Chapter 3 - Options for reform of the privity doctrine

 

Option 1 – Judicial development of circumvention of the privity doctrine

Option 2 – Legislative exceptions to the privity doctrine to be made in specific instances

Option 3 – Adopting a general provision that no third party should be denied enforcement of a contract made for his benefit on the grounds of lack of privity

Option 4 – Reform by means of a detailed legislative scheme

Conclusion

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3.1           Chapter 2 recommended reforming the privity doctrine.  In this Chapter we consider four possible reform options, which are all (except the first) founded upon a legislative scheme.[1]  The options are:

 

(1)       Leaving matters to the courts to circumvent the doctrine in deserving cases.

 

(2)       Providing legislative exceptions to the doctrine in specific instances.

 

(3)       Adopting a general provision that no third party be denied enforcement of a contract made for his benefit on the grounds of lack of privity.

 

(4)       Reforming the law by means of a detailed legislative scheme.

 

 

Option 1 – Judicial development of circumvention of the privity doctrine

 

3.2           The courts have, over the years, adopted various devices in mitigating the harshness of the privity doctrine.  The first option is to leave matters to the courts.[2]  The principal advantage of this option is that the courts are able to develop exceptions to meet particular injustices caused by the privity rule in specific cases.  The remedy can be tailored to meet the specific needs of the particular case coming before the court.  By contrast, a legislative scheme cannot be expected to achieve the same degree of flexibility.  Any shortcomings in the legislation identified later could only be remedied by further legislative amendments, involving additional time and costs.  In responding to our consultation paper, one consultee suggested that the hardship caused by the privity doctrine could be addressed by employing various common law devices, such as equitable estoppel, part performance, quantum meruit, duty of care, exception to the rule in Foss v Harbottle[3], etc.

 

3.3           However, there are distinct problems with judicial reform of the privity rule.  The courts act incrementally and can only act when a suitable opportunity arises.  It is impossible to predict when a case will arise which gives the courts the opportunity to "reform".  Even with the right case, the judicial process from the first instance stage to that of the final appeal can be lengthy.  A further disadvantage of judicial reform is the uncertainty that it would generate.  In Re The Mahkutai, for example, Lord Goff of Chieveley described how the pendulum of judicial opinion had swung backwards and forwards in its approach to the privity doctrine in cases involving carriage of goods by sea:

 

" [O]pinion has fluctuated about the desirability of recognising some form of modification of, or exception to, the strict doctrine of privity of contract to accommodate… commercial expectations that the benefit of certain terms of the contract of carriage should be made available to parties involved in the adventure who are not parties to the contract. …    At first there appears to have been a readiness on the part of judges to recognise [third parties'] claims. …  Opinion, however, hardened against them in the middle of the century as the pendulum swung back in the direction of orthodoxy in Midland Silicones Ltd v Scruttons Ltd [1962] AC 446; but in more recent years it has swung back again to recognition of their commercial desirability… ." [4]

 

 

Option 2 – Legislative exceptions to the privity doctrine to be made in specific instances

 

3.4           Some existing statutory provisions have the effect of getting round the privity doctrine and enabling third parties to enforce their rights.[5]  Under this option, reform is effected by legislation to create further specific exceptions to the privity doctrine in appropriate circumstances.

 

3.5           One advantage of this option is that the needs of specific situations can be directly addressed in detail.  A further advantage is that a policy intent to confer an enforceable right to a third party in a particular situation can be expressly addressed in the legislation.[6] 

 

3.6           The principal shortcoming of this option, however, is that it does not address the underlying anomalies of the doctrine. Instead of dealing directly with a rule which is fundamentally flawed, this option would not only leave those anomalies unsolved, but would also add further complexity to the existing rule.

 

 

Option 3 – Adopting a general provision that no third party should be denied enforcement of a contract made for his benefit on the grounds of lack of privity

 

3.7           Under this option, there would be a general legislative provision to the effect that a contract for the benefit of a third party should not be unenforceable by him for lack of privity.  This was the approach preferred by the Ontario Law Reform Commission in its report published in 1987.[7]

 

3.8           The Ontario Law Reform Commission favoured this approach rather than a detailed legislative scheme for several reasons.[8]  Firstly, it was thought that the courts should have some flexibility in dealing with the variety of issues which would undoubtedly arise under any reform, such as the designation of third party beneficiaries, etc.  A detailed legislative scheme would restrict the discretion of the courts in dealing with the special circumstances of the cases before them.  Secondly, anomalies would arise if the same piece of legislation were to apply to widely differing circumstances.  Third party beneficiary cases could arise in a range of different contexts (for example, contracts to pay money to relatives, contracts extending defences in bills of lading to stevedores, etc).  A single piece of legislation was thought unlikely to deal with all these cases satisfactorily.  Thirdly, the problem of defining the class of beneficiaries entitled to sue and the question of variation and rescission were regarded as particularly intractable.

 

3.9           The advantage of this broad-brush option is that it is simple to implement.  It is, however, by no means easy to apply, since many important questions about the detailed application of the general provision remain to be settled by the courts.[9]  In the meantime, it would be difficult for a lawyer to advise his client on whether the third party concerned can enforce the contract, or even whether that person is a third party beneficiary under the contract in the first place.  As pointed out by the Law Commission, to leave these questions to the courts with no legislative guidance could be said to be an abdication of responsibility.[10]  These questions are too fundamental and numerous to lend themselves to the generalised approach adopted under this option. 

 

 

Option 4 – Reform by means of a detailed legislative scheme

 

3.10                Under this option, the overall policy would be determined and provision would be made for various matters, including the designation of third party beneficiaries, when a third party can enforce a contract made for his benefit, the rights of contracting parties to vary or discharge the contract, and promisors' defences.

 

3.11                The two main advantages of this option are certainty and clarity.  Many of the difficulties accompanying reform of the privity doctrine could be addressed and dealt with in the legislation.  Some court decisions and statutory provisions may, on an ad hoc basis, have the effect of circumventing the privity doctrine with little thought for the overall development of the law.  Some of these statutory and common law rules are artificial and subject to limits not related to wider policy considerations.  A comprehensive legislative scheme could establish a coherent body of rules which are clear and certain, and provide for the overall development of this area of the law.  A comprehensive legislative scheme would provide the courts with clear guidelines for determining the cases coming before them.  This would be of particular benefit in the commercial world, enabling businesses to clearly identify their legal position and to make informed decisions accordingly.

 

3.12                A major shortcoming of a detailed legislative approach is its inflexibility.  Circumstances may arise which were not foreseen by the draftsman or the legislature, but the legislative provisions cannot be ignored.  The courts must apply the statute as they find it, no matter how hard the particular circumstances may seem.  Under a detailed statutory scheme, the courts may have insufficient flexibility to be able to do justice in deserving cases.  In addition, any defects in the legislation can only be remedied by legislative amendments, with the delay and complications associated with that process. 

 

 

Conclusion

 

3.13                Having weighed the advantages and disadvantages of each of the above options for reform, we have come to the conclusion that reform should proceed by means of a detailed legislative scheme.  We are aware that options 1 and 2 have the advantage of being flexible and can address the needs of specific circumstances.  Their principal shortcoming, however, is that both are only piecemeal in nature, and do not deal with the privity doctrine within a comprehensive, systematic and coherent scheme.  The problem is even more acute in option 1 where the courts would only be able to act when a suitable case arises.  For option 2, the creation of specific statutory exceptions will inevitably complicate an area of law which is already generally regarded as technical, artificial and complex.  Option 3 may be simple to implement, but it is not viable since it leaves too many fundamental questions unanswered and would create considerable uncertainty in its operation.

 

3.14                We understand there are concerns that a detailed legislative scheme may tie judges' hands, and would lack the flexibility of the other options in allowing specific circumstances to be catered for.  Cogent though these arguments may sound, we are firmly of the view that a detailed legislative scheme can strike a sensible balance between giving adequate guidance to judges and allowing them flexibility in deserving cases.  A wholesale reform of the privity doctrine would provide certainty, clarity and a coherent body of law, which is not available under the other options.  We note that this is also the approach adopted in a number of other jurisdictions, including Australia, England, New Brunwick, New Zealand and Singapore.  Neil Andrews is of the view that the Law Commission was right to adopt a detailed scheme which is "attractive in many respects…[and reveals] the power of legislative precision".[11]  In his opinion, the "tools of common law technique cannot match it".[12]  Professor Jack Beatson shares this view:

 

"[A]bolition of the privity rule… throws up a number of difficult problems that cannot be isolated.  This makes it particularly difficult to develop on a case by case basis without undue loss of certainty and without making choices of policy rather than of principle".[13]

   

Iacobucci J summarised it well in Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd:

 

"[P]rivity of contract is an established doctrine of contract law, and should not be lightly discarded through the process of judicial decree.  Wholesale abolition of the doctrine would result in complex repercussions that exceed the ability of the Courts to anticipate and address.  It is by now a well-established principle that the Courts will not undertake judicial reform of this magnitude, recognizing instead that the legislature is better placed to appreciate and accommodate the economic and policy issues involved in introducing sweeping legal reforms. …

That being said, the corollary principle is equally compelling, which is that in appropriate circumstances, the Courts must not abdicate their judicial duty to decide on incremental changes to the common law necessary to address emerging needs and values in society. ..."[14]

 

3.15                The British Chamber of Commerce, the Hong Kong Bar Association, Clement Shum of Lingnan University, the Hong Kong Federation of Women Lawyers, the Hong Kong Society of Accountants and Stephenson, Harwood & Lo agreed that a detailed legislative scheme was the best way to reform the privity doctrine.  Some consultees, including the Commerce and Industry Bureau, suggested that contracting parties should not be able to contract out of the recommended legislation.  The spirit of our proposed reform is to respect the contracting parties’ freedom of contract, however, and we believe that contracting parties should therefore have the freedom to contract out of the terms of the recommended legislation if they choose to do so.

 

3.16                The Law Society of Hong Kong queried whether the proposed reform would affect the rule discussed in Chapter 1 that a person can only recover nominal damages unless he has suffered actual loss, and the exception to that rule.[15]  We stress that the recommended legislation would exist alongside this rule and its exception, and would not affect them.  The Hong Kong Federation of Insurers commented that the proposed reform was contrary to the principle of freedom of contract and would create uncertainties and arguments in ascertaining the contracting parties’ intention.  We reiterate that the spirit of the reform is to respect the parties’ wishes, and the recommendations proposed in the next chapter are intended to minimise uncertainties as far as possible.