Signed in as:

Access is brought to you by

Sign in to an additional subscriber account

This account has no valid subscription for this site.

Oxford Law Citator

Part III Capacity and Parties, 9 Third Parties and Co-Parties

From: Contract Law in Practice

Neil Andrews

Content type:: Book content

Product:: International Commercial Law [ICML]

Published in print:: 27 May 2021

ISBN:: 9780192897947

Prev | Next

Subject(s):: Third parties — Contract

(p. 170) 9 Third Parties and Co-Parties

Damages Normally Confined to Promisee’s Personal Loss

General Position: the Rule in Woodar v Wimpey.

9.01 The Common Law rule is that a promisee can obtain substantial damages only in respect of his personal loss (the loss which his or her patrimony has suffered as a result of the breach) and not vicariously in respect of the third party’s loss. This can be conveniently called the rule in Woodar’s Case¹ (although it antedates that decision and indeed was the subject of regret in dicta given in that very case; the status of the rule is not in doubt, however).

9.02 In Woodar Investment Development Ltd v Wimpey Construction UK Ltd (1980)² Wimpey promised £850,000 to Woodar and £150,000 to T, a non-party. Even if Wimpey’s conduct had constituted breach (but the majority held that there had been no breach by renunciation: on this point [24.61]), Woodar could not obtain compensation on T’s behalf. This is the general rule: ‘the rule in Wimpey’s Case’. And thus Lord Russell said:³

If it were necessary to decide the point, … I would have concluded that no more than nominal damages had been established by Woodar as a consequence of the refusal by Wimpey to pay Transworld in the light of the law of England as it now stands.

9.03 The current approach is to look to the possibility of invoking a recognized exception, or even adding to the list of such exceptions.⁴ We will come to the main exception at [9.06], which concerns building contracts, where the work is paid for by party B, but the construction works concerns a new, or existing, building on land owned by T (a third party).

Judicial Regret.

9.04 Lord Scarman’s dicta in Woodar’s Case,⁵ where he laments the present damages rule, might be revisited (although his comment, founded upon the facts of the case before him, is confined to breach by failure to pay money to a third party).

Evaluation: Promisee Prima Facie Unable to Sue for Third Party’s Loss.

9.05 The present rule might be re-examined by the Supreme Court. In the meantime, however, there is little doubt that the rule is regarded as part of the current features of damages law with respect of breach of contract.⁶ Admittedly, some doubt has been expressed: in Alfred McAlpine Construction Ltd v Panatown (2001) Lord Goff doubted the proposition.⁷

(p. 171) Building Contract Exception to ‘Promisee Loss Only’ Compensation Rule

Scope of the Building Contract Exception.

9.06 There is a ‘building contracts’ exception (there are some other exceptions, but this is commercially the most significant) to the Common Law proposition that B can only obtain damages in respect of B’s personal loss (see text above on the Rule in Woodar’s Case). The exception was recognized by the House of Lords in Linden Gardens Trust v Lenesta Sludge Disposals (1994).⁸

9.07 More precisely, the building contract exception arises as follows. It is often the case that the building contract between A and B is funded by B, at least on the surface (but in fact B might have been funded by T), but the owner of the site is T. T is technically, therefore, a third party. An exception to the rule in the Woodar Case (1980) has been fashioned in this context to reflect the commercial fact that T needs to receive compensation if A defaults and that, because B lacks any personal or commercial interest in the project’s success, A might not be liable to B for anything more than nominal damages.

Extension of Dunlop v Lambert (1839).

9.08 In fact the building context just mentioned was the second situation in which this exception to the rule in Woodar v Wimpey had been recognized. Over 150 years earlier, the House of Lords in Dunlop v Lambert (1839)⁹ had recognized that an original owner of movables (B) can sue on behalf of a transferee of those goods (T), if those goods are damaged or lost during performance of a contract of carriage between A and B. Here B has a claim in contract against A, the carrier, but B has no continuing material interest in the subject matter. Prima facie, in accordance with the general rule, B’s damages are nominal, because he has suffered no substantial personal loss (the rule in Woodar v Wimpey). However, B is permitted to claim contractual damages on behalf of T, to whom the risk of loss has passed but who has no contractual claim against the carrier. The 1994 extension (in the Lenesta case)¹⁰ is clearly sound because there is no good reason to confine this Dunlop v Lambert (1839) exception to movables.

‘The Albazero’ Qualification.

9.09 There is a limitation on the operation of the Linden Gardens Trust exception. This is known as the qualification in ‘The Albazero’ (1977).¹¹ The House of Lords there recognized that the device which was fashioned in Dunlop v Lambert and which enables B to obtain damages for T’s benefit is not needed if T has a direct contractual right in T’s own name, resulting from a direct contract between A and T. Such a direct T–A contractual claim might arise under a bill of lading. From the mid-nineteenth century onwards, Dunlop v Lambert (1839) became something of a fossil because the bills of lading legislation (1855) subsequently enabled consignees of movable property to have direct contractual rights, by virtue of the statute, against carriers.¹²

(p. 172) 9.10 It might be contended that ‘The Albazero’ exception would be relevant where T has acquired a direct right of action under ‘limb two’ of the Contracts (Rights of Third Parties) Act 1999 (on the operation of ‘limb two’ in that context [9.50]). But the better view is that, for the following reasons, a statutory right of action under that Act would not engage the qualification contained in ‘The Albazero’.

9.11 One simple reason for this conclusion is that ‘The Albazero’ rule applies only where there is a separate contract between A and T, in addition to the A–B contract (and, if this is so, the 1999 Act right of action in favour of T, the third party, would not constitute a separate contract so as to trigger ‘The Albazero’ qualification).

9.12 A further reason is that the Contracts (Rights of Third Parties) Act 1999, section 4, preserves the rights of the ‘promisee’ (suggesting that the ‘promisee’s capacity should remain intact and thus B should continue to obtain damages on T’s behalf under the ‘Dunlop v Lambert /Linden Gardens Trust’ exception to the rule in Woodar v Wimpey.

9.13 Furthermore, section 5 of the Contracts (Rights of Third Parties) Act 1999 makes reference to the recovery by B of damages on T’s behalf.

9.14 And so, B retains the capacity at Common Law to obtain damages on T’s behalf in this building contract context even after the 1999 Act. That capacity to obtain Lenesta Sludge damages by way of exception to the Woodar rule is subject to the Albazero proviso (see text below) which proved fatal on the facts of the Panatown case.

Panatown Case (2001) and ‘The Albazero’ Qualification.

9.15 In Alfred McAlpine Construction Ltd v Panatown (2001),¹³ had it not been for the application of ‘The Albazero’ (1977) qualification on these facts, the Panatown case would not have proceeded to the House of Lords. The litigation would have been a straightforward and successful arbitration claim resulting in the award of substantial damages in favour of B, but intended to benefit T, the owner of the site (in accordance with the Linden Gardens Trust exception to the rule in Woodar’s Case). But, as we shall see, the claim by B, the promisee, foundered on the qualification recognized in ‘The Albazero’.

9.16 In the Panatown case the building was so defective that it required extensive renovation (the so-called cost of cure measure of damages [28.63]). Another head of burgeoning loss was loss of rental during the long period when the property, intended to be let commercially as offices, was unfit for occupation. Fatefully, however, T’s solicitors had earlier insisted on a deed given by A to T which would enable T to complain if A failed to exercise reasonable care in the performance of the building works. The House of Lords, by a majority (Lords Clyde, Jauncey, Browne-Wilkinson), held that the A–T deed triggered ‘The Albazero’ qualification. It thus prevented B from obtaining substantial damages, for T’s benefit, under the Linden Gardens Trust (1994) exception to the rule in Woodar’s Case (1980).

Nature of Promisee’s Cost of Cure Damages.

(p. 173) 9.17 In view of the decision, just summarized, the following point became a matter of dictum not necessary for the result. The obiter issue was this: if Linden Gardens Trust (1994) damages had been obtained, how should they be conceptualized? The majority in the Panatown case rightly characterized them as (i) intended for T’s protection, as distinct from (ii) being compensation for B’s personal benefit. Analysis (i) is known as ‘the narrow view’. Analysis (ii) is the so-called broad view, but that analysis lacks any sound basis. Analysis (ii) was adopted by the dissenting judges, Lords Goff and Millett, but only as a benevolent, but conceptually unattractive, attempt to circumvent the unfortunate blockage to justice presented by ‘The Albazero’ (1977) qualification on the present facts.

9.18 The ‘narrow view’ (and, it is submitted, the attractive analysis) refers to the theory that damages in the Linden Gardens Trust context are designed to protect T, the landowner. The so-called broad view (which is the rival and unattractive analysis adopted by the minority Lords Goff and Millett, and which is indeed wrong) is that the damages obtained are in fact protection of the promisee’s loss arising from the defective work. But the broad view is counter-factual and the narrow view reflects the fact that the immediate and continuing economic interest in gaining a non-defective structure is the landowner’s.¹⁴ In truth the broad view only makes sense if in fact the promisee has already incurred expenditure in rectifying the relevant breach, and thus has indubitably suffered loss in his own name. Where instead the promise is simply aggrieved that the promise has not been properly performed, the promisee’s bare sense of disappointment should fall within the general doctrine of breach sine injuria: nominal damages for a bare breach, in the absence of substantial loss (for examples of this position [28.27]).

9.19 The narrow view’s focus is on the promisee being able to pull procedural levers to assist the third party to receive (indirectly because the third party does not sue in his own name) compensation for the third party’s loss. That is the aim, the rationale, and the outcome. This is explained convincingly by Lord Clyde, who demonstrates that Linden Gardens Trust damages provide compensation at the suit of B in respect of T’s loss. Lord Clyde said in the Panatown case (2011):¹⁵

a more realistic and practical solution is to permit the contracting party to recover damages for the loss which he and a third party has suffered, being duly accountable to them in respect of their actual loss, than to construct a theoretical loss in law on the part of the contracting party, for which he may be under no duty to account to anyone since it is to be seen as his own loss.

9.20 The Court of Appeal in BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises (2019)¹⁶ considered that the broad view was available in principle. But this is debatable and, it is submitted, wrong. However, the Court of Appeal went on to conclude that the context (p. 174) did not involve a contract between A and B which was manifestly intended to be for a third party’s benefit. And so, the doctrine of ‘transferred loss’ did not apply.

Evaluation: In Support of the Narrow View (Damages Sought on Behalf of a Third Party).

9.21 It is submitted that:

(1) Subject to (5) below, in situations (1) to (4), it is not the promisee’s estate or balance-sheet which is being compensated or protected but the third party’s: and that is the basis of the narrow view, which is rooted in common sense;
(2) in cases concerning immovable property, and where the issue is whether the property can be rectified, the narrow view is applicable: the promisee receives damages designed to enable the property to be rectified, evidently for the third party owner’s benefit;
(3) if the loss concerns damage to, or destruction of, movable property, the promisee also acts as go-between for the benefit of the transferee owner of the goods (these problems are resolved under statute in the shipping context by the Carriage of Goods legislation enabling the transferee to sue in his own name);
(4) there might be other contexts where the promisee is permitted to sue and obtain substantial loss in respect of a third party’s loss,¹⁷ but it is conceptually unhelpful to regard that device as anything other than a remedial mechanism, actionable by the promisee, which is aimed at yielding compensation for the third party;
(5) in short, the damages obtained are not intended to be for the promisee to keep personally unless the promise is already concretely ‘out-of-pocket’, and so, if money has already been spent by the promisee (in reasonable mitigation of the loss: on mitigation [28.231]) for the purpose of rectifying the breach, compensation should be paid to the promisee in respect of his personal loss; the same should apply where there is a binding duty incurred by the promisee to indemnify the third party against the promisor’s default.

Promisee Obtaining Specific Performance to Compel Payments to the Third Party

Common Law Remedies Inadequate.

9.22 The promisee, party B, cannot recover a debt from A if A had promised B that A would pay money to T, a third party, rather than to B. This was one of the features of the curious (but sound) decision in Beswick v Beswick (1968).¹⁸

9.23 Here the House of Lords held that B’s estate could sue A and obtain specific performance of A’s promise to pay a long series of periodic sums to T. B had died and his estate happened now to be administered by T, who was B’s widow, and also the intended recipient of these payment obligations. It was convenient for T that this should be so because at the time (long before the Contracts (Rights of Third Parties) Act 1999) there was, in the absence of a trust of a promise [9.38], no way in which T, as non-party, could take the initiative to procure (p. 175) payment by A by civil process. The House of Lords concluded (i) that damages at B’s suit would be nominal and (ii) B could not sue for debt, T instead being the intended recipient, but (iii) specific performance [29.01] was appropriate because of the manifest deficiency of the Common Law remedies (i) and (ii) on these facts, as just noted.

Third Party Statutory Route.

9.24 This fortuitous outcome, which would not have occurred if B had not been interested in suing on T’s behalf, would now be guaranteed (unless the A–B contract excluded the Contracts (Rights of Third Parties) Act 1999 by a special clause) because, without relying on B’s intervention, T in his or her own name would hold a statutory right under the 1999 Act to sue A and thus T could in her own name obtain specific performance under ‘limb two’ of that statute [9.50].

Promisee’s Position Unaltered by Statute.

9.25 But even after the 1999 Act, the promisee’s rights and remedies are preserved by that statute, with the result that specific performance can be obtained at the suit of the promisee, if the analysis adopted in Beswick v Beswick (1968) is applicable to the relevant facts (section 4 of the Contracts (Rights of Third Parties) Act 1999 preserves the rights of the ‘promisee’).

9.26 Lord Reid said, in Beswick v Beswick (1968):¹⁹

The [promisee’s successful] argument is that she is entitled in her capacity of administratrix of her deceased husband’s estate to enforce the provision of the agreement for the benefit of herself in her personal capacity, and that a proper way of enforcing that provision is to order specific performance. That would produce a just result, and, unless there is some technical objection, I am of opinion that specific performance ought to be ordered.

Third Party Rights and Claims: Outline and Evaluation

Outline.²⁰

9.27 The Contracts (Rights of Third Parties) Act 1999 enables a third party to acquire a right of action for breach of contract either when such a right has been created by explicit language (a so-called limb one claim) or on the basis of implication (a ‘limb two’ claim). Where this statute applies, its effect is to reverse the Common Law privity doctrine [9.35]. The 1999 Act also enables a third party to acquire the benefit of an exclusion clause.

(p. 176) 9.28 That statute introduced important changes to the law, which can be summarized as follows: (i) at Common Law the third party has no direct right of action (by reason of lack of consideration, or simply because only a party can acquire contractual rights, in the absence of assignment); (ii) furthermore, at Common Law a third party cannot take the benefit of protection under an exclusion clause, even though the contract was intended by the parties to confer that benefit on him; (iii) a third party right of action in Equity is a theoretical possibility, but (since 1944) only if the contract expressly imposed on the promise an equitable duty (as ‘fiduciary’, that is, as ‘trustee of the promise’) to agitate (if necessary by taking legal proceedings) to procure the promisor’s performance of his obligations for the benefit of the third party.

9.29 It should be noted that the 1999 Act preserves the rights and remedies enjoyed by the promisee. The position at Common Law position can be summarized as follows:

(1) the promisee cannot sue in debt if the promisor has undertaken to pay money to a third party;
(2) prima facie the promisee can only sue for damages in respect of his personal loss and not in respect of the third party’s loss;
(3) exceptions to proposition (2) exist, notably where the promise is to build on a third party’s land or to carry out repairs to buildings on that land;
(4) if neither a claim in debt nor for damages will adequately protect the promisee’s interest in performance, the promisee might exceptionally obtain an order for specific performance to compel the promisor to perform for the third party’s benefit.

Evaluation: Reflections on the Regime Governing Third Party Rights.

9.30 It is well-known that the Contracts (Rights of Third Parties) Act 1999 is regularly excluded within commercial contracts. The reason for this is that parties are reluctant to take the risk that ‘limb two’, that is, implied, third party rights might be asserted and thus give rise to litigation (for an example of this see Prudential v Ayres: see [9.58]). The equitable doctrine of trust of promises has virtually disappeared, following the decision in Re Schebsman (1944) [9.38]. But the courts have developed the building contract exception [19.06] to the rule in Woodar v Wimpey (1980) [9.01]. The ultimate remedy of specific performance, granted at the promisee’s suit, as illustrated by Beswick v Beswick (1968) [9.22], might afford protection in a variety of situations where debt cannot be sued upon by the promisee and where that party’s loss is merely nominal on the facts. The 1999 Act makes it unnecessary to adopt the rather cumbersome ‘Himalaya clause’ [9.87]. But that device has lingered within maritime usage, given the conservatism of legal advisors (exclusion by agreement of the 1999 Act might coexist in the relevant contract with express inclusion of such a ‘Himalaya clause’).

9.31 And so, English lawyers now possess a complicated statute, which is seldom in fact operative, and a lumber-room of surprisingly rigid twentieth-century case law which intensified (see [9.82] on the Midland Silicones case, 1962) the nineteenth-century and Edwardian Common Law resistance to third party rights ([9.36] and [9.37] are the 1861 and 1915 landmark decisions within the Common Law). Perhaps the law has progressed, but not in a practical manner. The reality is that a statutory tool has been made available, but it is seldom removed from the toolbox.

(p. 177) 9.32 Corbin’s plea²¹ that the English courts should continue to deploy the device of a trust of a promise was ironically ill-timed, the horse having already bolted in Vandepitte v Preferred Accident Insurance Corporation of New York (1933)²² and Re Schebsman (1944).²³

9.33 Stevens’ contention that the 1999 Act is a juridical error might surprise some.²⁴ But the truth is that the subject has become more complex as a result of the 1999 Act. A simpler route to a jus quaesitum tertio (a direct third party right of action) would have been (i) to have maintained the trust of a promise or (ii) to have abrogated by judicial decision (perhaps on the occasion of Beswick v Beswick (1968) [9.22], where an opportunity was spurned) the foundational decisions in Tweddle v Atkinson [9.36] and in Dunlop v Selfridge (1915) [9.37]. Or it might have been possible to have re-visited the rule in Woodar v Wimpey (1980) [9.01], that is the general rule that the promisee cannot sue in respect of the third party’s loss. It is not clear why exceptions to that rule have been grafted on to that rule, without a radical reappraisal of the rule itself. The speeches in the Woodar case pour cold water on the very doctrine which the House of Lords decided to recognize. Were these missed opportunities for judicial creativity or judicious acts of self-restraint: pusillanimity or prudence?

9.34 Given the widespread exclusion of the 1999 Act in commercial documents, perhaps the author’s suggestion²⁵ merits further reflection: that a promise supported by consideration whereby A promises B to confer a benefit on T has the effect of entitling T to A’s performance, and that B, as promisee, should be fully competent to sue on T’s behalf in order to obtain monetary or specific relief, for the benefit of T.

The Common Law Privity Doctrine

9.35 As noted in the preceding section of the text, statute now enables third parties to acquire rights of action against a promisor, or to derive the benefit of exemption clauses as against the promisor. The statute, the Contracts (Rights of Third Parties) Act 1999, is explained at [9.27]. The Common Law position (which this statute alters) is that a third party cannot sue on a contract, nor acquire any rights thereunder.

Third Party Not Privy to Provision of Consideration.

9.36 That Common Law doctrine (the so-called privity [of contract] doctrine) position has been justified on two interrelated grounds (the second ground is examined in the next paragraph). The first suggested rationale for the Common Law privity restriction is that only a person who has supplied consideration can sue for breach of contract. This argument underpinned the reasoning in Tweddle v Atkinson (1861).²⁶

Promisee Exclusivity: Entrenchment of the Privity Doctrine.

(p. 178) 9.37 The dicta of Lord Haldane LC in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)²⁷ supplied a second rationale for the Common Law privity doctrine, that is, for the proposition that a third party cannot sue (on the agency aspect of this case see [10.42]). In addition to the consideration point mentioned in Tweddle v Atkinson (see preceding paragraph), Lord Haldane stated peremptorily that only a party to a promise, and not a non-party or non-promisee, can sue on it. Viscount Haldane LC said:²⁸

[C]ertain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio [a direct right of action by the third party] arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust [see now Re Schebsman (1944)²⁹], but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam [as a personal obligation].

Equitable Protection of Third Parties: Trusts of Promises

Nature.³⁰

9.38 Long before the Contracts (Rights of Third Parties) Act 1999, Equity devised a way of enabling third parties to press for performance of contracts even though they were neither co-promisees nor were they privy to the provision of consideration. But, as we shall see, this trust of a promise device has petered out. Indeed it is now close to extinct, following a highly restrictive decision of 1944.

9.39 What is the Equitable device of a ‘trust of a promise’? Where A promises B for consideration supplied by B that A will transfer property or pay money to T, a third party, this contractual arrangement can sometimes produce a second layer of obligations, namely a trust responsibility to be exercised by B, the promisee. B becomes trustee of A’s promise, for the benefit of T, the beneficiary of this trust. The result is that B can require A to perform, B acting in T’s interest. The result of B’s remedial intervention is that A’s satisfaction of the promise (payment or transfer of property) would be received directly by T.

9.40 A long line of pre-Schebsman case law had not insisted on strict proof of an intention to create a trust of a promise, for example, Fletcher v Fletcher (1844),³¹ where Wigram V-C had held that a promise by A to B to pay a large sum to T imported a trust of a promise in favour of T, without the need for an explicit declaration of a trust). This liberal line of cases had been supported by Corbin at the Yale Law School.³²

Need for Express Creation.

(p. 179) 9.41 Nevertheless, the Court of Appeal in Re Schebsman (1944) turned its back on this line of cases.³³ Instead the Court of Appeal in that case chose to recognize B, the promisee, as trustee of A’s promise for T’s benefit only if such a trust had been spelt out by the parties, that is, expressly added, by A and B under the contract.

9.42 There is one argument in favour of the restriction introduced by Re Schebsman (1944), namely that trusts of promises would fetter the contracting parties’ power to vary the contract.³⁴ But that issue might have been confined to particular contexts. In most situations the contracting parties did not wish to vary the contract. Instead the only practical issue was whether the third party could have his or her rights enforced, whether indirectly by the promisee or directly by the third party suing the promisor and promisee as co-defendants (and the promisor then being compelled to perform or to provide compensation in lieu).

Relics.

9.43 The position in modern law is that a trust of a promise, although as rare as hen’s teeth, is occasionally encountered. A trust of a promise was conceded by the ship-owner’s counsel to be operative, by implication of law, on the facts of Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003), Colman J, which is discussed below. The basis of this concession was that there was (and is) a House of Lords case directly in point on the facts of the Nisshin case. That House of Lords decision, Walford’s Case,³⁵ decided in 1919, has not been overruled, and so remains authority in this precise context for the existence of a trust of a promise (see next paragraph of the text).

9.44 In Walford’s Case (1919), the House of Lords gave effect to an implied trust of a promise within a charterparty between a ship-owner, A, and a charterer, B, for the payment by A of commission to T, a shipbroker. The commission clause in the A/B contract provided that A, the owner, would pay commission to the broker, a third party, T, who had arranged the charterparty. This meant that B, the charterer, was obliged to sue A on T’s behalf, failing which T could sue A directly. Walford’s Case (1919) was followed by Colman J in Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2004) (see below).

Effects of Trusts of Promises.

9.45 B can sue A on T’s behalf; indeed, B, as trustee of A’s promise for the benefit of T, is obliged by Equity to sue A on T’s behalf. In the absence of a suit by B, T can sue A (joining B as co-defendant). The ultimate capacity of T to sue on the trust of a promise is the important point which was affirmed by a dictum of Lord Wright in Vandepitte v Preferred Accident Insurance Corporation of New York (1933):³⁶ ‘The trustee then can take steps to enforce performance to the beneficiary by the other contracting party as in the case of other equitable rights. The action should be in the name of the trustee; if, however, he refuses to sue, the beneficiary can sue, joining the trustee as a defendant.’ This (p. 180) will be the position, however, only where a trust of a promise subsists. But the Vandepitte and Re Schebsman decisions had closed the door on recognition of (future) implied trusts of promises.

The Contracts (Rights of Third Parties) Act 1999: Positive Rights of Action

Summary.

9.46 The 1999 Act³⁷ provides two routes to a direct right of action: either A and B expressly state that T will be able to sue A (this is a ‘limb one’ 1999 Act claim); or, by a process of implication, the contract might purport to confer a benefit on T (such as payment of money to T by A), and in the circumstances the court might then conclude that T has gained an implied right of action against A (this is called a ‘limb two’ 1999 Act claim). In practice, ‘limb two’ claims are much more common, and of course they can be problematic because they arise by implication (it is for this reason that a boilerplate clause excludes the 1999 Act from many commercial contracts).

Identification of the Third Party under the Contracts (Rights of Third Parties) Act 1999.

9.47 The first issue concerns the identification of the putative third party. Section 1(3) states: ‘The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.’ And thus Section 1(3) recognizes three modes of identifying T: where T is: (i) ‘expressly identified in the contract by name’; or (ii) ‘as a member of a class’; or (iii) ‘as answering a particular description’, for example, ‘employees of B’ or ‘sub-contractors and agents of B’. Identification of a class of third parties can be achieved by the same words which also indicate that the relevant third parties are to receive contractual rights.

9.48 The leading case on this provision is Chudley v Clydesdale Bank plc (2019).³⁸ The case decides that the ordinary process of construction will determine whether a third party has been sufficiently identified. On the facts, an agreement between CB, a bank, and an investment company created a 1999 Act limb 2 right in favour of third parties, the arrangement being simply that a ‘segregated client account’ (viz., for T, the client of the investment company) should be created. The third parties were sufficiently identified.

9.49 The claimants in Chudley v Clydesdale Bank plc (2019) had been induced to invest in a golf resort in Cape Verde. The claimants had been lured into this investment by fraudsters, who (p. 181) controlled the investment company, which was called `Arck’ (the fraudsters were later convicted). The money invested was lost as a result of the fraud. The claimants chanced to discover, however, that the fraudsters and the defendant bank had entered into a written letter of instruction (LOI) which required the bank to open a segregated client account, to place the investment sums in that account, and to allow sums to be taken from that account unless a solicitor’s undertaking was given that the sum would be used properly in support of the third party’s proposed property development. But it turned out that no such segregated client account was in fact ever created. The investment money was instead paid into an account held by Arck, the investment company, which later became insolvent. The defendant bank allowed the money in that non-segregated account to be extracted, and it was then lost. The Court of Appeal found against the bank. Its decision turns on these five points (points (4) and (5) are particular points which are special to this context, but points (1) to (3) are of general significance):

(1) the third party beneficiaries were sufficiently identified;
(2) there was a ‘limb two’ intention [9.50] that the letter of instruction would benefit a class of third parties;
(3) for the purpose of the Contracts (Rights of Third Parties) Act 1999, the crucial written words ‘segregated client account’ were effective to establish both points (i) (nomination or identification of third parties) and (ii) (presumed intention); there was no reason not to allow a single phrase to have this double-barrelled operation;
(4) the bank had not satisfied the onus of establishing that the letter of instruction was subject to an unwritten condition precedent; if such a condition precedent had been made out, the contract would have remained inoperative, but on these facts, contrary to the trial judge’s finding, there was no evidence to support the existence of a condition precedent;
(5) the breach on these facts was payment out of the unsegregated account without a solicitor’s undertaking; the result of that breach was that the claimants lost their money; this was not a situation where it was incumbent on the claimants to prove that they would not have lost the money in any event either because the venture was doomed or because the fourth party fraudsters would have dissipated the money.³⁹

Implied Right of Action under the Contracts (Rights of Third Parties) Act 1999.

9.50 The three-step analysis of a successful claims that a ‘limb two’ right of action subsists in favour of a third party is as follows: (i) the third party must be sufficiently identified; (ii) the contract must purport to benefit the third party by conferring on the third party a direct benefit, as opposed to an incidental benefit; (iii) and the promisor has not succeeded in rebutting the presumption that there was an implicit contractual intention that the third party should acquire a ‘limb two’ right of action. In practice steps (i) and (ii) have been conflated as a first step and (iii) has been separated as a second step. That conventional analysis will be adopted here. But in fact there are three elements to the ‘limb two’ inquiry: identification; a direct benefit; and no contrary intention.

(p. 182) 9.51 It should be recalled that the statute confers a direct right of action where (i) (‘limb one’) the contract states that a third party will have a direct right of action or (ii) (‘limb two’) where the contract purports to confer on a third party a benefit and the promisor does not satisfy the court that ‘the parties did not intend the term to be enforceable by the third party’. Sub-sections 1(1) and 1(2) of the Act state:

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a third party) may in his own right enforce a term of the contract if—(a) the contract expressly provides that he may, or (b) subject to sub-section (2), the term purports to confer a benefit on him. (2) Sub-section (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

Two-Step Test under ‘limb two’ of the Contracts (Rights of Third Parties) Act 1999.

9.52 Sub-sections 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act 1999 involve a two-stage inquiry: (i) where parties A and B’s contract ‘purports to confer’ on T a ‘benefit’, this promise or clause is deemed furthermore to confer a right of action on T against A (or, in the case of the shield contained within an exclusion clause, T can take advantage of an exclusion clause); (ii) unless on a ‘proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party’.

9.53 The leading case concerning the operation of the main parts of the 1999 Act, notably the ‘limb two’ route to a direct right of action, is Colman J’s decision in Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003).⁴⁰ Ship-owner A was sued by T, a broker, which had arranged the chartering of A’s ship to charterer B.

9.54 In greater detail, in the Nisshin case, Cleaves had brokered nine charterparties (since the commencement of the 1999 Act: four others antedated that legislation) on behalf of the owner, Nisshin. In those charterparties Nisshin had agreed to pay the agreed commission to Cleaves. The charterparties also contained arbitration clauses, the effect of which was that the parties to the charterparty impliedly agreed not to use court proceedings to settle their disputes or enforce their contract, but instead would use only London arbitration. The charterparty had merely named a third party, Cleaves, as entitled to commission. It was not a limb 1 situation where the contract expressly conferred on T a right of action against the promisor.

9.55 In this specific context there is long-standing authority that a trust of a promise arises by implication (probably on the basis of mercantile custom).⁴¹ And so, the first issue was whether, under ‘limb two’ of the Contracts (Rights of Third Parties) Act 1999 (see above), the third party could sue to recover the promised sums. The second issue concerned an arbitration clause (on this second issue see [9.64]). Here the question was whether section 8(1) of the 1999 Act rendered it permissible or indeed (as Colman J and later authority have confirmed) compulsory that Cleaves’ action under the 1999 Act should proceed only by arbitration proceedings.⁴² Colman J answered both questions, ‘yes’.

(p. 183) 9.56 As for the first issue, Colman J in Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003) held that a ‘limb two’ third party statutory right of action arose. Colman J explained the structure of ‘limb two’ as follows. T will gain a ‘limb two’ right of action, enabling T to bring a claim to vindicate his substantive right, once it is shown that the contract ‘purports to confer a benefit’ on T. If that is shown, T prima facie has the right to sue the promisor. It then becomes incumbent on the promisor to rebut the presumption under ‘limb two’ that the conferring of a benefit on the third party enables him or her to bring a statutory claim for breach of the relevant promise.⁴³ But the promisor was unable to do in, and so Cleaves was entitled to sue in principle under ‘limb two’ of the 1999 Act.⁴⁴

9.57 On the facts of the Nisshin case (2003), T also had (in addition to the 1999 Act right of action) a right under a trust of a promise to sue A [9.38], B having defaulted in his trustee duty to sue A on T’s behalf. The trust of a promise right analysis was conceded by counsel on the basis of House of Lords authority directly in point.⁴⁵ But Colman J held that the coexistence of a trust of a promise is not a reason for permitting A to rebut the presumption arising under ‘limb two’. This is because section 7(1) of the 1999 Act expressly contemplates the coexistence of 1999 Act rights of action and third rights of action arising independently of the 1999 statute. And so, Colman J held in the Nisshin case (2003) that T had (i) a direct right of action under ‘limb two’ of the statute and (ii) the benefit of a trust of a promise.

Two Examples of No Implied Direct Right of Action Arising.

9.58 Context (ie factual matrix material [20.48]) will be relevant when assessing whether such an intention is manifest or can be discerned. The first example is Prudential Assurance Co Ltd v Ayres (2008)⁴⁶ where the Court of Appeal reversed Lindsay J’s decision that a third party was entitled under ‘limb two’ to a promise granting partial immunity from liability for breach of covenant under a commercial tenancy.

9.59 The second example of the process of construction yielding the conclusion that there was no implicit intention to benefit a third party is Petrologic Capital SA v Banque Cantonale De Genève (2012).⁴⁷ The third party was the applicant for a letter of credit, under which the bank, party A, would pay money to party B, the beneficiary under the letter of credit. The letter of credit (creating a payment obligation as between A and B) contained a jurisdiction clause nominating England. The third party (T being the applicant for the letter of credit, ie the entity interested in ensuring payment by the bank to B) sought to take advantage of that jurisdiction agreement by invoking the ‘limb two’ provisions of the 1999 Act, that is, section 1(1)(b), and section 1(2) (on the facts of the case, the third party was wishing to try to take advantage of the jurisdiction clause in the letter of credit, which nominated London, rather (p. 184) than being required to sue in Switzerland, which was the nominated forum within the contract between the applicant and the bank). The argument failed, the judge considering that it would be both commercially unattractive and implausible for an applicant for a letter of credit to derive any ‘limb two’ rights under the letter of credit. And so the judge rejected⁴⁸ the contention that it had acquired a ‘limb two’ direct right of action. An anterior point⁴⁹ was that the third party’s attempt to invoke the A-B jurisdiction clause was not an attempt to ‘enforce’ that agreement for the purpose of the 1999 Act, section 1, but an attempt to extend the scope of that jurisdiction agreement so as to benefit the third party.

Nature of a ‘Benefit’ under ‘limb two’ of the Contracts (Rights of Third Parties) Act 1999.

9.60 Under ‘limb two’ a ‘benefit’ refers to a direct benefit, as distinct from an incidental benefit. The Law Commission distinguished between a direct beneficiary and an ‘incidental’ one for this purpose.⁵⁰ And so, if A promises B that A will pay money to B or to B via T, T is a mere conduit. T is not intended to be a payee. And so, B alone is the debtor of A. Because B alone is intended to receive a benefit, there is no scope on these facts for invoking ‘limb two’ in favour of T.

9.61 In accordance with this analysis, Christopher Clarke J in Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening (2009)⁵¹ held that B’s agent, T, was not a beneficiary under ‘limb two’ of the 1999 Act, but merely a conduit for payment by A to B. Thus the only beneficial payee was B, the principal. Christopher Clarke J held that, even if the contract had provided that the money should only be paid to B via T, T was the not intended to be the ultimate recipient: there was no intention that T would be materially benefited (for a similar configuration and issue, see the Taurus case, examined at [27.12]).

9.62 Similarly, in Bates v Post Office Ltd (No 3: Common Issues) (2019),⁵² Fraser J held, following consideration of the Dolphin case, that the relevant provision in an agreement between the Post Office and sub-postmasters was not intended to create a direct right of action capable of being sued upon by trainees of sub-postmasters. Instead this arrangement fell on the ‘indirect benefit’ side of the line. And so, no ‘limb two’ right of action could be recognized.⁵³

9.63 By contrast, again following consideration of the Dolphin case, a positive result in favour of the third party was achieved in Cavanagh v Secretary of State for Work and Pensions (2016).⁵⁴ Laing J was required to consider an agreement between the employer, the Civil Service, and its employees whereby the employer would pay employees’ trade union subscriptions by deduction of the period sums from the relevant employee’s salary. The sum deducted would then be paid by the employer directly to the union. It was held that this was (p. 185) enforceable by the third party trade union under ‘limb two’ of the 1999 Act. The remedy of a declaration was granted.

Arbitration Clauses and Third Party Claims under the Contracts (Rights of Third Parties) Act 1999.⁵⁵

9.64 The second issue facing Colman J in Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003)⁵⁶ was section 8(1) of the Contracts (Rights of Third Parties) Act 1999. Section 8(1) concerns situations where the contract between A and B contains an arbitration clause. Such a clause renders use of arbitration the only way in which A and B can litigate as against each other.⁵⁷ Section 8(1) then confers on T the right to bring arbitration proceedings against A for the purpose of obtaining the benefit of A’s promise under the 1999 Act.

9.65 Where there is an arbitration clause in the contract between A and B, Colman J held that in fact T is bound to pursue A by arbitration if T is seeking to sue under the 1999 Act. Conversely, where T’s action is brought using a trust of a promise [9.38], section 8(1) does not apply (here T, as beneficiary of the trust of the promise, joins A and B as co-defendants, unless A waives the need for B to be added as co-defendant). If T sues upon the trust of a promise, therefore, T can only use court proceedings. On the facts of the case, it was possible for T to bring arbitration proceedings as against A, using section 8(1), and Colman J declared that such proceedings were available, indeed mandatory, on these facts.

9.66 Section 8(1) of the Contracts (Rights of Third Parties) Act 1999 provides:

Where—(a) a right under section 1 to enforce a term (`the substantive term’) is subject to a term providing for the submission of disputes to arbitration (‘the arbitration agreement’), and (b) the arbitration agreement is an agreement in writing for the purposes of Part 1 of the Arbitration Act 1996, the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party.

9.67 In Fortress Value Recovery Fund I LCC v Blue Skye Special Opportunities Fund LLP (2013), Toulson LJ explained⁵⁸ that section 8(1) creates a procedural precondition that T must vindicate his right by arbitration. But A can waive this pre-condition if A acquiesces in court proceedings brought by T or if A brings court proceedings against T (and so, in this second situation, T cannot insist on arbitration under section 8(1) if A prefers to use court proceedings).

(p. 186) 9.68 By contrast, also in the Fortress Value case, Toulson LJ noted that section 8(2) (cited below) enables A and B to confer on T a positive right to demand that dealings between A and T shall be exclusively adjudicated using arbitration. Under section 8(2), T can thus insist on arbitration. But this is possible only if T had received such a unilateral right under section 8(2). It will be seen that section 8(2) concerns a rather rare type of third party beneficial stipulation (and in practice section 8(1) is more important).

9.69 Section 8(2) of the Contracts (Rights of Third Parties) Act 1999 states:

‘Where—(a) a third party has a right under section 1 to enforce a term providing for one or more descriptions of dispute between the third party and the promisor to be submitted to arbitration (‘the arbitration agreement’), (b) the arbitration agreement is an agreement in writing for the purposes of Part I of the Arbitration Act 1996, and (c) the third party does not fall to be treated under subsection (1) as a party to the arbitration agreement, the third party shall, if he exercises the right, be treated for the purposes of that Act as a party to the arbitration agreement in relation to the matter with respect to which the right is exercised, and be treated as having been so immediately before the exercise of the right.

Variation or Rescission of the Contract under the Contracts (Rights of Third Parties) Act 1999.

9.70 Section 2(1) of the Contracts (Rights of Third Parties) Act 1999 states:⁵⁹

Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if–(a) the third party has communicated his assent to the term to the promisor, (b) the promisor is aware that the third party has relied on the term, or (c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

9.71 And so, in general, parties A and B will retain the power to vary or ‘rescind’ the contract without T’s consent. But there are two ‘cut-off’ points at which the parties will have lost the capacity jointly to vary or extinguish the third party’s rights:⁶⁰ (i) where T has communicated ‘assent to the term’ to A; or (ii) where T has relied on A’s promise; T’s reliance will count if A knew that it had occurred, or at least if it was reasonably foreseeable by A.

9.72 The Law Commission (1996) said that A and B cannot create from the outset an irrevocable set of rights for T’s benefit, although that view has been subsequently contradicted by Burrows. It is submitted that Burrows is right to suggest that an agreement which explicitly stipulates that a third party will enjoy a right under the Act without needing to consent to it, and that this right will not be revocable by A and B, should take effect as an irrevocable right.⁶¹

(p. 187) 9.73 Subject to that possibility of an irrevocable third party right, A and B will retain the right ‘by agreement, [to] rescind the contract, or vary it in such a way as to extinguish or alter [the third party’s] entitlement’.

Common Law Rights of Promisee Preserved under the Contracts (Rights of Third Parties) Act 1999.

9.74 Section 4 of the Contracts (Rights of Third Parties) Act 1999 states: ‘Section 1 does not affect any right of the promisee to enforce any term of the contract.’ And so, T’s rights under the Act apply in parallel to the promisee’s existing Common Law right to sue A for breach of contract. It follows that the promisee continues to have these remedial powers: (i) to bring a claim to protect a third party’s right to receive compensation (see the ‘building contract’ exception considered in the Panatown case (2001) [19.06]); and (ii) to seek specific performance. As for (ii), the facts of Beswick v Beswick (1968) [9.22] would now involve two alternative routes to justice: the promisee (the uncle’s estate) could still sue A and obtain specific performance on those facts, as the House of Lords held in that case; or T, the widow in her personal capacity could sue A directly under ‘limb two’ of the Act and obtain specific performance without relying on the promisee to take the initiative.

Right of Defence or Set-off Based on Relations between A and T.

9.75 If A is sued by T, A can raise against T any ‘defence or set-off’ or ‘counterclaim’ pertaining as between A and T directly (unless the contract provides otherwise: see section 3(5) of the Contracts (Rights of Third Parties) Act 1999 for this last point). If, for example, the A/B contract provides that A should pay T £1 million, but in a separate transaction T had incurred a debt to A of £100,000, satisfaction of T’s claim against A under the Act will be reduced to £900,000 to take into account (by way of ‘set-off’)⁶² of the latter sum.

9.76 Section 3(4) of the Contracts (Rights of Third Parties) Act 1999 states:

The promisor shall also have available to him—(a) by way of defence or set-off any matter, and (b) by way of counterclaim any matter not arising from the contract, that would have been available to him by way of defence or set-off or, as the case may be, by way of counterclaim against the third party if the third party had been a party to the contract.

Right of Defence or Set-off Based on Relations between A and B.

9.77 If A is sued by T, A can raise against T any ‘defence or set-off’ or ‘counterclaim’ pertaining as between A and B directly (unless the contract provides otherwise).⁶³ The effect is that T is placed in no better position in T’s claim against A than B would have placed if instead the claim against A were made by B. Section 3(2) states:

The promisor shall have available to him by way of defence or set-off any matter that—(a) arises from or in connection with the contract and is relevant to the term, and (b) would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee.

And so, for example, section 3(2) will have this effect: where A has been coerced by B into forming a contract with B, T’s claim under the 1999 Act in respect of A’s promise will be subject to the defence of duress (generally on duress, chapter 13).

(p. 188) 9.78 As for set-off under section 3(2), the examples given by the Law Commission in its final report on this topic (‘Privity of Contract: Contracts for the Benefit of Third Parties’, Law Commission Report No 242 (Cm 3329, 1996), at paragraph 10.9) are (i) B sells good to A and stipulates that the price is payable to T; the goods are defective; when sued by T, A should be able to set-off in diminution of the price the amount of the abatement attributable to the defect; (ii) A has promised B to pay a sum to T, but B had committed a misrepresentation; A should be able to set-off the damages attributable to the misrepresentation, in diminution of the sum claimed by T.

Rule Excluding ‘Double Compensation’ under the Contracts (Rights of Third Parties) Act 1999.

9.79 Section 5 of the Contracts (Rights of Third Parties) Act 1999 prevents A being at risk of ‘double jeopardy’ for the same loss, that is, liability to B at Common Law and liability to T in a claim brought under the Act. Section 5 provides:

Where under section 1 a term of a contract is enforceable by a third party, and the promisee has recovered from the promisor a sum in respect of—(a) the third party’s loss in respect of the term, or (b) the expense to the promisee of making good to the third party the default of the promisor, then in any proceedings brought in reliance on that section by the third party, the court shall reduce any award to the third party to such extent as it thinks appropriate to take account of the sum recovered by the promisee.⁶⁴

Parties Agreeing to Exclude the Contracts (Rights of Third Parties) Act 1999.

9.80 Parties A and B can insert a clause which excludes the Contracts (Rights of Third Parties) Act 1999, or they can orally exclude the Act, or at least they might exclude specific provisions within that statute. The effect will be that no third party benefits will arise under the Act, or at least that the Act will apply only to the extent so provided by the parties. The Act does not spell out this possibility. But the power is implicit and the Law Commission itself discussed this.⁶⁵

9.81 In fact, many commercial documents contain a clause excluding the Act and indeed the matter has become ‘boilerplate’. Such exclusion of the Act eliminates any doubt whether non-parties might have been intended to acquire rights under ‘limb two’ of the Act (on the operation of that limb, which operates by implication [9.50]). For example, the parties might stipulate:

The parties to this agreement do not intend that any term of this agreement shall be enforceable by any person who is not a party to this agreement and, accordingly, section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999 does not apply to any term of this agreement (and any amendments, alterations or supplements to it).

Third Parties Gaining Protection from Exclusion Clauses

Scruttons v Midland Silicones (1962): the Privity Problem.

9.82 The Common Law has now been overtaken by the Contracts (Rights of Third Parties) Act 1999, which enables a third (p. 189) party, if named or adequately identified, to take the benefit of an exclusion clause, if the main contract makes this clear.

9.83 The background Common Law is a saga involving attempted conceptual and commercial ‘catch-up’ following a disastrously dogmatic decision. The disaster occurred in the following case. By a majority, the House of Lords in Scruttons v Midland Silicones (1962)⁶⁶ held that an exclusion clause in A and B’s contract cannot avail non-party T who damages A’s goods during transit. The reason for this is that at Common Law the privity doctrine prevents non-parties from acquiring contractual rights of any kind, including protection under exclusion clauses. The facts are succinctly reported as follows:⁶⁷

By a bill of lading … limited to $500 [at the time equivalent to] £179] per package the liability of the carrier in the event of loss, damage or delay, a drum containing chemicals was shipped from America to London. The appellants … stevedores engaged by the carrier, while lowering the drum from an upper floor of a dock transit shed on to a lorry, negligently dropped … the drum … causing part (worth £593) of its contents to be lost. The consignees [transferees of the goods … sued the stevedores in tort claiming £593. The stevedores, relying on the bill of lading, claimed that their liability was limited to $500.

9.84 The consignee/claimants (transferees and now owners of the goods) contended that the stevedores (responsible for loading or unloading the ship) could not take the benefit of the exclusion clause. The House of Lords upheld this contention (Lord Denning dissenting). And so the Common Law position is that the non-party acquires no such benefit.

9.85 Lord Reid, a member of the majority in the Scruttons case, said:⁶⁸

Although I may regret it, I find it impossible to deny the existence of the general rule that a stranger to a contract cannot in a question with either of the contracting parties take advantage of provisions of the contract, even where it is clear from the contract that some provision in it was intended to benefit him. …

9.86 Lord Reid continued:

[the stevedores contended] that, although a stranger to a contract may not be able to sue for any benefit under it, he can rely on the contract as a defence if one of the parties to it sues him in breach of his contractual obligation that he can use the contract as a shield though not as a sword. I can find no justification for that. If the other contracting party can prevent the breach of contract well and good, but if he cannot I do not see how the stranger can. As was said in Tweddle v Atkinson (1861) 1 B & S 393, 398 [9.36], the stranger cannot ‘take advantage’ from the contract.

‘Himalaya Clause’ Creating Privity of Contract Between Owner of Goods and Stevedores.

9.87 The Privy Council in New Zealand Shipping v Satterthwaite (‘The Eurymedon’) (1975)⁶⁹ upheld an intricate collateral contract which directly established a link between the owner of lost or damaged goods and the sub-contractor firm of stevedores (responsible for loading (p. 190) and unloading ships). This was the result of a so-called Himalaya clause. The New Zealand decision can be viewed as a joining up of the dots sketched in Lord Reid’s ‘blue-print’ or template⁷⁰ for circumventing the privity doctrine.

9.88 The essence of the reasoning⁷¹ in the New Zealand Shipping case is that A and B can validly create a ‘side contract’ in favour of T (here the firm of stevedores), using a so-called Himalaya clause,⁷² thus creating privity of contract between A and T. Because A and T are now regarded as contracting parties, A being yoked to T, there is no direct conflict with the Midland Silicones case because that decision only prevents a non-party from taking the benefit of this ‘shield’. Following the New Zealand Shipping case (1975), T has lost the problematic status of a ‘non-party’ and has been ‘bumped up’ to the superior status of a ‘full contractual party’.

9.89 The majority’s reasoning in the New Zealand Shipping case involved these steps:⁷³

(1) A’s goods are to be transported by the carrier, B (a complication is that A1 might transfer title in the goods to A2, A1 being the consignor and A2 the consignee; and A2 will accede to A’s rights under the contract of carriage by virtue of the bill of lading legislation, the Carriage of Goods by Sea Act 1992);
(2) when the goods are loaded or unloaded, B will use the services of a stevedoring company, T;
(3) within the contract for carriage of goods between A and B, B acts as T’s agent by inserting a Himalaya clause into the A/B contract;⁷⁴
(4) that clause contains the offer of protection under an exclusion clause, and that offer is addressed by A to T; it is this offer which B, as T’s agent, communicates to T;
(5) the contractual relation between A and T is a unilateral contract: that T should have the benefit of the exclusion clause in return for his work in unloading B’s ship;
(6) there is no need for T to communicate to A the fact that T is willing to accept this unilateral contract; A is deemed to have waived the need for T’s explicit acceptance; instead acceptance is by conduct; it follows that T’s performance of the condition is enough;
(7) it does not matter that T, the stevedores, were already contractually obliged towards B to do this very same work; T provides consideration for A’s promise by T’s commencement of the job of unloading the ship.⁷⁵

‘The Starsin’ Exception.

9.90 But the House of Lords in ‘The Starsin’ (2003) noted⁷⁶ that the maritime international convention, the Hague–Visby rules, prevents such a clause from (p. 191) availing a maritime ‘carrier’. In that same case the House of Lords held that the statutory term ‘carrier’ includes a ship-owner.

9.91 In ‘The Starsin’ (2003), B, the charterer, which became insolvent and thus fell out of the picture (from a forensic perspective, at least), hired T’s ship to transport A’s goods from port X to port Y. During the voyage, the cargo (timber) was damaged because the hold of T’s ship became wet. A, the owner of the goods, did not sue B for breach of contract because (as mentioned) B had become insolvent. Instead, A sued T, the owner of the ship. T (unsuccessfully, for the reason just mentioned) attempted to raise an exclusion clause contained in A and B’s contract in favour of T.

Exclusive Jurisdiction Exception.

9.92 The Privy Council in ‘The Mahkutai’ (1996)⁷⁷ distinguished the successful operation of the Himalaya clause in respect of exclusion clauses (as established in the New Zealand Shipping case) and the inability of that clause to confer the benefit of an exclusive jurisdiction clause.⁷⁸ An exclusive jurisdiction clause involves mutual restrictions on the jurisdictions which can be used: each party is making a restrictive commitment that it will not sue the other party other than in the nominated forum, and thus all other courts are out-of-bounds, as between those parties.⁷⁹ An exclusive jurisdiction clause (‘EJC’) stipulates that legal disputes arising from the relevant job or transaction can only be litigated in a nominated jurisdiction (eg ‘in the courts of Singapore’). And thus exclusive jurisdiction clauses create mutual restrictions and mutual rights, matching shields and entitlements. The duty is to use only the nominated jurisdiction and thus not to litigate elsewhere.⁸⁰ This is quite different from the simple operation of the legal shield under an exclusion clause, which confers an immunity or liability cap on the benefited party and a correlative restriction on the burdened party.

9.93 In short, the bilateral restriction contained within an exclusive jurisdiction clause is not consistent with the one-way restriction for which the Himalaya clause has been designed. And so, Lord Goff concluded in ‘The Mahkutai’ that a Himalaya clause will not work in the context of an exclusive jurisdiction clause:⁸¹

… the exclusive jurisdiction clause … can be distinguished from terms such as exceptions and limitations in that it does not benefit only one party, but embodies a mutual agreement under which both parties agree with each other as to the relevant jurisdiction for the resolution of disputes. It is therefore a clause which creates mutual rights and obligations.

9.94 An exclusive jurisdiction between parties X and Y is binding also on X’s insurer, where the insurer sues by virtue of its right of insurer’s subrogation, and, when Y seeks to invoke this agreement, the insurer in breach of such an agreement will be subject to an injunction and/or declaration, the latter remedy having been the only available relief on the facts of Airbus SAS v Generali Italia SpA (2019).⁸²

The Contracts (Rights of Third Parties) Act 1999 and the Benefit of Exclusion Clauses.

(p. 192) 9.95 It should be noted that one important aspect of this statute is that it is now possible for exclusion clauses to be agreed between A and B and expressed to benefit third parties. The Contracts (Rights of Third Parties) Act 1999 will recognize this third party protection, provided the class of third parties is adequately defined. And thus the 1999 Act provides a direct route to achieving the protection more circuitously conferred by using a Himalaya clause [9.87].

9.96 The background to this point is as follows. The Act does not apply to five classes of contract (except categories (4) and (5) do apply to exclusion clauses):

(1) contracts in bills of exchange, promissory notes or other negotiable instruments (section 6(1) of the 1999 Act);
(2) contracts falling within section 14 of the Companies Act 1985 (section 6(3) and (4) of the 1999 Act);
(3) terms in contracts of employment purporting to enable a third party to sue an employee, or in a worker’s contract to sue a ‘worker’, or in a relevant contract against an agency worker (section 6(3) and (4) of the 1999 Act);⁸³
(4) terms purporting to enable a third party to sue in the case of carriage of goods by sea (section 6(5)(a), (6), and (7) of the 1999 Act; the Carriage of Goods by Sea Act 1992 already deals with third party rights of positive suit in this context);
(5) carriage of goods by rail, road or air, where an international transport convention applies (section 6(5)(b) and (8) of the 1999 Act).⁸⁴

9.97 And thus categories (4) and (5) are unaffected by the 1999 Act as far as active claims by the third party are concerned. But, in the case of categories (4) and (5), terms conferring the benefit of exclusion clauses on third parties are covered by the 1999 Act. This ‘exception to an exception’ is a point of great importance.

Privity of Contract and ‘Burdens’

General Principle.⁸⁵

9.98 Contracts cannot be thrust on parties behind their backs. Freedom of contract [2.02], a cornerstone of private law, prevents Z (‘Z’ will denote the third party throughout section 8 of this chapter) from being burdened without his consent. And so X and Y cannot render Z liable for failure to act for the benefit of X or Y. However, there are four exceptions to (perhaps better regarded as qualifications upon) this notion that Z cannot be affected detrimentally by the contractual relations between X and Y. These are: (i) the torts of inducing breach of contract and interference by unlawful means with a contract; (p. 193) (ii) restrictive covenants affecting freehold land; (iii) injunctions to prevent knowing interference with contractual rights affecting other types of property, especially goods (iv) the doctrine of ‘bailment on terms’. These are considered in turn.

Procurement of a Breach of Contract and Unlawful Interference with Another’s Contract.

9.99 The scope of this branch of tort law is now governed by OBG Ltd v Allan (2008)⁸⁶ where the House of Lords maintained the distinction between (i) the tort of inducing a breach of contract and (ii) the tort of interfering by unlawful means with a contract.

9.100 The tort of inducing a breach of contract is traceable to Lumley v Gye (1853).⁸⁷ Unlawful means are not required. The central question is whether Z has intentionally induced another to breach a contract (eg Z persuades Y to leave his manager, X; and this constitutes a breach of contract by Y vis-à-vis X). Z will be liable in tort towards X, the victim of Y’s breach of contract. As Lord Hoffmann explained in the OBG case (2008):⁸⁸

To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realise that it will have this effect … If someone knowingly causes a breach of contract, it does not normally matter that it is the means by which he intends to achieve some further end or even that he would rather have been able to achieve that end without causing a breach … On the other hand, if the breach of contract is neither an end in itself nor a means to an end, but merely a foreseeable consequence, then … it cannot for this purpose be said to have been intended.

9.101 As for the tort of interference with another’s contract by unlawful means, Lord Hoffmann explained in the OBG case (2008):⁸⁹

Unlawful means [are] acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. [This tort] does not in my opinion include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.

Restrictive Covenants Affecting Land.

9.102 Z, a purchaser of land can become subject to a restrictive covenant originally agreed between X and Y (eg an undertaking by Y and his successors in title that they will not use the relevant premises as a public house for the consumption of alcohol). The doctrine of restrictive covenants affecting freehold property is an established aspect of land law, traceable to Tulk v Moxhay (1848).⁹⁰ Y’s successors are bound regardless of their knowledge of the covenant. However, restrictive covenants cannot impose positive duties to act.

Injunction to Prevent Knowing Interference with Contractual Rights in Other Types of Property, especially Goods.

9.103 In some circumstances, X or Y can obtain an injunction (p. 194) against Z if Z has acquired rights in relevant property (tangible movable property, or intangible property such as a fund) knowing that X and Y have a subsisting contract (for example, a contract of hire) affecting that property and Z’s proposed conduct will interfere with Y’s performance of the contract. The injunction cannot, however, positively compel Z to act or to pay.⁹¹ Browne-Wilkinson J in Swiss Bank Corporation v Lloyds Bank Ltd (1979)⁹² surveyed the long line of cases.

Bailment of Goods ‘on Terms’.

9.104 Z, an owner of goods, having given possession of those goods to a bailee (Y) (see [7.75] on the nature of bailment), can become subject to an exclusion clause (or jurisdiction clause) in a contract of sub-bailment between X (a sub-bailee) and Y, provided Z implicitly consented to that sub-bailment by Y to X. The 1999 Act ([7.34]) does not affect this situation because it is concerned only with the conferring on third parties of the benefit of rights and not with the imposition upon third parties of burdensome aspects of contracts. Before considering this topic further, it is necessary to summarize the nature of bailment.

Nature of Bailment.

9.105 Bailment is a possessor’s (a bailee’s) responsibility for goods owned by the bailor (or, short of ownership, the bailor might have a right to possession). The bailee assumes responsibility to exercise reasonable care of the owner’s goods. This relation normally involves a contract between the bailor and the bailee, but a contract is not necessary. Bailment requires possession to be taken by the bailee. The transitory control exercised by the stevedores in the New Zealand Shipping case (1975)⁹³ [9.87] did not involve a relation of bailment. But taking goods into possession, once unloaded, can involve a relation of bailment. Furthermore, the bailee, Y, can sub-bail Z’s goods to another, X. This commonly happens when goods are transported, possession passing through several successive pairs of hands.

9.106 If there is an exclusion clause or an exclusive jurisdiction clause in the X/Y sub-contract, is Z subject to it (that is, ‘burdened’ by it, even though a non-party)? The Privy Council’s decision in ‘The Pioneer Container’ (1994)⁹⁴ said that Z would be subject in this way, but only if Z consents expressly or impliedly to Y’s sub-bailing of the goods to X (approving Lord Denning MR’s statement in Morris v CW Martin & Sons Ltd (1966)⁹⁵ that ‘the owner is bound by the conditions if he has expressly or impliedly consented to the bailee making a sub-bailment containing those conditions’).

9.107 In ‘The Pioneer Container’ (1994),⁹⁶ Z, the owner, bailed his goods to Y, a carrier, and Z expressly authorized Y to sub-bail the goods. Y used X, a ship-owner, to transport the goods. (p. 195) The contract between X and Y contained an exclusive jurisdiction clause, nominating Taiwan as the sole forum for litigating disputes concerning the X/Y carriage contract. X’s ship sank in fog and Z’s cargo was lost. Z sued X for damages in Hong Kong. X successfully invoked as against Z the exclusive jurisdiction clause. X thus obtained a stay of Z’s Hong Kong proceedings.

9.108 As for exclusive jurisdiction clauses, as on the facts of ‘The Pioneer Container’ (1994),⁹⁷ the result is that both Z’s action against X and any possible action between X and Y will be channelled to the same forum (on the facts, to Taiwan, nominated as the exclusive jurisdiction). This renders resolution of disputes predictable and convenient. As for exclusion clauses, the same result will also make commercial sense, because if this clause is ineffective to protect him, Z will need to increase his insurance cover. This extra cost will be ‘passed up the chain’ by X to Y.

Joint Obligations

9.109 We will consider the position of co-promisors and co-promisees in turn.

Co-promisors (also referred to as ‘co-obligors’).⁹⁸

9.110 Two or more parties (co-promisors) might jointly assume contractual liability (eg in debt) to another party under the same contract. Three situations must be distinguished:

(1) ‘several liability’ (ie cumulative and separate liability): the co-promisors severally agree to pay £X each; here the co-promisors can be separately sued for their independent debts; the link between the co-promisors is merely that the two promises are made simultaneously or in the same written contract; in substance they can be treated as independent contractual obligations subsisting in parallel, that is, a D1/C obligation and a D2/C obligation; their respective liabilities are cumulative; payment of £X by one party does not discharge the other party; and there can be no right of contribution as between these independent promisors;
(2) joint liability: the co-promisors might jointly make a single promise to pay £X; in this situation, if a co-promisor dies, his obligation passes to the surviving co-promisor; payment by either party of £X to the creditor discharges the other party, because liability is not cumulative; see below for the main rules relating to this category;
(3) joint and several liability: the co-promisors assume joint and several liability to pay £X; again, as in situation (2), but unlike situation (1), in the present context the co-promisors share liability under an unified obligation; and so, payment by either party of £X to the creditor discharges the other party because liability is not cumulative; but, by contrast with (2), within category (3) upon the death of a joint and several co-promisor the deceased’s several liability passes to his estate and does not devolve upon the surviving co-promisor(s); see below for the main rules governing this category.

(p. 196) 9.111 The rules which are common to categories (2) and (3) (see preceding paragraph of text) are:

(a) each co-obligor is liable for the whole amount; part payment by another co-obligor does not exonerate the other co-obligors for the balance which remains unpaid;
(b) if judgment is obtained against only one of the joint parties, and the judgment is not satisfied, the other party remains liable (section 3 of the Civil Liability (Contribution) Act 1978, which changed the law in this respect as far as joint liability is concerned; in the case of joint and several liability the present rule already applied);⁹⁹
(c) if a co-obligor pays more than his share, the other co-obligor(s) is/are liable to that payor to make a (Common Law non-statutory) contribution (on which see discussion below);
(d) (i) the creditor’s release of a co-obligor, whether by deed or by accord and satisfaction, simultaneously releases the other(s); (ii) the position is different if the creditor merely makes a binding promise, whether by deed or otherwise, not to sue a co-obligor; but the courts lean towards construing an arrangement as type (i) rather than type (ii);¹⁰⁰
(e) procedural joinder (ie the issue whether all co-obligors must be joined as parties to court proceedings in which the relevant debt is being claimed) is now within the court’s control; this means that the court can, where it sees the need, cure any failure to add a co-obligor by requiring the relevant person to be added as a co-defendant, in accordance with CPR 19.1(2)(a) and (b).¹⁰¹

9.112 Horner J in Radius Housing Association Ltd v JNP Architects (2018)¹⁰² upheld a clause which disapplied joint liability and thus had the effect of rendering the defendant architects liable only for their share of the loss, and not jointly liable for others’ contribution to the harm.

Contribution.¹⁰³

9.113 There are two systems of contribution: (i) the Common Law system of contribution and (ii) a statutory and discretionary system under the Civil Liability (Contribution) Act 1978. These two systems operate independently of each other. The Law Commission decided not to apply a statutory system of discretionary contribution to the area already covered by the Common Law doctrine.¹⁰⁴

Private International Law.

(p. 197) 9.114 In Roberts v The Soldiers, Sailors, Airmen and Families Association (2020)¹⁰⁵ the Court of Appeal held that the 1978 Act has ‘overriding’ effect, that is, it applies to all proceedings for contribution brought in England and Wales, without reference to any choice of law rules. This meant that the 1978 Act would apply in the proceedings, even though the applicable law, German law of tort, would not otherwise have enabled the contribution claim to succeed because the hospital would have ceased to have been liable under German tort law by reason of German prescription law (ie it would have been statute-barred). Here¹⁰⁶ the claimant, a minor, had suffered personal injury at birth as a result of negligence by a mid-wife. Her employer and the Ministry of Death were co-defendants, and they sought contribution from the German hospital (the Part 20 party) within which the events took place. Under German tort law, the German hospital would now enjoy a defence based on prescription (statute-barred). It was held that, provided the contribution claim had been made in time under the English statute, which it was,¹⁰⁷ then the statutory right of contribution arose even though the liability under foreign law would have been statute-barred.

Evaluation: Contribution Proceedings and Foreign Law.

9.115 The decision does not address the fact that section 1(3)¹⁰⁸ of the 1978 Act makes express reference to the Part 20 party’s liability (vis-a-vis the principal claimant, the victim) having ceased to apply by reason of a limitation rule which extinguishes liability (as distinct from procedurally barring the claim). But under English principles of limitation, it is very rare for a limitation rule to extinguish the underlying liability, as distinct from procedurally barring a claim. However, it seems likely that the German prescription rule in this case was extinctive. Does section 1(3) of the 1978 Act apply to German prescription rules which are extinctive in effect? Even if section 1(3) does not apply to foreign limitation rules (a possible construction on the basis of the language of section 1(6)¹⁰⁹ of the 1978 Act), it would remain relevant to reflect on the paradox created by the Roberts decision (at first instance and affirmed by the Court of Appeal): English contribution claims will fail if the Part 20 party’s liability has been extinguished by an English limitation rule whereas such a contribution claim will succeed even though the Part 20 party’s liability has been extinguished under a foreign prescription rule. That asymmetry does not appear to make sense.

Co-promisees.

9.116 Where a promise is made to two or more persons jointly (`co-promisees’), whether by deed or for consideration supplied by each of them, or for consideration given by one of them on behalf of himself and the others, the co-promisees must sue jointly. (p. 198) Consideration to support A’s promise can be validly supplied jointly by co-promisees B1 and B2, or even de facto by one, provided in this last situation the consideration is given ‘jointly on behalf of B1 and B2’.¹¹⁰ (For an example of co-promisees in the context of agency [10.48].)

9.117 A further Common Law rule is that a joint promisee can only sue if he joins his fellow promisee in the relevant claim.¹¹¹ This ‘joinder rule’ protects the promisor against the risk of successive actions and ensures that the court can receive all relevant arguments and information. The situation where party A has an obligation to benefit co-promisees B1 and B2 jointly should be distinguished from that where B has permitted A to pay B’s agent X, but B retains the right to require instead that A pay B. The Court of Appeal in ‘The Bulk Chile’ (2013) held¹¹² that ship-owner B was in this position vis-à-vis freight payable under bills of lading. So long as shipper A had not already paid X (X being B’s agent nominated to receive the freight), B could cancel this arrangement and require payment directly by A to B instead of payment to X.

9.118 The issue whether X’s promise to pay a debt is made to Y alone, or to Y and Z jointly, or to Z alone, can demand careful construction of a contract. Such a problem divided the Supreme Court in Taurus Petroleum Ltd v Scott Oil Marketing Co of the Ministry of Oil, Republic of Iraq (2017) [27.12]. Here A had bought oil from B. A issued a letter of credit to pay B. B was named as the beneficiary of the letter of credit, but addenda within that instrument stated that payment was to be made to T. Lords Clarke, Sumption, and Hodge considered that the primary ‘obligee’ remained B. In their dissenting judgments, Lords Neuberger and Mance preferred the analysis that the addenda rendered the nominated ultimate recipient, T, the true creditor.

9.119 Payment to a co-creditor discharges the debt jointly.¹¹³

Footnotes:

¹ [1980] 1 WLR 227 (HL).

² ibid.

³ ibid, 293, letter E.

⁴ Alfred McAlpine Construction Ltd v Panatown [2001] 1 AC 518, 581–82 (HL) (Lord Millett).

⁵ [1980] 1 WLR 227, 300–01. And see Neil Andrews, ‘Does a Third Party Beneficiary Have a Right in English Law?’ (1988) LS 14), suggesting that where A promises B to confer a benefit on T, B should be fully competent to sue on T’s behalf in order to obtain monetary or specific relief, for the benefit of T.

⁶ For example, AS Burrows, ‘No Damages for a Third Party’s Loss’ (2001) 1 OUCLJ 107, 108, citing Beswick v Beswick [1968] AC 58 (HL), and White v Jones [1995] 2 AC 207 (HL), as other instances of the Woodar rule.

⁷ Alfred McAlpine Construction Ltd v Panatown [2001] 1 AC 518, 538, 544 letter D (HL), drawing upon GH Treitel, ‘Damages in Respect of a Third Party’s Loss’ (1998) 114 LQR 527.

⁸ The exception was recognized by the House of Lords in Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85 (HL), and applied in Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 (CA) (both cases summarized in the Panatown case, [2001] 1 AC 518, 540–42, HL).

⁹ (1839) 6 Cl & F 600 (HL) (Sc) (on which see the Panatown case [2001] 1 AC 518, 523 ff (HL)).

¹⁰ Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85 (HL).

¹¹ [1977] AC 774, 847–48 (HL) (Lord Diplock).

¹² The Bills of Lading Act 1855, replaced by the Carriage of Goods by Sea Act 1992, transformed the context of contracts for the carriage of goods; but Dunlop v Lambert (1839) preceded this development; on the Carriage of Goods by Sea Act 1982, and the acquisition of rights to sue under the contract of carriage by holders of a bill of lading (consignees, or indorsees, the latter only on delivery of the document), see Standard Chartered Bank v Dorchester LNG (2) Ltd (‘Mt Erin Schulte’) [2014] EWCA Civ 1382, [2016] QB 1 at [10] to [17], Moore-Bick LJ.

¹³ [2001] 1 AC 518 (HL).

¹⁴ On the ‘broad view’ see also BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises [2019] EWCA Civ 596, [2020] QB 551, which is discussed at below; see too Lord Sumption’s general remarks in Swynson Ltd v Lowick Rose LLP [2017] UKSC 32, [2018] AC 313 at [16] and [17], in the context of the ‘transferred loss’ doctrine.

¹⁵ [2001] 1 AC 518, 535 (HL).

¹⁶ [2019] EWCA Civ 596, [2020] QB 551 at [66], [70], [73].

¹⁷ As contemplated in the statements in both the Swynson case, [2017] UKSC 32, [2018] AC 313 at [16] and [17], Lord Sumption, and the BV Nederlandse Industrie case, ibid, at [70] and [73] (Coulson LJ).

¹⁸ [1968] AC 58 (HL).

¹⁹ ibid, 77–78.

²⁰ Monographs, see Bibliography, Part II, section (41). Journal discussion: Andrews, ‘Does a Third Party Beneficiary Have a Right in English Law?’ (on the position pre-1999 Act); Neil Andrews, ‘Strangers to Justice No Longer: Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999’ [2001] CLJ 353; HG Beale, ‘A Review of the Contracts (Rights of Third Parties) Act 1999’ in AS Burrows and E Peel (eds), Contract Formation and Parties (OUP 2010) 225; AS Burrows ‘The Contracts (Rights of Third Parties) Act 1999 and its Implications for Commercial Contracts’ [2000] LMCLQ 540; Burrows, ‘No Damages for a Third Party’s Loss’; R Flannigan, ‘Privity—The End of an Era (Error)’ (1987) 103 LQR 564; P Kincaid, ‘Third Parties: Rationalising A Right to Sue’ [1989] CLJ 243; P Kincaid, ‘Privity Reform in England’ (2000) 116 LQR 43; C MacMillan, ‘A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999’ (2000) 63 MLR 721; Law Commission, ‘Privity of Contract: Contracts for the Benefit of Third Parties’ (Law Commission Report No 242, 1996), notably Parts VII to XI; J Morgan, Great Debates in Contract Law (2nd edn, Palgrave Publishing 2015) ch 10 (the 3rd edition, 2020, has reduced this discussion to a terse summary in the Appendix at 324); VV Palmer, ‘Contracts in Favour of Third Persons in Europe’ (2003) 11 European Review of Private Law 8; A Phang, ‘On Justification and Method in Law Reform—The Contracts (Rights of Third Parties) Act 1999’ (2002) 18 JCL 32; SA Smith, ‘Contracts for the Benefit of Third Parties: In Defence of the Third Party Rule’ (1997) 7 OJLS 643; R Stevens, ‘The Contracts (Rights of Third Parties) Act 1999’ (2004) 120 LQR 292 (who bemoans its enactment).

²¹ AL Corbin, ‘Contracts for the Benefit of Third Parties’ (1930) 46 LQR 12; GH Treitel, Some Landmarks of Twentieth Century Contract Law (OUP 2002) 51, notes that Corbin had been asked to write this article by Goodhart, editor of the Law Quarterly Review.

²² [1933] AC 70 (PC).

²³ [1944] Ch 83 (CA) (Corbin’s article, see Corbin, ‘Contracts for the Benefit of Third Parties’, was cited by the first instance judge, Uthwatt J, [1943] Ch 366, 370, and so was visible to the Court of Appeal).

²⁴ Stevens, ‘The Contracts (Rights of Third Parties) Act 1999’.

²⁵ Andrews, ‘Does a Third Party Beneficiary Have a Right in English Law?’.

²⁶ (1861) 1 B & S 393; 121 ER 763.

²⁷ [1915] AC 847 (HL).

²⁸ ibid, 853.

²⁹ [1944] Ch 83 (CA).

³⁰ Corbin, ‘Contracts for the Benefit of Third Parties’ (criticized by MacIntyre, see below); Treitel, Some Landmarks of Twentieth Century Contract Law, 51, notes that Corbin had been asked to write this article by Goodhart, editor of the Law Quarterly Review; on Corbin’s 1951 treatise ch 46, see Treitel, ibid, at 52. Corbin’s article was cited by the first instance judge in Re Schebsman (Uthwatt J, [1943] Ch 366, 370) and thus the Court of Appeal in that case will have been aware of this scholarly treatment; for other comment on trusts of promises, J Jaconelli, ‘Privity: The Trust Exception Examined’ [1998] Conv 99; M MacIntyre, ‘Third Party Rights in Canadian and English Law’ (1965) 2 U Brit Col L Rev 103; R Merkin (ed), Privity of Contract (Lloyd’s of London Press 2000) 2.18 to 2.25; J Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1997) 105 Yale LJ 625, 646–47.

³¹ (1844) Hare 67.

³² Corbin, ‘Contracts for the Benefit of Third Parties’.

³³ [1944] Ch 83 (CA) (Corbin’s article was cited by the first instance judge, Uthwatt J, [1943] Ch 366, 370, and so was visible to the Court of Appeal).

³⁴ This point was made by Du Parcq LJ, [1944] Ch 83, 104 (CA).

³⁵ Les Affréteurs Réunis SA v Leopold Walford (London) Ltd [1919] AC 801 (HL); applying Robertson v Wait (1853) 8 Ex 299; Walford’s case has survived, by virtue of hierarchical authority: hence the concession in Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004] 1 All ER (Comm) 481, [2004] 1 Lloyd’s Rep 38.

³⁶ [1933] AC 70, 79 (PC); Colman J was not directed to this point in Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004] 1 All ER (Comm) 481, [2004] 1 Lloyd’s Rep 38. Consistent with Lord Wright’s analysis in the Vandepitte case is Barrett v Universal-Island Records [2006] EWHC 1009 (Ch), [2006] EMLR 21 at [238] to [241] (Lewison J).

³⁷ An illuminating source of information concerning this statute is ‘Privity of Contract: Contracts for the Benefit of Third Parties’, Law Commission Report No 242 (Cm 3329, 1996). See also: Andrews, ‘Strangers to Justice No Longer: Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999’; Beale, ‘A Review of the Contracts (Rights of Third Parties) Act 1999’ in Burrows and Peel (eds), Contract Formation and Parties, 225; Burrows ‘The Contracts (Rights of Third Parties) Act 1999’; Law Commission, ‘Privity of Contract: Contracts for the Benefit of Third Parties’ (Law Commission Report No 242, 1996), notably Parts VII to XI; MacMillan, ‘A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999’; Phang, ‘On Justification and Method in Law Reform—The Contracts (Rights of Third Parties) Act 1999’; Stevens, ‘The Contracts (Rights of Third Parties) Act 1999’ (who bemoans its enactment).

³⁸ [2019] EWCA Civ 344, [2020] QB 284 (the case is also considered in connection with the parol evidence rule [17.20] and the Hughes-Holland scope of duty doctrine [28.218]); the decision reinterprets the Court of Appeal’s decision in Avraamides v Colwill [2006] EWCA Civ 1533, [2007] BLR 76.

³⁹ [2019] EWCA Civ 344, [2020] QB 284 at [81] to [85], Flaux LJ; see also the discussion of Flaux LJ at [77] to [80], and Longmore LJ at [93] and [94] (Moylan LJ agreed with both judgments).

⁴⁰ [2003] EWHC 2602 (Comm), [2004] 1 Lloyd’s Rep 38, [2004] 1 All ER (Comm) 481.

⁴¹ Les Affréteurs Réunis SA v Leopold Walford (London) Ltd [1919] AC 801 (HL), applying Robertson v Wait (1853) 8 Ex 299, which had given effect to an implied trust of a promise in this mercantile context.

⁴² The issue came before the Commercial Court under s 67, Arbitration Act 1996 (on which Andrews on Civil Processes (2nd edn, Intersentia Publishing 2019) 41.71 ff), the arbitral tribunal having held that the combined effect of ss 1 and 8(1), Contracts (Rights of Third Parties) Act 1999 was that the tribunal did have jurisdiction to hear the third party’s claims under the 1999 Act for non-payment of commission.

⁴³ [2003] EWHC 2602 (Comm), [2004] 1 Lloyd’s Rep 38, [2004] 1 All ER (Comm) 481 at [23].

⁴⁴ This two-step approach in the application of ‘limb two’ of the 1999 Act was approved by the Court of Appeal in Laemthong International Lines Co Ltd v Abdullah Mohammed Fahem & Co [2005] EWCA Civ 519, [2005] 2 All ER (Comm) 167, and applied in Starlight Shipping Co v Allianz Marine & Aviation Versicherungs AG [2014] EWHC 3068 (Comm), [2015] 2 All ER (Comm) 747, [2014] 2 Lloyd’s Rep 579 at [85] to [87] (Flaux J).

⁴⁵ Les Affréteurs Réunis SA v Leopold Walford (London) Ltd [1919] AC 801 (HL), applying Robertson v Wait (1853) 8 Ex 299.

⁴⁶ [2008] EWCA Civ 52, [2008] 1 All ER 1266.

⁴⁷ [2012] EWHC 453 (Comm), [2012] ILPr 20 (Males QC).

⁴⁸ Notably, ibid, at [53] to [56].

⁴⁹ ibid, at [53]: ‘[the third party] is not seeking to enforce the jurisdiction clause in the contract between the [letter of credit] beneficiary and the bank in order to ensure that a dispute between those parties is litigated in the proper agreed forum. Rather, it is attempting to take the benefit of that clause for itself, in an action to prevent the bank from performing what the bank considers to be its obligation under the letter of credit.’

⁵⁰ Law Commission, ‘Privity of Contract: Contracts for the Benefit of Third Parties’ (Law Commission Report No 242, Cm 3329, 1996) 7.19 ff.

⁵¹ [2009] EWHC 716 (Comm), [2010] 1 All ER (Comm) 473, [2009] 2 Lloyd’s Rep 123 at [74] to [84], especially [74] and [76]; followed by Picken J in Royal Bank of Scotland plc v McCarthy [2015] EWHC 3626 (QB) at [119] to [143] (notably at [137] and [138]).

⁵² [2019] EWHC 606 (QB) at [938] to [945].

⁵³ Fraser J’s conclusion, ibid, at [945].

⁵⁴ [2016] EWHC 1136 (QB), [2016] ICR 826 at [47] to [57], [73] to [77].

⁵⁵ Generally on arbitration agreements, Bibliography, Part II, section (2); on (the arbitration provision) s 8, Contracts (Rights of Third Parties) Act 1996: Neil Andrews in ‘Arbitration and the Expanding Circle of Consenting Parties’ in R Nazzini (ed), Transnational Construction Arbitration: Key Themes in the Resolution of Construction Disputes (Informa Law Publishing 2018) ch 5, and Neil Andrews, ‘Arbitration and Consent to Institutional Rules’ (2016) 2 Lis International 97 (Italian journal); M Ahmed, ‘Loosening the Grip of the Contracts (Rights of Third Parties) Act 1999 on Arbitration Agreements’ (2014) 31 J Int Arb 515; C Ambrose, ‘When Can a Third Party Enforce an Arbitration clause?’ [2001] JBL 415; Burrows, ‘The Contracts (Rights of Third Parties) Act 1999’; A Diamond, ‘The Third Man: the 1999 Act Sets Back Separability’ (2011) Arb Int 211; J Hayton, ‘Hijackers and Hostages: Arbitral Piracy after Nisshin v Cleaves’ [2011] LMCLQ 565; R Merkin, Arbitration Law (Informa Law Publishing 2020, looseleaf) 17.51 and 17.52; A Tweedale, ‘Arbitration under the Contracts (Rights of Third Parties) Act 1999 and Enforcement of an Award’ (2011) 27 Arb Int 653; VV Veeder, ‘On Reforming the English Arbitration Act 1996?’ in J Lowry and L Mistelis, Commercial Law: Perspectives and Practice (LexisNexis 2006) 243, at 14.12 (as for s 8(2), Veeder, ibid, fn 16, says that it is ‘beyond judicial repair’).

⁵⁶ [2003] EWHC 2602 (Comm), [2004] 1 Lloyd’s Rep 38, [2004] 1 All ER (Comm) 481.

⁵⁷ Andrews on Civil Processes, 34.25; K Lewison, Interpretation of Contracts (7th edn, Sweet and Maxwell 2020) 18.02 and 18.03, plus Supplements to 6th edn.

⁵⁸ [2013] EWCA Civ 367, [2013] 1 WLR 3466 at [45].

⁵⁹ Andrews, ‘Strangers to Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999’, 361 ff.

⁶⁰ Neil Andrews, ibid, 363–66.

⁶¹ On this issue see Andrews, [2001] CLJ 353, 362, noting ‘Privity of Contract: Contracts for the Benefit of Third Parties’, Law Commission Report No 242 (Cm 3329, 1996) 946; and noting Burrows’ contradiction of this in [2000] LMCLQ 540, 547, fn 22.

⁶² On counterclaims and set-off, see Andrews on Civil Processes, ch 7, and bibliography at 1149.

⁶³ On counterclaims and set-off, see preceding note.

⁶⁴ The phrase `sum recovered’ would not include a non-monetary order of specific performance, or an injunction, or a declaration, etc.

⁶⁵ Law Commission, ‘Privity of Contract: Contracts for the Benefit of Third Parties’ (Law Commission Report No 242, Cm 3329, 1996) 7.18(iii).

⁶⁶ [1962] AC 446 (HL).

⁶⁷ ibid, 447.

⁶⁸ ibid, 473.

⁶⁹ [1975] AC 154 (PC).

⁷⁰ Midland Silicones case, [1962] AC 446, 474 (HL) (Lord Reid).

⁷¹ Lord Wilberforce, [1975] AC 154, 167–69 (PC).

⁷² Adler v Dickson (‘The Himalaya’) [1955] 1 QB 158 (CA).

⁷³ For Lord Goff’s overview, see ‘The Mahkutai’ [1996] AC 650 (PC); other overviews are supplied in Homburg Houtimport BV v Agrosin Private Ltd (‘The Starsin’) [2003] UKHL 12, [2004] 1 AC 715, HL at [34], [56], [57], [93], [146] to [153], [163], and [197] to [201].

⁷⁴ ‘The Mahkutai’ [1996] AC 650 (PC): if B is unauthorized to be T’s agent, T can later ratify B’s purported agency.

⁷⁵ Applying Scotson v Pegg (1861) 30 LJ Ex 225.

⁷⁶ Homburg Houtimport BV v Agrosin Private Ltd (‘The Starsin’) [2003] UKHL 12, [2004] 1 AC 715 at [32], noting Article III, Rule 8, of the Hague–Visby Rules (within the Carriage of Goods by Sea Act 1971, Schedule); on this decision, E Peel (2004) 120 LQR 11; FMB Reynolds, ‘Tangling in the Undergrowth’ in PS Davies and J Pila (eds) The Jurisprudence of Lord Hoffmann: A Festschrift in Honour of Lord Leonard Hoffmann (Hart Publishing 2015) 241–50.

⁷⁷

Recently viewed (0)