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Cite as: [1996] EWLC 242(2)

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PART II

The Present Law and Calls for Reform

1.The Present Law

(1) A Brief Statement of the Third Party Rule in Contract

2.1 A contract or its performance can affect a third party. (1) However, the doctrine of privity means that, as a general rule, a contract cannot confer rights or impose obligations arising under it on any person except the parties to it. (2) This Report is concerned with the conferral of rights on third parties (including whether a third party should be able to claim the benefit of an exclusion clause contained in a contract to which he is not a party); and, as we have indicated above, (3) references in it to the "third party rule" are to this aspect of the privity doctrine. It was provisionally recommended in the Consultation Paper (4) that the present rule should be retained whereby, subject to a few exceptions, (5) parties to a contract cannot impose an obligation on a third party. There was no dissent from this by consultees. (6) It would be an unwarranted infringement of a third party's liberty if contracting parties were able, as a matter of course, to impose burdens on a third party without his or her consent. Our proposed reforms do not, therefore, seek to change the ?burden' aspect of the privity doctrine or the exceptions to it.

(2) Development of the Third Party Rule

2.2 It is generally agreed that the modern third party rule was conclusively established in 1861 in Tweddle v Atkinson. (7) In Drive Yourself Hire Co (London) Ltd v Strutt, (8) Denning LJ said:

It is often said to be a fundamental principle of our law that only a person who is a party to a contract can sue on it. I wish to assert, as distinctly as I can, that the common law in its original setting knew no such principle. Indeed, it said quite the contrary. For the 200 years before 1861 it was settled law that, if a promise in a simple contract was made expressly for the benefit of a third person in such circumstances that it was intended to be enforceable by him, then the common law would enforce the promise at his instance, although he was not a party to the contract. (9)

2.3 Denning LJ cited several cases to support his view. In Dutton v Poole, (10) a son promised his father that, in return for his father not selling a wood, he would pay £1000 to his sister. The father refrained from selling the wood, but the son did not pay. It was held that the sister could sue, on the ground that the consideration and promise to the father may well have extended to her on account of the tie of blood between them. (11) In Marchington v Vernon, (12) Buller J said that, independently of the rules prevailing in mercantile transactions, (13) if one person makes a promise to another for the benefit of a third, the third may maintain an action upon it. In Carnegie v Waugh, (14) the tutors and curators of an infant, C, executed an agreement for a lease with A, for an annual rent to be paid to C. It was held that C could sue on the instrument, even though he was not a party to it. In addition, there is a respectable line of 16th and 17th century authority allowing an intended beneficiary a right of action. (15) These cases often involved similar facts. The fathers of a potential bride and groom would agree to pay a sum of money to the groom if he married, the bride's father subsequently reneging on the agreement. In several of these cases it was held that, not only could the groom sue to recover the amount promised, but that his father, the promisee, could not sue because he had no interest in performance. (16)

2.4 In spite of these cases favouring actions by third party beneficiaries, it is not accurate to say that the third party rule was entirely a 19th century innovation. There were other 16th and 17th century cases where a third party was denied an action on the grounds that the promisee was the only person entitled to bring the action. (17) There were also cases where the reason given why the third party could not sue was because he was a stranger to the consideration, that is, he had given nothing in return for the promise. (18) These cases typically involved the following facts. B owed money to C. A would agree with B to pay C in return for B doing something for A, such as working or conveying a house. A would not pay, and C would sue A. C would lose because he or she had given nothing for A's promise.

2.5 Thus, by the mid-19th century there appeared to be no firm rule either way in English law. The position was to be clarified in Tweddle v Atkinson. (19) The facts involved an agreement by the fathers of a bride and groom to pay the groom a sum of money. When the bride's father failed to pay, the groom sued unsuccessfully. Wightman J said that no stranger to the consideration could take advantage of a contract though made for his benefit. Crompton J said that consideration must move from the promisee. (20)

2.6 The authority of Tweddle v Atkinson was soon generally acknowledged. In Gandy v Gandy, (21) Bowen LJ said that, in spite of earlier cases to the contrary, Tweddle v Atkinson had laid down "the true common law doctrine". In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, (22) the House of Lords accepted that it was a fundamental principle of English law that only a party to a contract who had provided consideration could sue on it. Despite several attempts by Denning LJ to allow rights of suit by third party beneficiaries, (23) the House of Lords reaffirmed the general rule in Midland Silicones Ltd v Scruttons Ltd. (24) Viscount Simonds said:

[H]eterodoxy, or, as some might say, heresy, is not the more attractive because it is dignified by the name of reform. ...If the principle of jus quaesitum tertio is to be introduced into our law, it must be done by Parliament after a due consideration of its merits and demerits. (25)

2.7 Although the House of Lords has subsequently strongly criticised the rule, (26) it has refrained from any judicial abrogation of it. Thus the general rule remains that a third party cannot enforce a contract made for its benefit.

(3) Existing Exceptions to, or Circumventions of, the Third Party Rule (27)

(a) Trusts of the Promise (28)

2.8 A chose in action may be the subject matter of a trust. Hence a promise by A to B to pay a sum of money to C may be construed as constituting B a trustee of the promise by A for the benefit of C. If so, C (as beneficiary of the trust) can sue to enforce the promise. Thus equity allows a third party to enforce a contract where this can be construed as creating a completely constituted trust in his or her favour. The third party is not then relying merely on a contract made by others. However, the cases demonstrate that the notion of a trust of the promise is confined within narrow limits. It has only been applied to promises to pay money or to transfer property, and attempts to apply it to other forms of contractual obligation have failed. (29) Most importantly, it must be established that the promisee intended to create a trust. The courts were once prepared to infer this from the simple intention to benefit a third party, (30) an approach which reached its high water mark in Les Affréteurs Réunis SA v Leopold Walford (London) Ltd. (31) But in the majority of cases since then they have refused to draw that inference and have instead required a clear indication that a trust was intended. (32) The consequence has been that in recent times this exception has rarely been of assistance to a third party.

2.9 We think it most unlikely that the reasoning of a majority of the Court of Appeal in Darlington Borough Council v Wiltshier (Northern) Ltd (33) will herald a swing back to the old approach to trusts of a promise. In that case, A (Wiltshier) entered into a contract with B (Morgan Grenfell) for the benefit of C (Darlington); and B had entered into a contract with C to assign the benefit of its contract with A to C. The majority considered that, by analogy to early trust cases like Lloyd's v Harper, (34) B was a "constructive trustee" of the benefit of its rights against A for C. Hence B could have recovered from A substantial damages as representing C's loss; and, on assignment by B to C, C was entitled to the substantial damages that B would itself have been entitled to. It should be emphasised that this was an alternative ground for the decision. As we explain below, the principal reasoning of the Court of Appeal was based on an application of the rule in Dunlop v Lambert. (35)

(b) Covenants Concerning Land

2.10 The law allows certain covenants (whether positive or restrictive) to run with land so as to benefit (or burden) people other than the original contracting parties. The relevant covenant may relate to freehold land or leasehold land. The law relating to the running of covenants is an illustration of where, for commercial and ethical reasons, the privity of contract doctrine has been departed from through the development of a separate body of "non-contractual" principles (here the principles being categorised as belonging to the law of real property).

2.11 The law on covenants relating to leasehold land has recently been reformed by the Landlord and Tenant (Covenants) Act 1995. (36) The effect of the 1995 Act can be briefly explained in the following four points:-

(i) The benefit and burden of covenants in a lease granted prior to 1996 would pass on an assignment of the lease or reversion so as to benefit or bind the assignee of the lease or the reversion, provided that the covenant "touched and concerned" the land. (37) As a result of the Landlord and Tenant (Covenants) Act 1995, in relation to leases granted after 1995, the benefit and burden of all covenants in a lease passes on an assignment of the lease or reversion unless the covenant is expressed to be personal. (38) It is now for the parties to decide whether a covenant is to be regarded as personal. It is no longer for the court to try to decide it objectively according to whether it is thought to "touch and concern" the land.

(ii)Where, prior to 1996, L granted a lease to T and T then sublet to S, the burden of the covenants in the headlease did not bind S, the sublessee, because there was no privity of estate (39) between L and S. This was subject to an exception. If the covenant was a restrictive covenant, it would bind S as an equitable property right, provided that, where the title was unregistered, he had notice of the covenant (as he would in practice) (40) or, where the title was registered, in any event. (41) In leases granted after 1995, this rule is codified. A restrictive covenant in the headlease binds any sublessee automatically. (42)

(iii)Where, prior to 1996, L granted a lease to T and T then sublet to S, S could enforce the benefit of any landlord covenants which touched and concerned the land against L, despite the absence of privity of contract. This is because the benefit of such covenants was annexed under section 78 of the Law of Property Act 1925 and could be enforced by a person with a derivative interest. (43) In a lease granted after 1995, this is no longer possible. (44) S cannot enforce any covenant in the headlease against L.

(iv)For leases granted prior to 1996, the original tenant and landlord remained liable for a breach of covenant in the lease despite assignment. For leases granted after 1995 the original tenant (45) will generally be released from covenants in the lease once the lease has been assigned. (46) This aspect of the reforms is concerned to cut back a normal feature of privity of contract rather than being concerned with the exception to privity of contract constituted by covenants running with land.

2.12 As regards covenants relating to freehold land (which are unaffected by the 1995 Act) any such covenants entered into after 1926 which touch and concern the land will in most cases be automatically annexed to the land of the covenantee under section 78 of the Law of Property Act 1925. (47) According to the wording of that section, where the covenant in question is positive it may then be enforced by the covenantee, his successors in title and those who derive title under him or them (such as mortgagees and lessees). Squatters (who are not successors in title) or licensees (who have no title) cannot enforce such an annexed covenant. Where the covenant is restrictive, any owner or occupier for the time being can enforce the annexed covenant even though he or she may be a squatter or licensee. There will be few covenants made after 1926 which are not annexed in this way. (48)

(c) Tort of Negligence

2.13 The tort of negligence can be viewed as an exception to the third party rule where the negligence in question constitutes the breach of a contract to which the plaintiff is not a party. For example, the classic case of negligence, Donoghue v Stevenson, (49) established that where A supplies goods to B under a contract with B, A may owe a duty to C in respect of personal injury or damage to property caused by defects in those goods. But the right not to be injured or to have one's property damaged by another's negligence exists independently of any contractual undertaking by A. It is only in a very wide sense, therefore, that standard examples of the tort of negligence constitute exceptions to the third party rule.

2.14 Of more direct interest are cases of pure economic loss recovery in the tort of negligence where the basis of the third party's claim appears to be the failure by A properly to perform a contract made with B. (50) In other words, cases where the basis of the third party's tort claim appears not to be independent of the rights conferred by the contract. For example, in Ross v Caunters, (51) an improperly executed will deprived a prospective beneficiary of an intended benefit, and the prospective beneficiary was able to recover in tort against the negligent solicitor. It can be argued that the remedy in tort effectively served to enforce a contract benefiting a third party at the suit of the third party. The third party was awarded the expectation loss of the benefits that he would have received under the will. This decision was confirmed by the House of Lords in White v Jones, (52) where solicitors were held to be negligent and liable to a prospective beneficiary for the loss of the intended legacy (an expectation loss), when they failed to draw up a will before the testator died. The decision was based on an extension of the principle of assumption of responsibility in Hedley Byrne and Co Ltd v Heller and Partners Ltd. (53) Lord Goff (54) was of the opinion that in allowing such liability to be imposed, there had been "no unacceptable circumvention of established principles of the law of contract". (55) But, whether acceptable or not, (56) it does seem to us that the decision is best analysed as allowing a third party to enforce a contract by pursuing an action in tort. (57) A further example is Junior Books Ltd v Veitchi Ltd. (58) Here the owners of a factory were allowed to recover expectation loss from a subcontractor, in that they were allowed to recover the cost of either replacing or repairing a negligently constructed factory floor. The owners' claim can again be viewed as being one by a third party beneficiary of a contract (here between the sub-contractor and the head-contractor) to enforce the benefit which was contracted for.

(d) Agency

2.15 Many contracts are made through intermediaries and will be subject to the law of agency. Agency is the relationship which exists between two persons, one of whom (the principal) expressly or impliedly consents that the other should act on his behalf, and the other of whom (the agent) similarly consents so to act or so acts. (59) One consequence of this relationship is that the principal acquires rights (and liabilities) under contracts made by the agent on his behalf with third parties. Although one can normally say, without undue fiction, that the principal is the real party to the contract concluded by his agent, agency can also be viewed as an exception to the privity doctrine in that the principal, albeit a third party to the contract concluded by his agent, is able to sue (and be sued) on it. The doctrine of the undisclosed principal is particularly controversial. (60) If an agent within his authority contracts in his own name and purportedly on his own behalf, the undisclosed principal may in certain circumstances intervene to sue and be sued on the contract. (61) The other party who has no knowledge of the principal's existence may thus find that he has made a contract with a person of whom he has never heard, and with whom he never intended to contract. (62)

(e) Assignment

2.16 Except when personal considerations are at its foundation, (63) the benefit of a contract may be assigned (that is transferred) to a third party. (64) The assignment is effected through a contract between the promisee under the main contract (that is, the assignor) and the third party (that is, the assignee). In addition to assignment by an act of the parties, there exists assignment by operation of law. (65) The assent of the promisor is not necessary for an assignment. Assignment may therefore deprive promisors of their chosen contracting party, although safeguards are imposed to protect promisors. While an equitable assignment is usually fully effective even without notice, (66) notice is desirable and there are circumstances in which failure to give notice may leave the equitable assignee unable to exercise rights enjoyed by the assignor. (67) In addition, an assignee takes "subject to equities", (68) that is, subject to any defences which the promisor has and any defects in the assignor's title. The effect of assignment is that the promisor is faced with an action brought on the contract by a person whom he did not regard as a party and whom he may not have intended to benefit. The practical importance of assignment is considerable; the whole industry of debt collection and credit factoring depends upon it.

2.17 In considering reform of the third party rule, assignment constitutes a particularly significant exception. For if, immediately after a contract for a third party's benefit is made, the promisee assigns his rights under it to that third party, the third party can enforce the contract and the promisee loses all right to enforce, vary or cancel the contract. There is a thin divide between (i) making a contract for the benefit of a third party; and (ii) making a contract for the benefit of a third party and, immediately thereafter, assigning that benefit to the third party (especially where the third party does not provide consideration). If an immediate assignment is valid, there can hardly be fundamental objections to allowing the third party to sue without an assignment. It also follows that in considering the details of reform it is instructive to consider the rules of assignment dealing with, for example, the defences and counterclaims available to the promisor (the principle is that an assignee takes "subject to equities"), and joinder of the original promisee (joinder of the assignor is sometimes necessary). (69)

(f) Collateral Contracts

2.18 A contract between two parties may be accompanied by a collateral contract between one of them and a third party. (70) A collateral contract may in effect allow a third party to enforce the main contract (between A and B). For instance, where C buys goods from B, there may be a collateral contract between C and the manufacturer in the form of a guarantee. Collateral contracts have been used as a means of rendering exclusion clauses enforceable by a third party; (71) and are extensively used in the construction industry as a way of extending to subsequent owners or tenants the benefits of a builder's or architect's or engineer's contractual obligations. (72) Strictly speaking, of course, a collateral contract is not an exception to the third party rule in that the ?third party' is a party to the collateral contract albeit not a party to the main contract.

(g) Techniques Used to Enable Third Parties to Take the Benefit of Exclusion Clauses

2.19 A problematic issue, that has been raised in numerous cases, has been the extent to which third parties to contracts may take the benefit of clauses in those contracts excluding or limiting liability for loss or damage. The tangled case law in this area provides an excellent illustration of the tension between, on the one hand, the formal adherence by the judiciary to the privity doctrine, which would prevent third parties taking the benefit of exclusion clauses, and the judiciary's desire to find ways round the doctrine so as to effect the contracting parties' intentions.

2.20 In the first leading case of the twentieth century, (73) Elder, Dempster & Co Ltd v Paterson, Zochonis & Co Ltd, (74) the question was whether, as a defence to a shipper's action in tort for negligently stowing cargo, shipowners could rely on an exclusion clause in the bills of lading, despite the fact that the contract of carriage was between the shipper and the charterer. The House of Lords held that they could do so, although the reasoning on which the result was based has proved very difficult to understand. (75)

2.21 Perhaps the most significant point (76) is that some of their Lordships seemed to accept a principle of vicarious immunity, according to which a servant or agent who performs a contract is entitled to any immunity from liability which his employer or principal would have had. Hence, although the shipowners may not have been privy to the contract of carriage (between shipper and charterer) they took possession of the goods on behalf of, and as agents for, the charterers and so could claim the same protection as their principals. (77)

2.22 Although the principle of vicarious immunity was subsequently generally accepted by the lower courts, (78) it did not survive the decision of the House of Lords (Lord Denning dissenting) in Midland Silicones Ltd v Scruttons Ltd. (79) The defendant stevedores, engaged by the carrier, negligently damaged a drum containing chemicals. When the cargo-owners sued in tort, the stevedores unsuccessfully attempted to rely on a limitation clause contained in the bill of lading between the carriers and the cargo-owners. The majority of the House of Lords confirmed English law's adherence to the privity of contract doctrine and was not prepared to hold that the principle of vicarious immunity was the ratio of Elder, Dempster. (80)

2.23 However, the possibility of third party stevedores taking advantage of exemption clauses was not entirely ruled out. Lord Reid said that there could exist a contract between the shipper and the stevedore made through the agency of the carrier, provided certain conditions were met: (81) (i) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions therein; (82) (ii) the bill of lading makes it clear that the carrier, in addition to contracting on its own behalf, is also contracting as agent for the stevedore; (iii) the carrier has authority from the stevedore so to act, or perhaps later ratification by the stevedore would suffice; (iv) there is consideration moving from the stevedore.

2.24 Lord Reid's speech encouraged the use of "Himalaya" clauses, (83) which purport to extend the defences of the carrier to servants, agents and independent contractors engaged in the loading and unloading process. In New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon), (84) the Privy Council considered the extent to which such an exclusion clause contained in a bill of lading could be relied on by the third party stevedore, an independent contractor employed by the carrier, who was sued by the consignees of goods for negligently damaging the goods while unloading them.

2.25 The majority of the Privy Council gave effect to the clause by regarding the shipper as having made an offer of a unilateral contract to the stevedores to unload the goods on terms incorporating the exclusion clause. This offer was accepted by the stevedores by commencing work. In the words of Lord Wilberforce, the bill of lading:

... brought into existence a bargain initially unilateral but capable of becoming mutual, between the shipper and the [stevedores], made through the carrier as agent. This became a full contract when the [stevedores] performed services by discharging the goods. The performance of these services for the benefit of the shipper was the consideration for the agreement by the shipper that the [stevedores] should have the benefit of the exemptions and limitations contained in the bill of lading. (85)

2.26 The exclusion clause in question was expressed to be entered into by the carrier as agent for its servants, agents and independent contractors, and therefore "the exemption is designed to cover the whole carriage from loading to discharge, by whomsoever it is performed: the performance attracts the exemption or immunity in favour of whoever the performer turns out to be". (86) Further,

In the opinion of their Lordships, to give the appellant 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. They see no reason to strain the law or the facts in order to defeat these intentions. 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... . (87)

2.27 Nevertheless, the reasoning of Lord Wilberforce in The Eurymedon has been criticised as artificial, (88) primarily because it effectively rewrites the Himalaya clause, which was an agreement between the shipper and the carrier and from which it is difficult to detect an offer of a unilateral contract made by the shipper to the stevedore. (89)

2.28 The Eurymedon was not received with enthusiasm in other jurisdictions, (90) and in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty Ltd (The New York Star), (91) the High Court of Australia sought to restrict its application. (92) Unloaded goods were stolen from the stevedores' possession, and the consignees sued the stevedores in negligence. The stevedores unsuccessfully attempted to rely on a Himalaya clause in the bill of lading. Stephen and Murphy JJ thought that, as a matter of policy, a decision in favour of the consignees would encourage carriers to insist on reasonable diligence on the part of their employees and contractors. Furthermore, a policy of extending protection to stevedores would merely benefit shipowning nations to the detriment of those countries, such as Australia, which relied on these fleets for their import and export trade. The Privy Council unanimously reversed the High Court of Australia. It warned against confining The Eurymedon to its facts, and stated that in the normal course of events involving the employment of stevedores by carriers, accepted principles enabled and required stevedores to enjoy the benefit of contractual provisions in the bill of lading. (93)

2.29 In other contexts the courts have been less attracted by this unilateral contract device though similar results have been achieved by other means. In Southern Water Authority v Carey, (94) engineering subcontractors, who were being sued in the tort of negligence, sought to rely on an exclusion clause in the main contract between the employer and the head-contractors which excluded liability on the part of all subcontractors, agents and independent contractors. Judge David Smout QC, sitting as an Official Referee, doubted that unilateral contract reasoning could be applied beyond the specialised practice of carriers and stevedores and described it as "uncomfortably artificial". (95) In particular, The Eurymedon was held inapplicable because it could not be said that the head-contractors were agents for the subcontractors. Nevertheless, effect was given to the exclusion clause in an alternative way by finding that it negatived the duty of care which would otherwise have existed. (96) A similar result was achieved in Norwich City Council v Harvey, (97) where a building was damaged by fire as a result of the negligence of the sub-contractor. The main contract provided that the building owner was to bear the risk of damage by fire, and the sub-contractor contracted on the same terms and conditions as in the main contract. The owner sued the sub-contractor in tort. The Court of Appeal held that, although there was no direct contractual relationship between the owner and the subcontractor, nevertheless they had both contracted with the main contractor on the basis that the owner had assumed the risk of damage by fire. Hence, the subcontractor owed the owner no duty of care in respect of the damage which occurred. May LJ said:

I do not think that the mere fact that there is no strict privity between the employer and the subcontractor should prevent the latter from relying upon the clear basis upon which all the parties contracted in relation to damage to the employer's building caused by fire, even when due to the negligence of the contractors or subcontractors. (98)

The reasoning in both cases represents a controversial application of the normal principles for ascertaining whether a duty of care in tort exists. This was particularly so in respect of Norwich CC v Harvey, where the finding of a duty of care should have been non-problematic because the harm in question was property damage and not pure economic loss.

2.30 Thus there have been several ways in which third parties have taken the benefit of exemption clauses limiting liability for negligence. These include the now rejected doctrine of vicarious immunity, the unilateral contract device and the idea of a contract limiting the scope of a duty of care in tort. By each of these rather artificial techniques, the courts have striven to achieve commercially workable results, despite the privity doctrine.

2.31 The Supreme Court of Canada has recently gone even further than the English courts in enabling third parties to take the benefit of exclusion clauses by in effect accepting the doctrine of vicarious immunity even where the employee has not been expressly referred to in the exclusion clause. In London Drugs Ltd v Kuehne & Nagel International Ltd, (99) the plaintiff bailors entered into a contract of bailment with a warehouseman. The contract contained a limitation clause as follows:

The warehouseman's liability on any one package is limited to $40 unless the holder has declared in writing a valuation in excess of $40 and paid the additional charge specified to cover warehouse liability.

The bailed goods (an electrical transformer) were damaged through the negligent handling of the warehouseman's employees. In the plaintiffs' claim against the employees in the tort of negligence, the question at issue was whether the employees could rely on the limitation clause in the contract. It should be emphasised that there was no express mention of the employees in that limitation clause.

2.32 A majority of the Supreme Court (100) held that employees could take the benefit of a contractual limitation clause where (i) the limitation of liability clause, expressly or impliedly, extends its benefit to the employees seeking to rely on it; and (ii) the employees seeking the benefit of the limitation of liability clause have been acting in the course of their employment and have been performing the very services provided for in the contract between their employer and the plaintiff customer when the loss occurred. On the facts of the case, the majority held that:

[W]hen all the circumstances of this case are taken into account, including the nature of the relationship between employees and their employer, the identity of interest with respect to contractual obligations, the fact that the appellant knew that employees would be involved in performing the contractual obligations, and the absence of a clear indication in the contract to the contrary, the term ?warehouseman' in s 11(b) of the contract must be interpreted as meaning ?warehousemen'. As such, the respondents are not complete strangers to the limitation of liability clause. Rather, they are unexpressed or implicit third party beneficiaries with respect to this clause. (101)

2.33 Finally, in the very recent case of The Mahkutai (102) the question before the Privy Council was whether shipowners, who were not parties to the bill of lading contract, (which was between the charterers, who were carriers, and the cargo-owners, the bill of lading being a charterers' bill) could enforce against the cargo-owners an exclusive jurisdiction clause contained in that contract. The Privy Council held that they could not because the Himalaya clause in the bill of lading, which extended the benefit of all "exceptions, limitations, provision, conditions and liberties herein benefiting the carrier" to "servants, agents and subcontractors of the carrier" did not include the exclusive jurisdiction clause because an exclusive jurisdiction clause is a mutual agreement and does not benefit only one party. Rather the rights conferred entail correlative obligations. Hence there was no question of the third party taking the benefit of the exclusive jurisdiction clause whether by application of the Eurymedon principle or under what Lord Goff referred to as the principle of "bailment on terms" deriving from Lord Sumner's speech in the Elder Dempster case. (103)

2.34 Of particular importance to this Report, however, was the Privy Council's recognition that, while the Eurymedon principle, or something like it, was commercially necessary, the principle rested on technicalities that would continue to throw up difficulties unless and until it was recognised that, in this area, there should be a fully-fledged exception to the third party rule. Lord Goff said the following:

[T]here can be no doubt of the commercial need of some such principle as this, and not only in cases concerned with stevedores; and the bold step taken by the Privy Council in The Eurymedon, and later developed in The New York Star, has been widely welcomed. But it is legitimate to wonder whether that development is yet complete. Here their Lordships have in mind not only Lord Wilberforce's discouragement of fine distinctions, but also the fact that the law is now approaching the position where, provided that the bill of lading contract clearly provides that (for example) independent contractors such as stevedores are to have the benefit of exceptions and limitations contained in that contract, they will be able to enjoy the protection of those terms as against the cargo owners. This is because (1) the problem of consideration in these cases is regarded as having been solved on the basis that a bilateral agreement between the stevedores and the cargo owners, entered into through the agency of the shipowners may, though itself unsupported by consideration, be rendered enforceable by consideration subsequently furnished by the stevedores in the form of performance of their duties as stevedores for the shipowners; (2) the problem of authority from the stevedores to the shipowners to contract on their behalf can, in the majority of cases, be solved by recourse to the principle of ratification; and (3) consignees of the cargo may be held to be bound on the principle in Brandt v Liverpool Brazil and River Plate Steam Navigation Co Ltd. (104) Though these solutions are now perceived to be generally effective for their purpose, their technical nature is all too apparent; and the time may well come when, in an appropriate case, it will fall to be considered whether the courts should take what may legitimately be perceived to be the final, and perhaps inevitable, step in this development, and recognise in these cases a fully- fledged exception to the doctrine of privity of contract, thus escaping from all the technicalities with which courts are now faced in English law. It is not far from their Lordships' minds that, if the English courts were minded to take that step, they would be following in the footsteps of the Supreme Court of Canada (seeLondon Drugs Ltd v Kuehne & Nagel International Ltd) (105) and, in a different context, the High Court of Australia (see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd). (106) Their Lordships have given consideration to the question whether they should face up to this question in the present appeal. However, they have come to the conclusion that it would not be appropriate for them to do so, first, because they have not heard argument specifically directed towards this fundamental question, and second because, as will become clear in due course, they are satisfied that the appeal must in any event be dismissed. (107)

2.35 While our proposed reform would reach the same result as in The Mahkutai (because, as we shall explain in Part XIV below, exclusive jurisdiction clauses fall outside our proposals), it would bring about at a stroke what Lord Goff regarded as a desirable development in that it would sweep away the technicalities applying to the enforcement by expressly designated third parties of exclusion clauses.

(h) Promisee's Remedies Assisting the Third Party

2.36 Although not strictly an exception to the third party rule - since it is the promisee suing - in certain circumstances the promisee may be able to assist the third party by recovering substantial damages representing its own loss or, more controversially, loss sustained by the third party; or by being granted specific enforcement of the obligation owed to the third party.

(i) Damages

2.37 Subject to a few exceptions (such as The Albazero (108) exception discussed below), the promisee is entitled to damages representing its own loss and not that of the third party. (109) For example, in Forster v Silvermere Golf and Equestrian Centre Ltd, (110) the plaintiff owned property which she and her two children occupied. She transferred the property to the defendant, who undertook to construct a house for the plaintiff and her children who could live there rent-free for life. When the defendant broke this undertaking, the plaintiff recovered damages for her own loss. However, she could not claim damages for the loss of rights of occupation after her death which her children would have enjoyed. In Jackson v Horizon Holidays Ltd (111) Lord Denning MR had reasoned generally that a contracting party could recover the third party's loss but this approach was firmly rejected by the House of Lords in Woodar Investment Development Ltd v Wimpey Construction UK Ltd. (112) A, a buyer of land, had promised B, a seller of land, to pay part of the purchase price to C. Although a majority of the House of Lords (Lords Wilberforce, Keith and Scarman; Lords Salmon and Russell dissenting) held that there had been no breach by A justifying termination by B, all their Lordships indicated that, had B had an action for breach, it could have recovered only its own loss and not C's loss.

2.38 As a promisee will commonly suffer no loss, in a contract made for a third party's benefit, it follows that a promisee can often recover nominal damages only. But this will certainly not always be so. (113) In some circumstances, for example where the promisee required the promisor to pay the third party in order to pay off a debt owed by the promisee to the third party, the promisor's failure to benefit the third party will constitute a substantial pecuniary loss to the promisee. (114) And in Woodar v Wimpey one justification for the generous measure of damages given to a father for a ruined family holiday in Jackson v Horizon Holidays Ltd was that the father was being fully compensated for his own mental distress. (115)

2.39 In two important recent cases, the House of Lords and Court of Appeal respectively have confirmed and extended an exception to the rule that the promisee recovers its own loss only. In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd, (116) the question arose as to the damages which could be recovered by a company (the ?employer') which had contracted for work on its property (the removal of asbestos) but had then, before breach of the works contract, sold the property to a third party (to whom the employer had made an invalid assignment of its contractual rights). The House of Lords held that the employer could recover substantial damages - the cost of curing the defects in the work -despite the fact that it no longer had a proprietary interest in the property by the time of the breach and despite the fact that the cost of the repairs had been borne by the assignee and not by the employer.

2.40 The reasoning of the majority of their Lordships (Lords Keith, Bridge and Ackner agreeing with Lord Browne-Wilkinson) was that the employer could recover the third party's (the assignee's) loss on an application of the exceptional principle applicable to a changed ownership of property established by Dunlop v Lambert (117) and The Albazero. (118) In The Albazero Lord Diplock explained the principle as follows:

[I]n a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into. (119)

The only modification required for the application of this principle to Linden Gardens was that the property in question was land and buildings not goods. It should be noted, however, that Lord Browne-Wilkinson in Linden Gardens confined the exception to cases where the third party had no direct right of action.

2.41 Lord Griffiths decided Linden Gardens on a much wider basis. He took the controversial view (120) that the employer had itself suffered a loss (measured by the cost of repairs) by reason of the breach of contract in that it did not receive the bargain for which it had contracted: whether the employer did, or did not, have a proprietary interest in the subject matter of the contract at the date of breach was irrelevant. He said:

I cannot accept that in a contract of this nature, namely for work, labour and the supply of materials, the recovery of more than nominal damages for breach of contract is dependent upon the plaintiff having a proprietary interest in the subject matter of the contract at the date of breach...the [promisee] has suffered loss because he did not receive the bargain for which he had contracted...and the measure of damages is the cost of securing the performance of that bargain...The court will of course wish to be satisfied that the repairs have been or are likely to be carried out but if they are carried out the cost of doing them must fall upon the defendant who broke his contract. (121)

Nor did it matter to Lord Griffiths that it was the assignee, and not the employer, who had ultimately borne the cost of repairs for, according to Lord Griffiths, "the law regards who actually paid for the work necessary as a result of the defendant's breach of contract as a matter which is res inter alios acta so far as the defendant is concerned". (122)

2.42 In Darlington BC v Wiltshier Northern Ltd (123) Darlington BC wished to build a recreational centre on its land, but needed to avoid contravening restrictions on local authority borrowing. Thus an arrangement was reached whereby Morgan Grenfell (Local Authority Services) Ltd ("Morgan Grenfell") contracted with Wiltshier Northern Ltd ("Wiltshier") for the latter to build the recreational centre on Darlington BC's land. Darlington BC then entered into a covenant agreement with Morgan Grenfell which provided, inter alia, that Morgan Grenfell would pay Wiltshier all sums falling due under the building contract, that the council would reimburse these monies, and that Morgan Grenfell were not liable to the council for building defects. It also provided that, on request, Morgan Grenfell would assign any rights against Wiltshier to Darlington BC. The rights were duly assigned pursuant to the covenant agreement. The council alleged that Wiltshier's construction work was defective. The Court of Appeal had to decide whether Darlington BC, as the assignee of Morgan Grenfell's rights under the construction contract, could recover substantial damages for the cost of repairs that it had incurred. This in turn depended on whether Morgan Grenfell could have claimed substantial damages. The Court of Appeal, by extending the principle in Linden Gardens (124) held that Morgan Grenfell, and hence Darlington BC, were entitled to substantial damages.

2.43 The principle of Linden Gardens required extension because, in contrast to the facts of Linden Gardens and Lord Diplock's formulation of the principle in The Albazero, the original contracting party (Morgan Grenfell) had never had a proprietary interest in the property. It was not therefore a case of the owner at the time of contract transferring ownership before breach. Nevertheless Steyn LJ was able to describe the extension required as a "very conservative and limited" one. (125) In effect the principle becomes that wherever there is the breach of a contract for work on property causing loss to a third party who is an owner of that property, and it was known or contemplated by the parties that a third party was, or would become, owner of the property and that owner has no direct right to sue for breach of contract, the original contracting party, who has the right to sue, can recover substantial damages as representing the owner's loss.

2.44 It should also be noted that Steyn LJ (but not Dillon LJ or Waite LJ) expressed support for Lord Griffiths' wider view in Linden Gardens, albeit that he did not agree with Lord Griffiths that there was any need to show an intention to carry out the repairs by someone. On this qualification, however, Steyn LJ's view appears to have been subsequently rejected (albeit without direct reference) by the approach of the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth (126) in which a plaintiff's intention to effect repairs was considered a crucial ingredient in deciding whether it was reasonable to claim the cost of repairs when higher than the difference in value.

2.45 As an additional ground for allowing the council's appeal, the majority of the Court in Darlington (Dillon LJ, with whom Waite LJ agreed) considered that Morgan Grenfell could be treated as a constructive trustee for Darlington BC of the benefit of its rights under the contract against Wiltshier. (127)

2.46 The effect of these cases has been to enhance a promisee's prospects of recovering substantial damages in a contract made for a third party's benefit. The decisions themselves are confined to confirming and developing The Albazero exception; but in addition dicta in the cases controversially suggest that substantial damages may be an appropriate measure of the promisee's own loss in a wider range of situations than has traditionally been thought to be the case.

(ii) Specific Performance and a Stay of Action

2.47 In Beswick v Beswick (128) an uncle transferred his business to his nephew who, in return, promised that, after his uncle's death, he would pay £5 a week to his widow. The uncle died and his widow brought an action for specific performance of the nephew's promise. The House of Lords, applying the third party rule, held that while the widow could not maintain a successful action in her personal capacity, she could as administratrix succeed in suing for the estate's loss, though not her own personal third party loss. Most importantly, the Lords held that as administratrix she should be granted specific performance of the nephew's promise rather than being confined to damages. This was on the basis that the administratrix's damages would be nominal (129) and that nominal damages would here be inadequate given that the purpose of the bargain was to benefit the widow. This reasoning opens the door to specific performance being an appropriate remedy for promisees in many contracts for a third party's benefit, where the third party rule would otherwise produce an unjust result. It should be noted, however that there are well-known additional restrictions on specific performance (that is, over and beyond damages having to be inadequate) such as that specific performance will not be ordered of a contract for personal service or where the contract to be enforced is not supported by valuable consideration.

2.48 In the case of a promise not to sue a third party, the promisee may assist the third party beneficiary by seeking a stay of any action by the promisor against the third party under section 49(3) of the Supreme Court Act 1981. This preserves the power of the court to stay any proceedings before it, where it thinks fit to do so, whether on its own motion or on the application of any person.

2.49 In Gore v Van der Lann, (130) the question was whether Liverpool Corporation could restrain the holder of a free bus pass from suing a bus conductor for negligence, given that the free pass contained a clause excluding liability for personal injury on the part of the Corporation or its servants. On the facts, the clause was void under section 151 of the Road Traffic Act 1960. However, the Court of Appeal said that the Corporation could have obtained a stay, if: (i) the clause could have been construed as a promise by Mrs Gore not to sue (which on the facts it was not); and (ii) if the Corporation had a sufficient interest so as to entitle it to a stay, for instance if it had been required to indemnify its servants in respect of torts committed by the latter. (131) In Snelling v John G Snelling Ltd, (132) Ormrod J said that it did not follow from Gore that there had to be an express promise not to sue. It was sufficient that it was a necessary implication of the agreement that P would not sue. (133)

2.50 In The Elbe Maru, (134) a bill of lading provided an undertaking that the holder would not make any claim against the carriers' sub-contractors. Whilst the goods were in the custody of sub-contractors of the carriers, they were stolen. The indorsees of the bill of lading claimed damages against the sub-contractors, the action against the original carriers being time barred. The carriers applied for a stay, which was granted. Unlike Gore, this was a clear case of a promise not to sue. However, the remedy being discretionary, Ackner J said that it was not enough to show a clear promise not to sue. But where an applicant could show a real possibility of prejudice if the action were not stayed, as here by being exposed to an action by its agents, the discretion to stay would be exercised in their favour. (135)

2.51 Since it is the promisee who obtains the stay rather than the third party, the above cases are best seen as examples of promisees assisting the third party by enforcing the contract in favour of the third party. They constitute the mirror image of Beswick v Beswick, the difference being that the "specific" remedy in that case was concerned to enforce a positive rather than a negative obligation.

(i) Statutory Exceptions

2.52 This section will outline some of the major legislative exceptions (136) to the third party rule.

(i) Life Insurance

2.53 By section 11 of the Married Women's Property Act 1882, a life insurance policy taken out by someone on his or her own life, and expressed to be for the benefit of his or her spouse or children, creates a trust in favour of the objects named in the policy. (137)

(ii) Fire Insurance

2.54 Under section 83 of the Fire Prevention (Metropolis) Act 1774, where an insured house or building is destroyed by fire, the insurer may be required "upon the request of any person or persons interested" to lay out the insurance money for the restoration of the building. (138) This means that a tenant can claim under its landlord's insurance, and a landlord under its tenant's insurance. (139)

(iii) Motor Insurance

2.55 Under section 148(7) of the Road Traffic Act 1988, a person issuing a policy under section 145 of the Act shall be liable to indemnify the persons or classes of person specified in the policy in respect of any liability which the policy purports to cover in the cases of such persons.

(iv) Third Parties' Rights Against Insurers

2.56 A contract of insurance may insure the policy-holder against liability to third parties. By section 1 of the Third Parties (Rights Against Insurers) Act 1930, where an insured becomes, inter alia, bankrupt or wound up, and before or after that time he incurs liability to a third party, the insured's rights under the contract of insurance are transferred to the third party. In other words, the third party has a direct action against the insurer. However, the third party only has transferred to him the rights which the insured would have had. Difficulties have arisen with the Act which we discuss in Part XII below. (140)

(v) Insurance by Those with Limited Interests

2.57 In general, a person with a limited interest in property can insure and recover its full value, holding any amount above his own interest on account for others similarly interested. (141) Section 14(2) of the Marine Insurance Act 1906 states that 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". Likewise, section 47 of the Law of Property Act 1925 provides that any insurance money received by the seller between contract and conveyance shall be held on behalf of the buyer and be paid to him.

(vi) Bills of Exchange

2.58 In general, negotiable instruments (such as bills of exchange, cheques and promissory notes), are transferable by delivery and give to the transferee for value, who acts in good faith, ownership of, or a security interest in, the instrument free from equities. Under the Bills of Exchange Act 1882, (142) the holder of a bill of exchange may sue on the bill in his own name. If a bill of exchange is dishonoured, the drawer, acceptor and indorsers are all liable to compensate the holder in due course. (143)

(vii) Bills of Lading

2.59 Where goods are to be carried by sea, the shipper will typically enter into a contract of carriage with a carrier, which is evidenced by a bill of lading. The goods are then usually consigned to the buyer, to whom the bill will be endorsed. At common law the buyer was not able to sue the carrier on the contract of carriage because there was no privity between them. (144) It was to remedy this defect that the Bills of Lading Act 1855 was passed. Under that Act, however, a buyer only had a right of action under the bill of lading contract if the property in the goods passed by reason of, and at the same time as, endorsement of the bill to him or if the endorsement of the bill played an essential causal role in the chain of events by which the property passed to him. (145) The Act was replaced by the Carriage of Goods by Sea Act 1992 (146) which separates the right to sue the carrier from the passing of property in the goods under the sale contract. This is achieved, under section 2, by a statutory assignment of the right to sue the carrier. The right is assigned to a holder of a bill of lading or to a person to whom delivery of goods is to be made under a sea waybill or ship's delivery order. By section 3, where those with a title to sue under the statute take or demand delivery of the goods or make a claim against the carrier under the contract of carriage they become subject to the liabilities (147) under the contract but without affecting the liabilities of the original shipper. Where a pledgee takes delivery of the goods and pays any carriage charges such as freight or demurrage, there may come into existence an implied contract between the pledgee and the carrier on the terms of the bill of lading. Such a contract, known as a Brandt v Liverpool contract, (148) is a further circumvention of the third party rule.

(viii) Law of Property Act 1925, Section 56(1)

2.60 Whereas at common law, no person could sue on a deed inter partes unless a party to that deed, section 56(1) of the Law of Property Act 1925 states:

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.

Although Denning LJ, in Drive Yourself Hire Co (London) Ltd v Strutt, (149) took the view that this abolished the rule in Tweddle v Atkinson, (150) it is clear from Beswick v Beswick (151) that section 56(1) does not apply to a mere promise by A to B that money will be paid to C. The exact scope of section 56(1) remains unclear. It may be confined (i) to real property; (ii) to covenants running with the land; (iii) to cases in which the instrument is not solely for the benefit of the third party but purports to contain a grant to or covenant with it; (iv) to deeds strictly inter partes. (152) It does appear, however, that a person cannot take the benefit of a covenant under section 56(1) unless he or she or his or her predecessor in title was in existence and identifiable when the covenant was made. (153)

(ix) Companies Act 1985, Section 14

2.61 Under section 14 of the Companies Act 1985, the registered memorandum and articles of association of a company bind the company and its members to the same extent as if they respectively had been signed and sealed by each member. (154)

(x) Package Travel, Package Holidays and Package Tours Regulations 1992 (155)

2.62 Where a contract for the provision of a package (156) holiday is made between an organiser or retailer and a consumer, (157) the organiser or retailer is liable to the consumer for the proper performance of the obligations under the contract, whether those services are to be performed by the organiser or retailer or not. (158) The Regulations therefore, inter alia, circumvent the third party rule by giving the beneficiaries of package tour contracts direct rights against the organiser and/or retailer with whom the contract was made. (159) The Regulations also require that contracts for the provision of package holidays should comply with certain formalities and provide certain information, (160) provide for withdrawal from the contract where it is significantly altered or cancelled, (161) and make arrangements for bonding and insurance cover. (162)

2. Calls for Reform

2.63 Whilst it is self-evidently desirable that a complete stranger to a contract should not normally have contractual obligations forced upon him or her, without consent, the third party rule (by which a third party cannot take rights under a contract) has been much criticised. This criticism has come from academics, (163) law reform bodies (including the Law Revision Committee in England (164) and bodies in several Commonwealth jurisdictions (165)) and the judiciary. In this section we focus our attention on calls for reform made by the judiciary in past cases.

2.64 In 1967, in Beswick v Beswick, (166) Lord Reid cited with approval the Law Revision Committee's proposals that when a contract by its express terms purports to confer a benefit directly on a third party, it should be enforceable by the third party in its own name. While implying that the way forward was by legislation, he stated that the House of Lords might find it necessary to deal with the matter if there was a further long period of Parliamentary procrastination. In Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (167) Lord Salmon (dissenting) regarded the law concerning damages for loss suffered by third parties as most unsatisfactory and hoped that, unless it were altered by statute, the House of Lords would reconsider it. (168) Lord Scarman expressed "regret that [the] House has not yet found the opportunity to reconsider the two rules which effectually prevent [the promisee] or [the third party] recovering that which [the promisor], for value, has agreed to provide." (169) He reminded the House that twelve years had passed since Lord Reid in Beswick v Beswick had called for a reconsideration of the rule, and hoped that all the cases which "stand guard over this unjust rule" might be reviewed. (170) Lord Scarman concluded his judgment with an unequivocal call for reform:

[T]he crude proposition...that the state of English law is such that neither [the third party] for whom the benefit was intended nor [the promisee] who contracted for it can recover it, if the contract is terminated by [the promisor's] refusal to perform, calls for review: and now, not forty years on. (171)

2.65 In Forster v Silvermere Golf and Equestrian Centre Ltd, (172) Dillon J referred to the effects of Woodar in the case before him as being a blot on the law and thoroughly unjust. In Swain v Law Society, (173) Lord Diplock referred to the general non- recognition of third party rights as "an anachronistic shortcoming that has for many years been regarded as a reproach to English private law".

2.66 More recently, Lord Goff and Steyn LJ have added their influential voices to criticisms of the third party rule. In The Pioneer Container (174) Lord Goff called into question the future of the rule, and in White v Jones (175) his Lordship said, "[O]ur law of contract is widely seen as deficient in the sense that it is perceived to be hampered by the presence of an unnecessary doctrine of consideration and (through a strict doctrine of privity of contract) stunted through a failure to recognise a jus quaesitum tertio". (176) Steyn LJ's dicta in Darlington Borough Council v Wiltshier Northern Ltd (177) - with which we opened this Report - are particularly notable for their forthright treatment of the third party rule.

2.67 Of the criticisms of the third party rule made by the judiciary in other jurisdictions, (178) the judgments in the High Court of Australia in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (179) are particularly clear and rigorous. A company which operated a limestone crushing plant took out a liability insurance policy with the appellants (Trident), which was expressed to cover all contractors at the plant. The respondent contractor (McNiece) fell within the terms of the policy, but when it sought indemnification for damages payable to one of its subcontractors, the appellant insurance company refused to indemnify the respondent on the grounds that the latter was not a party to the contract of insurance.

2.68 The respondent succeeded before the High Court of Australia, (180) in a decision which effectively reversed the decision of the legislature not to make the Insurance Contracts Act 1984 (181) retrospective. In doing so, three of the Justices mounted an attack on the doctrine of privity. Mason CJ and Wilson J were of the opinion that "[t]here is much substance in the criticisms directed at the traditional common law rules [of privity]...", (182) and they accepted that reform was needed in the area under consideration, as it was an example of "common law rules which operate unsatisfactorily and unjustly". (183) Toohey J was even more vociferous, stating that the rule is "based on shaky foundations and, in its widest form, lacks support both in logic or jurisprudence". (184) He was of the opinion that,

...when a rule of the common law harks back no further than the middle of the last century, when it has been the subject of constant criticism and when, in its widest form, it lacks a sound foundation in jurisprudence and logic and further, when that rule has been so affected by exceptions or qualifications, I see nothing inimical to principled development in this Court now declaring the law to be otherwise... (185)

2.69 In the event, Mason CJ and Toohey and Wilson JJ decided the case on the basis of a specific abrogation of the third party rule in relation to insurance contracts. Two reasons were advanced. First, it would be unjust not to give effect to the contracting parties' intentions. Secondly, it was likely that third party beneficiaries would rely on an insurance policy covering them and not insure separately. Deane and Gaudron JJ favoured the use of a trust and the principle of unjust enrichment (186) respectively, in order to avoid the injustice of the operation of the third party rule, and even the two dissenting judges, Brennan and Dawson JJ, based their dissent on maintaining coherent and gradual development of the common law rather than justifying their decision on the appropriateness of the rule itself.

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Footnotes to Part II

(1)As when C guarantees a debt owed by A to B and A pays, thus releasing C who thereby indirectly gains a benefit. See Treitel, The Law of Contract (9th ed, 1995) p 551.

(2)Before Donoghue v Stevenson [1932] AC 562, the privity doctrine was seen as precluding actions in tort by third parties arising from negligence by a party to a contract in carrying it out: Winterbottom v Wright (1842) 10 M & W 109; 152 ER 402.

(3)See para 1.2 above.

(4) Consultation Paper No 121, paras 5.36-5.37, 6.17.

(5) The exceptions include agency, restrictive covenants running with land, restrictive covenants running with goods (see, eg, Lord Strathcona SS Co v Dominion Coal Co [1926] AC 108), bailment (eg, Morris v CW Martin & Sons Ltd [1966] 1 QB 716; Singer (UK) Ltd v Tees and Hartlepool Port Authority [1988] 2 Lloyd's Rep 164, 167-168; The Captain Gregos (No 2) [1990] 2 Lloyd's Rep 395, 405; KH Enterprise (cargo owners) v Pioneer Containers (owners), The Pioneer Container [1994] 2 AC 324), and the Carriage of Goods by Sea Act 1992, s 3.

(6)Although a few consultees did suggest further exceptions that, at least at this stage, we consider are better left to common law development (eg that the situations in which exclusion clauses bind third parties should be extended).

(7)(1861) 1 B & S 393; 121 ER 762.

(8)[1954] 1 QB 250.

(9)[1954] 1 QB 250, 272.

(10)(1678) 2 Lev 210; 83 ER 523. This decision was supported, obiter, by Lord Mansfield in Martyn v Hind (1776) 2 Cowp 437, 443; 98 ER 1174, 1177.

(11)The report discloses disagreement in the King's Bench during the argument, on the grounds that the daughter was privy neither to the promise nor the consideration. Nevertheless, the decision was upheld in the Exchequer Chamber: (1679) T Raym 302; 83 ER 156.

(12)(1797) 1 Bos & P 101, n (c); 126 ER 801, n (c). This case was described as "but a loose note at Nisi Prius" by counsel in the interesting case of Phillips v Bateman (1812) 16 East 356, 371; 104 ER 1124, 1129, where A, in the face of a run on a banking house, promised to support the bank with £30,000, whereupon note holders stopped withdrawing their money. When the bank subsequently stopped paying out, A was held not liable to an action by individual holders of bank notes.

(13)The case itself involved a bill of exchange.

(14)(1823) 1 LJ (OS) KB 89.

(15)A Simpson, A History of the Common Law of Contract (1975), pp 477-478. See also V Palmer, "The History of Privity - The Formative Period" (1500-1680) (1989) 33 Am J Leg Hist 3; D Ibbetson; "Consideration and the Theory of Contract in Sixteenth Century Common Law" in J Barton (ed), Towards a General Law of Contract (1990), 67, 96-99. Cf V Palmer, The Paths to Privity - The History of Third Party Beneficiary Contracts at English Law (1992).

(16)(16)Lever v Heys Moo KB 550; 72 ER 751; also Levet v Hawes Cro Eliz 619, 652; 78 ER 860, 891; Provender v Wood Het 30; 124 ER 318; Hadves v Levit Het 176; 124 ER 433. In an altogether different scenario in Rippon v Norton Cro Eliz 849; 78 ER 1074, A promised B that his son would keep the peace against B and B's son (C). A's son thereafter assaulted B's son. B, alleging medical expenses and loss of the services of his son, failed in his action against A, even though he was the promisee. It was said that the son (C) was the person who should have sued, which he later did successfully: Cro Eliz 881; 78 ER 1106.

(17)(17)Jordan v Jordan (1594) Cro Eliz 369; 78 ER 616 (C gave a warrant to B to arrest A for an alleged debt. A promised B that, in return for not arresting him, he would pay the debt. C failed in his action, on the ground, inter alia, that the promise had been made to B); Taylor v Foster (1600) Cro Eliz 776; 78 ER 1034 (A, in return for B marrying his daughter, agreed to pay to C an amount which B owed to C. In an action by B against A, it was held that B was the person to sue, being the promisee).

(18)(18)Bourne v Mason (1669) 1 Ventr 6; 86 ER 5; Crow v Rogers (1724) 1 St 592; 93 ER 719; Price v Easton (1833) 4 B & Ad 433; 110 ER 518. Although in the former two cases, the reason why C failed was because he was a stranger to the consideration, Price v Easton contains seeds of more modern doctrine: whereas Denman CJ said that no consideration for the promise moved from C to A, Littledale J said that there was no privity between C and A.

(19)(1861) 1 B & S 393; 121 ER 762.

(20)The earlier cases allowing children to be considered a party to their father's consideration were considered obsolete. Dutton v Poole (1678) T Raym 302; 83 ER 156, being a decision of the Exchequer Chamber could not be overruled by the Queen's Bench, but was nonetheless not followed.

(21)(1885) 30 ChD 57, 69.

(22)[1915] AC 847.

(23)Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500; Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250.

(24)[1962] AC 446 (Lord Denning dissenting).

(25)At pp 467-468.

(26)See Beswick v Beswick [1968] AC 58, 72; Woodar Investment Developments Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277, 291, 297-298, 300. See also dicta of Lord Diplock in Swain v Law Society [1983] 1 AC 598, 611; and of Lord Goff in The Pioneer Container [1994] 2 AC 324, 335 and White v Jones [1995] 2 AC 207, 262-263. See generally paras 2.63-2.69 below.

(27)Two consultees pointed out to us that deed polls (under which a person can undertake an obligation to another person without that other person having to be a party to the document) are quite frequently used in the commercial world as a means of evading privity, particularly where the beneficiaries belong to a large and fluctuating class. Deed polls cannot be varied once executed. See generally Sunderland Marine Insurance Co v Kearney (1851) 16 QB 925; 117 ER 1136; Norton on Deeds (2nd ed, 1928) p 27 ff.

(28)See generally, J Hornby, "Covenants in Favour of Volunteers" (1962) 78 LQR 228; W Lee, "The Public Policy of Re Cook's Settlement Trusts" (1969) 85 LQR 213; J Barton, "Trusts and Covenants" (1975) 91 LQR 236; R Meager and J Lehane, "Trusts of Voluntary Covenants" (1976) 92 LQR 427; C Rickett, "The Constitution of Trusts: Contracts to Create Trusts" (1979) 32 CLP 1; C Rickett, "Two Propositions in the Constitution of Trusts" (1981) 34 CLP 189.

(29) See Southern Water Authority v Carey [1985] 2 All ER 1077, 1083; Norwich City Council v Harvey [1989] 1 WLR 828; Chitty on Contracts (27th ed, 1994), paras 18-045-18-054.

(30)Eg Tomlinson v Gill (1756) Amb 330, 27 ER 221; Fletcher v Fletcher (1844) 4 Hare 67, 67 ER 564; Lloyd's v Harper (1880) 16 ChD 290; Re Flavell (1883) 25 ChD 89.

(31) [1919] AC 801. See M MacIntyre, "Third Party Rights in Canadian and English Law" (1965) 2 UBCL Rev 103, 104-105.

(32)See Re Engelbach [1924] 2 Ch 348; Vandepitte v Preferred Accident Insurance Corpn of New York [1933] AC 70; Re Clay's Policy [1937] 2 All ER 548; Re Foster [1938] 3 All ER 357; Re Sinclair's Life Policy [1938] Ch 799; Re Schebsman [1944] Ch 83 (see also Treitel, The Law of Contract (9th ed, 1995) p 578 n 99).

(33)[1995] 1 WLR 68, 75 per Dillon LJ (with whom Waite LJ agreed); Steyn LJ, at p 81, found it unnecessary to consider this point. See paras 2.42-2.45, below.

(34)(1880) 16 ChD 290. In Lloyd's v Harper, however, both James LJ (at p 315) and Lush LJ (at p 321) seemed to regard as important the fact that this approach was necessary in order to permit effective functioning of the common practice in existence in insurance transactions at Lloyd's.

(35)(1839) 6 Cl & F 600; 7 ER 824. See paras 2.39-2.46 below.

(36) Based on the recommendations made in Landlord and Tenant Law: Privity of Contract and Estate (1988) Law Com No 174.

(37)(37)Spencer's Case (1583) 5 Co Rep 16a; 77 ER 72 (leases); Law of Property Act 1925, ss 141-142 (reversions).

(38)(38)Landlord and Tenant (Covenants) Act 1995, s 3(6).

(39)Which simply means the relationship of landlord and tenant.

(40)See Law of Property Act 1925, s 44; White v Bijou Mansions Ltd [1937] Ch 610.

(41)Land Registration Act 1925, s 23(1)(a).

(42)Landlord and Tenant (Covenants) Act 1995, s 3(5).

(43)(43)Smith v River Douglas Catchment Board [1949] 2 KB 500 (lessee able to enforce annexed freehold covenant on the wording of s 78). As it is clear that s 78 applies to leases as well as to freeholds: Caerns Motor Services Ltd v Texaco Ltd [1994] 1 WLR 1249, S must be able to enforce the covenant against L.

(44)Law of Property Act 1925, s 78 does not apply to such leases (Landlord and Tenant (Covenants) Act 1995, s 30(4)) and this effect of that section is not replicated: cf Landlord and Tenant (Covenants) Act 1995, s 15.

(45)Somewhat different provisions apply in respect of an assignment of the reversion by the landlord. The landlord must apply to the tenant to be released from the landlord covenants. If the tenant refuses to do so, the court may release the landlord if it considers it reasonable to do so. See Landlord and Tenant (Covenants) Act 1995, ss 6-8.

(46)Landlord and Tenant (Covenants) Act 1995, ss 3 and 5; although under s 16 a tenant may enter into an "authorised guarantee agreement" to guarantee compliance with the covenants by the assignee.

(47)(47)Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 WLR 594.

(48)It is probably only those which are expressed to be capable of passing solely by express assignment: Roake v Chadha [1984] 1 WLR 40.

(49)[1932] AC 562.

(50)For discussion of the relationship between contract and tort in this type of situation, see: A Jaffey, "Sub-Contractors - Privity and Negligence" [1983] CLJ 37; J Holyoak, "Tort and Contract after Junior Books" (1983) 99 LQR 591; A Jaffey, "Contract in Tort's Clothing" (1985) 5 LS 77; B Markesinis, "An Expanding Tort Law - The Price of a Rigid Contract Law" (1987) 103 LQR 354; W Lorenz and B Markesinis, "Solicitors' Liability Towards Third Parties: Back Into the Troubled Waters of the Contract/Tort Divide" (1993) 56 MLR 558.

(51)[1980] Ch 297.

(52)[1995] 2 AC 207.

(53)[1964] AC 465; see [1995] 2 AC 207, 268.

(54)Who gave the most detailed of the majority speeches.

(55)[1995] 2 AC 207, 268. Lord Goff saw the decision as giving effect to the considerations of "practical justice".

(56)We discuss the decision further in paras 7.19-7.27, 7.36 and 7.48 below.

(57)Lord Mustill (dissenting) was clearly of the opinion that the beneficiaries were effectively seeking to enforce a contract to which they were not a party: "...the intended beneficiaries did not engage the solicitor, undertake to pay his fees or tell him what to do. Having promised them nothing he has broken no promise. They nevertheless fasten upon the circumstance that the solicitor broke his promise to someone else..."; [1995] 2 AC 207, 278.

(58)[1983] 1 AC 520. It should be noted that since it was decided, Junior Books has come to be seen as unreliable authority and has consistently been confined to its facts: "The consensus of judicial opinion, with which I concur, seems to be that the decision ... cannot be regarded as laying down any principle of general application in the law of tort or delict", D & F Estates Ltd v Church Commissioners [1989] AC 177, 202, per Lord Bridge. Cf Murphy v Brentwood DC [1991] 1 AC 398; White v Jones [1995] 2 AC 207.

(59)(59)Bowstead and Reynolds on Agency (16th ed, 1996) para 1-001.

(60)See, for example, Treitel The Law of Contract (9th ed, 1995) p 645 ff; Cheshire, Fifoot and Furmston's Law of Contract (12th ed, 1991) p 489; Chitty on Contracts (27th ed, 1994) para 31- 058.

(61)(61)Bowstead and Reynolds on Agency (16th ed, 1996), para 8-069.

(62)Atiyah, An Introduction to the Law of Contract (5th ed, 1995) p 366. Cf R Goode, Commercial Law (2nd ed, 1995) p 181.

(63)Farrow v Wilson (1869) LR 4 CP 744.

(64)Cheshire, Fifoot & Furmston's Law of Contract (12th ed, 1991) ch 16; Treitel, The Law of Contract (9th ed, 1995) ch 16; Chitty on Contracts (27th ed, 1994), ch 19.

(65)For instance, when a party to a contract is declared bankrupt, rights of action forming part of his estate are "deemed to have been assigned" to his trustee in bankruptcy: Insolvency Act 1986, s 311(4).

(66)(66)Gorringe v Irwell India Rubber and Gutta Percha Works (1887) 34 Ch D 128.

(67)The failure to give notice of the equitable assignment of an option may mean that the option is not exercisable by the assignee: Warner Bros Records Inc v Rollgreen Ltd [1976] QB 430: cf Three Rivers DC v Bank of England [1995] 3 WLR 650. Notice of a statutory assignment must be in writing: Law of Property Act 1925, s 136(1).

(68)Cheshire, Fifoot & Furmston's Law of Contract (12th ed, 1991) pp 516-7; Treitel, The Law of Contract (9th ed, 1995) p 605 ff; Chitty on Contracts (27th ed, 1994), paras 19-039-19-045.

(69)See Chitty on Contracts (27th ed, 1994), paras 19-002, 19-022-19-023.

(70)Cheshire, Fifoot & Furmston's Law of Contract (12th ed, 1991) pp 64-65; Treitel, The Law of Contract (9th ed, 1995) pp 534-536; Atiyah, An Introduction to the Law of Contract (9th ed, 1995) pp 97-100. Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854; Wells (Merstham) Ltd v Buckland Sand and Silica Ltd [1965] 2 QB 170; Charnock v Liverpool Corpn [1968] 1 WLR 1498.

(71)See paras 2.24-2.30 below.

(72)See paras 3.12-3.19 below.

(73)For 19th century cases, which normally involved carriage by rail, see eg, Hall v North Eastern Railway Company (1875) 10 QB 437, a case where the reasoning has been described as artificial but face-saving for privity. See Treitel, The Law of Contract (9th ed, 1995) p 568. See also Bristol and Exeter Ry v Collins (1859) 7 HLC 194; 11 ER 78; Martin v Great Indian Peninsular Ry (1867) LR 3 Ex 9; Foulkes v Metropolitan District Ry Co (1880) 5 CPD 157.

(74)[1924] AC 522.

(75)Lord Reid in Midland Silicones Ltd v Scruttons Ltd stated that the task of extracting a ratio from the case was "unrewarding" [1962] AC 446, 479. See also Johnson Matthey & Co Ltd v Constantine Terminals Ltd [1976] 2 Lloyd's Rep 215, 219 (per Donaldson J, "something of a judicial nightmare") and The Forum Craftsman [1985] 1 Lloyd's Rep 291, 295 (per Ackner LJ, "heavily comatosed, if not long-interred"). See also Treitel, The Law of Contract (9th ed, 1995) pp 568-569; N Palmer, Bailment (2nd ed, 1991) pp 1638-1640. Carver's Carriage by Sea (13th ed, 1982) p 529, refers to the case as a "mystery". Scrutton on Charterparties (19th ed, 1984) p 251 n 36, contends that no general principle is to be extracted from the case.

(76)For the alternative line of reasoning see Lord Sumner, [1924] AC 522, 564, with whom Lord Dunedin and Lord Carson agreed. Lord Sumner talked of there being a "bailment on terms" which appears to mean that by entrusting the goods to the shipowners, the shipper may be taken to have impliedly agreed that the shipowner received the goods on the terms of the bill of lading which included the exemption from liability for bad storage. Lord Goff has recently given some support to this line of thinking in obiter dicta in The Pioneer Container [1994] 2 AC 324, 339-340 and, most importantly, in The Mahkutai [1996] 3 WLR 1 (see para 2.33 below).

(77)This was the basis of Scrutton LJ's judgment in the Court of Appeal: [1923] 1 KB 421, 441, and was supported by Viscount Cave, at p 534, with whom Lord Carson agreed. See also Viscount Finlay, at p 548.

(78)See, for instance, Scrutton LJ in Mersey Shipping & Transport Co Ltd v Rea Ltd (1925) 21 Lloyd's Rep 375; Pyrene Co Ltd v Scindia Steam Navigation Co Ltd [1954] 2 QB 402. For a discussion of the Pyrene case, see Consultation Paper No 121, para 5.37. But cf Cosgrove v Horsfall (1945) 62 TLR 140 (where Elder, Dempster was not cited) and Adler v Dickson [1955] 1 QB 158.

(79)[1962] AC 446. It should be noted that Art IV bis rule 2 of the Hague-Visby Rules, enacted in the UK by the Carriage of Goods by Sea Act 1971, provides that servants or agents of the carrier (but not independent contractors, eg stevedores, employed by it) are to have the benefit of the exceptions and limitations of liability given to the carrier under the Hague-Visby Rules themselves. Similar provisions are contained in the Geneva Convention on the Contract for the International Carriage of Goods By Road (CMR) (implemented in England by the Carriage of Goods by Road Act 1965); in the Warsaw Convention (implemented in England by the Carriage by Air Act 1961); and in the Berne Convention Concerning International Carriage by Rail 1980 (COTIF) (implemented in England by the International Transport Convention Act 1983): see para 12.14, note 21, below.

(80)Lord Denning, in his dissenting speech, [1962] AC 446, 487-488, argued that, if the buyer is able to sue a sub-contractor (eg a stevedore) in tort for what was in truth a breach of the main contract, and the stevedore is not allowed the benefit of the terms of that contract, there exists an easy way for the buyer to avoid the terms of the main contract. He held that the stevedores could take advantage of the exclusion clause, since the earlier decision of the House in Elder, Dempster & Co Ltd v Paterson, Zochonis & Co Ltd [1924] AC 522 had determined this point in favour of stevedores.

(81)[1962] AC 446, 474.

(82)The exclusion clause was expressed to exclude the liability of the "carrier", and the stevedores suggested that the word "carrier" could be read as including stevedores. This proposition was rejected by a majority of their Lordships: see [1962] AC 446, 471 (per Viscount Simonds), 474 (per Lord Reid), 495 (per Lord Morris).

(83)So called after the vessel in Adler v Dickson [1955] 1 QB 158.

(84)[1975] AC 154. Although sometimes overlooked, the negligence claim in the case was being brought by the buyers (consignees) not the shipper. The buyers were held to be bound by the shipper's contract with the stevedore by reason of a so-called Brandt v Liverpool [1924] 1 KB 575 contract which arose when the buyers presented the bill of lading and took delivery. See Treitel, The Law of Contract, (9th ed 1995) p 570-571.

(85)[1975] AC 154, 167-8.

(86)[1975] AC 154, 167.

(87)[1975] AC 154, 169. Lord Wilberforce emphasised the difficulty of analysing many of the common transactions of daily life within the classical "slots" of offer, acceptance and consideration; [1975] AC 154, 167. In dissenting speeches, Viscount Dilhorne and Lord Simon of Glaisdale emphasised that artificial reasoning should not be employed in contractual interpretation with the effect of rewriting contractual provisions. Viscount Dilhorne stated that "...clause 1 of the bill of lading was obviously not drafted by a layman but by a highly qualified lawyer. It is a commercial document but the fact that it is of that description does not mean that to give it efficacy, one is at liberty to disregard its language and read into it that which it does not say and could have said or to construe the English words it contains as having a meaning which is not expressed and which is not implied." [1975] AC 154, 170. At p 172, he referred with approval to the judgment of Fullagar J in Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43, 70, where Fullagar J decried the seeming anxiety of some courts and judges to save grossly negligent people from the normal consequences of their negligence, despite the established tendency of the law to construe exclusion clauses strictly.

(88)See generally F Reynolds, ?Himalaya Clause Resurgent' (1974) 90 LQR 301; B Coote, ?Vicarious Immunity by an Alternative Route - II' (1974) 37 MLR 453; N Palmer, ?The Stevedore's Dilemma: Exemption Clauses and Third Parties - I' [1974] JBL 101; A Duggan, ?Offloading the Eurymedon' (1974) 9 Melbourne ULR 753; F Rose, ?Return to Elder Dempster?' (1975) 4 Anglo-Am LR 7; G Battersby, ?Exemption Clauses and Third Parties: Recent Decisions' (1978) 28 U of Toronto LJ 75; S Waddams, Comment (1977) 55 Can Bar Rev 327; P Davies and N Palmer, ?The Eurymedon Five Years On' [1979] JBL 337. For discussion of whether the better analysis is a unilateral or a bilateral contract, see N Palmer, Bailment (2nd ed, 1991) pp 1610-1611. In The Mahkutai [1996] 3 WLR 1, Lord Goff referred to, and appeared to support, Barwick CJ's description, in The New York Star [1979] 1 Lloyd's Rep 298, of the contract as bilateral.

(89)Since the carrier desires the result that holders of the bill of lading should not sue his servants or independent contractors, he can achieve this by procuring that they promise not to sue, by contracting to indemnify the servants or agents against claims, and by making it clear to the consignor and holder of the bill that he has done so. The carrier would then be able to obtain the staying of any action against the third party in breach of this agreement. See F Reynolds (1974) 90 LQR 301, 304.

(90)It was distinguished by the Supreme Court of British Columbia in The Suleyman Stalskiy [1976] 2 Lloyd's Rep 609, and by the Kenyan High Court in Lummus Co Ltd v East African Harbours Corpn [1978] 1 Lloyd's Rep 317, 322-323, because it was not shown that the carrier had authority to contract on behalf of the stevedore. See also Herrick v Leonard and Dingley Ltd [1975] 2 NZLR 566.

(91)[1981] 1 WLR 138 (PC). See N Palmer, Bailment (2nd ed, 1991) pp 1600-1601, for the view that the case might have been decided on the basis of bailment.

(92)Even though they were considering a situation in which all four of Lord Reid's conditions could be said to have been satisfied.

(93)At p 143. Treitel, The Law of Contract (9th ed, 1995) pp 571-572, submits that the principle of The Eurymedon should not be confined to cases where carriers and stevedores are associated companies or where there is some previous connection between them. He accepts that the protection of Himalaya clauses does not cover acts wholly collateral to contractual performance, see Raymond Burke Motors Ltd v The Mersey Docks and Harbour Co [1986] 1 Lloyd's Rep 155 (goods damaged while they were stored and not during any loading or unloading).

(94)[1985] 2 All ER 1077.

(95)At p 1084.

(96)The judge applied the speech of Lord Wilberforce in Anns v Merton London Borough Council [1978] AC 728, 751-752 to determine whether a duty of care in tort arose between the client and the subcontractors. He found that sufficient proximity existed to render it reasonably foreseeable by the subcontractors that a failure by them to exercise care would lead to loss or damage to the client. He then asked whether there were any considerations which suggested that the scope of that duty should be reduced, and said that the contractual exemption clause, which defined the area of risk which the client was entitled to regard the contractors as undertaking responsibility for, meant that no duty of care arose. Although this precise approach to the establishment of duties of care in negligence is now out of favour, the courts will presumably employ similar reasoning to determine whether it is "just and reasonable" to impose a duty of care: see Caparo Industries plc v Dickman [1990] 2 AC 605; Murphy v Brentwood DC [1991] 1 AC 398.

(97)[1989] 1 WLR 828. See also Pacific Associates Inc v Baxter [1990] 1 QB 993 in which the Court of Appeal held that if, contrary to its view, there would otherwise have been a duty of care owed by the defendant engineer (C) to the plaintiff main contractor (A) for pure economic loss, it would have been negatived by the exclusion clause in the contract between A and the employer (B) excluding C's liability to A: see on this case Chitty on Contracts (27th ed) para 14-044.

(98)At p 837. This reasoning does not, however, explain the non-liability (at pp 833-834) of the sub-contractor's employee who was also sued. This may be the ghost of Elder, Dempster rising from its watery grave, the reasoning being reminiscent of the now rejected doctrine of vicarious immunity; N Palmer, Bailment (2nd 1991) pp 1609-1610; C Hopkins ?Privity of Contract: The Thin End of the Wedge?' [1990] CLJ 21, 23.

(99)(1992) 97 DLR (4th) 261. Noted by J Adams and R Brownsword, ?Privity of Contract - That Pestilential Nuisance' (1993) 56 MLR 722; S Waddams, ?Privity of Contract in the Supreme Court of Canada' (1993) 109 LQR 349; J Fleming ?Employee's Tort in a Contractual Matrix: New Approaches in Canada' (1993) OLJS 430; C MacMillan, ?Privity and the Third Party Beneficiary: The Monstrous Proposition' [1994] LMCLQ 22; R Wintemute, ?Don't look to me: The Negligent Employee's Liability to the Employer's Customer' (1994-95) 5 KCLJ 117. See also para 2.67, note 178, below.

(100) Iacobucci J with whom L'Heureux-Dube, Sopinka and Cory JJ concurred; McLachlin J concurred on different grounds; La Forest J dissented in part.

(101) (1992) 97 DLR (4th) 261, 369.

(102)[1996] 3 WLR 1.

(103)See para 2.21, note 76, above.

(104)[1924] 1 KB 575.

(105)(1992) 97 DLR (4th) 261.

(106)(1988) 165 CLR 107.

(107)[1996] 3 WLR 1, 11-12.

(108) [1977] AC 774. See para 2.40 below.

(109)The traditional view is also that the promisee will normally be unable to bring an action in debt to enforce payment to him or her of sums due to the third party under the contract, since those sums were by definition not due to the promisee: see Chitty on Contracts (27th ed, 1994) para 18-030 and Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460, 502. Quaere whether the promisee can bring an action for sums due to the third party if the purpose of the claim is for the sums to be paid direct to the third party rather than to the promisee; see A Burrows, Remedies for Torts and Breach of Contract (2nd ed, 1994) p 317.

(110)(1981) 125 SJ 397.

(111)[1975] 1 WLR 1468.

(112)[1980] 1 WLR 277.

(113)See, generally, A Burrows, Remedies for Torts and Breach of Contract (2nd ed, 1994) p 153.

(114)See Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460, 501-502 (per Windeyer J).

(115)Lords Wilberforce, Russell and Keith all relied on this justification. Lord Wilberforce's alternative explanation, [1980] 1 WLR 277, 283, was that a few types of contract - for example, persons contracting for family holidays, ordering meals in restaurants for a party, hiring a taxi for a group - call for special treatment.

(116)[1994] 1 AC 85. For notes on this case see, eg, I Duncan Wallace, "Assignment of Rights to Sue: Half a Loaf" (1994) 110 LQR 42; A Tettenborn, "Loss, Damage and the Meaning of Assignment" [1994] CLJ 53; A Berg, "Assignment, Prohibitions and the Right to Recover Damages for Another's Loss" (1994) JBL 129.

(117)(1839) 6 Cl & F 600; 7 ER 824. In this case, goods had been jettisoned from the defendants' ship in a storm, and the appellant consignor sought to recover damages under the contract notwithstanding the fact that title had passed to the consignee before the goods were lost. The consignor was permitted to recover substantial damages for the carrier's failure to deliver, even though the consignor had parted with property in the goods before the breach occurred.

(118)[1977] AC 774.

(119)(119)Ibid at 847.

(120)Although it should be noted that the other Law Lords expressed some tentative support for his view.

(121) [1994] 1 AC 85, 96-97.

(122)(122)Ibid at 98.

(123)[1995] 1 WLR 68.

(124)[1994] 1 AC 85.

(125)[1995] 1 WLR 68, 80.

(126) [1996] 1 AC 344.

(127) See para 2.9 above.

(128) [1968] AC 58.

(129)Lord Pearce alone considered that the damages would be substantial. And see generally para 2.38 above.

(130)[1967] 2 QB 31. See P Davies, ?Mrs Gore's legacy to commerce' (1981) 1 LS 287.

(131)In European Asian Bank v Punjab and Sind Bank [1982] 2 Lloyd's Rep 356, 369, Ackner LJ said that for the promisee to obtain a stay it would be necessary to establish an express or implied promise not to sue and some legal or equitable right to protect, such as an obligation to indemnify D. In these circumstances it would be a fraud on the promisee for the proceedings to continue.

(132)[1973] QB 87.

(133)It has been argued that Snelling is difficult to reconcile with the requirement of sufficient interest as explained in Gore, but is nonetheless consistent with the spirit of Beswick v Beswick: Chitty on Contracts (27th ed, 1994) para 18-038.

(134)[1978] 1 Lloyd's Rep 206.

(135)[1978] 1 Lloyd's Rep 206, 210. In The Chevalier Roze [1983] 2 Lloyd's Rep 438, 443, Parker J, having referred to The Elbe Maru, respectfully doubted whether it was correct that P had done enough if he merely showed a possibility of prejudice. Where P was seeking to prevent D from asserting a possibly good claim, and where D had raised a triable issue which could not be determined without a further investigation of the facts, he found it difficult to see how it could be a fraud on P to allow D's action to proceed.

(136)For an analogous exception, see Swain v Law Society [1983] 1 AC 598 in which the House of Lords interpreted s 37 of the Solicitors Act 1974 as empowering the Law Society to create a contract for the benefit of third parties (its members). Lord Diplock said, at p 611, "[T]he policy of insurance which the Society is empowered to take out and maintain by section 37(2)(b) is a contract which creates a jus quaesitum tertio. It does so by virtue of public law, not the ordinary English private law of contract. This makes it unnecessary in the instant case to have recourse to any of those juristic subterfuges to which courts have, from time to time, felt driven to resort in cases in which English private law is applicable, to mitigate the effect of the lacuna resulting from the non-recognition of a jus quaesitum tertio - an anachronistic shortcoming that has for many years been regarded as a reproach to English private law ...."

(137)The Law Revision Committee recommended that section 11 of the 1882 Act should be extended to all life, endowment and education policies in which a particular beneficiary is named: Sixth Interim Report Statute of Frauds and the Doctrine of Consideration (1937) Cmd 5449, para 49. See para 12.22 below.

(138)See Colinvaux's Law of Insurance (ed Merkin) (6th ed, 1990) pp 194-195.

(139)See Vural Ltd v Security Archives Ltd (1989) 60 P & CR 258, 271-272.

(140)See paras 12.19-12.21 below.

(141)See Treitel, The Law of Contract (9th ed, 1995) p 584.

(142)Section 38(1).

(143)Sections 54-56.

(144)(144)Thompson v Dominy (1845) 14 M & W 403; 153 ER 532.

(145)(145)Sewell v Burdick (1884) 10 App Cas 74 (where an action against the bank by the carrier for unpaid freight, the bank being pledgees of the bill of lading, failed as the bank had no property in the bill and the goods); The San Nicholas [1976] 1 Lloyd's Rep 8; The Sevonia Team [1983] 2 Lloyd's Rep 640; The Delfini [1990] 1 Lloyd's Rep 252.

(146)See Rights of Suit in Respect of Carriage of Goods by Sea (1991) Law Com No 196; Scot Law Com No 130, for the recommendations which led to the Carriage of Goods by Sea Act 1992.

(147)Most importantly in practice the obligation to pay the carrier freight in respect of the cargo.

(148)(148)Brandt v Liverpool, Brazil & River Plate Steam Navigation Co Ltd [1924] 1 KB 575; The Aramis [1989] 1 Lloyd's Rep 213; The Captain Gregos (No 2) [1990] 2 Lloyd's Rep 395.

(149)[1954] 1 QB 250, 274.

(150)(1861) 1 B & S 393; 121 ER 762. See para 2.5 above.

(151)[1968] AC 58.

(152)(152)Chitty on Contracts (27th ed, 1994) para 18-057.

(153)(153)Ibid; Megarry & Wade, The Law of Real Property (5th ed, 1984) p 764.

(154)The Law Commission is currently considering section 14 in our work on Shareholders' Remedies.

(155)155SI 1992/3288 implementing EEC Council Directive 90/314 on package travel, package holidays and package tours.

(156)Defined in Regulation 2(1) to mean "the pre-arranged combination of at least two of the following components when sold or offered for sale at an inclusive price and when the service covers a period of more than twenty-four hours or includes overnight accommodation:- (a) transport; (b) accommodation; (c) other tourist services not ancillary to transport or accommodation and accounting for a significant proportion of the package". The definition does not exclude tailor-made packages, and is not avoided by the submission of separate accounts (Reg 2(1)(i) & (ii)).

(157)Which means the person who takes or agrees to take the package, any person on whose behalf that person agrees to purchase the package or any person to whom that person or any of the beneficiaries transfer the package (Reg 2(2)).

(158)Regulation 15.

(159)Regulation 15(1) read in conjunction with the definition of "consumer" in Regulation 2. The Regulations provide that the organiser or retailer is to be liable unless the damage suffered by the consumer was due to his own fault, or to the unforeseeable failures of a third party or circumstances beyond the control of the organiser or retailer: Regulation 15(2). Certain limitations of liability are permitted: Regulation 15(3) & (4).

(160)Regulations 4 to 12.

(161)Regulations 12 and 13.

(162)Regulations 16ff.

(163)See, eg, A Corbin, ?Contracts for the Benefit of Third Persons' (1930) 46 LQR 12; F Dowrick, ?A Jus Quaesitum Tertio By Way of Contract in English Law' (1956) 19 MLR 374; M Furmston, ?Return to Dunlop v Selfridge?' (1960) 23 MLR 373; J Wylie ?Contracts and Third Parties' (1966) 17 NILQ 351; B Markesinis, ?An Expanding Tort Law - The Price of a Rigid Contract Law' (1987) 103 LQR 354; R Flannigan, ?Privity - The End of an Era (Error)' (1987) 103 LQR 564; F Reynolds, ?Privity of Contract, the Boundaries of Categories and the Limits of the Judicial Function' (1989) 105 LQR 1; P Kincaid, ?Third parties : Rationalising a Right to Sue' [1989] CLJ 243; J Adams & R Brownsword, ?Privity and the concept of a network contract' (1990) 10 Legal Studies 12; D Beyleveld & R Brownsword, ?Privity, Transitivity and Rationality' (1991) 54 MLR 48; J Beatson, ?Reforming the Law of Contracts for the Benefit of Third Parties: A Second Bite at the Cherry' (1992) 45 CLP 1; H Beale, ?Privity of Contract: Judicial and Legislative Reform' (1995) 9 JCL 103; J Wilson, ?A Flexible Contract of Carriage - The Third Dimension?' [1996] LMCLQ 187; S Whittaker, ?Privity of Contract and the Tort of Negligence: Future Directions' (1996) 16 OxJLS 191; E McKendrick, Contract Law (2nd ed, 1994) pp 127-131; J Adams and R Brownsword, Key Issues in Contract (1995) ch 5.

(164)Sixth Interim Report (1937) Cmd 5449, paras 41-49. See paras 4.2-4.4 below.

(165) See paras 4.5-4.14 below.

(166)[1968] AC 58, 72.

(167)[1980] 1 WLR 277.

(168)At p 291.

(169) At p 300.

(170)At p 300. Lord Keith, at pp 297-298, also associated himself with Lord Scarman's view.

(171) [1980] 1 WLR 277, 301.

(172) (1981) 125 SJ 397.

(173)[1983] 1 AC 598, 611. See para 2.52, note 136, above.

(174) [1994] 2 AC 324, 335. See also para 2.34 above for Lord Goff's comments, in a more specific context, in The Mahkutai [1996] 3 WLR 1.

(175) [1995] 2 AC 207.

(176) [1995] 2 AC 207, 262-263.

(177) [1995] 1 WLR 68, 76. See para 1.1 above. Steyn LJ later went on to say, after referring to our Consultation Paper, that there is a respectable argument that reform is best achieved by the courts working out sensible solutions on a case-by-case basis. "But that requires the door to be opened by the House of Lords reviewing the major cases which are thought to have entrenched the rule of privity of contract. Unfortunately, there will be few opportunities for the House of Lords to do so." [1995] 1 WLR 68, 78.

(178) See, eg, the judgment of Iacobucci J (with whom L'Heureux-Dube, Sopinka and Cory JJ concurred) in London Drugs Ltd v Kuehne & Nagel International Ltd (1992) 97 DLR (4th) 261, 340-370. He spoke of the need for reform of the privity rule and, while he did not think it appropriate for the courts to embark on major reform or abolition, he recognised an obligation to ameliorate injustice by the incremental relaxation of the rule in limited circumstances. Having said that, the approach that the majority ultimately advocated is, in our view, a radical one and would appear to go beyond our proposed reform by allowing an employee, even if not expressly identified in the exclusion clause, to rely on it. As Professor John Fleming pertinently observes in ?Employee's Tort in a Contractual Matrix: New Approaches in Canada' (1993) 13 OxJLS 430, 437, "[T]he step from express to implied intent to benefit third parties may not look far, but long experience with ?implication' warns against the slide into fiction. Is the failure to mention employees just an oversight, a drafting glitch, or does it signify that the parties never had a mind to include employees? The most that one can say is that in all probability they would have been included, if the need to do so had occurred to the parties. But this is certainly a long way from the ?necessary implication' postulated by Lord Denning in Adler v Dickson". See, generally on the London Drugs case, paras 2.31-2.32 above.

(179) (1988) 165 CLR 107. In Olsson v Dyson (1969) 120 CLR 365, 392 Windeyer J in the High Court of Australia spoke of "...the rigidity of the obstacles the common law doctrine of privity of contract places in the way of justice to third parties."

(180)Brennan and Dawson JJ dissenting.

(181)See para 12.23 and Appendix B below.

(182) (1988) 165 CLR 107, 118.

(183) (1988) 165 CLR 107, 123,

(184) (1988) 165 CLR 107, 168.

(185) (1988) 165 CLR 107, 170-1.

(186)This is a novel and controversial approach in that the principle against unjust enrichment is being used to protect expectations rather than to reverse benefits acquired at the expense of the plaintiff: see K Soh, "Privity of Contract and Restitution" (1989) 105 LQR 4; I Jackson (1989) 63 ALJ 368.

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