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You are here: BAILII >> Databases >> The Law Commission >> Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(9) (31 July 1996)
URL: http://www.bailii.org/ew/other/EWLC/1996/242(9).html
Cite as: [1996] EWLC 242(9)
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PART IX
Variation and Cancellation
1. Provisional Proposals and Consultation
9.1 It was suggested in the Consultation Paper that a question central to reform of the third party rule was that of when the parties, after having agreed to confer a right on a third party, should be permitted to vary or cancel that right. (1) To allow the contracting parties an unlimited power to vary the contract would mean that the third party would not have a right that he could confidently rely on; on the other hand, to restrict the right to vary could be seen as an unacceptable fetter on the parties' freedom of contract. While most consultees favoured the ideas that (i) there should be some opportunity for the original parties to cancel or vary the contract but that (ii) there should be a cut-off point after which the contract could not be varied or cancelled without the consent of the third party, no clear view emerged from consultation as to what that cut-off point should be.
9.2 In the Consultation Paper, several tests for a cut-off point (or, as one might otherwise phrase it, the time of crystallisation of the third party's right) were outlined: (2)
(i) when the third party becomes aware of the contract;
(ii)when the third party adopts the contract either expressly or by conduct; (3)
(iii)when the third party accepts or assents to the contract; (4)
(iv)when the third party materially alters his position in reliance on the contract; (5)
(v) when the third party either materially changes his position in justifiable reliance on the promise, or brings suit on it, or manifests assent to it at the request of the promisor or promisee.
9.3 We suggested that the central choice lay between (ii), (iii) and (iv). Consultees were divided between these. Options (ii) and (iii) were criticised on the grounds that the meaning of adoption or acceptance was unclear. Some consultees argued that the concept of reliance in option (iv) was unclear, that its use could lead to artificial acts of reliance, that a choice had to be made between mere "reasonable" reliance and "detrimental" reliance, and that reliance could occur without the knowledge of either of the contracting parties.
9.4 We also asked "whether modification should be permitted where the contract allows it (either expressly or impliedly) regardless of adoption, acceptance or material reliance or at least where the third party knows (or should reasonably have been aware) that the contract permits modification even though he subsequently adopts, accepts or materially relies on the contract." (6) A large majority of consultees were in favour of permitting contractual provisions which preserve the right of the contracting parties to vary or cancel the contract to prevail over the crystallisation of a third party's rights.
2. The Two Extreme Positions
(1) Variation or Cancellation at Any Time
9.5 A number of consultees favoured allowing revocation at any time. Some others argued that revocation should be permitted at any time unless the third party had in some form provided payment for the benefit conferred upon it. These consultees were for the most part among those who were opposed to any reform of the doctrine of privity of contract, and therefore most likely saw this as a means of preserving the powers of the original contracting parties to the fullest extent possible. This option would preserve the ability of the contracting parties to agree between themselves to alter the contract at any time, in the same manner as if there were no third party rights involved.
9.6 Similarly some consultees saw the imposition of any limit on the power of the contracting parties to vary or cancel the contract as an attack on the doctrine of consideration. They argued that, if a third party's rights were allowed to crystallise so as to become irrevocable by the contracting parties, this would effectively mean enforcing gratuitous promises (or at best, promises supported only by reliance or detrimental reliance) made to the third party. This is a fundamental and important point. We have, however, dealt with it in Part VI above. We there explained that we saw no objection to accepting that, while formally, our proposed reform does not affect the requirement of consideration, at a deeper policy level, and within the area of third party rights, it may represent a relaxation of the importance attached to consideration. (7)
9.7 If the contracting parties were able to vary or cancel the contract at any time the impact of reforming the law, by giving a third party an entitlement to sue, would be marginal. As the New Zealand Contracts and Commercial Law Reform Committee pointed out, if reform of the third party rule is to have any substantial effect, there must be some limit on the parties' power to vary or cancel the third party beneficiary's rights without the third party's consent, even if it is only to prevent them doing so once judgment has been given in his or her favour. (8) If this were not the case, the reform would amount to little more than a procedural device to allow the third party to sue in his or her own name when for some reason the promisee was not prepared to act, and would not guarantee the third party any rights at all under the contract. The third party would be left in much the same position as at present. (9)
9.8 At the core of this issue is a conflict between preserving the freedom of the contracting parties to implement their intentions as they see fit at any particular time, and allowing the creation of effective third party rights so that a third party can arrange its affairs with some certainty. (10) We consider that the former policy is outweighed by the latter.
9.9 We therefore reject the view that the contracting parties should be permitted to vary or cancel at any time a contractual provision that is enforceable by a third party.
(2) No Variation or Cancellation
9.10 At the other extreme, a number of consultees favoured a rule which would not permit any variation or cancellation of a contractual provision enforceable by a third party. (11) But the majority agreed with our provisional view that to refuse to permit variation or cancellation at all would be too restrictive. (12) Where the third party is not even aware of the promise it is hard to see any conceivable injustice to the third party in allowing the contracting parties to vary or cancel the contract. We therefore reject this approach as creating too great a fetter on the ability of the contracting parties to change their original intentions.
3. Possible "Crystallisation" Tests
9.11 It is obvious from the above discussion that we consider that any reform will require some degree of constraint on the contracting parties' rights to vary the contract, but that this should not amount to a total bar on variation. In other words, along with the majority of consultees, we consider that there should be a ?crystallisation' test. We now move to consider what that test should be.
(1) Awareness
9.12 We reject at the outset a test which requires merely that the third party is aware of the terms of the contract, although it is the solution that was favoured by a few consultees. It is the crystallisation point that is most favourable to third parties and comes close to rejecting altogether a right to vary. However, we see variation or cancellation as causing no injustice to a third party who, while aware of the terms of the contract, has no wish to take advantage of them or who does not believe that the promise will be performed or that he or she has an entitlement to performance. Indeed he or she may even renounce the contract. Of course, it might be argued that such a third party is most unlikely to object to a variation or cancellation by the contracting parties so that no dispute would arise. But a dispute might arise where the third party changes its mind about wanting the promise performed after the contracting parties have varied or cancelled the contract. We therefore reject "awareness" as an appropriate crystallisation test.
9.13 In our view, this leaves reliance, detrimental reliance, acceptance or adoption as the major possible tests. In choosing between them, it is first necessary to clarify what each means.
(2) Reliance
9.14 Reliance on a promise, in our view, means "conduct induced by the belief (or expectation) that the promise will be performed or, at least, that one is legally entitled to performance of the promise." The reliance need not be detrimental: that is, the conduct need not make the plaintiff worse off than before the promise was made. To give two illustrations. Say A promises B to pay C £500. C then goes out and buys some shares, which he would not have risked buying but for A's promise of the £500. The shares have now tripled in value. Here C has relied on A's promise without being worse off than he was before the promise was made. Or say A promises B to pay C £500 and C, on hearing of this and because of it, immediately pays some outstanding bills. By so doing C has relied on the promise. But there is no necessity in showing reliance to go on to prove that, if A were to break the promise, C would be in a worse position than if the promise had never been made.
(3) Detrimental Reliance
9.15 Detrimental reliance means that the third party's conduct in reliance on the promise renders him or her worse off than he or she would have been if the promise had never been made. In the example of C buying shares in the previous paragraph, C would have detrimentally relied if the shares had fallen in value. Again a person detrimentally relies if he or she passes up profitable opportunities on the strength of the promise.
(4) Acceptance
9.16 Although a third party, unlike an offeree, is not normally being requested to respond, we consider that in defining what is meant by acceptance, some help can be derived from the well-known notion of "acceptance" of an offer in a standard bilateral contract. In that context, acceptance means communication of one's assent. This is supported by the legislation in Queensland which uses "acceptance" by the third party as the test for crystallisation of its rights, and defines "acceptance" as "an assent by words or conduct communicated by the beneficiary to the promisor...." (13) However, this definition leaves open whether "communication of one's assent" means that one's acceptance must be received by the promisor or whether it is sufficient that one communicates one's assent even though the promisor does not know of it (for example, by posting a letter). We return to that issue below. (14)
(5) Adoption Expressly or by Conduct
9.17 This was the crystallisation test favoured by the Law Revision Committee in 1937 and by the Western Australia Property Law Act 1969. (15) However, the phrase does not appear to have been defined in any case law and the difficulty is to know what it means. One possibility is that it means the same as "acceptance" (as defined above). Another is that it means either "acceptance" or "reliance". We consider that the ambiguity of the phrase means that it is best avoided.
4. Choice of Test
9.18 Having ruled out "adoption" as insufficiently clear in its meaning, we are left with three main possible crystallisation tests: reliance, detrimental reliance, and acceptance. After much deliberation, we have decided that the appropriate balance between avoiding injustice to a third party and allowing the contracting parties to change their minds is achieved by having a test whereby reliance or acceptance by the third party crystallises his or her rights.
9.19 In arriving at that test we have first had to make a choice between reliance and detrimental reliance. We have opted for the former. The essential injustice caused to a third party by the privity rule is that that party's reasonable expectations of the promised performance are disappointed. Reliance serves to indicate that expectations have been engendered in the third party. To require the reliance to be detrimental tends to shift the focus away from protecting the plaintiff's expectation interest to protecting the plaintiff's reliance interest. In other words, an insistence that reliance be detrimental makes it very difficult (albeit not impossible) to explain why the third party is entitled to performance of the promise, or its monetary substitute in the form of expectation damages, rather than damages for reliance loss (as, for example, for tortious misrepresentation). (16) A useful analogy is the doctrine of promissory estoppel, which, like our reform is concerned with the enforcement of certain promises by those who have not provided consideration. There the debate has raged for many years as to whether the promisee needs to have merely relied, or must have detrimentally relied, on the promise in order to fall within the doctrine. Although the matter cannot be regarded as entirely settled, there seems to be an emerging consensus to the effect that mere reliance is sufficient. (17)
9.20 But while we consider that reliance by the third party should be the primary test for the crystallisation of the third party's rights, we also think it necessary to have an alternative test of acceptance. This is primarily because, in our view, a third party who has (successfully) communicated its assent to the promisor ought to be secure in its entitlement without also having to show reliance on the promise. Furthermore, an acceptance enables the promisor to know exactly where it stands. In this respect, we think that the standard posting rule (that acceptance of an offer takes place when the letter is posted) (18) is here inappropriate. To apply the rule that a valid acceptance takes place on the posting of a letter (subject to exceptions) would mean that a third party could crystallise his rights not only without the promisor knowing anything about it but, more crucially, without the promisor even being able to foresee it (because, for example, the promisor did not know that the third party had come into existence). And in contrast to the reliance test (as discussed below) (19) it would seem impracticable and overelaborate to suggest that the posting rule should only apply where it was reasonably foreseeable that a postal acceptance would be made.
9.21 It has been suggested to us that an alternative test of acceptance is unnecessary because reliance encompasses acceptance (on the basis that reliance means "any conduct induced by the promise"). We do not agree. Acceptance by communicating one's assent is conduct designed to secure performance of the promise; it is not conduct induced by the belief that the promise will be performed or that one is legally entitled to performance of the promise. A third party who writes to the promisor saying "I do not want to take advantage of your promise" is not relying on the promise even though his conduct is induced by the promise. Similarly a third party who writes out of fear that the promise will otherwise be withdrawn saying "I want to take advantage of your promise" is accepting the promise but is not relying on it.
9.22 On the other hand we do not see the need for an additional alternative test of the third party "bringing suit on the promise". In our view, a third party who brings suit on the promise is relying on that promise in that it is embarking on conduct based on the belief that it is legally entitled to performance of the promise.
9.23 We are supported in our view that the best crystallisation test is reliance or acceptance by the fact that an approach of alternative tests was favoured by many consultees and that the precise approach of reliance or acceptance was particularly popular.
9.24 Some consultees preferred a single test of acceptance. A merit of this would be that the contracting parties would know where they stood before proceeding to vary or cancel the contract. However, we consider that any problems caused by the ?unilateral' nature of reliance are sufficiently catered for by modifying the reliance test so as to require that the promisor could reasonably have foreseen/anticipated that the third party would rely on the promise. This is discussed further below. (20) The obvious objection to a single acceptance test is that many third parties will rely (and even detrimentally rely) without having communicated their assent. As the contracting parties will not normally ask for communication of assent (although if they do, this will displace the reliance test as is explained below) (21) only those third parties who know the law can be expected to communicate assent. If acceptance alone were the test, one could even have a situation where the third party is present when the contract is made and is told of the beneficial promise, yet because he does not communicate his assent, the parties would be free to revoke despite reliance (including detrimental reliance) by the third party.
9.25 We should add the perhaps obvious point that where a contract contains more than one provision that is enforceable by a third party, only those provisions which the third party relies upon or accepts should become irrevocable (although, of course, the third party could rely on or accept all the provisions).
9.26 We therefore recommend that:
(14)the contracting parties' right to vary or cancel the contract or, as the case may be, the contractual provision should be lost once the third party has relied on it or has accepted it ("acceptance" meaning "an assent by words or conduct communicated by the third party to the promisor"). The posting rule, applicable to the acceptance of offers sent by post (and possibly by some other means), (22) should not apply. (Draft Bill, clause 2(1) and (2))
5. The Reliance Test : Further Details
(1) Need the Promisor Be Aware Of, or Foresee, the Reliance?
9.27 A number of consultees considered that the third party's reliance should only crystallise its rights if the contracting parties, or one of them, was aware of the reliance. It was also suggested by one consultee that reliance should only count if it was reasonably to be anticipated. These suggestions stem from a fear about the consequences of the unilateral nature of reliance. The contracting parties may purport to vary or cancel a contract at a time when they do not know that the third party has relied; the promisor may then go on to perform in favour of someone else (that is, a fourth party). Although the promisor may have a claim in restitution against the party to whom performance was rendered, this will not always be so and the promisor will in any event normally have to bear the risk of the insolvency of that party.
9.28 In our view, the correct resolution of this difficulty rests on recognising that the promisor generally ought to check with the third party before revoking or cancelling the contract. In normal circumstances a promisor who has entered into a contract which, under our recommendations, is enforceable by a third party (because the parties have intended to confer legal rights on the third party) ought to realise that that third party is likely to rely on the contract and that he is not free to resile from the contract simply by obtaining the consent of the promisee. It follows from this that the unilateral nature of reliance only causes difficulty where the promisor could not reasonably be expected to check with the third party because the promisor did not realise that the third party knew of the contract. Indeed in the case of a third party who was not in existence at the time the contract was made, it may even be that the promisor did not realise that the third party had come into existence. To deal with this sort of problem we consider that the reliance test should be qualified so that reliance should only count where, unless the promisor is actually aware that the third party has relied, the promisor could reasonably have foreseen that the third party would rely on the promise.
9.29 It should be added that this qualification will create some incentive for a third party, who knows the law, to ?accept' the promise by communicating its assent. For if the third party goes ahead and relies without acceptance it runs some risk in certain circumstances of falling foul of the qualification.
9.30 We therefore recommend that:
(15)the reliance test should be qualified so that reliance should only count where (unless the promisor is aware that the third party has relied) the promisor could reasonably have foreseen that the third party would rely on the promise. (Draft Bill, clause 2(1)(b) and 2(1)(c))
(2) Material Reliance
9.31 It was suggested to us that the third party's reliance should only count if it was material. And in New Zealand the Contracts (Privity) Act 1982, s 5(1)(a) requires that "the position of a beneficiary has been materially altered by the reliance of that beneficiary ... on the promise ...". (23) It is not entirely clear what the word ?material', in the phrase ?material reliance', refers to. In particular it is ambiguous as between the causal potency of the promise and the seriousness of the conduct induced by the promise. Even if one confines it to the latter, with the aim being to rule out trivial acts of reliance, we consider that it would be a recipe for litigation; for where is the line is to be drawn between trivial and non-trivial reliance? This is especially so given that we have clarified that the relevant test is reliance and not detrimental reliance. In our view, the importance of reliance is in indicating that expectations have been engendered in the third party, and the triviality of the reliance seems irrelevant to that.
(3) Protection of the Third Party's Reliance or Expectation Interest?
9.32 Some consultees doubted whether a third party should be entitled to expectation damages, where the promise for the third party has become irrevocable because of the third party's reliance and yet the parties have purported to vary or cancel the contract so that the promisor does not perform. They argued that, in this situation, the third party should be confined to recovering its reliance loss.
9.33 We have already touched on this question. (24) We believe that there is no good reason to restrict damages to the reliance measure. The reform that we are concerned to introduce allows third parties to ?enforce' contracts and we see no reason why the normal contractual measure of recovery (the expectation measure) should not apply. Again the analogy of promissory estoppel may be thought helpful; for that doctrine is not confined to protecting the plaintiff's reliance interest. (25)
(4) Burden of Proof
9.34 As it can be difficult to prove reliance, it was suggested to us that the burden of proof would be very important and that the burden should lie on the contracting parties to show that the third party had not relied. Although we see the force in the argument, there are great difficulties in proving a negative and, in view of the fact that our proposals are concerned to confer rights upon a third party, we consider that the burden of proving the existence of those rights should be laid at the door of the third party. Again, this continues the analogy with promissory estoppel, as the party seeking the protection of the estoppel has the burden of proving reliance. (26)
(5) Reliance by Someone Other Than the Third Party
9.35 The New Zealand legislation prevents variation or cancellation of the third party's right once the third party's position has been materially altered by reliance on the promise by either the third party or by any other person. (27) In other words, the New Zealand provision extends to situations where someone other than the third party (ie one of the contracting parties or a fourth party) acts in reliance on the expected benefit to the third party, and the third party suffers detriment because of this reliance. An example of this may be where a parent or guardian of a child third party beneficiary has acted on the assumption that the child will be provided for by the benefit under the contract and has not therefore made any provisions for the child. The question was not raised in the Consultation Paper of whether acts of reliance should only count if undertaken by the third party, although we received one comment favouring the provisions of the New Zealand legislation on this issue.
9.36 We have decided not to follow the New Zealand approach on this question. First, we feel that that approach would make the reform unattractive to contracting parties, as we do not believe that contracting parties envisage themselves as effectively becoming insurers for any loss that the third party may suffer as a result of fourth party actions. Secondly, to allow the actions of fourth parties to constitute reliance would not sit well with the analogy we have been drawing with promissory estoppel. Thirdly, and perhaps most importantly, we have acknowledged that, while there are arguments for requiring the contracting parties to have knowledge of any reliance before their rights are fettered, it is not unreasonable to expect them to check whether the third party has actually relied. However, we think that it would be unreasonable to expect the contracting parties to check whether any other party has relied in such a way as to alter the third party's position, particularly as the third party may not know that its position has been so altered. To provide otherwise would be to place too heavy a burden on the contracting parties, and could result in the situation where the contracting parties have had their rights abrogated, yet neither they nor the third party know of this.
6. Reservation of a Right to Vary or Cancel
9.37 It was provisionally recommended in the Consultation Paper that the parties should be able to reserve the right to vary or cancel the third party's right even after the latter had adopted, accepted or relied on that right. (28) There seemed to be broad agreement among consultees that the parties should have power to reserve to themselves or even to one of them (29) such a right to vary or cancel. This view was particularly prevalent among consultees involved in the construction industry, highlighting the fact that collateral warranties often provide for variation. (30)
9.38 It could be argued that any attempt to preserve the contracting parties' rights to vary negates the value of the third party's right: if the parties can vary the contract at any stage, even after reliance on it or acceptance of it by the third party, it would seem that the third party has few guaranteed rights. However, the third party's rights may be defined and limited by the terms of the contract, (31) and it would seem inconsistent to allow the contracting parties to make a contract that confers a benefit on a third party which is conditional upon an external factor, but not one which is conditional upon their own future intentions.
9.39 A number of consultees thought that the parties should only have such a right if the third party was aware, or perhaps should have been aware, of the reservation: otherwise, there might be a danger that the third party beneficiary could be misled. The New Zealand Contracts (Privity) Act 1982, section 6 provides that the parties may not operate such a clause unless the third party knew of it before it materially altered its position in reliance on the promise. This gives the third party the opportunity to consider the fact that it is not guaranteed the right of enforcement before it chooses to rely on the promise. This is part of a wider issue relating to the extent to which, in this legislation, one can fully deal with the possibility of the third party being misled as to its entitlement. (32) In line with our basic commitment to respecting the intentions of the contracting parties, and not causing unnecessary uncertainty, we have concluded that this legislation should only go so far as to require that the reservation of a right to vary or cancel is expressly provided for.
9.40 We therefore recommend that:
(16)the contracting parties may expressly reserve the right to vary or cancel the third party's right irrespective of reliance or acceptance by the third party. (Draft Bill, clause 2(3)(a))
7. Can the Relevant Crystallisation Test be Laid Down in the Contract?
9.41 We consider that, by an express term, the parties should be able to lay down in the contract a crystallisation test different from reliance or acceptance. That is, they should be able to reserve a right to vary or cancel the contract until, for example, the third party has accepted by writing (so that reliance would not count and nor would an oral acceptance).
9.42 We therefore recommend that:
(17)the parties, by an express term, should be able to lay down a crystallisation test different from reliance or acceptance. (Draft Bill, clause 2(3)(b))
8. Crystallisation Where There Is More Than One Third Party
9.43 Although this was not put out to consultation, it is perhaps worth clarifying that, in our view, where there is more than one third party, who can satisfy the test of enforceability, reliance on or acceptance of the contract (or satisfaction of whatever other crystallisation test is expressly laid down in the contract) by each third party should be needed to crystallise that third party's rights. (33) The practical effect of this will vary depending on whether the promise is intended to confer enforceable rights that are to be separately, or jointly, enjoyed with other third parties. For example, where A contracts with B to pay C £100 and D £150, it is clear that any crystallisation of C's rights or consent by C cannot affect D's rights and vice versa. On the other hand, a contract between A and B to benefit C and D jointly, where D has neither accepted nor relied (indeed D may not yet be alive) but C has accepted or relied, could not be varied to exclude D unless C consents: but it could be varied to exclude D if C does consent. (34)
9.44 We therefore recommend that:
(18)although no legislative provision on this is necessary, (35) where there is more than one third party who satisfies the test of enforceability, the relevant crystallisation test would need to be satisfied by each third party in order to crystallise that third party's rights.
9. Creating Irrevocable Rights
9.45 We did not put forward any provisional view as to whether effect should be given to a term in the contract (enforceable by the third party) that the contract is irrevocable and, while we drew attention to the position under US law, (36) we did not expressly seek consultees' views on this point.
9.46 We do not see the attraction, nor the justification, for holding the contracting parties to a contract which the third party has neither relied upon nor accepted. In our view this would be an unreasonable fetter on the contracting parties' freedom of contract which could not be justified by reference to any injustice to another party. In any event, this would cut across the standard contractual principle that the parties are free to vary any term of the contract, even a ?no-variation' term. We therefore consider that any provision of a contract for the benefit of a third party which purports to render that contract irrevocable should be as open to variation or discharge as any other contractual term. Similarly if the parties have expressly laid down a crystallisation test different from reliance or acceptance, they should be free to vary it prior to reliance or acceptance by the third party.
9.47 We therefore recommend that:
(19)a contractual term to the effect that the contract is irrevocable should be as open to variation or cancellation by the contracting parties as any other term.
10. Judicial Discretion to Authorise Variation or Cancellation
9.48 The New Zealand Contracts (Privity) Act 1982, section 7, gives the court a discretion to authorise a variation or discharge of the contract if "it is just and practicable to do so", despite a material reliance which would otherwise have crystallised a third party's rights. The legislation further provides that the court which orders a variation or discharge may also order that such sum as it considers just to compensate the third party who has relied on the promise be paid by the promisor. In the Consultation Paper we provisionally recommended that the courts should not have a residual discretion to authorise variation or discharge for reasons of justice. (37) Most consultees agreed on grounds of certainty. However, there was a minority view that a measure of judicial discretion to authorise variation or discharge was desirable. We have been persuaded that that is a preferable approach.
9.49 We particularly have in mind situations where the contracting parties wish to vary or cancel the contract but cannot reasonably ascertain whether the third party has relied on the contract so that his consent is required. This may be, for example, because the third party simply refuses to say whether it has relied or not or cannot reasonably be contacted to ascertain whether it has relied or not. It is of course possible to seek a declaration of rights under the contract without involving the court in authorising a variation or cancellation, but such a declaration would not aid the parties if they wished to vary and there was found to have been reliance. We also have in mind situations where, although consent is known to be required, the contracting parties are locked into the contract because the third party cannot reasonably be contacted in order for consent to be obtained or because the third party is mentally incapable of consenting to a variation.
9.50 Therefore we now consider that the courts should be given a limited discretion to authorise variation or cancellation and on such terms (including as to the payment of compensation to the third party) as seems appropriate. The discretion should extend to where the third party is mentally incapable of consenting, or cannot reasonably be contacted in order for consent to be obtained, or where the parties cannot reasonably ascertain whether the third party's consent is required. We would not expect such a limited discretion to create any significant degree of uncertainty.
9.51 We therefore recommend that:
(20)there should be a judicial discretion to authorise a variation or cancellation (and on such terms, including as to the payment of compensation to the third party, as seems appropriate) in certain limited circumstances irrespective of reliance or acceptance by the third party. The discretion should extend to where the parties cannot reasonably ascertain whether the third party's consent is required for the cancellation or variation of the contract; or where the third party's consent cannot be obtained because his whereabouts cannot reasonably be discovered or because he is mentally incapable of giving his consent. (Draft Bill, clauses 2(4) to 2(7))
Footnotes to Part IX
(1)Consultation Paper No 121, para 5.28. Variation or cancellation by the parties must be distinguished from a term (or statutory provision) which permits one of the parties unilaterally to alter the contracted-for work. A third party's rights are subject to such a term: see, eg, paras 9.37, note 30, and 10.31 below.
(2)2 Consultation Paper No 121, para 5.27.
(3)See section 11(3) of the Western Australia Property Law Act 1969.
(4)Under section 55(6)(a) of the Queensland Property Law Act 1974, "?acceptance' means an assent by words or conduct communicated by or on behalf of the beneficiary to the promisor ...".
(5)This is the primary test favoured in New Zealand: see Contracts (Privity) Act 1982, s 5(1).
(6)Consultation Paper No 121, para 5.31.
(7)See paras 6.13-6.17 above.
(8)8 Privity of Contract (1981) para 8.3.1.
(9)9 That is, under the present law the third party will not get performance unless both parties decide that they want to honour the terms of the original contract, whereas a reform allowing variation or cancellation at any time would mean that the third party would not be able to secure performance where both parties agree to vary the terms of the original contract.
(10)See para 3.2 above.
(11)This was also the approach provisionally favoured by the Scottish Law Commission subject to there being a term in the contract providing for cancellation or variation: see Memorandum No 38 Constitution and Proof of Voluntary Obligations: Stipulations in Favour of Third Parties (1977) para 33.
(12)12See Consultation Paper No 121 para 5.29. Indeed it was pointed out to us that the inability to vary or cancel benefits subsequently is one of the disadvantages of using a deed poll to overcome the doctrine of privity: see para 2.8, note 27, above.
(13)Section 55(6)(a) Queensland Property Law Act 1974.
(14)See para 9.20 below.
(15)See paras 4.2-4.7 above.
(16)See A Burrows, Remedies for Torts and Breach of Contract (2nd ed, 1994) pp 171-178.
(17)See, eg, Lord Denning in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130; W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189; Treitel, The Law of Contract (9th ed, 1995) p 105; Chitty on Contracts (27th ed, 1994) paras 3-070-3-071; E McKendrick, Contract Law (2nd ed, 1994) p 93.
(18)See, eg, Household Fire Insurance Co Ltd v Grant (1879) 4 Ex D 216. The posting rule contrasts with the standard rule for instantaneous means of communication (eg telex and telephone) that the acceptance is valid only when received: see, eg, Entores Ltd v Miles Far East Corp [1955] 2 QB 327; Brinkibon Ltd v Stahag Stahl and Stahlwarenhandels GmbH [1983] 2 AC 34. The position in relation to fax and E-mail is, arguably, unclear: see Treitel, The Law of Contract (9th ed), pp 25-26.
(19)See paras 9.27-9.30 below.
(20)See paras 9.27-9.30 below.
(21)See paras 9.37-9.42 below.
(22)See para 9.20, note 18, above.
(23)There has been no judicial consideration of this provision: New Zealand Law Commission Contract Statutes Review (1993) para 5.30. The New Zealand Contracts and Commercial Law Reform Committee's Report, Privity of Contract (1981); para 8.3.5 uses both the terms "materially alter" and "injurious reliance" in a manner which suggests that the Committee did not regard the two as coterminous.
(24)See para 9.19 above.
(25)See A Burrows, ?Contract, Tort and Restitution - A Satisfactory Division or Not?' (1983) 99 LQR 217, 239-244.
(26)26Although Lord Denning's judgment in Brikom Investments v Carr [1979] QB 467 may be interpreted as reversing the burden of proving reliance.
(27)Contracts (Privity) Act 1982, s 5(1)(a).
(28)Consultation Paper No 121, para 5.27.
(29)Cf New Zealand Contracts (Privity) Act 1982, s 6(b).
(30)30Almost all construction contracts of any complexity contain a clause permitting the employer, or the architect or engineer on behalf of the employer, to order variations to the work. Though often called "variations", such changes are not variations to the contract but only to the work, since they are contemplated by the original contract. The third party's rights, since they are conferred by the contract, would clearly be subject to such variations.
(31)See para 10.4 below.
(32)See para 13.10 point (iv) below.
(33)The issue of releases where there is more than one third party is dealt with at para 11.9 below.
(34)The main two alternative approaches to this question of jointly entitled third parties would, in our view, produce obviously unacceptable results. These two alternatives are: (i) requiring the consent to variation of each jointly entitled third party (including the consent of those who may not yet be alive) once the rights of one of them have crystallised; or (ii) allowing a variation or cancellation of the rights of all of them (despite the known refusal to consent of a third party whose rights have already crystallised) unless and until the rights of each of them have crystallised.
(35)We have taken the view throughout this Report that legislative provisions dealing with where there is more than one third party with a right of enforceability are unnecessary and that the law to be applied follows directly, or by analogy, from the normal principles applicable to a plurality of creditors. See also paras 11.9-11.10 below. See generally Treitel, The Law of Contract (9th ed, 1995) pp 529-533. In leaving these matters to the courts to determine, we have also been influenced by the facts that (i) these matters were not put out to consultation; and (ii) these matters do not appear to have been dealt with in the legislation reforming privity in, eg, New Zealand, Western Australia or Queensland.
(36)36Restatement (2d) Contracts, § 311(1) prevents discharge or modification by the contracting parties if a term of the promise creating the duty so provides. See Consultation Paper No 121, para 5.29.
(37)37Consultation Paper No 121, paras 5.32-5.33, 6.13.