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Contracts 200011

Privity of ContractLecturer: Francois Brun

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Overview of Privity

• Beswick v Beswick [1968] AC 58 • Trident General Insurance Co Ltd v McNiece

Bros P/L (1988) 165 CLR 107• Coulls v Bagot’s Executor & Trustee Co Ltd

(1967) 119 CLR 460• Port Jackson Stevedoring v Salmond &

Spraggon (Aust) (The ‘New York Star’)(1978) 139 CLR 231

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Beswick v Beswick [1968] AC 58

– [16.21C] (p 381)• Facts: By an agreement in writing made in

March, 1962, P. B., then aged over 70 and in poor health, agreed with his nephew, the defendant, that he would transfer to the nephew the goodwill and trade utensils of his coal round business in consideration of the nephew's employing him as consultant at £6 10s. a week for the rest of his life.

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Beswick (cont.)

• Furthermore the contract contained clause 2 the nephew agreed for the same consideration to pay to P. B.'s wife after his death an annuity charged on the business at the rate of £5 a week for life.

• P. B.'s wife was not a party to the agreement. The nephew took over the business and in November, 1963, P. B. died.

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Beswick (cont.)

• The nephew paid one sum of £5 to the widow, then aged 74 and in poor health, but refused to pay any further sum.

• The widow, having taken out letters of administration to her late husband's estate, brought an action against his nephew in her capacity as administratrix and also in her personal capacity asking (inter alia) for specific performance of the agreement.

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Beswick (cont.)

• Furthermore, that the widow, as administratrix of a party to the contract was entitled to an order for specific performance of the promise made by the nephew and was not limited to recovering merely nominal damages on the basis of the loss to the estate.

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Beswick (cont.)

• Lord Reid:[at 71] Provideda simple case where, in consideration of a sale by A to B, B agrees to pay the price of £1,000 to a third party X. Then the first question appears to me to be whether the parties intended that X should receive the money simply as A's nominee so that he would hold the money for behoof of A and be accountable to him for it

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Beswick (cont.)

• Or whether the parties intended that X should receive the money for his own behalf and be entitled to keep it.

• That appears to me to be a question of construction of the agreement read in light of all the circumstances which were known to the parties.

• Followed In re Schebsman [1944] Ch. 83.

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Beswick (cont.)

• [at 77-78] The respondent's second argument is that she is entitled in her capacity of administratrix of her deceased husband's estate to enforce the provision of the agreement for the benefit of herself in her personal capacity, and that a proper way of enforcing that provision is to order specific performance.

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Beswick (cont.)

• That would produce a just result, and, unless there is some technical objection, I am of opinion that specific performance ought to be ordered.

• For the reasons given by your Lordships I would reject the arguments submitted for the appellant that specific performance is not a possible remedy in this case.

• Judge was therefore of opinion that the Court of Appeal reached a correct decision and that this appeal should be dismissed.

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Trident General Insurance Co Ltd v McNiece Bros P/L (1988) 165 CLR 107

• See textbook: [16.07C] (p 367)• Facts: The appellant (Trident) entered a

contract of insurance with Blue Circle Southern Cement Ltd which covered contract works, liability to the public, and maintenance/defects liability in relation to construction work at Blue Circle's plant at Marulan.

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Trident (facts)

• The policy, inter alia, indemnified “the Assured” against liability in respect of personal injury of persons not employed by the assured, and defined the “assured” as “Blue Circle Southern Cement Ltd, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers”.

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Trident (facts cont.)

• The respondent (McNeice) was Blue Circle's principal contractor, and was found liable to pay damages to an injured crane driver employed by another firm.

• McNiece sought an indemnity under the appellant's policy, and its claim was upheld by the Supreme Court of New South Wales.

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Trident (procedural history)

• The Court of Appeal accepted a submission that a common law a beneficiary under a policy of insurance could sue on the policy even though it was not a party to the policy and provided no consideration.

• On appeal to the High Court of Australia.

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Trident (overview of judgment)

• Held, per Mason CJ, Wilson, Toohey and Gaudron JJ (Brennan, Deane and Dawson JJ dissenting), dismissing the appeal:

• Mason CJ and Wilson J [at 578-579]: Quoted the Privy Council in Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 at 79 that the common law rules are qualified by the equitable principle that a party to a contract can constitute himself a trustee for a third party of a right under a contract so that the third party can enforce the promise…

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Trident (context)

• The end effect being that the promisee-trustee becomes a defendant in an action against the promisor.

• The view expressed by their learned honours was consistent with the operation of Insurance Contracts Act 1984 (Cth) which reflected the public policy considerations made in Trident.

• Note the ICA was amended during the case.

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Trident (useful obiter)

• [at 585] the old rules apply to a policy of insurance. The injustice which would flow from such a result arises not only from its failure to give effect to the expressed intention of the person who takes out the insurance but also from the common intention of the parties and the circumstance that others, aware of the existence of the policy should be enforced.

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Trident (Toohey J)

• Toohey J: When an insurer issues a liability insurance policy, the contractor is included as part of the purpose of the venture covered by the policy, and it is reasonable to expect the contractor to be covered then the contractor may sue the insurer.

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Trident (Deane J)

• Deane J: Trident held the insurance payments by Blue Circle on trust for the benefit of Sub-contractors such as McNiece.

• His honour applied reliance and promise theory in the context of “the insurer under such a policy received moneys payable for the promised indemnity but has then refused to indemnify the third party on the ground that the third party was not a party to the contract of insurance…”

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Trident (Deane J)

• His honour also noted that this relationship “…could give rise to a cause of action based on unjust enrichment.”

• Therefore his honour found that the nature of the transaction gave rise to McNiece being entitled to the benefit of Trident’s promise to indemnify it.

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Trident (Gaudron J)

• Gaudron J: Unjust enrichment, trident would be unjustly enriched by a benefit without making sure the benefit they were accruing was not used for a certain purpose.

• Brennan J cited Barwick CJ in Coulls (1967) (at 478): I would find it odd that a person to whom no primise was made could himself in his own right enforce a promise made to another.

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Trident (Brennan J)

• Brennan J (Dissenting): Disagreed with the expansion of the exception to the doctrine of privity if policies of liability insurance are an exception to the doctrine of privity, some criterion must be found to distinguish the exception from the general rule.

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Trident (Dawson J)

• Dawson J (Dissenting): Argued the court should follow Wilson v Darling Island Stevedoring (1956) and Coulls on the basis that “the manner in which the third person is to be specified in the contract, whether the benefit to the third person must be direct… are beyond the purview of a court”.

• Expounds notions of non-interference in Classical Contract Theory.

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Privity restricted to parties with consideration

• Coulls v Bagot’s Executor & Trustee Co Ltd (1967)

• Mrs C signed the contract, but was not a party to contract. However, on his death the obligation to pay Mrs C lapsed, because she was not party to the contract, despite signing it, “she, personally, gave no consideration for the company’s promise.”

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Coulls (dissenters)

• Barwick CJ, dissenting: “the promise to pay, a promise to pay the deceased and [Mrs Coulls] during their joint lifetime and thereafter the survivor of them, but that it was a promise given to both of them to make those payments.

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Coulls (dissenters)

• Windeyer J dissenting: “the promise of the company was to pay for the stone at the rate stipulated, such payments to be made to the husband and wife jointly during their lives and thereafter to the survivor. Ms Coulls was signatory to the contract.”

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Himalaya Clauses in Privity

• Port Jackson Stevedoring v Salmond (The ‘New York Star’) (1978)

• Schick Razor Co of Canada shipped razor blades to Sydney on the New York Star.

• Appellant Stevedores misdelivered goods. • The respondent consignee sued the appellant in

tort. • Appellant asserted that a Himalaya clause conferred

protection to contractors. (i.e. the stevedore).

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Port Jackson (cont.)

• Mason and Jacobs JJ: The appellant stevedore did not act as agent for the carrier to misdeliver the goods; rather, it as bailee failed to take reasonable care of the goods.

• Cannot rely on the clause indemnifying it from contractual liability.

• Stephen J: Public Policy argument ‘This divorcing of power and control from any liability for consequences… may also be in undesirable in the public interest.’

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Comments on Port Jackson

• Similar facts but different outcome in (The Eurymedon) [1975] UKPC 1, where the stevedore was entitled to immunity by conferring benefit or exemption from liability to third party contractors.

• Exclusion clauses can be used to indemnify a party, however, onus of proof rests on the party seeking to rely on it.