|
Hong Kong Law Reform Commission |
(1) Leaving matters to the courts to circumvent the doctrine in deserving cases.
(2) Providing legislative exceptions to the doctrine in specific instances.
(3) Adopting a general provision that no third party be denied enforcement of a contract made for his benefit on the grounds of lack of privity.
(4) Reforming the law by means of a detailed legislative scheme.
3.2 The courts have, over the years, adopted various devices in
mitigating the harshness of the privity doctrine. The first option is to leave
matters to the courts.[71] The
principal advantage of this option is that the courts are able to develop
exceptions to meet particular injustices caused by the privity rule in specific
cases. The remedy can be tailored to meet the specific needs of the particular
case coming before the court. By contrast, a legislative scheme cannot be
expected to achieve the same degree of flexibility. Any shortcomings in the
legislation identified later could only be remedied by further legislative
amendments, involving additional time and costs.
3.3 However, there are
distinct problems with judicial reform of the privity rule. The courts act
incrementally and can only act when a suitable opportunity arises. It is
impossible to predict when a case will arise which gives the courts the
opportunity to "reform". Even with the right case, the judicial process from
the first instance stage to that of the final appeal can be lengthy. A further
disadvantage of judicial reform is the uncertainty that it would generate. In
Re The Mahkutai, for example, Lord Goff of Chieveley described how the
pendulum of judicial opinion had swung backwards and forwards in its approach to
the privity doctrine in cases involving carriage of goods by sea:
" [O]pinion has fluctuated about the desirability of recognising some form of modification of, or exception to, the strict doctrine of privity of contract to accommodate... commercial expectations that the benefit of certain terms of the contract of carriage should be made available to parties involved in the adventure who are not parties to the contract. ... At first there appears to have been a readiness on the part of judges to recognise [third parties'] claims. ... Opinion, however, hardened against them in the middle of the century as the pendulum swung back in the direction of orthodoxy in Midland Silicones Ltd v Scruttons Ltd [1962] AC 446; but in more recent years it has swung back again to recognition of their commercial desirability... ." [72]
3.4 Some existing statutory provisions have the effect of getting
round the privity doctrine and enabling third parties to enforce their
rights.[73] Under this option,
reform is effected by legislation to create further specific exceptions to the
privity doctrine in appropriate circumstances.
3.5 One advantage of this
option is that the needs of specific situations can be directly addressed in
detail. A further advantage is that a policy intent to confer an enforceable
right to a third party in a particular situation can be expressly addressed in
the legislation.[74]
3.6 The principal shortcoming of this option, however, is that it does
not address the underlying anomalies of the doctrine. Instead of dealing
directly with a rule which is fundamentally flawed, this option would not only
leave those anomalies unsolved, but would also add further complexity to the
existing rule.
3.7 Under this option, there would be a general legislative provision
to the effect that a contract for the benefit of a third party should not be
unenforceable by him for lack of privity. This was the approach preferred by
the Ontario Law Reform Commission in its report published in
1987.[75]
3.8 The Ontario
Law Reform Commission favoured this approach rather than a detailed legislative
scheme for several reasons.[76]
Firstly, it was thought that the courts should have some flexibility in dealing
with the variety of issues which would undoubtedly arise under any reform, such
as the designation of third party beneficiaries, etc. A detailed legislative
scheme would restrict the discretion of the courts in dealing with the special
circumstances of the cases before them. Secondly, anomalies would arise if the
same piece of legislation were to apply to widely differing circumstances.
Third party beneficiary cases could arise in a range of different contexts (for
example, contracts to pay money to relatives, contracts extending defences in
bills of lading to stevedores, etc). A single piece of legislation was thought
unlikely to deal with all these cases satisfactorily. Thirdly, the problem of
defining the class of beneficiaries entitled to sue and the question of
variation and rescission were regarded as particularly
intractable.
3.9 The advantage of this broad-brush option is that it is
simple to implement. It is, however, by no means easy to apply, since many
important questions about the detailed application of the general provision
remain to be settled by the
Courts.[77] In the meantime, it
would be difficult for a lawyer to advise his client on whether the third party
concerned can enforce the contract, or even whether that person is a third party
beneficiary under the contract in the first place. As pointed out by the Law
Commission, to leave these questions to the courts with no legislative guidance
could be said to be an abdication of
responsibility.[78] These questions
are too fundamental and numerous to lend themselves to the generalised approach
adopted under this option.
3.10 Under this option, the overall policy would be determined and
provision would be made for various matters, including the designation of third
party beneficiaries, when a third party can enforce a contract made for his
benefit, the rights of contracting parties to vary or discharge the contract,
and promisors' defences.
3.11 The two main advantages of this option are
certainty and clarity. Many of the difficulties accompanying reform of the
privity doctrine could be addressed and dealt with in the legislation. Some
court decisions and statutory provisions may, on an ad hoc basis, have
the effect of circumventing the privity doctrine with little thought for the
overall development of the law. Some of these statutory and common law rules
are artificial and subject to limits not related to wider policy considerations.
A comprehensive legislative scheme could establish a coherent body of rules
which are clear and certain, and provide for the overall development of this
area of the law. A comprehensive legislative scheme would provide the courts
with clear guidelines for determining the cases coming before them. This would
be of particular benefit in the commercial world, enabling businesses to clearly
identify their legal position and to make informed decisions
accordingly.
3.12 A major shortcoming of a detailed legislative approach
is its inflexibility. Circumstances may arise which were not foreseen by the
draftsman or the legislature, but the legislative provisions cannot be ignored.
The courts must apply the statute as they find it, no matter how hard the
particular circumstances may seem. Under a detailed statutory scheme, the
courts may have insufficient flexibility to be able to do justice in deserving
cases. In addition, any defects in the legislation can only be remedied by
legislative amendments, with the delay and complications associated with that
process.
3.13 Having weighed the advantages and disadvantages of each of the
above options for reform, we have come to the conclusion that reform should
proceed by means of a detailed legislative scheme. We are aware that options 1
and 2 have the advantage of being flexible and can address the needs of specific
circumstances. Their principal shortcoming, however, is that both are only
piecemeal in nature, and do not deal with the privity doctrine within a
comprehensive, systematic and coherent scheme. The problem is even more acute
in option 1 where the courts would only be able to act when a suitable case
arises. For option 2, the creation of specific statutory exceptions will
inevitably complicate an area of law which is already generally regarded as
technical, artificial and complex. Option 3 may be simple to implement, but it
is not viable since it leaves too many fundamental questions unanswered and
would create considerable uncertainty in its operation.
3.14 We
understand there are concerns that a detailed legislative scheme may tie judges'
hands, and would lack the flexibility of the other options in allowing specific
circumstances to be catered for. Cogent though these arguments may sound, we
are firmly of the view that a detailed legislative scheme can strike a sensible
balance between giving adequate guidance to judges and allowing them flexibility
in deserving cases. A wholesale reform of the privity doctrine would provide
certainty, clarity and a coherent body of law, which is not available under the
other options. We note that this is also the approach adopted in a number of
other jurisdictions, including Australia, England, New Zealand and Singapore.
Neil Andrews is of the view that the Law Commission was right to adopt a
detailed scheme which is "attractive in many respects...[and reveals] the
power of legislative
precision".[79] In his opinion,
the "tools of common law technique cannot match
it".[80] Professor Jack Beatson
shares this view:
"[A]bolition of the privity rule... throws up a number of difficult problems that cannot be isolated. This makes it particularly difficult to develop on a case by case basis without undue loss of certainty and without making choices of policy rather than of principle".[81]
Iacobucci J summarised it well in Fraser River Pile & Dredge Ltd
v Can-Dive Services Ltd:
"[P]rivity of contract is an established doctrine of contract law, and should not be lightly discarded through the process of judicial decree. Wholesale abolition of the doctrine would result in complex repercussions that exceed the ability of the Courts to anticipate and address. It is by now a well-established principle that the Courts will not undertake judicial reform of this magnitude, recognizing instead that the legislature is better placed to appreciate and accommodate the economic and policy issues involved in introducing sweeping legal reforms. ...
That being said, the corollary principle is equally compelling, which is that in appropriate circumstances, the Courts must not abdicate their judicial duty to decide on incremental changes to the common law necessary to address emerging needs and values in society. ..."[82]
|
Recommendation 2 We recommend that a clear and straightforward legislative scheme (the "recommended legislation") be enacted whereby, subject to the manifest intentions of the parties to an agreement, the parties can confer legally enforceable rights or benefits on a third party under that agreement. |
[70] Reforming the "remedy" rule which prevents the promisee from recovering the third party's loss is another possibility. The Law Commission also considered it as an option. However, reform of the "remedy" rule would have its own repercussions on the law of contract and goes beyond the Sub-committee's terms of reference. In any event, as pointed out by the Law Commission, this method in itself would not be adequate, as the promisee may be unwilling or unable to recover the third party's loss for one reason or another.
[71] See the discussion in Chapter 1.
[72] [1996] AC 650, at 658D-G (PC).
[73] Chapter 1 has discussed some examples of these statutory provisions under the heading "Statutory provisions".
[74] Law Commission Consultation Paper No 121 (cited above), at para 5.2.
[75] Ontario Law Reform Commission, Report on Amendment of the Law of Contract, (Toronto 1987).
[76] Law Commission Consultation Paper No 121 (cited above), at para 5.4.
[77] The questions include the designation of third party beneficiaries and whether the contractual parties can vary or rescind the contract.
[78] Law Commission Consultation Paper No 121 (cited above), at para 5.5.
[79] Andrews, "Strangers to Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999" [2001] CLJ 353, at 356.
[80] Andrews, (cited above),
[81] Beatson, "Reforming the Law
of Contracts for the Benefit of Third Parties: A Second Bite at the Cherry",
(1992) 45 CLP 1, 18.
[82] [2000]
1 Lloyds Rep 199, at paras 43-44.