Who is a third party?

4.2 There are two issues involved: (1) how a third party can be designated; and (2) whether a third party must have been in existence when the contract was made. As to the first issue, a third party can be expressly identified by:

1. name (eg Mr John Doe),

2. class (eg "stevedores", "subsequent owners"), or

3. description (eg "person living at 123 King's Road", or "A's nominee").

Australia

4.3 In Australia, the parliaments of the Northern Territory, Queensland and Western Australia have reformed the privity rule. The reform in Queensland was made following the report of that State's Law Reform Commission.[84] The main statutory provision is section 55 of the Property Law Act 1974 (the "1974 Act (Qlnd)"), which is almost identical to section 56 of the Law of Property Act 2000 (the "2000 Act (NT)") in the Northern Territory. Under both Acts, "beneficiary" (ie a third party) means:

"a person other than the promisor and promisee, and includes a person who, at the time of acceptance is identified and in existence, although that person may not have been identified or in existence at the time when the promise was given."

It seems that a third party need not be identified by name. In the opinion of the New Zealand Contracts and Commercial Law Reform Committee, the provisions preserve the promise for the benefit of a person identified by description but not yet having that status (for example, a future spouse of the promisee).[85]

4.4 Section 11(2) and (3) of the Property Law Act 1969 (Western Australia) (the "1969 Act (WA)") implements the recommendations of the English Law Revision Committee.[86] This section applies where a contract "expressly in its terms purports to confer a benefit directly on a person who is not named as a party to the contract." This seems to imply that only the person named can enforce the contract.[87] It does not appear to allow enforcement by those who are non-existent at the time the contract is made.[88]

England and Wales

4.5 Calls for legislative reform were made as long ago as 1937 by the English Law Revision Committee,[89] whose report did not lead to any reform in England and Wales at that time. In 1991, the Law Commission put forward for discussion in a consultation paper proposals for reforming the privity rule, and recommended in its final report in 1996 a detailed legislative scheme to reform the doctrine.[90] The English Contracts (Rights of Third Parties) Act 1999 (the "1999 Act (E & W)") was passed to implement the report. Under section 1(3) of the 1999 Act (E & W), a third party must be "expressly identified in the contract by name, as a member of a class or answering a particular description but need not be in existence when the contract is entered into". After discussing the New Zealand position (which is explained in the following paragraphs), the Law Commission emphasised that in their view there would be sufficient identification by description if a third party was referred to as "B's nominee".[91]

New Zealand

4.6 In its 1981 Report, the New Zealand Contracts and Commercial Law Committee made various proposals for the reform of the privity doctrine.[92] The Contracts (Privity) Act 1982 (the "1982 Act (NZ)") implements these proposals. Just like the English provisions, section 4 of the 1982 Act (NZ) allows a third party to be "designated by name, description, or reference to a class". Designation requires a degree of specification or identification by which the beneficiary is to be identified.[93] Words like "nominee" were not regarded as sufficient.[94] Tipping J in Rattrays Wholesale Ltd v Meredyth-Youth & A'Court Ltd[95], however, held that "X's nominee" was a person designated by description for the purpose of section 4. That section should be given a "fair, large and liberal interpretation". This wide view is supported by academics who regard it as "both commercially convenient and... [consistent] with the purpose of the 1982 Act".[96] Section 4 does not require a third party to be in existence at the time when the contract is made. Thus a promise for the benefit of a company yet to be incorporated[97] or a child yet to be born may fall within the section.[98]

Singapore

4.7 The Contracts (Rights of Third Parties) Act 2001 (Cap 53B) (the "2001 Act (Sg)") implements a report of the Law and Revision Division of the Attorney-General's Chambers[99], and is broadly similar to the 1999 Act (E & W). In relation to the designation and existence of a third party, the Singaporean provisions are identical to their English counterparts.

Options and conclusions

4.8 There are at least two possible options in relation to the designation of a third party: (a) only a third party named in the contract can enforce it (as in Western Australia); and (b) a third party can be designated by name, description, or reference to a class (as in England, New Zealand and Singapore). The provisions in the Northern Territory and Queensland are more akin to option (b).

4.9 In our opinion, it would be too restrictive to identify a third party by name alone. This is the criticism which the New Zealand Contracts and Commercial Law Reform Committee levelled at the Western Australian provision. We agree with the Law Commission, which rejected a requirement for an express designation by name only because that would prevent rights from being conferred upon a third party who could only be identified by class or description.[100] This would mean, for example, that an employer and contractor would not be able to provide in a construction contract for rights to be conferred on future occupiers of the premises under construction. The third party cannot, however, be identified by implication. It would give rise to unacceptable uncertainty if third party rights were conferred on someone whose identity was to be implied from the mind of the parties to the contract. We therefore recommend that a third party can be expressly designated either by name, as a member of a class or as answering a particular description.

4.10 As to the question of whether a third party must be in existence at the time of the contract, the provisions in England, New Zealand and Singapore expressly exclude such a requirement. The provisions in the Northern Territory and Queensland have similar effect. The alternative would be to follow the approach in Western Australia which appears to require a third party to be in existence at the time the contract is made.

4.11 We note that the New Zealand Contracts and Commercial Law Reform Committee criticised the provision in Western Australia as being too restrictive. There is, however, the concern that the potential range of third parties may be unduly widened if those not yet in existence at the time of contracting are included. Furthermore, it may be unfair to the contracting parties, as they may not be aware of their potential liability to a third party who is not yet in existence. It will also restrict the parties' right to vary their contract subsequently. However, we do not consider these to be convincing arguments against the inclusion of a third party not yet in existence. The contracting parties may still be unaware of a third party even if he was in existence at the time of contracting. As regards the restriction on the parties' variation rights, it is a question of determining what particular act by a third party can stop the contracting parties from varying their contract. This will be dealt with as a separate issue later in this chapter.

4.12 We see no good reason why a benefit should not be conferred on a third party who is not yet in existence at the time of contracting. This is especially true when, as highlighted in the explanatory notes to the 1999 Act (E & W) (the "Explanatory Notes"), such an approach would enable the parties to give enforceable rights to, for example, an unborn child, a future spouse or a company that has not yet been incorporated.[101] A third party should, however, be capable of being ascertained with certainty at the time when the promisor's duty to perform arises, or when a liability against which the contractual provision seeks to protect the third party is incurred. We agree with the Law Commission that this is the normal principle that to be valid a contract, or contractual provision, must be sufficiently certain.[102] A related issue is the position of pre-incorporation contracts. There should a differentiation between a contract on behalf of a company (the third party) and that for the benefit of a company.[103] The present reform is about the latter type of contract, and does not involve a third party becoming a party to the contract. Hence, the present reform does not derogate from the rule that a company which is not incorporated at the time when a contract is made on its behalf cannot enforce the contract. No specific rules are thus needed in the recommended legislation

4.13 The Law Commission concluded that a joint promisee who had not provided consideration should not be regarded as a third party for the purpose of the present reform.[104] We agree with its conclusion. The issue is somewhat peripheral to the focus of the reform and we defer to the courts to determine the most appropriate remedies to the promisee on a case-by-case basis.

What is the test of enforceability?

4.14 A core issue of a detailed legislative scheme is to define the limits within which a third party can enforce a contract to which he is not a party.

Australia

4.15 In the Northern Territory and Queensland, a promisor who promises to do something for the benefit of a beneficiary, will be subject to a duty enforceable by the beneficiary.[105] Under section 56(6) of the 2000 Act (NT) and section 55(6) of the 1974 Act (Qlnd), a promise means a promise (in writing in the Northern Territory) that:

(a) is or appears to be intended to be legally binding; and
(b) creates or appears to be intended to create a duty enforceable by a beneficiary.

Mason CJ and Wilson J said, as obiter dicta, in Trident General Insurance Co Ltd v McNiece Bros Proprietary Ltd[106] that for the Queensland provision to apply, the parties' intention that the third party should be able to enforce the contractual term for his benefit was required.

4.16 In Western Australia, a third party can enforce a contract where the "contract expressly in its term purports to confer a benefit directly on" him under section 11(2) of the 1969 Act (WA). In Westralian Farmers v Southern Meat[107], Westralian Farmers were livestock agents acting for King in the sale of cattle to Southern Meat Packers. Under the contract of sale, Southern Meat Packers were to make payment for the cattle not to King but direct to Westralian Farmers (who were not parties to the contract) so as to protect Westralian Farmers for their fees. Southern Meat Packers paid King direct and Westralian Farmers sued. The Supreme Court of Western Australia held that the contract term regarding payment did directly confer a benefit on Westralian Farmers within the meaning of section 11(2). Consequently, they could enforce that aspect of the contract even though they were not a party to it. Moreover, in the "Trident General Insurance" case[108] Mason CJ, Wilson J and Brennan J said, as obiter dicta, that an express intention to benefit a third party was required in the contract under this section.

England and Wales

4.17 Under section 1(1) of the 1999 Act (E & W), a third party may enforce a contract term if (a) "the contract expressly provides that he may" do so, or (b) "the term purports to confer a benefit on him". According to subsection (2), however, a third party will not acquire any rights under the second limb "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". The first limb is relatively straightforward and would apply where a contract contains phrases like "C shall have the right to enforce the contract (or terms 3 and 4 of the contract)" or "C shall have the right to sue".[109] Less clear-cut is the second limb which consists of a rebuttable presumption. The test "the term purports to confer a benefit on [a third party]" will be satisfied where a third party is to receive a benefit from the promisor directly, but not a consequential or incidental benefit stemming from a promisor's performance.[110] This presumption can be rebutted by the contracting parties where on a proper objective construction of the contract, because of an express term to this effect or other inconsistent terms, it appears that the parties did not intend the third party to have the right to enforce. Mr Justice Colman noted that subsection (2) did not provide that subsection 1(b) was disapplied unless on a proper construction of the contract it appeared that the parties intended that the benefit should be enforceable by the third party.[111] Instead, it provides that subsection 1(b) is disapplied if, on a proper construction, it appears that the parties did not intend third party enforcement. Hence he held that if the contract was neutral on the question, subsection (2) did not disapply subsection 1(b). A third party's right of enforcement under the Act can be used both as a sword and a shield. It is a sword because the Act enables him to sue on a term for his benefit, while according to section 1(6) it is also a shield since the Act allows him to rely on an exclusion or limitation clause in the contract when he is sued by the promisor. In both limbs, the reference is to a contract term but not the contract in its entirety. In other words, a third party can enforce the contract as a whole or just one or more specific terms, depending on the parties' intention.

New Zealand

4.18 Under section 4 of the 1982 Act (NZ), where a promise in a deed or contract confers or purports to confer a benefit on a third party, the promisor is under an obligation to perform the promise and the third party can enforce it. This section does not apply if, on a proper construction of the deed or contract, the promise is not intended to create an obligation enforceable by the third party. There are several elements in this provision.

4.19 The promise must be contained in a deed or contract between the promisor and promisee. It was held in Morton-Jones v RB & JR Knight Ltd[112] that a solicitor's letter purporting to designate a third party as the beneficiary of an existing agreement did not fall within section 4. Another example is Gartside v Sheffield Young & Ellis.[113] In this case, the testatrix died before the will was finalised, and the legatee sued as a third party beneficiary of an implied term in the contract between the testatrix and her solicitor that the solicitor would draw up and present the will to the testatrix for execution promptly. Richardson J dismissed the claim since the contract did not include any provision for the benefit of a third party. The benefit to the legatee, which arose only when the contract was properly carried out, was not conferred by the contract itself.

4.20 The term "benefit" is defined in section 2 as follows:

"'Benefit' includes—

(a) Any advantage; and

(b) Any immunity; and

(c) Any limitation or other qualification of— (i) An obligation to which a person (other than a party to the deed or contract) is or may be subject; or (ii) A right to which a person (other than a party to the deed or contract) is or may be entitled; and

(d) Any extension or other improvement of a right or rights to which a person (other than a party to the deed or contract) is or may be entitled".

The term "advantage" is relatively straightforward and means something positive conferred by the contract. The benefit may be money, property or some other form of financial advantage. The Court of Appeal held that section 4 applied to an agreement between a union and a hospital giving redundant employees priority of appointment to vacancies in other hospitals.[114] The section was also applied in New Zealand Guardian Trust Co Ltd v Peat Marwick, a case where the third party was a trustee.[115] In this case, the trustee for holders of debenture stock issued by X Co sued the auditor of the company, claiming that under the audit contract between the company and the auditor, the auditor was required to research and report to the shareholders and the trustee, and that the audit contract conferred a benefit under section 4. The court held that the case fell within the section despite the trustee's representative capacity, and the benefit was the advantage in receiving the auditor's advice so that the trustee could perform its duties properly.

4.21 The term "immunity" means that a third party can have the benefit of an exclusion clause in the contract when he is sued by the promisor. A benefit can also be a release from liability: "limitation or other qualification of an obligation to which a person [other than a party] is or may be subject".

4.22 Just like its English counterpart discussed above, the application of section 4 is subject to the contrary intention of the parties upon a proper construction of the deed or contract. Indeed, the second limb of the English provision was modelled on section 4. In Malyon v NZ Methodist Trust Association,[116] there was such a contrary intention. A lessor of land sued the guarantor of the obligations of the assignee/lessee of the land. The guarantor covenanted in the deed of assignment with the vendor/assignor of the lease, not with the lessor. The court held that the lessor could not enforce the guarantee under section 4. The guarantee was to provide security to the vendor/assignor against the failure of the assignee to pay rent which would lead to a claim by the lessor against the assignor. The proviso to section 4 applied since there was no intention to create an obligation enforceable by the lessor. In Saunders & Co v Bank of New Zealand[117], a solicitor was appointed by the District Law Society (DLS) under a statute to investigate the affairs of a law firm. One of the issues was whether the contract between the solicitor and DLS conferred a benefit on the firm under investigation. The court held that the statutory appointment was a regulatory matter and did not confer a benefit on the firm under section 4. In any event, on a proper construction of the contract, the contract was not intended to create an obligation enforceable at the suit of the firm under investigation. To find otherwise would compromise the statutory investigative power and would put the investigator in a position of conflict which was difficult to resolve.

Singapore

4.23 The tests in section 2(1) and (2) of the 2001 Act (Sg), and section 2(6) are identical to those in England, and the earlier discussion of the English provisions is equally applicable to Singapore.

Options and conclusion

4.24 There appear to be at least four options available to Hong Kong:

1. The contract expressly in its terms purports to confer a benefit directly on a third party (as in Western Australia) (option 1).

2. The parties intend a third party to receive the benefit of the promise and also intend to create a legal obligation enforceable by him (following the tests in the Northern Territory and Queensland) (option 2).

3. A third party can enforce a contract if the parties intend him to receive the benefit of the promise, provided that on a proper construction of the contract the promise is intended to create an obligation enforceable by the third party (as in New Zealand) (option 3).

4. The "alternative" approach (as in England): either (a) a contract expressly provides that a third party may enforce a contract term, or (b) a term purports to confer a benefit on the third party, subject to the proviso that the promise is intended to create an obligation enforceable by the third party (option 4).

4.25 Before making its final recommendation which resulted in the present section 1(1) and (2) of the 1999 Act (E & W), the Law Commission had considered other possible tests. These four tests were that a third party might enforce a contract:

(a) where the parties intend that he should receive the benefit of the promised performance, regardless of whether they intend him to have an enforceable right of action or not (option 5);

(b) where to do so would effectuate the intentions of the parties and either the performance of the promise satisfies a monetary obligation of the promisee to him or it is the intention of the promisee to confer a gift on him (option 6);

(c) on which he justifiably and reasonably relies, regardless of the intentions of the parties (option 7); and

(d) which actually confers a benefit on him, regardless of the purpose of the contract or the intention of the parties (option 8).

4.26 We are of the view that if the parties have expressly provided that the third party can enforce a contractual term, he should be able to do so. The parties' intention should be respected and given effect to, and the test of enforceability should enshrine their intention. To this end, we can rule out options 1, 5, 7 and 8 which are contrary to this view. Options 7 and 8 also have the added disadvantage that they are too wide in scope and would, contrary to the parties' intention, potentially enable a wide range of people to sue as third parties. The problems of option 7 can be illustrated in an example where a person purchases a house, on the understanding that a new motorway is to be built. If the motorway is not built on time, under option 7 the person can sue the builder for his loss, such as extra petrol costs. Another example can exemplify the shortcomings of options 1, 5 and 8. Where a contract to build a new road expressly purports to confer a benefit on nearby residents, or intends that the residents should receive the benefit, or the contract actually confers a benefit on the residents, those residents can enforce the contract under options 1, 5 and 8 if the road is not built on time or at all.

4.27 We are also of the opinion that if the parties have intended that a third party can enforce a promise, it should not be necessary to further require that the third party is an intended beneficiary of the promise. A third party need not be a beneficiary under the contract to have a right to enforce it. For instance, where the parties confer on C (as a trustee) a right to enforce a promise in the contract which would benefit D, C should have the right to enforce the promise even though C is not the beneficiary of the promise. One common problem of options 2, 3 and 6 is that they require the parties to intend a third party to be benefited from the promise and also intend to create a legal obligation enforceable by him. It seems that the only option which allows a third party to enforce a contract if the contract so provides is the first limb of option 4, and hence we recommend its adoption.

4.28 It is, however, too restrictive if a third party can enforce a contract only where the contract has expressly so provided. We notice that with the exception of option 7, all the above options require either that the contract purports to confer, or that the parties intend to confer, a benefit on the third party. We agree with the Law Commission that a test which gives effect to the parties' intentions in the light of the contract and the surrounding circumstances can lead to uncertainty.[118] The second limb in option 4, as recommended by the Law Commission and modelled on the New Zealand provision, adopts a presumption in favour of a third party's right to enforce a contractual term which purports to confer a benefit on him. The presumption can be rebutted where, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party. Professor Andrew Burrows has explained the basis of the presumption thus:

"if you ask yourself, 'When is it that parties are likely to have intended to confer rights on a third party to enforce a term, albeit that they have not expressly conferred that right', the answer will be: 'Where the term purports to confer a benefit on an expressly identified third party.' That then sets up the presumption."[119]

4.29 Academics in general endorse the presumption, regarding it as striking a balance between the aims of effecting the parties' intentions and the avoidance of uncertainty. It also enshrines the notion of "freedom of contract". Nonetheless, some academics have expressed reservations. The first concern is what amounts to "purports to confer a benefit" and where the line should be drawn.[120] Both Professor Burrows and Sir Guenter Treitel are of the view that the presumption is only triggered where a third party is to receive a benefit from the promisor directly, and this must not be just a consequential or incidental benefit stemming from the promisor's performance.[121] If A contracts with B to cut B's hedge adjoining C's land, performance by A might benefit C but the term does not purport to confer a benefit on C. By the same token, a solicitor's contractual obligation to use reasonable care in drawing up a will would not, vis-a-vis the beneficiaries of the will, fall within the presumption because the term does not purport to confer a benefit on those beneficiaries. The benefit to them derives from the testator, not from the solicitor, whose role is only to enable his client to confer a benefit on the beneficiaries.[122] This was also the conclusion of the New Zealand court in Gartside v Sheffield Young & Ellis on similar facts discussed above.[123]

4.30 Another concern is the manner in which the presumption can be rebutted. It seems that the contract should be looked at as a whole, and the presumption can be rebutted if there is an express term to the effect that the parties did not intend the third party to have the right to enforce, or there are other inconsistent terms in the contract.[124] Professor Robert Merkin is of the opinion that on a strict reading of section 1(2), extrinsic evidence is to be disregarded, but he also thinks that the 1999 Act as a whole does not have that effect, nor was it the Law Commission's intention.[125] No general principle can be derived from the New Zealand cases on this issue. Professor Andrew Burrows observes that the normal objective approach to contractual interpretation should be applied, and classic cases on what is admissible in relation to interpretation of a contract therefore apply.[126] We think that the extent to which surrounding circumstances can be taken into account would best be left to the courts to decide. We therefore recommend adopting the second limb of option 4. Nonetheless, the words "it appears that" in section 1(2) of the 1999 Act (E & W) obscure the meaning of the provision. We believe that those three words are unnecessary. Otherwise, the court would only look for what appears to be, but not the parties' actual intention, and this would lower the threshold. We emphasise that the test should remain an objective one, and we believe that the words "on a proper construction" should already put this beyond doubt. A third party will have the right to enforce the contract so long as he falls within either of the two limbs. We believe that the recommended two-limb test recognises the parties' freedom of contract in the sense that they can decide when a third party should be able to sue on their contract. We also agree with section 1(6) of the 1999 Act (E & W) that a reference to the third party enforcing a contractual term should include a reference to his availing of an exclusion or limitation clause contained in the contract. The definition of the term "benefit" in section 2 of the 1982 Act (NZ)) has the same effect.

4.31 A more lenient test for consumers Another issue is whether there should be a more lenient test of enforceability for consumers. None of the jurisdictions discussed in this paper have provided for such a test. In view of some consultees' feedback that the proposed reform should go further in protecting consumers by having a more lenient test of enforceability for consumers, the Law Commission considered the issue in its report. The consultees' suggested tests were in effect options 7 and 8 discussed above. The Law Commission rejected the suggestions on the grounds that the specific concern on consumer protection could not be addressed through the kind of general reform, on general law of contract, which it was handling.[127]

4.32 In Hong Kong, we are, however, not aware of any initiative to enact comprehensive consumer protection legislation in the near future. In addition, the two-limb test recommended above may not cover all situations involving consumer third parties. For example, a contract between a property developer and a main contractor instructing the latter to use specific materials in the construction of a block of flats ultimately destined for retail to consumers may not be regarded by the Court as purporting to confer a benefit on third parties under the second limb. Similarly, it is doubtful whether a contract whereby a retailer buys goods from a manufacturer could without more be said to constitute an agreement to purport to confer a benefit on third party consumers who subsequently deal with the retailer. A third example is where goods are sold to a buyer who, unbeknown to the retail seller, intends to make a gift of the goods to a consumer third party. In any event, none of the ultimate consumers just considered are expressly identified by name or description, or as members of a class by the original transactions between promisor and promisee as required in Recommendation 3. In such circumstances, it is worth considering whether our recommended legislation should include measures for consumer protection.

4.33 Having examined the issue we are not entirely convinced that we should formulate a more lenient test for consumers alongside the two-limb test in our recommended legislation for the reasons set out below. First, relaxation of the strict privity rule would of itself result in a major change of Hong Kong contract law, it would be prudent first to see how the law takes effect as a matter of practice before considering whether refinements, including special rules to cater for consumers, should further be enacted.

4.34 Secondly, the two-limb test which we recommend is intended to respect the parties' freedom to contract. A more lenient test for consumers may enable a consumer to enforce a promise made by the promisor even when it is against the promisor's wish. Such a test would thus deviate from the principle of freedom of contract. While such a deviation may be justifiable in certain cases, the balance to be struck between the private interests of contracting parties and those of consumers is far from clear cut in every case to enable simple universally applicable rules to be articulated.

4.35 Thirdly, a more lenient test for consumers may not be able to achieve its intended result. Promisors may simply be discouraged from entering into agreements for the benefit of third parties or they may contract out of the more lenient test (or even the entire recommended legislation) where their wishes may be ignored. Promisors may find the consequences of entering into contracts to benefit third party too onerous.

4.36 Fourthly, not all of the cases involving consumer third parties are deserving of sympathetic treatment. Where, as in the third example mentioned above, a buyer does not tell a retailer that he is buying goods in order to make a present of them to a consumer, we do not see any anomaly if the consumer cannot sue the retailer directly under the two-limb test.[128] Without knowing the buyer's intention to benefit the consumer, the retailer did not have the chance to refuse to deal with the buyer on the footing of liability to the consumer. It is, however, reasonable for a promisor, such as the retailer in the above example, to wish to limit his exposure to third party liability (for example, in light of the terms of his liability insurance). In such case, it would be anomalous if an unexpected liability to an unknown third party is forced upon him.

4.37 Finally, in the discrete situation of property developer and contractor, we are hopeful that, without the need for special consumer rules, market forces would cause contractors of their own accord to agree that (say) certain building specifications may be enforceable against them by consumer third parties. Thus, for example, the fact that a contractor has expressly agreed to be liable to an ultimate buyer of a flat if the same does not turn out to be up to specification, could (we believe) well be perceived as a major selling point for a property development. To a consumer choosing between a flat in either development A or development B (with only one of them offering a right to enforce building covenants against the building contractor), such a right could be a factor in his choice. The Government, as the sole supplier of land in Hong Kong and a major employer in construction development, may, together with major property developers and building contractors in Hong Kong, take the lead in adopting a code of practice and standard forms of contract whereby building contractors agree to certain of their covenants being enforceable by consumers.[129] In this way, even without special rules for consumers, we are optimistic that the new law could help foster a commercial environment from which consumers can substantially benefit.

4.38 There are two issues related to a third party's enforcement of the benefit conferred on him by the contract. The first is whether, in enforcing the right, a third party should be subject to other relevant terms of the contract. Another one is the remedies available to a third party.

Australia

4.39 Under section 55(3)(b) of the 1974 Act (Qlnd), upon acceptance, a beneficiary will be bound by the promise and subject to a duty to do or refrain from doing such acts as required in the promise. A promisor will be entitled to such remedies and relief as may be just and convenient for the enforcement of the duty. A promisor and a beneficiary may vary or discharge the terms of the promise and the duty of the promisor and beneficiary. There are almost identical provisions in section 56(3) the 2000 Act (NT). Under section 11(2)(c) of the 1969 Act (WA), a promisor is entitled to enforce, as against the third party, all the obligations imposed by the contract on the third party for the promisor's benefit.

4.40 Under section 55(3)(a) of the 1974 Act (Qlnd) (section 56(3)(a) the 2000 Act (NT)), a beneficiary is entitled to such remedies and relief as may be just and convenient for the enforcement of the promisor's duty

England and Wales

4.41 Section 1(4) the 1999 Act (E & W) expressly provides that the Act does not confer a right on a third party to enforce a contractual term otherwise than subject to and in accordance with any other relevant terms of the contract. The purpose of this provision is to prevent a third party from picking and choosing as between contract terms. If he is empowered to enforce a particular obligation, he is bound by the restrictions relating to the enforcement, including exemption clauses and agreed limitation periods.[130]

4.42 According to section 1(5), the remedies available to a third party in enforcing a contractual term are those that would have been available to him in an action for breach of contract if he had been a party to the contract. The rules relating to damages, injunctions, specific performance and other relief will apply accordingly. Section 7(4) makes it expressly that a third party should not be treated as a party to the contract for other enactments merely because of the reference to treating him as if a party to the contract in section 1(5).

New Zealand

4.43 Section 8 of the 1982 Act (NZ) provides that a beneficiary can enforce the obligations imposed on a promisor as if the beneficiary were a party to the contract. In other words, a beneficiary can obtain full contract damages and also equitable relief.[131]

Singapore

4.44 Sections 2(4) and (5) and section 8(4) of the 2001 Act (Sg) are nearly identical to the equivalent provisions in the 1999 Act (E & W).

Conclusion

4.45 As to the first issue, the provisions in the Northern Territory, Queensland and Western Australia amount to imposing obligations on third parties. This derogates from the general principle that a contract cannot impose a burden on a third party, and also deviates from the focus of the present reform, ie conferring benefits rather than imposing obligations on third parties. On the contrary, the English provision only imposes conditions on a third party if he wants to enforce the benefits conferred on him. It is in line with the above general principle of contract law and is well within the scope of the present reform. We believe that contracting parties should have the freedom to place conditions on the third party's right since they are the ones who confer the right on the third party. We therefore recommend that a third party's right to enforce a contractual term should be subject to and in accordance with other relevant terms of the contract.

4.46 In respect of the remedies available to third parties, the provision in Queesland is general in nature: "such remedies and relief as may be just and convenient for the enforcement". Under the New Zealand provision, a third party can enforce his right as if "he were a party to the deed or contract". The remedies under the English provision have three characteristics.[132] They are remedies available in an action for breach of contract, and this means that termination of a contract for a promisor's substantial breach is excluded since termination is a self-help, not a judicial, remedy. They also exclude restitutionary remedies because a promisor may be unjustly enriched at the expense of the promisee, but not the third party. Finally, the clause "if he had been a party to the contract" means that the rules as to remedies are to apply by analogy, including the application of the rules of remoteness and mitigation, the possibility of specific performance, etc. In our opinion, the general provision in Queensland is concise and would give the courts the required discretion to award the most appropriate remedies in view of the cases' circumstances. We thus recommend adopting it.

Can the contracting parties vary or rescind the contract?

4.47 This issue concerns the rights of the contracting parties to alter or cancel their contract after a third party has been conferred rights under the contract. Here, a balance has to be struck between the freedom of contracting parties to change the contract in accordance with their intentions, and the interests of the third party, who may suffer some injustice as a result of the variation or rescission.

4.48 Not allowing the parties to vary the contract would unduly restrict the parties' freedom of contract. In contrast, to give the parties unfettered power to vary the contract would mean that the third party could not rely on any right conferred by the contract. Hence, there should be a cut-off point after which the parties cannot vary or rescind the contract. In other words, there should be a "crystallisation" test for determining when and/or how a third party's rights "crystallise", thereby putting an end to the contracting parties' rights to vary or cancel the contract.

Australia

4.49 In Queensland and the Northern Territory, under section 55(1) of the 1974 Act (Qlnd) and section 56(1) of the 2000 Act (NT) respectively, a promisor is subject to a duty to perform the promise "upon acceptance by the beneficiary". Prior to acceptance, the parties may, without the consent of the third party, vary or discharge the promise.[133] Both Acts use a third party's "acceptance" as the crystallization test. "Acceptance" means:

"an assent by words or conduct communicated by or on behalf of the beneficiary to the promisor, or to some person authorised on the promisor's behalf, in the manner (if any), and within the time, specified in the promise or, if no time is specified, within a reasonable time of the promise coming to the notice of the beneficiary." [134]

The key is that a beneficiary must communicate his assent to the promisor. Mr Justice Andrew Rogers considers that although the provision is "no doubt fair and sensible on the face of it, [it] may well bring about the failure of some otherwise meritorious beneficiaries".[135]

4.50 In Western Australia, the parties can, with mutual consent, cancel or modify the contract at any time before a third party "has adopted it either expressly or by conduct" under section 11(3) of the 1969 Act (WA). Burt CJ of the Supreme Court of Western Australia said, as an obiter dictum in the "Westralian Farmers" case that the third party had adopted the contract by crediting the account of one of the buyers with the price less commission.[136]

England and Wales

4.51 Section 2(1) of the 1999 Act (E & W) provides that the parties cannot rescind or vary the contract in such a way as to extinguish or alter a third party's rights where

(a) the third party has communicated his assent to the contractual term to the promisor;
(b) the promisor is aware that the third party has relied on the contractual 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.[137]

In other words, both the "acceptance" test and the "reliance" test are used. In this context, acceptance means communication of one's assent.[138] Reliance means conduct induced by the belief (or expectation) that the promise will be performed, or at least the belief that there is a legal entitlement to performance of the promise. The reliance need not be detrimental. In other words, the conduct need not make the plaintiff's position worse than it was before the promise was made.[139]

New Zealand

4.52 The 1982 Act (NZ) uses different tests. Under section 5, the parties cannot vary or discharge the promise where

(a) the position of a beneficiary has been materially altered by the reliance of the beneficiary or any other person on the promise (whether or not the beneficiary or that other person knows the precise terms of the promise); or

(b) a beneficiary has obtained judgment against the promisor, or an arbitrator's award on the promise.

The first test is akin to a "reliance" test, but has the element of "material". It is a matter of fact as to what amounts to a "material" alteration. No cases can be found on this.[140] The second test is the "judgment/award" test.

Singapore

4.53 The tests in the Singaporean provisions are similar to their English counterparts, except that the Singaporean ones have put it beyond doubt that the tests in (b) and (c) above still apply whether or not the third party has knowledge of the precise term of the promise.[141]

Options and conclusions

4.54 Different tests are adopted in different jurisdictions. Five options can be considered in Hong Kong: (a) the "acceptance" test (the Northern Territory, Queensland, England and Singapore); (b) the "adoption expressly or by conduct" test (Western Australia); (c) the "reliance" test (England and Singapore); (d) the "material reliance" test (New Zealand); and (e) the "already obtained judgement or arbitrator's award" test (New Zealand). It should be noted that these tests are not mutually exclusive, and they can be used in different combinations (as in England and Singapore).

4.55 Other options considered and rejected by the Law Commission were the "awareness" test, the "detrimental reliance" test and the "third party's bringing suit on the promise" test. The first of these tests requires merely that the third party is aware of the terms of the contract. It is the crystallisation point most favourable to the third party, and comes close to rejecting a right to vary. We do not favour the "awareness" test as it puts unnecessary restrictions on the contracting parties' rights. The "detrimental reliance" test means that the third party's conduct in reliance on the promise renders him worse off than he would have been if the promise had never been made.[142] That is to say, the third party has suffered some detriment in reliance on the promise. The Law Commission did not favour this test since the essential injustice caused to a third party by the privity rule was that his reasonable expectations of the promised performance were disappointed. It was the expectation interest which the crystallisation test should seek to protect, and the Law Commission was of the view that the normal contractual measure of recovery (the expectation measure) should apply. [143] To require the reliance to be detrimental would shift the focus away from protecting the third party's expectation interest to protecting the plaintiff's reliance interest.[144] As to the third test, if a third party sues on the promise, he is relying on the promise since he believes that he is entitled to it. In the Law Commission's opinion, this test adds nothing new. We share the views of the Law Commission and we have accordingly rejected all three of these tests. Furthermore, none of the other jurisdictions reviewed have adopted these three tests.

4.56 The meaning of the "adoption expressly or by conduct" test in Western Australia is ambiguous. It is not clear what a third party needs to show in order to prove his "adoption" of the contract. The 1969 Act (WA) itself does not shed any light on this, nor do any cases.[145] According to the Law Commission, "adoption" may have the same meaning as "acceptance", and another possibility is that it means either "acceptance" or "reliance". In view of its ambiguity, we believe that this test should be avoided. The same can be said about the "material reliance" test in New Zealand, since there can be much uncertainty as to what amounts to "material". As the Law Commission rightly pointed out, "it would be a recipe for litigation".[146] In addition, the shortcomings of the "detrimental reliance" test discussed above also apply to this test. In other words, it is the third party's expectation interest which the crystallisation test should seek to protect. Whether the reliance is detrimental or not should be irrelevant. The "already obtained judgement or arbitrator's award" test in New Zealand is not particularly helpful either. If a third party has already obtained judgment or an arbitrator's award upon the promise, it will be of little concern to him whether or not the parties can vary or rescind the contract.

4.57 Once a promise has been made by a promisor to the promisee, the third party may have expectations that the promise will be performed, and may, in relying on the promise, regulate his affairs accordingly. This may cause injustice to the third party. We are therefore of the view that the "reliance" test can best capture the essence of the reform. In other words, once a third party has relied on the promise, the parties should not be free to rescind or vary the contract. The test should apply not only where a promisor is aware that the third party has relied on the promise, but also where the promisor can reasonably be expected to have foreseen that the third party would rely on the promise and the third party has indeed relied on it. A promisor need not actually foresee the third party's reliance or his particular mode of reliance, so long as reliance of some sort is reasonably foreseeable.[147] This would protect the third party where the promisor is willfully blind to the third party's reliance on the promise. We note that the New Zealand provision covers the case where someone other than the third party acts in reliance on the promisor's promise. While we believe that contracting parties should check whether the third party has relied on the promise, it is too onerous for the parties to make sure that apart from the third party, no one else has acted in reliance on the promise. If too heavy a burden is imposed on contracting parties, they may be discouraged from conferring benefits on third parties. Furthermore, since it is difficult for a promisor to prove that the third party has not relied on the promise, the burden to prove reliance should be borne by the third party.

4.58 Apart from the "reliance" test, a third party who has "accepted" (ie communicated his assent by word or conduct) to the promisor should also be protected from the parties' variation or rescission of the contract. This is because the third party has already done his part in informing the promisor of his assent. Since the promisor is aware of the assent, he should not be free to vary or rescind the contract. To be fair to the promisor and for the sake of certainty, the postal rule that acceptance of an offer takes effect where the letter is posted should not apply so as to ensure that the promisor is actually informed of the third party's assent. A third party should bear the responsibility to check whether the promisor is in a position to perform before relying on the promise. One obvious advantage of the "acceptance" test is certainty. We therefore come to the conclusion that both the "reliance" test and the "acceptance" test should be adopted as alternatives to each other. Where a contract has more than one provision conferring benefits on a third party, only the provision which has been relied on or accepted by the third party would become irrevocable. We also recommend that an assent sent to the promisor should not be regarded as communicated to the promisor until received by him.

4.59 Neil Andrews points out that "by agreement... rescind... or vary..." was adopted to replace the original "vary or cancel..." in section 2(1) of the 1999 Act (E & W) during the Parliamentary debate[148] because in the Lord Chancellor's words:

"We would not want a contracting party to be prevented from accepting a repudiation because of the interests of the third party".[149]

In other words, only variation or rescission by agreement of the parties will be caught by section 2. If B decides to end the contract because of A's repudiation or some vitiating factors for which A is responsible, B can still terminate the contract even after C (the third party) has relied on or assented to the benefit. This is because the contract is not rescinded "by agreement". By the same token, where a contract is frustrated, C's rights under the contract would also be extinguished and section 2(1) would not apply.[150] We believe that in these situations, the parties' right to rescind or vary the contract should not be restricted simply because of the third party's interests. We agree that "by agreement" should be added to the provision.

4.60 Related issues The Law Commission also considered some related issues. First, it decided not to give effect to a contractual term, enforceable by a third party, that the contract was irrevocable whether or not his right had crystallised.[151] We agree with the Law Commission that it is an unreasonable fetter on the contracting parties' freedom of contract. Secondly, the Law Commission concluded that where more than one third party satisfied the test of enforceability, the principles relating to the case of "plurality of creditors" as discussed by Sir Guenter Treitel should apply by analogy.[152] The effect of the application is that where A contracts with B to pay C and D each $10 separately, crystallisation of C's rights (or C's consent to variation of the promise) will not affect D's rights and vice versa. In contrast, where A contracts with B to pay C and D $10 jointly, crystallisation of C's rights will also crystallise D's rights and vice versa. Furthermore, the relevant statutes in Queensland, Western Australia and New Zealand have not dealt with the issue. The Law Commission thus concluded that no legislative provision was needed. We agree that this issue can be left to the courts to determine. Thirdly, the Law Commission regarded performance by a promisor to the promisee (rather than to the third party) or release of the promisor by the promisee as a variation or cancellation of the contract.[153] If the contract can still be varied (ie before crystallisation of the third party's right), the said performance or release would discharge the promisor. Thus there is no need to have a provision on this issue in the recommended legislation.

Can the parties vary or rescind the contract after crystallisation, or lay down their own crystallisation test?

4.61 There are two further issues relating to the contracting parties' rights to vary or rescind the contract. The first is whether the parties should be allowed to reserve their rights to vary or rescind the contract even after crystallisation ie where the third party has assented to or relied on the benefit. The second issue is whether the parties should be allowed, by an express term, to lay down in the contract a crystallisation test different from the default tests laid down in the recommended legislation. None of the three jurisdictions in Australia have provisions to these effects.

England and Wales

4.62 Under section 2(3)(a) of the 1999 Act (E & W), if a contract expressly provides that the parties may by agreement rescind or vary the contract without the consent of the third party, then they may do so. According to section 2(3)(b), the contract may also expressly provide that the third party's consent to rescission or variation is required in circumstances other than those specified in subsection (1). Hence, the parties to the contract can, by express terms, provide for rescission or variation without the third party's consent, or provide that his consent to rescission or variation is required only in circumstances specified by the parties themselves.

New Zealand

4.63 Section 6 of the 1982 Act (NZ) is similar in its effect to the English provisions. Where there is an express contractual provision allowing the variation or discharge of the contract, and the beneficiary knows of this provision before materially altering his position in reliance on the promise, any party or parties to the contract can vary or discharge the contract according to that provision. Since this section refers only to reliance by the beneficiary, variation may be still possible where a beneficiary's position is materially altered by another person's reliance before the beneficiary is aware of the contractual provision.[154]

Singapore

4.64 Section 3(3) of the 2001 Act (Sg) is identical to its English counterpart, allowing contracting parties to vary or rescind the contract without the third party's consent, or to set their own crystallisation tests.

Options and conclusions

4.65 The relevant legislation in Australia (the Northern Territory, Queensland and Western Australia) does not allow the parties to reserve the right to vary or rescind the contract once the third party's benefit is crystallised. The alternative approach (adopted in England, New Zealand and Singapore) is to allow the parties to do so. We believe that the parties should be free to reserve the right to themselves to vary or rescind the contract after crystallisation of the third party's benefit, as it is the contracting parties who confer a benefit on the third party. Nevertheless, it would be unfair to the third party, and would create considerable uncertainty, if their freedom to vary or rescind the contract were unfettered.

4.66 To alleviate the uncertainty, section 6 of the 1982 Act (NZ) in New Zealand allows the contracting parties to vary or rescind the contract by virtue of an express contractual provision only if the third party is aware of that provision before materially altering his position in reliance on the promise. England takes a different approach in dealing with this issue. After considering the New Zealand provision, the Law Commission recommended that requiring contracting parties to spell out the right of variation or rescission in the contract would strike a balance between alleviating the uncertainty for the third party and respecting the parties' intentions.[155] Section 2(3)(a) of the 1999 Act (E & W) implements the Law Commission's recommendation. Neil Andrews, however, finds it surprising that the parties' express reservation need not be communicated to the third party, nor need he be aware of it. He submits that elementary fairness requires the courts to strictly construe such contractual provisions so as to lean against the parties who want to "pull the carpet from under the innocent third party's feet".[156] Catherine Macmillan also considers that it is not difficult to envisage unfortunate cases where a third party could develop a reasonable expectation of benefit and be unaware of the actual terms of the contract which conferred it.[157] The situation is even more unfortunate if a promisee is using the contract as a means to fulfill another obligation owed to the third party.

4.67 On the one hand, we appreciate that contracting parties should have the freedom to allow themselves by a contractual clause to vary or rescind the contract even after crystallization. On the other hand, we realize that the third party might be kept in the dark without knowing the existence of such a clause, especially when he is a consumer. The third party may even have difficulties in ascertaining whether there is such a clause. The situation is particularly acute when there is fraud on the part of the contracting parties. After careful deliberations, we suggest a middle-of-the-road approach: contracting parties can by virtue of a contractual term added before crystallisation vary or rescind the contract even after crystallisation so long as the promisor has taken reasonable steps to bring the term to the notice of the third party before his rights crystallise, such as a notice published in the press.

4.68 Another issue is whether a contracting party can vary or rescind the contract unilaterally as under section 6 of the 1982 Act (NZ). It seems unlikely that contracting parties can, under section 2(3) of the 1999 Act (E & W), include a contractual term under which one of the parties may unilaterally bring the contract to an end or vary its terms. In Professor Merkin's opinion, such contractual terms are common in construction contracts, where the specification of works can be altered as matters progress. He believes that the better construction of s 2(3) is that it permits the parties to include an express term providing for variation or termination, whether unilateral or bilateral.[158] We agree that contracting parties should have the freedom to allow themselves to vary or rescind the contract unilaterally, especially when the spirit of the reform is to give effect to the parties' intention.

4.69 As to whether the parties' should be able to lay down their own crystallisation test, Hong Kong could, like England and Singapore, allow contracting parties to stipulate in their contract a test different from those set out in the recommended legislation. An alternative would be to remain silent on this point, as in the three Australian jurisdictions and New Zealand. We take the view that in terms of the principle of freedom of contract, the parties should be allowed to set their own criteria or tests for determining their rights to vary or rescind their contract. In other words, they should have the right to set a crystallisation test which is either more favourable to a third party (such as the "awareness" test) or less favourable to him (such as a "written acceptance" test).

Should there be any judicial discretion to authorise variation or cancellation?

4.70 The question arises as to whether the courts should have discretion in a deserving case to authorise variation or cancellation of the contract even after the third party's right has crystallised. There are no provisions on this in the three jurisdictions in Australia discussed in this chapter.

England and Wales

4.71 Section 2(4) of the 1999 Act (E & W) gives the court a limited judicial discretion, upon the parties' application, to dispense with a third party's consent to variation or rescission (which is required under the section) where his consent cannot be obtained because his whereabouts cannot reasonably be ascertained or where he is mentally incapable of giving his consent. Under section 2(5), if consent is required under section 2(1)(c) (where a promisor can reasonably be expected to have foreseen a third party's reliance), the court may dispense with the consent so long as the consent cannot reasonably be ascertained, whether or not there is third party reliance. Arbitral tribunals are also given the same discretion under the Act. In dispensing with the consent, the court or arbitral tribunal can impose such conditions, including compensation to a third party, as it thinks fit.

New Zealand

4.72 Where variation or discharge of a promise is precluded because the beneficiary's position has been materially altered (because of his or another person's reliance) or it is uncertain whether the variation or discharge is so precluded, section 7(1) of the 1982 Act (NZ) confers jurisdiction on a court to authorise the contracting parties to vary or discharge the contract if it is just and practicable to do so. According to subsection (2), however, the court must make it a condition of the variation or discharge that the promisor should pay compensation to the beneficiary where the beneficiary has suffered damage as a result of the reliance upon the promise.

Singapore

4.73 Section 3(4) and (5) of the 2001 Act (Sg) is equivalent to the English provisions, giving the court and arbitral tribunal the discretion to order variation or discharge of a contract without the third party's consent.

Options and Conclusions

4.74 We consider that the judicial discretion to authorise variation or rescission is useful. It can cater for situations in which the contracting parties are locked into their contract because the third party cannot be found. It is also useful in a consumer situation where there is a large class and it is impossible to locate each and every member of that class. There are two alternative approaches as to how to grant the discretion. One is the English and Singaporean approach and the other is that adopted in the New Zealand provision. The former approach is only applicable to designated circumstances and does not amount to a residual power for the court to dispense with consent whenever it considers just.[159] We do not favour the English and Singaporean approach of a limited judicial discretion. We are aware of Mr Justice Andrew Rogers' comments on the New Zealand approach that it is "unfortunate where the only guidance given to the court is that the order be 'just and practicable'".[160] We are, however, of the view that the legislation should allow a sufficiently wide judicial discretion to enable the court to do justice in deserving cases. Under the English provision, an application to the court has to be made by both the contracting parties. In contrast, either party can apply to the court under the New Zealand Act. In our opinion, allowing a single party to apply would avoid the possibility that one party's wishes may be blocked by the intransigence of the other. Accordingly, we propose that either party should be allowed to make the application. We recommend adopting a provision along the lines of:

"A party can apply to the court to dispense with the consent from the third party."

4.75 An outstanding issue is whether arbitral tribunals should have the same discretion. Arbitral tribunals in New Zealand do not have that. In contrast, section 2(4) of the 1999 Act (E & W) and section 3(4) of the 2001 Act (Sg) give arbitral tribunals the said discretion. Professor Merkin, however, points out a jurisdictional problem where contracting parties apply to an arbitral tribunal, and the arbitrators' jurisdiction is limited to disputes arising out of or under the parties' contract. He elaborates that there has been by definition a subsequent agreement between the contracting parties to vary their original contract. Not only may that later contract fall outside the arbitration clause, there is also plainly no "dispute" between the parties, as the person adversely affected is the third party.[161]

4.76 We believe that the problems highlighted by Professor Merkin would need to be dealt with on a case-by-case basis if arbitral tribunals are given the discretion. Our main concern is that arbitration is held behind closed doors and the awards are not public documents. Conversely, court proceedings are open to the public. Another difference is that the court is the custodian of justice and would look after the interests of those who are not parties to the proceedings. Arbitrators would, however, only deal with the dispute between the parties, and could not go beyond the arbitral rules to investigate. A third party would probably feel more aggrieved by a decision on allowing a variation made by an arbitral tribunal behind closed doors than that made by the court. The court cannot subsequently do much about the arbitral tribunal's decision so as to address the third party's grievances. Hence, we are of the view that arbitral tribunals should not have the discretion to authorize variation or cancellation.

Should consideration be an issue?

4.77 The law of contract has a maxim that "consideration must move from the promisee". This maxim is generally understood to mean that consideration must be provided by the party seeking to enforce the contract. Thus, merely abrogating the privity doctrine would not in itself give third parties who have not provided consideration a right to enforce the contract. It is therefore important that the rule "consideration must move from the promisee" is also reformed to the extent necessary to avoid nullifying the proposed reform of the privity doctrine.

4.78 However, as the requirement of consideration is a basic tenet of the common law, a general abolition of the rule would have far-reaching, and perhaps unintended for, consequences.

Australia

4.79 Section 55(1) of the 1974 Act (Qlnd) makes express provision that a promisor who, for a valuable consideration moving from the promisee, promises to do something for the benefit of a beneficiary will be under a duty to perform the promise (if other conditions in the section are fulfilled). Section 55(3) (a) goes on to provide that relief to the beneficiary under the section will "not be refused solely on the ground that, as against the promisor, the beneficiary may be a volunteer". There are equivalent provisions in section 56(1) and (3)(a) of the 2000 Act (NT). The Acts put it beyond doubt that there is no need for the beneficiary to provide consideration to the promisor.

4.80 Section 11 of the 1969 Act (WA) has not addressed this issue. The promisor in Westralian Farmers Co-op Ltd v Southern Meat Packers Ltd[162] sought to rely on the defence that the third party had not provided consideration for the benefit. This argument was rejected on the ground that a third party is necessarily a stranger to the consideration, if the contract purports to confer a benefit on him. It would deny the efficacy of the major part of section 11 if a contracting party could rely on a lack of consideration as a defence.

England and Wales

4.81 The Law Commission took the view that the phrase "consideration must move from the promisee" was probably generally understood to mean that consideration must have moved from the plaintiff, even though the promise was already supported by consideration provided by another.[163] In other words, the party seeking to enforce the contract must have provided consideration. In this case, reforming the privity rule while leaving the consideration rule intact would allow an impediment to the recognition of third party rights to remain. The Law Commission therefore recommended that the prospective legislation should ensure that the consideration rule should be reformed to the extent necessary to avoid nullifying its proposed reform on the privity rule.[164] This is, in Sir Guenter Treitel's opinion, a "quasi-exception" to the consideration rule.[165]

4.82 After discussions with the law draftsman, the Law Commission was satisfied that it was unnecessary to make specific provision in respect of consideration, as the proposed statutory recognition of third party rights would necessarily imply reform of the consideration rule. Thus there is no express provision on this either in the bill attached to the Law Commission's report or in the 1999 Act (E & W). Professor Robert Merkin summarizes it well:

"The 1999 Act does not contain any express provision relating to consideration, and s 1 of the 1999 Act simply provides that a third party may enforce a contract term if the contract provides that he may or if the term purports to confer a benefit on him. This general statement of principle would seem to do all that is required. Section 1 of the 1999 Act does not say that the rights of a third party to enforce a contract term is not to be defeated only because he is not a party to the contract, as such wording would have left intact any other objection to third party enforcement, specifically, want of consideration. Instead, the wording adopted simply allows the third party to enforce the term free of legal objection, so that the abolition of privity takes the rule that consideration must move from the promisee along with it."[166]

New Zealand

4.83 The New Zealand Contracts and Commercial Law Reform Committee adopted a different approach:

"where consideration is provided by a party to a contract [though not by the third party], that should be sufficient to constitute lawful rights in a third person as contemplated by, and in accordance, with the terms of the contract".[167]

The 1982 Act (NZ), in implementing the Committee's recommendation, makes it clear in section 8 that relief sought by a third party "shall not be refused on the ground that ... as against the promisor, the beneficiary is a volunteer". Thus, a third party can be a volunteer provided that the promisee has given consideration for the contract.

Singapore

4.84 Section 2(5) of the 2001 Act (Sg) makes it express that any remedy available to a third party under the Act will not be refused merely because, as against the promisor, the third party is a volunteer.

Options and conclusion

4.85 The two alternatives are to follow the approach adopted in England, or to adopt a provision along the lines of that in New Zealand or Singapore. The proposed reform of the privity rule is to give a third party a statutory right to enforce a contract and he may not even be in existence at the time of contracting. Thus, he may not be in a position to provide consideration for the promise. We agree with the New Zealand Contracts and Commercial Law Reform Committee that it should be sufficient that consideration has been provided by the promisee. Mr Justice Andrew Rogers observes that section 8 deals with "the problems of privity and consideration with clarity, obviating the difficulties which the Western Australian and Queensland Acts may have passed over".[168] In our view, the recommended legislation should provide that consideration moving from the promisee is sufficient.

4.86 We also favour the adoption of a provision along the lines of section 8 of the 1982 Act (NZ). This would make it clear that the third party can be a volunteer. There is the concern, however, that if the New Zealand provision is adopted, the promisor may challenge the existence of the contract for want of consideration from the promisee. The third party will in turn have to prove consideration from the promisee before he can sue. We do not see much force in this argument. It is usual that when a party sues on a contract, he must plead the consideration which he has provided. Even without the New Zealand provision, it would still be open to the defendant to ask where the promisee's consideration was. In our view, a third party should not be placed in a better position than the promisee.

What defences, set-offs and counterclaims should be available to promisors?

4.87 This issue concerns the defences, set-offs and counterclaims that would be available to a promisor in an action by the third party to enforce his rights against the promisor.

Australia

4.88 Under section 55(4) of the 1974 Act (Qld), any matter which in proceedings not brought in reliance on this section:

(a) would render a promise void, voidable or unenforceable, whether wholly or in part; or

(b) is available by way of defence to enforcement of a promissory duty arising from a promise

would, in like manner and to the like extent, render void, voidable or unenforceable or be available by way of defence in proceedings for the enforcement of a duty to which this section gives effect. This is, however, subject to the parties' intention as expressed in the promise itself. There is an equivalent provision in section 56(4) of the 2000 Act (NT).

4.89 In Western Australia, all defences that would have been available to the defendant (promisor) had the plaintiff (third party) in an action to enforce the contract been named as a party to the contract, will be so available under section 11(2)(a) of the 1969 Act (WA).

England and Wales

4.90 Section 3(2) of the 1999 Act (E & W) sets out the default position. In an action brought by a third party, the promisor can avail himself of any defence or set-off that would have been available to him had the proceedings been brought by the promisee, provided the defence or set-off arises from, or in connection with, the contract and is relevant to the term being enforced. Thus a promisor may raise a defence which questions the existence, validity or enforceability of the contract because the contract is void for mistake or voidable for misrepresentation, or because of the promisee's repudiatory breach. Under section 3(3), contracting parties can, however, agree to enable the promisor to avail himself of any defences and set-offs which would be available against the promisee, even if they are irrelevant to the term being enforced by the third party or are unconnected with the contract.

4.91 Section 3(4) further enables a promisor to raise defences, set-offs and counterclaims (only those not arising from the contract) that are specific to the third party only and would not be available to the promisor in an action by the promisee. Examples would be where a promisor had been induced to enter into the contract by the third party's misrepresentation, or where the third party was indebted to the promisor under a separate deal. Unlike the defences and set-offs under section 3(2) which are capable of further expansion, the defences, set-offs and counterclaims under section 3(4) have no scope for expansion since they are already as wide as they could be. The defences, set-offs and counterclaims under both subsections can, nevertheless, be narrowed down by an express term in the contract under section 3(5).

4.92 Section 3(6) provides an approach analogous to that in subsection (2) where a third party seeks to enforce an exclusion or limitation clause in response to an action brought by the promisor. A third party cannot enforce the clause if he could not have done so (whether or not because of any particular circumstances relating to him) had he been a party to the contract. Thus a third party would not be able to rely on an exclusion or limitation clause which is invalid as between the parties (because of the inducement by the promisee's fraud, duress or undue influence, or because of its falling foul of the Unfair Contract Terms Act 1977), or which is unenforceable because of the third party's own conduct (such as fraud).[169] In other words, the validity of the clause depends on the position between the promisor and the promisee, as well as that between the promisor and the third party.[170]

4.93 Section 7(2) ensures that section 2(2) of the Unfair Contract Terms Act 1977 does not apply where a third party sues the promisor under the 1999 Act for negligence which consists of the breach of a contractual obligation. The purpose is to allow a promisor to exclude his liability to the third party for the breach of a contractual obligation whether or not the exclusion clause is reasonable.

New Zealand

4.94 Under section 9(2) of the 1982 Act (NZ), a promisor can avail himself by way of defences, counterclaims and set-offs of any matter which would have been available

(a) if the beneficiary had been a party to the deed or contract in which the promise is contained; or

(b) if (i) the beneficiary were the promisee; and (ii) the promise to which the proceedings relate had been made for the promisee's benefit; and (iii) the proceedings had been brought by the promisee.

A promisor can only avail himself of a set-off or counterclaim against the beneficiary if the subject-matter of that set-off or counterclaim arises out of, or in connection with, the deed or contract in which the promise is contained (section 9(3)). Furthermore, according to section 9(4), a beneficiary would not be liable on a counterclaim, unless he elects, with full knowledge of the counterclaim, to proceed with his claim against the promisor. In any event, his liability on the counterclaim would not exceed the value of the benefit conferred on him by the promise (section 9(4)).

Singapore

4.95 Section 4 and section 8(2) of the 2001 Act (Sg) are almost identical to section 3 and section 7(2) of the 1999 Act (E & W) respectively. The discussion on the English provisions is relevant to their Singaporean counterparts.

Options and conclusion

4.96 The provisions in all three jurisdictions in Australia allow a promisor to raise all defences which would have been available to him in an action brought by the promisee. This is the first option open to Hong Kong (option 1). A second option is to follow the New Zealand approach (option 2). The English (or Singaporean) provision is the third option (option 3). The Law Commission also considered two other options in its report: (a) allow the promisor only defences affecting the existence or validity of the contract (or of the contractual provision being enforced) (option 4); and (b) allow the promisor all defences, set-offs and counterclaims which would have been available in an action brought by the promisee (option 5).[171]
4.97 We rule out both options 1 and 4 since they do not include set-offs and counterclaims. Option 4 is even narrower in that it only includes defences affecting the existence or validity of the contract (or of the contractual provision being enforced). By contrast, option 5 is too wide. The third party is not simply stepping into the shoes of the promisee, and may be unaware of the counterclaims that the promisor might have against the promisee. This could be unfair to the third party since his liability on the counterclaims may well exceed the value of the benefit conferred on him by the promise. The effect would be to defeat the parties' intention to benefit the third party.

4.98 Our choice is between option 2 and option 3. On balance, we favour option 3 for the following reasons. Firstly, a separate provision along the lines of section 9(4) in the 1982 Act (NZ) would be needed if option 2 is adopted so as to make sure that a third party will not be liable to counterclaims exceeding the value of the benefit conferred on him. A reference to defences and set-offs only, as in option 3 (section 3(2) of the 1999 Act (E & W)), would obviate the need for such a separate provision. Secondly, we share the Law Commission's concern that including counterclaims would imply that a third party could be sued by the promisor in a separate action on those counterclaims.[172]

4.99 Thirdly, both options 2 and 3 allow a promisor to raise defences, set-offs and counterclaims specific to the third party, which would not be available in an action by the promisee. Professor Michael Bridge does not see the need to have this provision because the existing law on set-off and counterclaim already covers this.[173] Nonetheless, he understands that the Law Commission had in mind an "avoidance of doubt provision".[174] We agree that this is a sensible move. The difference between the two options is that option 3 expressly limits the counterclaims to those not arising from the contract while option 2 does not. In our opinion, it is advisable to provide specifically, as in option 3 (section 3(4) of the 1999 Act (E & W)), that a promisor can only raise counterclaims not arising from the contract in order to ensure that the burden of the contract will not pass to the third party.

4.100 Fourthly, section 3(1) of the 1999 Act (E & W) is more precise in referring to "the enforcement of a term of a contract ... by a third party", rather than merely referring to "the contract" as in section 9 in the 1982 Act (NZ). Section 3(2)(a) goes on to require the defence or set-off to be "relevant to the term", and not merely "aris[ing] out of or in connection with the ... contract" as is the case in section 9(3) in the 1982 Act (NZ). We think it makes sense that the promisor's defence or set-off should be relevant to the term being enforced by the third party. Catharine MacMillan also thinks that the narrowing is necessary so as to ensure that a third party will not be burdened by defences unrelated to the term which benefits him.[175] This view is also shared by Professor Robert Merkin.[176]
4.101 Fifthly, option 3 also allows the parties to broaden or restrict, by an express term in their contract, the defences and set-offs that would have been available to the promisor in an action by the promisee. The contracting parties can also restrict (but not broaden) defences, set-offs and counterclaims that would have been available to the promisor had the third party been a contractual party. Professor Michael Bridge is of the view that these provisions are "entirely in accord with the contracting parties' ability to define or exclude the nature of the third party beneficiary's right under the contract".[177] There are, however, no such provisions under option 2. The spirit of the present reform is to respect the parties' intention, and we welcome provisions that enshrine this spirit.[178]

4.102 Finally, option 3 makes specific provision for the case where a third party enforces an exclusion or limitation clause in an action brought by the promisor (section 3(6) of the 1999 Act (E & W)). Since it is inaccurate to refer to defences in this case, we see the need to have a separate provision to the effect that a third party cannot rely on the exclusion or limitation clause if he could not have done so (whether or not because of any particular circumstances relating to him) had he been a party to the contract.

4.103 We also endorse section 7(2) of the 1999 Act that a promisor should have the freedom to restrict or exclude his liability to the third party for the breach of a contractual obligation. This is because the purpose of the present reform is to give effect to the intentions of the contracting parties. If they agree that the third party's right is to be subject to an exclusion clause, the legislation should respect their consensus. As section 7(2) of the Control of Exemption Clauses Ordinance (Cap 71) is modelled on section 2(2) of the 1977 Act, the recommended legislation should disapply section 7(2) of Cap 71 as in the 1999 Act. We recommend that section 7(2) of Cap 71 should not apply where a third party sues the promisor under the recommended legislation for negligence which consists of the breach of a contractual obligation. If, however, the promsior's negligence causes personal injury or death, we agree with the Law Commission that the third party should not be bound by the exclusion clause for the obvious policy reasons underlying section 2(1) of the 1977 Act (section 7(1) of Cap 71).[179] An exclusion clause in respect of a third party's claim in tort of negligence should remain subject to the statutory control since a claim in tort is independent of the promisor's contractual obligations.

How should overlapping claims against promisors be dealt with?

4.104 Allowing third parties to enforce contracts between promisors and promisees raises a number of questions about promisors' liabilities. Should promisors be liable to both promisees and third parties? What should the promisors' position be upon performance of obligations to third parties? Should promisors be shielded from double liability? If so, how?

Promisor's duty owed both to the promisee and the third party

4.105 In Queensland, section 55(7) of the 1974 Act (Qlnd) provides that nothing in the section affects any right or remedy which exists or is available apart from the section. There is an equivalent provision in the Northern Territory (section 56(7) of the 2000 Act (NT)). This means that promisees retain their rights against promisors even though third parties may, by virtue of these provisions, be able to sue promisors directly. In other words, promisors are liable to both promisees and third parties. The 1969 Act (WA) is silent on this point.

4.106 In England, section 4 of the 1999 Act (E & W) provides that the fact that a third party has been given rights does not affect the promisee's rights to enforce any term of the contract. The Act gives the third party a right to enforce the contract which is additional to, and not at the expense of, the rights of the promisee. In Professor Robert Merkin's opinion, not only can a promisee claim his own loss, he can also bring an action on behalf of the third party where this was permitted by the common law or equity before the 1999 Act.[180] Promisees can also claim an injunction or other relief.

4.107 Section 14(1)(a) of the 1982 Act (NZ) similarly provides that nothing in this Act limits or affects any right or remedy which exists or is available apart from this Act. Singapore also has a provision modelled on section 4 of the 1999 Act (E & W).[181]

4.108 Even with the enactment of our recommended legislation, promisees' rights to enforce the contract will still matter for two reasons. Firstly, disputes may arise from contracts ante-dating the legislation's enactment, and contracting parties can in any case contract out of the recommended legislation. Moreover, we consider it sensible that the promisor's duty to perform should be owed both to the third party and to the promisee since there will be no statutory assignment of the promisee's rights to the third party under the recommended legislation. Were it otherwise, the third party would be in a better position than the original promisee. Of the overseas provisions, we prefer those in England and Singapore which spell out clearly that the promisee's right to enforce any term of the contract should not be affected by the mere fact that the contract is enforceable at the suit of the third party under the Act.

4.109 The Law Commission considered other related issues. First, the Law Commission decided that a third party could not release the promisor's obligation to the promisee unless otherwise agreed in the contract.[182] The promisee should not be deprived of his right of action against the promisor, especially when the promise benefits both the promisee and the third party. In the Law Commission's opinion, this is in line with the principles relating to releases in the case of "plurality of creditors" discussed by Sir Guenter Treitel[183]: a release granted by one of a number of creditors entitled severally releases only the share of the grantor. Secondly, the Law Commission also concluded that where the contractual benefit to the third party comprised the performance by the promisor of a pre-existing liability that the promisee owed to the third party, the third party could still claim against the promisee if the promisor did not fulfil his contractual obligation.[184] A third party's acceptance of the benefit under the contract should discharge his claim against the promisee only to the extent that the promisor fulfils his contractual obligation. A third party, however, should not recover twice, and it is not necessary to have any order of priority for enforcement by the third party.[185] We have considered the above matters, and agree that no legislative provisions are needed.

4.110 Thirdly, the Law Commission concluded that where both the promisee and the third party had rights of action against the promisor, there should be no prescribed order of priority of actions.[186] We share the Law Commission's view that where a promisee wishes to sue, he should be joined as a party so as to save costs and avoid inconvenience, and the same can be said about a third party where the promisee sues first.[187] The question is whether there should be a requirement as to joinder of parties in the recommended legislation. Under section 11(2)(b) of the 1969 Act (WA), each person named as a party to the contract is to be joined as a party to the action commenced by the third party under the section. The New Zealand Contracts and Commercial Law Reform Committee, however, did not see the need of having such a requirement because it could lead to unnecessary expense and possible problems as to service of the proceedings.[188] For similar reasons, the Law Commission also rejected the approach adopted in Western Australia.[189] We share the views of the law reform agencies in both New Zealand and England. Another reason is that the existing Rules of the High Court (Cap 4A), in our opinion, are flexible enough to facilitate the joinder of parties where it is desirable to do so.[190]

Discharge of promisor by performing obligation to the third party

4.111 None of the jurisdictions discussed in this Paper have specific provisions on this issue. The Law Commission believes that a promisor who performs his obligation, wholly or partly, to the third party should obtain discharge, to that extent, from his obligations to the promisee. The Law Commission nevertheless considers this to be self-evident and that a specific legislative provision on this principle is unnecessary.[191] We take the view that this seemingly evident and sensible principle should be spelt out explicitly in the legislation for the avoidance of doubt.

4.112 A related issue is the effect of a release by one third party on the promisor's obligation to other third parties. The Law Commission concluded that it depended on whether the promise was intended to confer benefits on the third parties jointly or separately. A release given by one of the third parties should release the promisor's obligation to other third parties in the former case, but not in the latter.[192] We agree with the Law Commission on dealing with the issue according to the principles relating to releases in the case of "plurality of creditors" as discussed by Sir Guenter Treitel, and on concluding that specific legislative provisions are unnecessary.

Avoidance of double liability

4.113 A consequence of our recommendation to allow a promisee and the third party to enforce the contract is that the promisor may face double liability for the same loss. There are two situations where double liability for the same loss may arise.[193] The first is where a promisee sues the promisor for the third party's loss and recovers damages for that loss as an exception to the rule that promisees can only recover their own losses.[194] The promisee is then under a duty to account for the damages to the third party. If the promisee fails to do so, the third party may wish to sue the promisor who has already discharged his obligation by paying damages to the promisee. The second situation is where a promisee recovers damages from the promisor on the basis that the former will make good the latter's default to the third party. In this case, the damages recovered by the promisee represent his own loss, since he has accepted liability to the third party. If the promisee fails to make good the promisor's default, the third party can still claim for his own loss against the promisor who will then face double liability.

4.114 Of the jurisdictions studied in this Paper, only England and Singapore have provided for these situations. Section 5 of the 1999 Act (E & W) provides that if the promisee sues the promisor and:

"has recovered 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 or arbitral tribunal 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".

In Singapore, there is an identical provision in section 6 of the 2001 Act (Sg). Since these provisions refer to the recovery of "a sum", they would not apply where a promisee has obtained specific performance against the promisor. Sir Guenter Treitel observes that in addition to the receipt of the performance, a third party can still claim damages from the promisor in respect of, for example, delay in rendering performance, since this would not make the promisor liable twice for the same loss.[195]

4.115 In our view, if the proposed reform results in the promisor's owing a duty both to the third party and to the promisee, there is a possibility that the promisor may face a duplicity of claims for the same loss in the two situations discussed above. As to the first situation, there is a view that after paying damages to the promisee, the promisor would not be liable to the third party, since the promisee's duty to account means that the third party has no loss to recover from the promisor.[196] We believe that it would be prudent to put this beyond doubt and we therefore recommend an express provision to deal with the possible double liability in the two situations. However, we think that it should be for the courts and arbitral tribunals, rather than the legislature, to determine the circumstances under which a promisee may be under a duty to account to the third party for the sum that the promisee has recovered.

4.116 For the sake of completeness, we have also considered the situation where a third party has recovered damages from the promisor first. The question is whether the promisor should be protected from double liability, ie liability to the promisee for the same loss. We agree with the Law Commission that the promisee would then be left with no corresponding loss outstanding, and the promisor would not face double liability.[197]

Should arbitration clauses and exclusive jurisdiction clauses be binding on third parties?

4.117 Contracting parties may include in their contract an arbitration clause which requires any dispute arising from the contract to be resolved only by arbitration, and an exclusive jurisdiction clause which specifies the jurisdiction for any action in relation to the contract. The question is whether these clauses should bind a third party. Of the jurisdictions discussed in this Paper, only England & Wales and Singapore have a statutory provision on arbitration clauses. None of these jurisdictions have provided for exclusive jurisdiction clauses.

England & Wales

4.118 Section 8(1) of the 1999 Act (E & W) provides that where a contractual term confers a benefit on a third party (the substantive term) and its enforcement is subject to a written arbitration clause, the third party will be treated as a party to that clause for the purposes of any dispute between the promisor and the third party relating to the enforcement of the substantive term. This subsection deals with the situation where contracting parties confer a benefit (including that of an exclusion clause) on a third party subject to disputes being referred to arbitration (see section 1(4)).[198] This is based on a "conditional benefit" approach, and ensures that a third party who wants to enforce his substantive right is not only entitled to arbitration, but is also "bound" to enforce his right by arbitration (so that, for example, a stay of proceedings can be ordered against him under section 9 of the Arbitration Act 1996). The Explanatory Notes explain that the approach is analogous to that applied to assignees who may be prevented from unconscionably taking a substantive benefit free of its procedural burden. "Disputes .... relating to the enforcement of the substantive term by the third party" in section 8 is intended to have a wide ambit and to include disputes between the third party and the promisor as to the validity, interpretation, existence or performance of the substantive term; the third party's entitlement to enforce the term; the jurisdiction of the arbitral tribunal; or the recognition and enforcement of an arbitration award.[199] Subsection (1) does not cover, for example, a separate dispute in relation to a tort claim by the promisor against the third party for damages so as not to impose a "pure" burden on a third party.

4.119 Section 8(2) provides that where a third party can enforce under section 1 a contractual term providing for the dispute between the promisor and the third party to be submitted to arbitration (the arbitration agreement), the third party, if he so enforces, will be treated as a party to the arbitration agreement, provided that he is not so treated under section 8(1). Subsection (2) deals with situations where a third party is given a unilateral right to arbitrate under section 1 and the "conditional benefit" approach underpinning subsection (1) is inapplicable.[200] For instance, where a promisor seeks to bring a tort action against a third party (not concerning a right conferred on the third party under section 1), the third party can by virtue of subsection (2) choose whether to stay the court proceedings and to have the dispute arbitrated instead, or to continue the court proceedings. This gives a third party the "pure" benefit of an arbitration clause.

Singapore

4.120 Section 9 of the 2001 Act (Sg) is almost identical to section 8 of the 1999 Act (E & W), and the above discussion is equally relevant.

Options and conclusions

4.121 In the following paragraphs, we will first deal with arbitration clauses, followed by exclusive jurisdiction clauses. It is noteworthy that the Law Commission initially argued against conferring on third parties rights of enforceability in respect of arbitration agreements or jurisdiction agreements because these agreements impose burdens as well as conferring benefits. The Law Commission considered that this would contradict a central philosophy of its reform, which was to confer rights, but not impose burdens, on third parties.[201] The Law Commission, however, changed its mind during the legislative process and the result is the present section 8 on arbitration agreements:

"while arbitration and exclusive jurisdiction clauses should be enforceable by third parties, those clauses cannot operate satisfactorily unless the entitlement to enforce also carries a duty on the third party to submit to arbitration or to comply with the jurisdiction agreement, as the case may be. But, as I said, the reform deals solely with conferring benefits on third parties, not with imposing duties or burdens on them. It would be unsatisfactory, however, if the third party could take the benefit of a clause such as this, without being bound by it. ...on further reflection, the Law Commission concluded that in practice the third party would not be able to do so. The Law Commission concluded that, although in theory the third party might seek to rely on an arbitration clause to stay court proceedings without being bound to arbitrate, in practice no stay would be granted by the court unless he had shown willingness to go to arbitration. On that basis, the conclusion was that there was no good reason to exclude these clauses from the operation of the reform."[202]

(i) Arbitration agreements

4.122 There are three options in respect of arbitration agreements. The first option is that arbitration agreements are to apply to third parties, regardless of the parties' intention. The second option is that arbitration agreements are not to apply to third parties. The third option is that an arbitration agreement would apply to a third party if it expressly covers the third party, but would otherwise not apply to him. We consider that the first option would make arbitration agreements binding on third parties regardless of the circumstances. This would force third parties to arbitrate even if the contracting parties do not want to. Unlike the first option, the second option prevents arbitration agreements from applying to third parties, and may deprive third parties of the benefits of those agreements. We have concluded that the third option offers the more appropriate approach. Contracting parties should have the right to decide whether a third party should be bound by the dispute resolution clause, since they are the ones who confer benefits on the third party. As Anthony Diamond QC has pointed out, if the parties' intention is that the third party should enforce the right conferred on him by arbitration, the third party, in choosing to enforce the right, must do so by means of arbitration.[203] This is in line with the "conditional benefit" approach underpinning section 8 of the 1999 Act (E & W), without imposing burdens on third parties, and we believe strikes a fair balance.

4.123 Anthony Diamond QC has some doubts about the meaning of section 8(1) of the 1999 Act when it speaks of a right under section 1 being "subject to a term providing for the submission of disputes to arbitration":

"Does the subsection refer only to cases where the term conferring substantive rights on the third party is strictly conditional upon the third party enforcing that term only by arbitration ('the conditional benefit theory') or does the subsection apply more broadly: for example, whenever the third party has a right under section 1 to enforce a term of the contract and another term of the contract contains an arbitration agreement?

There are two further general considerations to be borne in mind in construing section 8(1). The first is the general principle of the autonomy of the parties which underlies so much of the law and practice of arbitration. A party should not be bound to arbitrate unless he has agreed to do so and this consent should be real and not merely notional or hypothetical. This consideration might be thought to suggest that the third party should only be bound to arbitrate if the term conferring substantive rights upon him is strictly conditional.

The second consideration may, however, point in the direction of a broader approach to the words 'subject to' in section 8(1). This is section 1(4), which provides as follows: '[Section 1] does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract.' "[204]

4.124 It is arguable that that Mr Justice Colman adopted the broader approach in Nisshin Shipping Co Ltd v Cleaves & Co Ltd.[205] In that case, the broker on behalf of the owner negotiated charters, each providing for payment of commission to the broker and containing an arbitration clause. The arbitration clauses referred to the disputes between "the parties to the charterparty" or between "Owner and Charterer", and the wording was wide enough to cover the charterers' claims against the owner for his commission to the broker. The broker claimed the commission directly against the owner. Mr Justice Colman highlighted the explanation in the Explanatory Notes that the approach in section 8(1) was analogous to that applied to assignees. He emphasized that the explanation was directed to the words "a right under section 1... is subject to an arbitration agreement" in section 8. The broker, a third party, was not expressed to be a party to the arbitration clauses but had become a statutory