Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(3) (31 July 1996)

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1. The Intentions of the Original Contracting Parties are Thwarted

3.1 A first argument in favour of reform, as stated in the Consultation Paper, is that the third party rule prevents effect being given to the intentions of the contracting parties. If the theoretical justification for the enforcement of contracts is seen as the realisation of the promises or the will or the bargain of the contracting parties, the failure of the law to afford a remedy to the third party where the contracting parties intended that it should have one frustrates their intentions, and undermines the general justifying theory of contract. (2)

2. The Injustice to the Third Party

3.2 A second argument focuses on the injustice to the third party where a valid contract, albeit between two other parties, has engendered in the third party reasonable expectations of having the legal right to enforce the contract particularly where the third party has relied on that contract to regulate his or her affairs. In most circumstances this argument complements the above argument based on the intentions of the contracting parties. For in most circumstances the intentions of the contracting parties and the reasonable expectations of the third party are consistent with each other. However, one of the most difficult issues that we face is the extent to which the contracting parties can vary or discharge the contract. That issue can be presented as raising the conflict between these two fundamental arguments for reform. In other words, should the injustice to the third party trump the intentions of the parties where those intentions change? As will become clear, we believe that where the injustice to the third party is sufficiently "strong" (that is, where the third party has not merely had expectations engendered by knowledge of the contract but has relied on the contract or has accepted it by communicating its assent to the promisor) it should trump the changed intentions of the contracting parties. That is, the original parties' right to change their minds and vary the contract should be overridden once the third party has relied on, or accepted, the contractual promise.

3. The Person Who Has Suffered the Loss Cannot Sue, While the Person Who Has Suffered No Loss Can Sue

3.3 In a standard situation, the third party rule produces the perverse, and unjust, result that the person who has suffered the loss (of the intended benefit) cannot sue, while the person who has suffered no loss can sue. This can be illustrated by reference to Beswick v Beswick. (3) In that case, as we have seen, (4) the House of Lords held that the widow could not enforce the promise in her personal capacity, since the contract was one to which she was not privy. However, as administratrix of her husband's estate, she was able to sue as promisee, albeit that she could only recover nominal damages because the uncle, and hence his estate, had suffered no loss from the nephew's breach. Hence we see that the widow in her personal capacity, who had suffered the loss of the intended benefit, had no right to sue, while the estate, represented by the widow in her capacity as administratrix, who had suffered no loss, had that right. As it was, a just result was achieved by their Lordships' decision that nominal damages were, in this three party situation, inadequate so that specific performance of the nephew's obligation to pay the annuity to the widow should be ordered in respect of the claim by the administratrix. But where specific performance is not available (for example, where the contract is not one supported by valuable consideration or where the contract is one for personal service) the standard result is both perverse and unjust.

4. Even if the Promisee Can Obtain a Satisfactory Remedy for the Third Party, the Promisee May Not be Able to, or Wish to, Sue

3.4 In Beswick v Beswick, the promisee, as represented by the widow as administratrix, clearly wanted to sue to enforce the contract made for her personal benefit. However, in many other situations in which contracts are made for the benefit of third parties, the promisee may not be able to, or wish to, sue, even if specific performance or substantial damages could be obtained. Clearly the stress and strain of litigation and its cost will deter many promisees who might fervently want their contract enforced for the benefit of third parties. Or the contracting party may be ill or outside the jurisdiction. And if the promisee has died, his or her personal representatives may reasonably take the view that it is not in the interests of the estate to seek to enforce a contract for the benefit of the third party.

5. The Development of Non-Comprehensive Exceptions

3.5 A number of statutory and common law (5) exceptions to the third party rule exist. These have been discussed at paragraphs 2.8 to 2.62 above. Where an exception to the third party rule has been either recognised by case-law or created by statute, the rule may now not cause difficulty. Self-evidently, this is not the case where the situation is a novel one in which devices to overcome the third party rule have not yet been tested. We believe that the existence of exceptions to the third party rule is a strong justification for reform. This is for two reasons. First, the existence of so many legislative and common law exceptions to the rule demonstrates its basic injustice. Secondly, the fact that these exceptions continue to evolve and to be the subject of extensive litigation demonstrates that the existing exceptions have not resolved all the problems.

6. Complexity, Artificiality and Uncertainty

3.6 The existence of the rule, together with the exceptions to it, has given rise to a complex body of law and to the use of elaborate and often artificial stratagems and structures in order to give third parties enforceable rights. (6) Reform would enable the artificiality and some of the complexity to be avoided. The technical hurdles which must be overcome if one is to circumvent the rule in individual cases also lead to uncertainty, since it will often be possible for a defendant to raise arguments that a technical requirement has not been fulfilled. Such uncertainty is commercially inconvenient.

7. Widespread Criticism Throughout the Common Law World

3.7 In Part II, we saw that there had been criticism of the third party rule and calls for its reform from academics, law reform bodies and the judiciary. We shall see in Part IV that the rule has been abrogated throughout much of the common law world, including the United States, New Zealand, and parts of Australia. The extent of the criticism and reform elsewhere is itself a strong indication that the privity doctrine is flawed.

8. The Legal Systems of Most Member States of the European Union Allow Third Parties to Enforce Contracts

3.8 A further factor in support of reforming the third party rule in English law is the fact that the legal systems of most of the member states of the European Union recognise and enforce the rights of third party beneficiaries under contracts. In France, for example, the general principle that contracts have effect only between the parties to them (7) is qualified by Art 1121 of the Code Civil, which permits a stipulation for the benefit of a third party as a condition of a stipulation made for oneself or of a gift made to another. The French courts interpreted this as permitting the creation of an enforceable stipulation for a person in whose welfare the stipulator had a moral interest. In so doing, they widened the scope of the Article so as to permit virtually any stipulation for a third person to be enforced by him or her, where the agreement between the stipulator and the promisor was intended to confer a benefit on the third person. (8) In Germany, contractual rights for third parties are created by Art 328 of the Burgerliches Gesetzbuch permitting stipulations in contracts for performances to third parties with the effect that the latter acquires the direct right to demand performance, although the precise scope of these rights depends on the terms and circumstances of the contract itself. (9) Surveying the member states of the European Union, we are aware that the laws of France, Germany, Italy, (10) Austria, (11) Spain, (12) Portugal, (13) Netherlands, (14) Belgium, (15) Luxembourg,~(16)~ and Greece, (17) recognise such rights (as does Scotland); (18) whereas only the laws of England and Wales (and Northern Ireland) and the Republic of Ireland (19) do not. (20) With the growing recognition of the need for harmonisation of the commercial law of the states of the European Union - illustrated most importantly by the work being carried out by the Commission on European Contract Law under the chairmanship of Professor Ole Lando (21) - it seems likely that there will be ever increasing pressure on the UK to bring its law on privity of contract into line with that predominantly adopted in Europe.

9. The Third Party Rule Causes Difficulties in Commercial Life

3.9 Lest it be erroneously thought that the third party rule nowadays causes no real difficulties in commercial life, or that the case for reform is purely theoretical rather than practical, we have chosen two types of contracts - construction contracts and insurance contracts - to illustrate some of the difficulties caused by the rule. (22)

(1) Construction Contracts

3.10 Both simple construction contracts involving only an employer and a builder, and complex construction contracts involving several main contractors, many subcontractors and design professionals are affected by the third party rule.

3.11 Simple construction contracts illustrate the difficulties which can arise when one contracting party agrees to pay for work to be done by another contracting party which will benefit a third party to the contract. Say, for example, a client contracts with a builder for work to be done on the home of an elderly relative. If the work is done defectively, it is only the client who has a contractual right to sue the builder for its failure to deliver the promised performance. On traditional principles, and subject to the decisions in Linden Gardens Trust v Lenesta Sludge Disposals Ltd (23) and Darlington BC v Wiltshier Northern Ltd, (24) the client can often only recover nominal damages, since he or she will have suffered no direct financial loss as a result of the builder's failure to perform. (25) The elderly relative could not himself or herself sue for breach of contract, and the tort of negligence does not normally allow the recovery of pure economic loss. (26) Therefore the elderly relative could not recover the cost of repairs in the tort of negligence and, if forced to move to alternative accommodation while the repairs were being carried out, could not recover consequent loss and expense either.

3.12 In complex construction projects, there will be a web of agreements between the participants in the project, allocating responsibilities and liabilities between the client (and sometimes its financiers), the main contractor, specialist sub-contractors and consultants (architects, engineers and surveyors). Most significant construction projects in the UK are carried out under one of three major contractual procurement routes, (27) and so the documentation used is very often highly standardised.

3.13 The third party rule means that only the parties within each contractual relationship can sue each other. The unfortunate result is that one cannot in the ?main' contracts simply extend the benefit of the architect's and engineer's duties of care and skill, and the contractor's duties to build according to the specifications, to subsequent purchasers or tenants of the development, or to funding institutions who might suffer loss as a result of the defective execution of the works. This cannot be achieved under the present third party rule without either joining the third party in question into the contract which contains these obligations, which in the case of a subsequent purchaser or tenant is impractical, since their identity may be unknown at the commencement of the works, or even for a long time afterwards, or executing a separate document - a "collateral warranty" - extending the benefit of the duties in question. Were it not for these collateral warranties, the third party rule would prevent contractual actions by subsequent owners of completed buildings against the architect, engineer, main contractor or subcontractor whose defective performance may have caused loss or damage to them. (28)

3.14 In an effort to overcome the privity deficiency of the law of contract, attempts were earlier made by subsequent owners of defective premises to sue in tort, and the expansion of the categories of negligence following Hedley Byrne & Co v Heller & Partners Ltd, (29) and particularly Anns v Merton London Borough Council, (30) initially resulted in such claims being successful. (31) However, the law is now set against the recovery in negligence of economic loss caused by defective construction. In D & F Estates Ltd v Church Commissioners for England, (32) it was held that a builder was not liable in tort to a subsequent purchaser in respect of the cost of repair of defects to a building. The House of Lords then overruled Anns v Merton LBC in Murphy v Brentwood District Council (33) in holding that a local authority, which negligently failed to ensure that the builder complied with relevant by-laws and building regulations, owed no duty of care in tort as regards defects in the building causing pure economic loss; and, in a decision handed down on the same day, confirmed the approach taken in the D & F Estates Ltd case in relation to builders. (34) As a result of these cases, a subsequent owner or purchaser now has little protection in tort.

3.15 A typical collateral warranty given by an architect, engineer or main contractor excludes consequential economic loss and limits the defendant's liability, having regard to other claims of the warrantee, to a just and equitable proportion of the third party's loss. A typical warranty in favour of a finance house will also contain provisions permitting the finance house to take over the benefit of the contractor's or architect's or engineer's appointment contracts on condition of payment of liabilities, if the main finance contract is determined for any breach on the part of the employer, so that the finance house could ensure the continuance of work on the development notwithstanding some breach of the loan agreement by which the original employer was financed. There will also be provisions permitting the finance house, purchaser or tenant a licence to copy and use for specified purposes any designs or documents that are the property of the contractor or architect or engineer, and a clause undertaking that the contractor, architect or engineer will maintain professional indemnity insurance in a specified sum for a specified period. Finally, the warranty will normally permit assignment by the finance house, purchaser or tenant without any consent of the warrantor being required. These collateral warranties are generally supported by separate nominal consideration or are made under deed and thus are not tied to consideration in the main contract.

3.16 It is important to add that, where the benefit of the obligations undertaken by the warranty are assigned to sub-financiers or further purchasers or tenants down the line, this can give rise to further difficulties arising from the law of assignment. In particular, there is the difficulty as to whether an assignee can recover full damages, which was in issue in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (35) and Darlington Borough Council v Wiltshier Northern Ltd (36) and which led to the application, and extension, of an exception to the normal rule on quantification of damages. (37)

3.17 Our proposed reforms would enable contracting parties to avoid the need for collateral warranties by simply laying down third party rights in the main contract. Moreover, our proposed reforms would enable the contracting parties to mirror the terms in existing collateral warranties. Although this involves ?jumping ahead' to some details of our proposed reforms, it is worth explaining this latter point in some detail. Applying our conditional benefit approach discussed in Part X below, there is no reason why the architects' engineers' and contractors' liability to the third party could not be limited, as it presently is under collateral warranty agreements, so as to exclude consequential loss and so as to be limited to a specified share or a just and equitable share of the third party's loss. (38) As regards defences, a claim by a third party under our proposed legislation, as we examine in Part X below, will be subject to defences and set-offs arising from, or in connection with, the contract and relevant to the particular contractual provision being enforced by the third party and which would have been available against the promisee. But this is a default rule only and the contracting parties can provide for a wider or a narrower sphere of operation for defences and set-offs, if they so wish. So the present position under collateral warranties, whereby the claim is subject to defences arising under the main contract, is, or can be, replicated. What about variation of the contract by the original contracting parties? A collateral warranty, once executed, may not be varied without the consent of the benefited third party purchaser, tenant or finance house. Our proposals are, on the face of it, more flexible in that the contracting parties can vary the contract without the third party's consent until the third party has relied on the contract or has accepted it. In practice, however, this ability to vary is not likely to be of any great advantage to the contracting parties because, assuming that the promisor could reasonably be expected to have foreseen that the third party would rely on the contract, they would only be certain that it was safe to vary or cancel the original contract if they first communicated with the third party to ensure that there has been no reliance. It should be stressed that when we refer to variation, we are referring to variation of the contract. The work in building contracts is commonly subject to variation and, if so, would obviously continue to be variable irrespective of the third party's reliance or acceptance. (39)

3.18 So, in our view, our proposals would enable the contracting parties to replicate the advantages of collateral warranties without the inconvenience of actually drafting and entering into separate contracts. Moreover, our proposals may carry a limited degree of extra flexibility as regards variation.

3.19 A further advantage of our legislative reform, as against collateral warranty agreements, is that it would not be necessary to assign the benefit of a provision extending the contractor's or architect's duty of care to sub-financiers and other purchasers and tenants down the line, since these persons could simply be named as potential beneficiaries of the clause by class. Thus, the difficulties caused by quantification of damages in claims under assigned collateral warranty agreements would be entirely removed.

3.20 The main contract between the client and main contractor may also contain exclusion clauses limiting the liability of the main contractor for certain types of defective performance. The main contractor may have entered into these clauses on its own behalf and on behalf of subcontractors, in an effort to enable subcontractors to take advantage, in actions against them in the tort for negligence, of the limitations and exemptions contained in such clauses. As we have seen, the exception to the third party rule, developed in New Zealand Shipping Ltd v A M Satterthwaite & Co Ltd, (40) may not necessarily work in this context albeit that the courts have sometimes allowed third parties to take advantage of the exclusion clause by regarding it as negativing the duty of care that would otherwise have arisen. (41) A reform of the privity rule would permit contractors and clients straightforwardly and uncontroversially to extend the benefit of exclusion clauses in their contract to employees, sub-contractors and others.

3.21 Further problems may arise as regards payment obligations. At present, when a main contractor fails to pay a subcontractor for work performed, the subcontractor will have no right to sue the client directly for payment, although the client will be entitled to take the benefit of the subcontractor's work. It may be that the participants in a construction project might wish to provide for payment direct by the client to the subcontractor for work performed under a subcontract, (42) and to give the subcontractor a corresponding right to sue the client for the agreed sum once the work is performed. Even if such a right were expressly provided for, the present third party rule would prevent such an express term from being enforceable by the subcontractor against the client, unless the subcontractor and client are in a contractual relationship.

3.22 Employers may make arrangements with contractors which are designed by both parties to benefit neighbours with regard to issues such as noise, access and working hours. The intended recipients of these benefits may be protected via the tort of nuisance but reform of the third party rule would enable the parties to give the neighbours the right to enforce the contract which would give them additional, and often significantly better, protection than in tort.

3.23 Our attention has also recently been drawn to the difficulties caused by the third party rule in the offshore oil and gas industry, which provide an excellent example of the anomalies and inconsistencies generated by the rule in practice. We understand that for many years, major oil companies and their advisers have attempted to minimise litigation arising from drilling contracts in the North Sea. This has largely been achieved by the use of cross indemnities between oil companies and contractors, which to be effective, must not only benefit the parties to the contracts in question but also all other companies in their respective groups, their employees, agents, sub- contractors and co-licensees. This is because, for example, it will often be unclear at the outset of a project which member of a client company's group will operate a platform and will thus be caused loss by any failings on the part of the contractor. An indemnity should therefore ideally benefit all companies likely to be affected. It is generally impractical for more than a handful of the beneficiaries of the indemnities given to be made parties to the contract. Moreover, careful drafting of the indemnity is necessary to ensure that those made parties to the indemnity can recover losses actually sustained by other group companies and beneficiaries. At present therefore, the third party rule is circumvented by making the parties to the contract agents or trustees for the other beneficiaries. Some devices used have become even more complex than those commonly employed in the construction industry, with webs of mutual cross-indemnities, back to back indemnity agreements, and incorporation of all main contract provisions into sub-contracts. We understand that there is concern among legal advisers as to the validity of these circumventions of privity. Our proposed reform will permit contractors and employers straightforwardly to extend the benefit of indemnity and exemption clauses contained in a contract to other companies in a group, employees, sub-contractors and others.

(2) Insurance Contracts

3.24 There are several common situations where one party takes out an insurance policy for the benefit of another. The third party rule would prevent the third party enforcing the contract of insurance against the insurer. The inconvenience of this has led to a number of statutory inroads. For example, 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. By section 148(7) of the Road Traffic Act 1988 a person covered by a liability insurance policy for motor accidents, even though taken out by someone else (for example, by a spouse or employer) is able to enforce that policy against the insurer. And under other legislation dealing, for example, with fire insurance and situations where the insured party becomes insolvent, third parties are given rights to enforce insurance contracts even though they are not expressly designated in them. (43)

3.25 There are, however, still a number of insurance contracts where legislation has not intervened to give third party beneficiaries a right to enforce the contract against the insurer. For example, a life insurance policy taken out for the benefit of dependants other than spouses and children, for example a co-habitee or a parent or a stepchild, falls outside the Married Women's Property Act 1882 and appears, therefore, not to be enforceable by those dependants. If a company takes out liability insurance covering the liability of its subsidiary company, and its contractors and sub- contractors, only the company itself would have the right to enforce the insurance contract. (44) Again, if an employer takes out private health insurance, to cover medical expenses, on behalf of its employees, the employees would have no right to enforce the insurance contract so as to ensure reimbursement of expenses incurred. (45) If in these circumstances the employer is insolvent or, because of a transfer of undertakings, has no interest in the contract, the employee has no legal standing to force the insurance company to pay in the event of a claim under the policy and the liquidator in the employer's insolvency may not wish to pursue such a claim. Even if the employer is solvent and wishes to sue, the employer may have difficulty in securing an adequate remedy as, in an action for damages, it can normally only recover its own loss which will usually be nil. (46)

3.26 In Australia, section 48 of the Insurance Contracts Act 1984 allows third parties to enforce insurance contracts where they are named as beneficiaries or as "covered by the policy". We explain in Part XII why our recommendations for reform in this project do not go quite so far as the Australian legislation. (47) Nevertheless our reform proposals will enable an insurer and assured, by an express term, to confer enforceable rights on third parties (for example, employees): and contracts of insurance which purport to confer a benefit on an expressly designated third party will be enforceable by a third party subject to this being contrary to the parties' intentions on a proper construction of the contract.

3.27 We should add, finally, that, if renegotiated on the same terms after our proposals come into force, (48) the well-known agreement between the Motor Insurers' Bureau and the Secretary of State for the Environment, whereby the Bureau agrees to pay to a victim of a road accident any unsatisfied judgment against an uninsured (or untraceable) driver, would prima facie be enforceable by a victim (although of course, in any renegotation, the MIB might decide to insert a term to the effect that the agreement is not to be enforceable by the third party). The third party rule means that, at present, the agreement is unenforceable by the victims (49) although the Bureau's practice is not to rely on the doctrine of privity as a defence. (50)

10. Conclusion

3.28 For the reasons articulated above, we believe that a reform of the third party rule is necessary. Contracting parties may not, under the present law, create provisions in their contracts which are enforceable directly by a third party unless they can take advantage of one of the exceptions to the third party rule. Our basic philosophy for reform is that it should be straightforwardly possible for contracting parties to confer on third parties the right to enforce the contract.

3.30 Following on from this, we need to clarify at the outset what we mean by the "right to enforce the contract". In the Consultation Paper we provisionally recommended that rights which may be created in favour of a third party should extend (a) both to the right to receive the promised performance from the promisor where this is an appropriate remedy and to the right to pursue any remedies for delayed or defective performance, and (b) to the right to rely on any provisions in the contract restricting or excluding the third party's liability to a contracting party as if the third party were a party to the contract. (51) We explained that the first part of this recommendation states the central point that the third party beneficiary is to be entitled to performance of the promise, or damages for its non-performance. The second part of the recommendation allows third parties to be able to take advantage of exemption clauses agreed for their benefit, thus achieving the result reached in The Eurymedon (52) and The New York Star (53) more directly.

3.31 Consultees generally agreed with this provisional recommendation, although a few academic lawyers raised doubts as to whether this was the appropriate way to deal with exclusion clauses. While we continue to agree with our provisional recommendation, we would now formulate the recommendation in slightly different language. (54)

Footnotes to Part III

(1)Most of the arguments were canvassed in Consultation Paper No 121, paras 4.1-4.35. We do not set out again here the discussion in paras 4.3-4.4 of the Consultation Paper in which possible arguments for the third party rule were set out and then refuted one by one. See also paras 1.7-1.8 above.

(2)2 See, eg, F Dowrick "A Jus Quaesitum Tertio By Way of Contract in English Law" (1956) 19 MLR 374, 390-392; R Flannigan, "Privity - The End of an Era (Error)" (1987) 103 LQR 564, 582-587; C Fried, Contract as Promise (1981) pp 44-45 (although Fried argues that acceptance by the third party is essential). Contra is P Kincaid, "The UK Law Commission's Privity Proposals and Contract Theory" (1994) 8 JCL 51 who argues that the promise theory underpinning contract dictates that only the promisee can enforce the promise: in our view, this is to take an unnecessarily narrow view of the morality of promise-keeping where a promise is intended to benefit a third party.

(5)We use this phrase to mean ?non-statutory' or ?judge-made'. Some of the exceptions are equitable.

(7)7 Art 1165, Code Civil. See B Nicholas, The French Law of Contract, (2nd ed, 1992), p 169ff.

(8)8 For further detailed discussion of the stipulation pour autrui in French law, see B Nicholas, The French Law of Contract (2nd ed, 1992) p 181ff; Consultation Paper No 121, Appendix, paras 24-27. See also, generally, S Whittaker, "Privity of Contract and the Law of Tort: the French Experience" (1995) 15 OxJLS 327.

(15)15Who apparently followed the French Civil Code model: see International Encyclopedia of Comparative Law (ed Kötz), Vol VII, ch 13, para 13-12.

(18)18See W McBryde, The Law of Contract in Scotland (1987), ch 18. See also Consultation Paper No 121, Appendix paras 22-23.

(19)See Consultation Paper No 121, Appendix para 21. Although in the Republic of Ireland, as in England and Wales, exceptions to the doctrine permitting the creation of enforceable third party benefits exist: see Married Women's Status Act 1957, s 8(1).

(20)20We have obtained no conclusive information regarding the law in the Scandinavian member states of the EU, Denmark, Finland and Sweden, although we understand that in Denmark third party rights are enforced: see Principles of European Contract Law, Part I : Performance, Non- performance and Remedies (ed O Lando and H Beale) (1995), Art 2.115 Notes.

(21)21The first part of the Commission's work, Principles of European Contract Law, Part I: Performance, Non-performance and Remedies (ed O Lando and H Beale) was published in 1995. Art 2.115 headed "Stipulation in favour of a Third Party" allows third parties to be given legally enforceable rights. It should be noted that in 1989 the European Parliament passed a Resolution requesting that a start be made on the preparatory work for drawing up a European Code of Private Law. The preamble to the Resolution states that "...unification can be carried out in branches of private law which are highly important for the development of the single market, such as contract law..." (Resolution of 26 May 1989, OJEC No C 158/401, 26 June 1989).

(22)For practical difficulties in relation to shipping contracts (but see now the Carriage of Goods by Sea Act 1992), sale of goods contracts, contracts to pay money to a third party and contractual licences, see Consultation Paper No 121, paras 4.8-4.11, 4.19-4.21, 4.23-4.24, 4.26.

(27)27In 1987, 52% of work was undertaken on lump sum contracts with firm bills of quantities, whether for private or public clients, such as the Joint Contracts Tribunal Standard Form of Building Contract, 1980 edition ("JCT 80") or the JCT Intermediate Form of Contract, 1984 edition ("IFC 84"). 12% of work was carried out on design and build contracts, such as the JCT Standard Form of Building Contract with Contractor's Design, 1981 edition ("CD 81"). 9% was carried out under management works contracts, such as the JCT Management Works Contract, 1987 edition ("MC 87"). The method of procurement will depend on factors such as the design route chosen for the project, the client's objectives and requirements, the funding arrangements chosen, and external factors such as economic risk and demographic trends: Ashworth, Contractual Procedures in the Construction Industry (2nd ed, 1991) pp 37-39, 47-48.

(28)28Similar problems apply when the third parties seeking rights of suit are tenants with full repairing leases, and who are therefore under a contractual obligation to the landlord of the building to maintain its fabric.

(31)31See Salmond & Heuston on the Law of Torts (eds Heuston and Buckley) (20th ed, 1992) p 288ff, esp 295-296.

(38)In contrast to limitations in collateral warranties, limitation clauses will not be subject to ss 2(2) or 3 of the Unfair Contract Terms Act 1977 where an action is brought by a third party under our proposed Act: see paras 13.9-13-13 below.

(39)See para 9.37, note 30, below. Note also that, as explained at paras 9.37-9.42 below, our proposals would allow the parties, expressly, to reserve the right to vary irrespective of reliance or acceptance by the third party.

(41)41Southern Water Authority v Carey [1985] 2 All ER 1077; Norwich City Council v Harvey [1989] 1 WLR 828; Pacific Associates Inc v Baxter [1990] 1 QB 993. See para 2.29 above.

(42)42JCT 80 (clauses 35.13.3-35.13.5) and Form NSC (Employer/Nominated Subcontractor's Agreement) 2a, clause 6(1), create a duty on the part of the client to pay nominated subcontractors direct.

(44)Cf Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. See paras 2.67-2.69 above.

(45)Cf Green v Russell [1959] 2 QB 226; see para 7.51 below. A Which? report, April 1992, "Income When You're Ill" 224, 227 draws attention to the problem for employees of enforcing an insurance policy taken out by an employer.

(46)These types of situation are not within the strict ratio of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 or Darlington Borough Council v Wiltshier Northern Ltd [1995] 1 WLR 68 (discussed above in paras 2.39-2.46). However they might appear to fall within the scope of these decisions, in that it was envisaged that the fruits of the contract would be enjoyed by a third party, and "it could be foreseen that damage caused by a breach would cause loss to a [non-contracting party] and not merely to the original contracting party", [1994] 1 AC 85, 114, per Lord Browne-Wilkinson.

(48)Our proposed Act will not apply to contracts made before the coming into operation of the Act: see paras 14.20-14.21 below.

(49)Although the agreement may be specifically enforced by the Minister: Gurtner v Circuit [1968] 2 QB 587.

(50)See, eg, Hardy v Motor Insurers' Bureau [1964] 2 QB 745; Albert v Motor Insurers' Bureau [1972] AC 301; Persson v London Country Buses [1974] 1 WLR 569. See, generally, Treitel, The Law of Contract (9th ed, 1995) p 585.

(54)The main equivalent provision in the New Zealand legislation is s 8 of the Contracts (Privity) Act 1982 which reads as follows: "The obligation imposed on a promisor by section 4 of this Act may be enforced at the suit of the beneficiary as if he were a party to the deed or contract, and relief in respect of the promise, including relief by way of damages, specific performance, or injunction, shall not be refused on the ground that the beneficiary is not a party to the deed or contract in which the promise is contained or that, as against the promisor, the beneficiary is a volunteer". "Beneficiary" and "benefit" are defined in s 2. See Appendix B below

(56)Goff and Jones, The Law of Restitution (4th ed, 1993) pp 407-409, 412-424; P Birks, An Introduction of the Law of Restitution (revised ed, 1989) chapter 7; A Burrows, Remedies for Torts and Breach of Contract (2nd ed, 1994) pp 307-308; A Burrows, The Law of Restitution (1993) pp 397-398.

(57)P Birks, An Introduction to the Law of Restitution (revised ed, 1989) pp 23-24, 40-44, 313-315; A Burrows, The Law of Restitution (1993) pp 16-17, 376.

(58)This is made clear in cases subsequent to Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145, such as Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 and Koufos v Czarnikow Ltd, The Heron II [1969] 1 AC 350.

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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(3) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(3).html Cite as: [1996] EWLC 242(3)

The Law Commission