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Hong Kong Law Reform Commission |
2.2 The idea that a contract requires consideration leads naturally
to the view that a stranger to a contract cannot take advantage of its terms
because he has not provided consideration. To put matters another way, since a
promisee must provide consideration, it would be unreasonable to place a third
party who has not provided consideration in a better position than a promisee
who has not provided
consideration.[36]
2.3 In
the Law Commission's opinion, whilst the privity doctrine determines the
question of who may enforce a contract, the doctrine of consideration decides
which promises may be enforced.[37]
There is a bargain (a valid contract) if consideration has been given, since the
promisor's promise has been "paid for", albeit by the promisee and not the third
party. The fact that there has been consideration means that the third party
can potentially acquire rights under the contract. This contrasts with the case
where the promisee has given no consideration: in that case, there is no valid
contract. The majority of the Sub-committee agrees with the Law Commission that
the "consideration" rule should not be confused with the privity doctrine. It
is thus unconvincing to seek to justify the privity doctrine on the basis of a
lack of consideration moving from the third party.
2.4 Another argument is that the ambit of a contract should extend
only to those who agree on its terms and scope (ie, the contracting parties),
rather than any third party beneficiary. Contracts are seen as personal
transactions affecting only the parties to them. This is based on the notion
that contracts need an element of consent which is provided by making an offer
or an acceptance. Since a third party has, by definition, made neither an offer
nor an acceptance, and so has not consented, he should not obtain any
contractual
rights.[38]
2.5 The Law
Commission, however, argued that the purpose of requiring consent was to protect
personal autonomy, and a third party's autonomy would not be undermined when the
issue concerned the giving of benefits to (but not imposing burdens on)
him.[39] In addition, where both
parties have agreed to benefit a third party, allowing the third party to
enforce the agreement gives effect to their intention and, if anything, promotes
the autonomy of the parties to the contract rather than the reverse. Sir
Guenter Treitel observes that the privity doctrine can scarcely be justified by
saying that a contract is a personal relationship affecting only the parties to
it; for this amounts to a restatement of the doctrine rather than a reason for
it.[40] The majority of the
Sub-committee understands that contracts are personal in nature. Nonetheless,
if the parties intend to benefit a third party, their wishes as stipulated in
the contract should be respected. The law should give effect to the parties'
intention.
2.6 If a third party can enforce the promise, the promisor will be
liable to be sued by both the promisee and the third party. It could be argued
that it is undesirable for a promisor to be liable to actions from both the
promisee and the third
party.[41]
2.7 The Law
Commission considered that the concern could be addressed. Once a promisee or a
third party has enforced the promise made by the promisor, the promisor's
liability would disappear and the promisor would not be liable to anyone
else.[42] Experience in
other jurisdictions shows that it is possible to devise a rule which protects a
promisor from double liability. So, for instance, under the Contracts (Rights
of Third Parties) Act 1999 in England, where a promisee has recovered
substantial damages representing the third party's loss, the third party will
not be entitled to an award duplicating that
sum.[43] Chapter 4 will further
explore this issue of double liability.
2.8 One argument in favour of the privity doctrine is that it avoids
the unjust result that a person could be treated as a party to a contract for
the purpose of suing upon it when he could not be
sued.[44]
2.9 However, the
fact that the third party can sue, but not be sued, should not be seen as an
impediment to enforceability of a contract since unilateral
contracts[45] in which only one
person is obliged to perform are enforceable under the law of
contract.[46] Moreover, although
the third party is immune from reciprocal action by the promisor, the promisor
may protect his interests by taking action against the
promisee.[47] The majority of the
Sub-committee must also emphasise that it is up to the parties to decide whether
to confer a benefit on a third party, and what benefit is to be conferred. If
their intention is to benefit a third party when they are fully aware that the
third party cannot be sued, they should have the freedom to do so.
2.10 Clearly, if third parties are able to enforce contracts made for
their benefit, the freedom of the contracting parties to rescind or vary such
contracts is affected, and promisors may be subject to a wide range of possible
third party plaintiffs.[48]
However, experience in other jurisdictions suggests that it is possible to
strike an appropriate balance between the interests of contracting parties in
maintaining freedom to rescind or vary their contract and the interests of third
parties in maintaining enforceable rights. For instance, under the Contracts
(Rights of Third Parties) Act 1999 in England, the contracting parties may vary
or cancel the contract until the third party has communicated his assent to the
promise, or has relied on
it.[49]
2.11 Similarly,
a sufficiently circumscribed test of who is a third party beneficiary could
narrow the range of third party plaintiffs and avoid a flood of
litigation.[50] The majority of the
Sub-committee understands that these issues must be addressed, but they should
not preclude reform. Chapter 4 will explore them in greater
details.
2.12 Apart from setting out the arguments against reforming the
privity doctrine, the Law Commission also listed out comprehensively the case
for reforming the doctrine in its 1996 report. In the following paragraphs, we
will discuss those arguments with examples to better illustrate the anomalies of
the doctrine before concluding that the doctrine should be reformed.
2.13 The foremost criticism of the privity doctrine is its failure to
give effect to the expressed intention of the parties. The privity doctrine
prevents effect from being given to the contracting parties' intention to
benefit a third party. The failure of the law to afford a remedy to third
parties in such cases frustrates the parties'
intentions.[51] The majority of the
Sub-committee finds it difficult to justify why, in situations where a contract
is expressly made for the benefit of a third party, the third party should not
be able to enforce that benefit.
2.14 The facts of the case of
Tweddle v Atkinson[52]
well illustrate how the privity doctrine can impede the contracting parties'
intention. In that case, the plaintiff's father and his would-be father-in-law
agreed to pay the plaintiff £100 and £200 in contemplation of his
intended marriage. The marriage took place, but the father-in-law failed to pay
the £200 as agreed and subsequently died. The plaintiff sued the executor
of his father-in-law's estate. It was held that the plaintiff could not
succeed, as he had not provided consideration for the agreement between his
father and father-in-law. The agreement in question was made by the
contracting parties with the intention of benefiting the plaintiff, but the
manifest intention of the contract was frustrated by the privity
doctrine.
2.15 One of the main criticisms of the doctrine is that the law
relating to it is unduly complex. Over time, the courts have circumvented the
privity doctrine to mitigate its harshness. The effect has been to increase the
law's complexity and artificiality, and to raise doubts as to whether a third
party in a particular case can circumvent the doctrine. The majority of the
Sub-committee fully endorses the view that the existing law is complex,
uncertain and artificial. The need to circumvent the doctrine demonstrates that
the doctrine causes injustice in particular cases. It also casts doubt on the
coherency of the doctrine. It is clear from the extensive litigation that the
problems associated with the privity doctrine have not yet been
resolved.[53]
2.16 The
Priviy Council's approach to the case of New Zealand Shipping Co Ltd v A M
Satterthwaite & Co Ltd (The
Eurymedon)[54]
demonstrates the unnecessary complexities which can arise in seeking to
circumvent the doctrine and give effect to the contracting parties' intention.
2.17 In that case, a drilling machine was shipped from Liverpool
to New Zealand. The bill of lading contained a clause exempting the carrier
from liability after one year. Another clause extended this immunity to the
carrier's servants, agents and independent contractors. Stevedores negligently
damaged the machine. The consignee sued the stevedores more than a year later.
The stevedores sought to rely on the exclusion clause in the bill of lading.
For the stevedores to be able to claim the protection of the exclusion clause,
four conditions laid down by Lord Reid in the earlier case of Scruttons Ltd v
Midland Silicones Ltd had to be satisfied.
2.18 The first three of the four conditions were satisfied. The
main problem lay in finding the consideration by the stevedores for the
exclusion clause in a contract to which they were not a party. The Privy
Council found in favour of the stevedores by proceeding in the following
way:
"... the bill of lading brought into existence a bargain initially unilateral but capable of becoming mutual, between the shipper and the appellant [ie the stevedores], made through the carrier as agent. This became a full contract when the appellant performed services by discharging the goods. The performance of these services for the benefit of the shipper was the consideration for the agreement by the shipper that the appellant should have the benefit of the exemptions and limitations contained in the bill of lading." [55]
2.19 The
Eurymedon demonstrates that, with considerable ingenuity and inconvenience,
it is possible in some circumstances to get round the privity doctrine. That
result, however, was only achieved at the end of protracted and expensive
litigation.. The solution used in The Eurymedon was criticised as too
technical by Lord Goff of Chieveley in Re The Mahkutai:
"Though these solutions are now perceived to be generally effective for their purpose, their technical nature is all too apparent; and the time may well come when, in an appropriate case, ... the courts should... recognise... a fully-fledged exception to the doctrine of privity of contract, thus escaping from all the technicalities with which courts are now faced in English law." [56]
2.20 As pointed out by the Law Commission, the doctrine produces the
perverse and unjust result that the person who has suffered the loss of the
intended benefit (ie the third party) cannot sue, while the person who has
suffered no loss (ie the promisee) can
sue.[57] The absurdity of the
doctrine's effect is illustrated by the case of Beswick v
Beswick.[58] In that case, an
uncle transferred his business to his nephew in return for a promise from the
nephew to pay a weekly sum to the uncle's widow after the uncle's death. The
House of Lords held that the widow could not maintain a successful action in her
personal capacity, as she had not been a party to the promise between the uncle
and his nephew. She was, however, held to be able to sue for the loss to her
husband's estate in her capacity as administratrix. Nevertheless, she could
only recover nominal damages because the uncle (and hence his estate) had
suffered no loss from the nephew's breach of promise. The widow, in her
personal capacity, who had suffered actual loss of the intended benefit of the
promise, could not sue, while the estate, which had suffered no loss, had that
right to sue. Their Lordships took the view that it would be unjust to award
nominal damages in the present situation and therefore ordered specific
performance of the nephew's promise.
2.21 The House of Lords was able to
achieve fairness by ordering specific performance in Beswick v Beswick.
Such a remedy may not be available in every case, however. It could not be
used, for instance, where the contract is not supported by valuable
consideration or is one for personal service. Moreover, the widow as
administratrix in the "Beswick" case of course had no problem with bringing
action against the promisor for her own good. In other cases, even if specific
performance or substantial damages could be obtained, the promisee may not be
able to, or wish to, sue for one reason or another, such as the stress and
strain of litigation and its cost, sickness and being
overseas.[59] The majority of the
Sub-committee believes that in many situations, third parties may be left
without a remedy.
2.22 The Law Commission highlighted the injustice to a third party
who had, in relying on the promisor's promise, regulated his affairs in the
expectation that he would benefit from the
promise.[60] That injustice would
be particularly acute where a third party regulates his affairs to his own
detriment.
Illustration
A and B agree that A is to pay a sum of money to C. C gives his car to D, in the expectation of using the money from A to buy himself a new one. If A does not keep his promise, C may be left with no remedies even though he has relied on the promise to his own detriment.
2.23 The privity doctrine has been the subject of considerable
judicial criticism over the years. Professor Jack Beatson has stated that no
other doctrine of English contract Law has been subjected to more criticism by
the senior Judiciary than the privity
doctrine.[61] Steyn LJ pointed out
that:
"there [was] no doctrinal, logical, or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that [was] the expressed intention of the parties."[62]
The
House of Lords has also made repeated demands for reform of the doctrine. For
example, Lord Scarman hoped that the House of Lords would reconsider
Tweddle v Atkinson and other cases which stood guard
over the unjust rule.[63] Professor
Andrew Burrows has also observed,
"Lord Denning in various cases tried unsuccessfully to bring about reform judicially. And Lords Reid, Scarman, Diplock and, more recently, Lord Goff and Lord Steyn have all in their judgments criticized the privity doctrine and called for its reform."[64]
2.24 Sir
Roy Goode has said that a strong case can be made out for relaxing, if not
entirely abandoning, the privity
rule.[65] In addition, various law
reform bodies in the common law world have critically examined the privity
doctrine and recommended its
reform.[66] In Australia (the
Northern Territory, Western Australia and Queensland), England, New Zealand and
Singapore the doctrine has eventually been abrogated by
legislation.[67] In Europe, the
legal systems of many non-common law jurisdictions also recognise and enforce
third parties' rights, including Austria, Belgium, France, Germany, Greece,
Italy, Luxembourg, the Netherlands, Portugal, and
Spain.[68] The extent of the
criticism, and the fact that reform has been adopted in so many jurisdictions,
clearly indicate that the privity doctrine is fundamentally flawed.
2.25 After careful deliberations, the majority of us agree that there
is a need to reform the privity doctrine. One member of the Sub-committee,
however, is not convinced that a case for reform has been made out.
2.26 In that member's opinion, the doctrine is a cornerstone of the
common law and has worked well for over one hundred and fifty years. Although
there have been calls from various quarters for the doctrine to be changed by
statute, many jurisdictions remain unconvinced. For instance, while some states
in Australia have reformed the doctrine, most states (including New South Wales,
Victoria and the Australian Capital Territory) have not. Furthermore, there is
no evidence that the abolition of the doctrine will benefit consumers. The
effects of change should be ascertained in those jurisdictions where the
doctrine has been reformed.
2.27 The member also highlights the specific
problem in the construction industry. Generally speaking, a number of different
contractors are involved in any building project, and the purchaser of a flat
may not be able to tell which of those contractors should be held responsible
for a particular defect. This would compound the cost and complexity of any
legal action brought by the purchaser. Reform of the privity doctrine may also
bring injustice to a contractor if an unscrupulous developer winds up its shelf
company to avoid liabilities and does not pay its contractors for their work.
In this case, a contractor is not only unpaid for his work, but may also become
involved in a legal action concerning work which may or may not be found to be
defective. If the abolition of the privity doctrine is designed to shift the
risk of buying a flat from the purchaser to the contractor, the contractor is
not the best party to take the risk and would become a victim in such
circumstances. Furthermore, the type of claim which can be made by a purchaser
may be different from the type which can be made by a developer, thus further
increasing a contractor's risk. This does not seem fair.
2.28 The
majority of the Sub-committee does not share this member's concerns. Whether
the developer remains in existence or not should not affect the contractor's
duty to consumers to make good any defects due to its poor workmanship. By
paying the purchase price, a consumer pays the contractor indirectly (through
the developer) for the construction work up to a specified standard. It would
seem unfair to the consumer if the main contractor were not to assume any
responsibility for defects or sub-standard materials used in the development.
There is no valid reason why the consumer should not be given the benefits of
any warranty given by the contractor to the developer. All in all, the majority
of the Sub-committee does not accept the arguments against reform which have
already been dealt with one by one in the preceding paragraphs. Although
certain issues require further thought, this should not stand in the way of what
is in the opinion of the majority of the Sub-committee a convincing case for
reform. None of the issues raised are insurmountable and Chapter 4 will
consider ways to address these concerns.
2.29 The majority of the
Sub-committee finds the arguments in favour of reform compelling, and considers
that there should be a simple and clear mechanism whereby a third party can
generally enforce a benefit intended to be conferred on him. In other words, if
the parties to a contract wish to confer a benefit on a third party, they should
have the freedom to do so, and their wishes should be respected and given legal
effect. The fact that the privity doctrine prevents effect from being given to
the contracting parties' intention runs counter to the underlying theory of
contract, and presents a range of practical difficulties which we have described
in this chapter and Chapter 1. Sir Guenter Treitel has pointed out that none of
the reasons for the privity doctrine take account of "the inconvenience that can
result from its practical
operation".[69] The majority of the
Sub-committee would emphasise, however, that it favours reform of the doctrine,
rather than its outright abolition. The majority's intention is to provide a
fair mechanism for the enforcement of third party rights.
|
Recommendation 1 The majority of the Sub-committee recommends reform of the general rule that only the parties to a contract may enforce rights thereunder, but not the complete abolition of the rule. |
2.30 The dissenting Sub-committee member, however, points out
that if the privity doctrine is to be reformed as proposed in Recommendation 1,
adopting other recommendations made in this Paper should be the way forward.
[35] Law Commission, Consultation Paper on Privity of contract: Contracts for the Benefits of Third Parties, (1991), WP No 121.
[36] Law Commission Consultation
Paper No 121 (cited above), at para
4.3(v).
[37] Law Commission
Consultation Paper No 121 (cited above), at para
4.4(v).
[38] Law Commission
Consultation Paper No 121 (cited above), at para 4.4(ii).
[39] Law Commission Consultation
Paper No 121 (cited above), at para
4.4(ii).
[40] G Treitel, The
Law of Contract, (cited above), at 588.
[41] Law Commission Consultation Paper No 121 (cited above), at para 4.3(iii).
[42] Law Commission Consultation Paper No 121 (cited above), at para 4.4(iii).
[43] Contracts (Rights of Third Parties) Act 1999 (England), section 5, and Contracts (Rights of Third Parties) Act 2001 (Singapore), section 6. See also Law Commission, Report on Privity of contract: Contracts for the Benefits of Third Parties, (1996), (Law Com No 242), at para 11.21.
[44] Law Commission Consultation Paper No 121 (cited above), at para 4.3(iv).
[45] A unilateral contract may
arise when one party promises to pay the other a sum of money if the other will
do (or forbear from doing) something without making any promise to that effect.
The contract is described as unilateral because the promisee has not made any
counter-promise in favour of the
promisor.
[46] G Treitel, The
Law of Contract (cited above), at 588.
[47] Law Commission Consultation Paper No 121 (cited above), at para 4.4(iv).
[48] Law Commission Consultation
Paper No 121 (cited above), at paras 4.3(vi) and
(vii).
[49] Contracts (Rights of
Third Parties) Act 1999, sections 2(1) and 2(2)
[50] Law Commission Consultation
Paper No 121 (cited above), at paras 4.4(vi) and (vii); See also Law
Commission Report No 242 (cited above), at paras 8.1 to
8.18.
[51] Law Commission Report
No 242 (cited above), at para
3.1.
[52] (1861) 1 B & S
393.
[53] Law Commission Report
No 242 (cited above), at para
3.5.
[54] [1975] AC 154
(PC).
[55] [1975] AC 154, at
167-168 (PC).
[56] [1996] AC
650, at 664-5.
[57] Law
Commission Report No 242 (cited above), at para 3.3.
[58] [1968] AC
58.
[59] Law Commission Report
No 242 (cited above), at para
3.4.
[60] Law Commission Report
No 242 (cited above), at para 3.2.
[61] Jack Beatson, "Reforming
the law of Contracts for the Benefit of Third Parties: A Second Bite at the
Cherry" (1992) 45 CLP 1, at
2,
[62] Darlington Borough
Council v Wiltshier Northern Ltd [1995] 1 WLR 68, at 76.
[63] Woodar Investment Ltd v Wimpey Construction [1980] 1 WLR 277, at 300. See also Lord Reid in Bewick v Bewick [1968] AC 58, at 72; Lord Diplock in Swain v Law Society [1983] 1 AC 598, at 611
[64] Andrew Burrows, "The
Contracts (Rights of Third Parties) Act 1999 and Its Implications for Commercial
Contracts", [2000] LMCLQ 540, at
540.
[65] R Goode, Commercial
Law, 2nd Edition, 1995, Penguin Books, at 108.
[66] Such as the Queensland Law Reform Commission, Report on a Bill to Consolidate, Amend and Reform the Law Relating to Conveyancing, Property, and Contract and to Terminate the Application of Certain Imperial Statutes (1973); Law Commission Report No 242 (cited above); the New Zealand Contracts and Commercial Law Committee, Report on Privity of Contract (1981); and Law and Revision Division, Attorney General Chambers (Singapore), Report on the Proposed Contracts (Rights of Third Parties) Bill 2001.
[67] See the Western Australian Property Law Act 1969 (Western Australia); the Queensland Property Law Act 1974 (Queensland); the Law of Property Act 2000 (the Northern Territory); the Contracts (Rights of Third Parties) Act 1999 (England); the Contracts (Privity) Act 1982 (New Zealand); and the Contracts (Right of Third Parties) Act 2001 (Singapore).
[68] Law Commission Report No
242 (cited above), at para
3.8.
[69] G Treitel, The Law
of Contract (quoted above), at 588.