim since to find the creation of a “trust” (for which there was no evidence) would
be to allow a simple circumventing of the privity of contract rule.

(d) Statutory exceptions

Married Women's Property Act 1882, s11: A person can create a “policy of assurance”
for their spouse or children so that money subject to the trust is payable directly to the
spouse/children and is not subject to the debts of the person creating the policy.

Marine Insurance Act 1906, s 14(2): “A mortgagee, consignee, or other person having an
interest in the subject-matter insured may insure on behalf and for the benefit of other
persons interested as well as for his own benefit.” (NB only relates to marine insurance).

Road Traffic Act 1988, s 148(7): “a person issuing a policy of insurance under section
145 of this Act shall be liable to indemnify the persons or classes of persons specified in
the policy in respect of any liability which the policy purports to cover in the case of
those persons or classes of persons.” (NB only relates to car insurance)

Law of Property Act 1925, s 56: “A person may take an immediate or other interest in
land or other property, or the benefit of any condition, right of entry, covenant or
agreement over or respecting land or other property, although he may not be named as a
party to the conveyance or other instrument.”

Carriage of Goods by Sea Act 1992, ss1 and 2: The lawful holder of a bill of lading;
the person who (without being an original party to the contract of carriage) is the person
to whom delivery of the goods to which a sea waybill relates is to be made by the carrier
in accordance with that contract; or the person to whom delivery of the goods to which a
ship's delivery order relates is to be made in accordance with the undertaking contained in
the order, shall have rights of suit under the contract despite not originally being a party
to it.

(e) Covenants concerning land

(f) Overlap with Tort of Negligence

Junior Books v Veitchi [1983] 1 AC 520: J employed MC to build a factory, who
subcontracted the floor to V. When V laid the floor defectively, J sued V directly in tort
(NOT for breach of contract). HL allowed the claim since there was sufficient proximity
between the parties to establish a duty of care. Lord Roskill said the relationship could be
considered as being proximate since it was as close as it was possible to be, short of there
being privity of contract. HL didn’t address the point that this case undermines the
privity of contract.

White v Jones [1995] 2 AC 207: X wrote to his solicitors (D) asking them to change his
will so as to give £9,000 to each of his daughters but, due to the solicitors’ inefficiency,
they failed to do this before, a few months later, X died. The daughters (P) sued D in tort.
HL allowed their claim, accepting that it contradicted the privity rule but said that this
claim had to be allowed in the interests of justice and avoiding a “legal black hole” of
rights.

Henderson v Merrett [1994] 3 All ER 506: Ps entered a syndicate whereby Ds would

manage their funds. Some contracted directly with fund managers, while others had a
contract to join the syndicate and their relationship with a fund manager was through the
medium of a sub-agency agreement. HL held that the more “indirect” plaintiff could still
claim for tort damages as the relationship was proximate enough.

Ross v Caunters [1980] Ch. 297: D were solicitors to X and when X made his will, D
forgot to mention to him that the spouses of beneficiaries must not be present. P’s spouse
was present and therefore P was unable to get what X had promised her in the will. CA
allowed P’s claim against D for negligence for the value of the thing being claimed. It
said that lack of privity of contract was no bar to claim provided there was proximity
between P and D, as here.

(h) Enforcement by Third Parties of Exclusion Clauses

Scruttons v Midland Silicones – see above

Gore v Van der Lahn [1967] 2 QB 31: see above

Snelling v Snelling [1973] QB 87: see above

New Zealand Shipping Co Ltd v Satterthwaite, The Eurymedon [1975] AC 154: X, a

carrier, was exempted from liability by law for goods that it transported. It entered into a
contract with P (whose objects it was transporting) where it stated that any actions
brought against itself or its agents were subject to a one year limitation within which the
action could be brought. D, an agent company used by X to unload the ship damaged an
object but were sued after a year by P. The question was whether X had the authority to
contract for a third party. HL found that D could take advantage of the contract.

Lord Wilberforce: there are 4 conditions for an agency contract to work: 1. The contract
makes it clear that the company working for X is to be protected by the limitations
provisions. 2. The contract makes it clear that X is contracting on behalf of the other
company (i.e. the company working on X’s instructions). 3. X has authority from the
other company to act as agent, or perhaps later ratification by the company would suffice.
4. Any difficulties about consideration moving from the company are overcome. In this
case all conditions were satisfied. In this commercial context the financial interests and
dealings of all 3 parties show that there must have been consideration between P and D,
however the fact that D was only directly dealing with P and not D (i.e. that it had a pre-
existing duty to D to do the work) showed how problematic the “offer and acceptance”
approach could be, but did not prevent D from claiming the protection of the clauses.
This should be regarded as a unilateral contract whereby P has offered protection from
prosecution to X and all the groups it uses to carry out the carriage, including D.

The New York Star [1981] 1 WLR 138: P contracted X to convey packages to the
destination. D, stevedores contracted by X to unload the ship, negligently allowed the
packages to be stolen in the course of the unloading. There was a clause in the contract
that conferred the same protection that X had (claims to be brought within 1 year) on D
and Privy Council held that this “Himalaya” clause was effective despite D not being a
party to the original contract.

Lord Wilberforce: in the normal course of things stevedores can rely on these clauses for
ease of business + precedent of The Eurymadon (above). This can apply in tort as well as
contract provided the exemption clauses relate to both contractual and tortious liability.
Had to be interpreted in the light of industry practice- What about where a party is
unaware of industry practice/chooses not to use it?

Norwich CC v Harvey [1989] 1 All ER 1180: N contracted with X for X to extend a

swimming pool, including a clause that the risk of fire was purely N’s risk. X
subcontracted to H whose negligence caused a fire and damage. N tried to bring a tortious
claim against H. CA rejected the claim since there was no duty of care: there was no
proximity (WHAT? Surely if you are working on someone’s house you should have the
owners in contemplation) and it wouldn’t be fair just and reasonable to impose a duty in
this scenario. The mere absence of privity of contract did not make it fair, just etc to
impose a duty. In fact the exemption clauses of the main contract could be relied on by
them because P had accepted the risk of fire lay with them, regardless of whether or not
negligence had caused it.

London Drugs Ltd v Kuehne & Nagel International (1993) 97 DLR (4th) 261, 1992
Carswell BC 315 (NB CANADIAN case): D was storing a transformer owned by P
valued at $32,000. The agreement between the parties included a limitation of liability
clause which limited liability for damage to the transformer to $40. Two employees were
moving the transformer with a forklift and negligently dropped it. London Drugs sued the
two employees on the basis that they owed a separate duty of care and could not seek
protection under the contract. Supreme court held that the employers, despite not being
mentioned themselves in the contract, were exempted. Exemption clauses could be relied
on by employees of a company where “(1) the limitation of liability clause must, either
expressly or impliedly, extend its benefit to the employee(s) seeking to rely on it; and (2)
the employee(s) seeking the benefit of the limitation of liability clause must have been
acting in the course of their employment and must have been performing the very
services provided for in the contract between their employer and the plaintiff when the
loss occurred.”

The Mahkutai [1996] 3 WLR 1: A chartered its ship to B who sub-charetered it to C. In A

& B’s contract was a clause that extended limitation/exemption clauses to all agents, sub-
contractors etc of B. There was also clause 19 which stated that the contract was
exclusively to be governed in Indonesian jurisdiction. It was found that there was a leak
in the boat damaging the cargo, and the cargo owners made a claim for damages against
the ship owners. The ship owners (as sub-contracters: they were being given an additional
benefit) sought to use the “exclusive jurisdiction” clause to stay the proceedings started in
Hong Kong. Privy Council held that they were not entitled to stay the proceedings since
the “exclusive jurisdiction clause” was NOT within the meaning of Himalaya clauses that
benefited TPs: in fact it created “mutual rights and obligations”.

Lord Goff: the attitude to TP claimants has swung back and forth: initially they were
allowed to claim through “vicarious” rights to sue, while later courts were reluctant to
allow TP claimants. Recently TPs have started to be allowed to obtain benefits from the
main contracts through exemption clauses that explicitly give them rights for which
consideration (TP’s performance) and ratification (inferred from their conduct) is later
given i.e. that they become parties to the contract and do NOT simply draw vicarious
rights.

The Starsin [2003] 2 WLR 711, paras 93, 149–153, 196–197: A cargo owner sued both
the charterer and the owner of a boat whose poor condition led to damage of cargo. HL
held that in fact the contracts were between the cargo owners and the charterers, NOT the
ship owners, who could not therefore be liable. However the cargo owners would be able
to ship owners in tort.

Lord Hoffman: a Himalaya clause protects third parties via a main contract where the
party who introduces the clause on TP’s behalf does so either with TP’s permission (i.e.
as agent) or the clause is ratified later on by TP’s acting upon it. It is in the act of
rendering the service that TP’s contract with the contractor is formed since, until that
stage, there is no consideration for the exemption from liability that the contractor is
giving TP.

Lord Millett: A Himalaya clause has the effect of bringing into being a separate or
collateral contract between the cargo owner and a third party, usually an independent
contractor such as a stevedore, under which the third party enjoys exemption from
liability to the cargo owner. They also establish that the contract is a unilateral or 'if'
contract by which the third party undertakes no obligation to the cargo owner of any kind,
but the cargo owner promises that if the third party does anything in the course of its
employment which damages the cargo it will have the benefit of the protective provisions
of the clause”.

(iii)Negotiable instruments

A negotiable instrument is a type of written promise under which the right to enforce that
promise may be transferred either by delivery or by delivery and endorsement of the
person to whom the debt was payable – the principal categories are bills of exchange,
cheques and promissory notes.
(eg. a cheque is a written order by a person to his bank to pay on demand a stated sum of money to a
named person – now that person can transfer the cheque to another party and that third party can demand
payment from the bank, even though he was not privy to any contract with the bank and has not himself
furnished the bank with any consideration.)

iv) Contracts (Rights of Third Parties) Act 1999

Law Commission Report No 242:

 Privity rule defeats intention of the contracting parties by limiting what
rights they can confer on third parties.
 The rule is unjust to third parties since it defeats their expectation interest
and reliance interest
 It creates commercial difficulty (e.g. where parties try to exempt a
subcontractor from liability or where A takes out insurance for B from C,
or where A employs B to do work for C).
 It creates a “black hole” for rights and liabilities since a promisee cannot
sue where the rights conferred on 3rd party haven’t been breached, having
suffered no loss personally, while 3rd party is barred from suing.
 The exceptions to the privity rule are too complex
 All other advanced legal systems recognise and enforce to some degree
3rd party rights i.e. it cant be that impractical if everyone does it.

Contracts (Rights of Third Parties) Act 1999

 S.1 allows a 3rd party to enforce a contractual term where a contract
expressly provides that he may. Alternatively it allows a TP to enforce a
term which purports to confer a benefit him (though this doesn’t apply if
the parties did not intend to confer a benefit on him). 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. TP cannot enforce a term unless the contract so
provides.
 S.2 If a party to the contract is aware of TP relying on a term which he has
been given a right to enforce, or should reasonably expect that TP has
relied on it and TP in fact has, or where TP has communicated assent of
the term to the party, then the main parties cannot by agreement rescind or
modify the term without TP’s consent. Assent = words or conduct or in
other ways but only when communicated to the main party. However they
can modify/extinguish without TP’s consent where the contract so
provides. No need for consent where TP is AWOL or mental.
 S.3 the Promisor has all the defences that would have been available to
him if the promisee had brought the action instead of TP. This includes
defences given by express terms. S.3 is subject to the express terms of the
contract.
 S.4: s.1 doesn’t affect the promisee’s rights to enforce the contract.
  S.5 where promisee claims against promisor to get money for 3rd party
due to breach of 3rd party rights and then TP brings a claim, the court will
reduce the value of his claim by whatever promisee has already given him.
 S.6: s.1 confers no rights on a third party in the case of a contract on a bill
of exchange, promissory note or other negotiable instrument or contract
made binding under the Companies Act. Also see various instances of
exceptions to this act e.g. carriage of goods by sea.

Nissin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38 (section 1 point
only): P brokered deals for D and the clause in each of the contracts between D and their
customers which referred to their commission for each clause brokered was worded “A
commission of two per cent. for equal division is payable by the vessel and owners to
Messrs Ifchor S.A. Lausanne and Messrs Cleaves and Company Ltd., London on hire
earned and paid under this Charter”. QBD said that under s.1 of the 1999 act (see above)
the clause did purport to confer on the named parties (P) a right to enforce it. QBD also
said that the position was NO LONGER that established in Leopold Walford: that in
cases of brokering parties, the charter party was held to be the agent of the brokering
party so that the broker relied on the charter party accepting the role as trustee. This is a
“cumbrous fiction”. INSTEAD the 1999 act recognises that in reality the broker is a 3rd
party and can claim nevertheless.

The Starsin [2003] 2 WLR 711, paras 93, 149–153, 196–197- see above

The Laemthong Glory (No. 2) [2005] EWCA Civ 519, [2005] 1 Lloyd’s Rep 688: A
allowed B to charter his boat, who in turn allowed C to charter it. C wrote B a letter of
indemnity, offering to indemnify B, B’s agents and servants etc all bail, securities etc
should the boat be arrested. A tried to sue C to gain the costs of bailing the boat after it
had been arrested. CA held that the owners were the agents of the charter parties and
could therefore claim under s.1 (1) B of the 1999 act. S.1(2) doesn’t apply since there is
no evidence that the parties did not intend A to be able to sue and the fact that both
parties envisaged that it would be the owners who actually delivered the cargo shows C
must have known that it was A who would take advantage of the letter of indemnity.

2. The Imposition of Burdens on Third Parties

i) Agency

ii) Restrictive Covenants Concerning Land

iii) Statutory Exceptions

iv) Bailment
Morris v Martin [1965] 2 All ER 725: P (bailor) contracted X (bailee) to clean her mink
coat. X sub contracted the work, with P’s consent, to D (sub bailee) who, by carelessness,
let the coat be stolen. There were exemption clauses in the contract between X and D but
not between P and X. CA held that on the facts of this case the exemption clauses offered
no defence (they did not cover this type of good), but as a general rule, where P consents
to sub bailment, they are impliedly consenting to the bailee making a contract under the
“usual terms of the trade” and P will be bound by them. Thus if the exemption clauses
had covered this type of scenario, D could have relied on them against P (per lord
Denning).

The Pioneer Container [1994] 2 All ER 250: Ps contracted the bailee to convey their
goods and allowed them to sub-bail under any terms. The bailee sub-bailed to D with an
exclusive jurisdiction to Taiwan. When D’s ship sunk, P wanted to sue them in Hong
Kong. Privy Council ruled that the action in HK would be stayed since P was bound by
the terms of the sub-bailment. General propositions: A sub-bailee owes the same duty to
take care as does a bailee for reward and when sub-bailee is in breach of this, the bailor
can pursue him directly. However, where sub-bailment agreement is agreed to by bailor,
the terms of it can be invoked by the sub-bailee and bailor is bound by them.

v) Burden Running with Goods/Tortious Interference with Contract

The Strathcona [1926] AC 108: S bought a ship, aware that a charter had been agreed to
by the previous owner and he accepted it when buying a ship. However, after purchase,
he tried to deny the charter-party’s contract to use the ship. HL said that since there had
been full disclosure of the agreement, S was really a constructive trustee for the charter-
party with obligations that “a court of equity will not allow him to violate”. This was on
the basis of Knight LJ in an earlier case: “Reason and justice seem to prescribe that, at
least as a general rule, where a man, by gift or purchase, acquires property from another,
with knowledge of a previous contract, lawfully and for valuable consideration made by
him with a third person, to use and employ the property for a particular purpose in a
specified manner, the acquirer shall not, to the material damage of the third person, in
opposition to the contract and inconsistently with it, use and employ the property in a
manner not allowable to the giver or seller.”

Port Line v Ben Line [1958] 2 QB 146: X contracted to give P a charter, before selling
the boat to D. D gave X a charter for the remaining period of P’s entitled use of the boat
(so as to allow X to honour its contract with P) but demanded a clause, which X accepted,
that if the boat was requisitioned then the charter would cease. The boat was
requisitioned, but when returned the charter would still have 7 months on it. P sued for
the remaining months. D didn’t realise that no similar clause was contained in the
agreement between X and P. QBD held that the equity principle of Strathcona was wrong
and that, even if it was right, this case was distinguished since here D was not acting
inequitably: he was unaware of the non-existence of the clause. QBD also said that P
should really be suing X for breach of contract.

Swiss Bank Corp v Lloyds Bank [1979] 3 WLR 201): P lent IFT money to buy
shares in FIBI. It then borrowed money from D, in return for which it gave D
charge over the FIBI shares. Since IFT was unable to repay P, P instead
demanded the FIBI shares as equitable charge. CA held that “an equitable charge .
. . is said to be created when property is expressly or constructively made liable,
or specially appropriated, to the discharge of a debt or some other obligation, and
confers on the chargee a right of realization by judicial process, that is to say, by
the appointment of a receiver or an order for sale.” However, where there is no
intention by the debtor to allow the object to be substituted for payment, as here,
there is no charge. Also there is no requirement that the debt should be paid from
FIBI shares. (Buckley LJ).

This was reversing BW J’s judgment that: injunctions in the interests of equity
will be granted to stop A (new owner) from acting so as to cause B (original
owner) to breach his agreement with C (borrower/hirer/charter party etc) where
(1) A had knowledge of the contract between B and C at the time of purchase, and
(2) it is still possible for B to perform (or the fault will obviously lie with B).
However NB that CA didn’t directly contradict this section.

Law Debenture Corp v Ural Caspian Oil [1994] 3 WLR 122: X procured L to act in
breach of a restrictive covenant that L had agreed with P (not to sell shares without P’s
permission). X then sold shares to D, whom P sued (along with all other parties).
However the court said that since P had sought no injunction against X’s purchase of the
shares from L nor D’s purchase from X and therefore following that, the conduct was not
unlawful. This was despite the tortious liability of X.

Lord Hoffman: “the defendant violates no legal right of the plaintiff if he makes himself
judgment-proof by dissipating his assets before he is enjoined from doing so and he does
not act unlawfully in failing to give disclosure before he is ordered to do so.”

Articles and Casenotes

C MacMillan, “A Birthday Present for Lord Denning: The Contracts (Rights of Third
Parties) Act 1999” (2000) 63 MLR 721:
 Had the act been in place, in Beswick v Beswick P could have sued as
wife and not administraix, while in Morris v Martins, there would have
been no need to resort to bailment. However, Scrutton v Midland
Siliciones would not necessarily have been decided any differently since
there was no clause purporting to give protection to the stevedores.
 Reasonable TP expectations + giving effect to contractors’ intentions are
the 2 primary reasons for reform.
 There are problems in the application of 1(1)b and 1(2) in that it creates a
rebuttable presumption in favour of TP, which is bad for the main parties
if they didn’t in fact intend to give TP rights. However it is also not an
effective method for TP to gain contractual rights since, unlike an express
granting of rights, each clause individually has to satisfy the test to grant
enforceable rights. Finally, the term “purport” is vague and subject to
interpretation i.e. legal uncertainty.
  Uncertainty: LC said that White v Jones did not fall within the act on the
grounds that the contract with the solicitor was a contract that would have
a benefit for the TPs, but was not a contract to benefit them directly. This
distinction is no tenable in most cases (nor indeed in this case, where there
is an obvious direct benefit to the daughters: rights to £9k each.
 Another problem of uncertainty lies in the strength of the presumption: LC
says that Junior is outside because in the construction industry the
presumption is strong that you are not entitled to claim on the contract to
which you are not a direct party. However MacMillan says this creates
problems for those who do not share the assumptions of the industry +
problems of defining “industry assumptions” in the future.
 “answering a particular description” is problematic regarding the identity
of the 3rd party e.g. does a description of the employer necessarily include
employees, agents etc.
 There is a trade-off between giving effect to intentions and protecting 3rd
party expectations. LC concedes that it is open to main parties to have a
clause stating that no TP consent is needed to change or end the contract
i.e. intentions take precedence over expectations. MacMillan claims that
this will put TP in a worse situation than before since their expectations
can be suddenly ended. Too far: if the contract states that their consent is
not needed then they wont rely or base future expectations on the contract:
it merely gives them temporary rights that they would otherwise not have
had.
 “It is a sound piece of legislation that will solve many problems in
Contract Law”.
 The main parties can escape the act through explicitly stating that TP is to
have no rights so that it is not a restrictive act: it merely deals with what
happens in the cases of uncertainty (which accounts for some of the
inevitable uncertainty in the act)

N Andrews, "Strangers to Justice No Longer: The Reversal of the Privity Rule Under the
Contracts (Rights of Third Parties) Act 1999" [2001] CLJ 353:

 Due to the act Scruttons can be bypassed.

 There was a need for legislation because the privity rules before were v
complex and often produced unfairness: Lord Diplock described it as “an
anachronistic shortcoming that has for many years been regarded as a
reproach to English law”
 White v Jones: LC’s attitude is that here Ps were “incidental beneficiaries”
and NOT “TP beneficiaries”
 NB TP’s rights cease if the contract is terminated by operation of law (as
distinct from “by agreement” so that TP’s rights are not completely
secured e.g. if promisee is in breach and promisor terminates.
  If B gratuitously releases A from the contract, is this by agreement or
unilateral? The act does not prevent unilateral releases so TP’s rights
could be lost in this way.
 Overall conclusion that the act simplifies and improves the law, despite
the problems.

B Coote, “Consideration and the Joint Promisee” [1978] CLJ 301

R Flannigan, “Privity – The End of an Era (Error)” (1987) 103 LQR 564
J Adams, A Beyleveld and R Brownsword, “Privity of Contracts – The Benefits and
Burdens of Law Reform” (1997) 60 MLR 238
S Smith, “Contracts for the Benefit of Third Parties: in Defence of the Third Party Rule”
(1997) 17 OJLS 643
B Coote, “The Performance Interest, Panatown and the Problem of Loss” (2001) 117
LQR 81
A Burrows, "No Damages for a Third Party's Loss" (2001) Ox Univ Commonwealth LJ
107
A Burrows, “Reforming Privity of Contract: Law Commission Report No 242” [1996]
LMCLQ 467
A Burrows, “Contracts (Rights of Third Parties) Act 1999 and its implications for
Commercial Contracts” [2000] LMCLQ 540