Rights of third parties

1. Common law doctrine

-- The common law doctrine of privity confers no rights or imposes no obligations on third parties.

→ Then the question is:

1) Who are the parties privy to the contract?

2) Consideration?

Tweddle v Atkinson (1861) 1 B & S 393

Facts: A promised B to pay a sum of money to B’s son (C), on C’s marriage to A’s daughter.

1) C could not enforce against A the promise between A and B

2) Tweddle commonly referred as the case that established the doctrine of privity
3) Was affirmed that the “fundamental” doctrine that “only a person who is a party to the contract
can sue on it” (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 (HL))
4) Was reaffirmed that doctrine of privity - third party cannot benefit from the limited liability
clause in the main contract (Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 (HL))

Dunlop Pneumatic Tyre Co Ltd v Selfridge & CO Ltd [1915] AC 847 (HL)

Facts: P sold tyres to distributor on the terms that the distributor would not sell them lower than the
list-price, and that the distributor needed to obtain similar undertakings from subsequent purchases.
Distributor sold to D. D resold at a lower price than the list-price. Injunction and damages?

1) No consideration provided by P to D, therefore no cause of action

2) As a matter of privity, P was not a party of the contract between D and the distributor
3) Approved in B+B Construction Co Ltd v Sun Alliance and London Insurance Plc [2000] 2 HKC 295
(CA, HK) per Godfrey VP
a. Only a person who is party to a contract can sue on it
b. If a person [other than one who hasmade a contract by deed] is to be able to enforce it
consideration must have been given by him to the promisor or to some other person at
the promisor’s request
c. A principal not named in a contract may sue upon it if the promisee really contracted as
his agent. But… he must have given consideration either personally or through the
promisee, acting as his agent in giving it [Highlights “agency”]

-- Cf. Bailment and sub-bailment contract which would receive a different treatment

Beswick v Beswick [1968] AC 58 (CA)

Facts: Coal merchant transferred his business to his nephew who promised that he would pay an
annuity to the uncle’s widow. She became the administratrix (the executor). Only paid the first annuity
then stopped. Sued the nephew on her right and as administratrix.

1) Lord Denning MR: could sue in her own right at common law, notwithstanding the doctrine of
privity; doctrine of privity could be overcome by joining the promisee as a party to the action
(administratrix + herself)
2) Lord Denning MR and Danckwerts LJ: could sue in own right by s 56(1) of the Law of Property
Act 1925 [This is rejected by HL in the same case]
3) Lord Denning MR, Danckwerts and Salmon LJJ: could sue in capacity as administratrix and order
specific performance to order the nephew to pay the annuity to her [Affirmed by HL]

-- Accepted that only the parties to the contract can enforce it at common law

-- Why specific performance was ordered? The executor did not in fact suffered any form of damages
and so damages would be nominal.

2. Collateral contracts, agency and multilateral contracts

(1) Collateral contracts

1) Consideration
a. Shanklin Pier: contractors employed by the plaintiffs to buy paint from A
b. Andrews v Hopkinson: entering by the customer into the agreement with the finance
company
c. Charnock v Liverpool [1968] 1 WLR 1498: P’s damaged car sent to D for repair. Main
contract was between D and the insurance company. P sued D for not repairing within
reasonable time.
 Found consideration despite no payment from P to D; consideration found as the
owner left the car to D for repair – benefit to the garage to contract with insurance
company
2) Contractual intention (Heilbut, Symons & Co v Buckleton [1913] AC 30)
a. Alicia Hosiery Ltd v Brown Shipley Ltd [1970] 1 QB 95: owner of goods in warehouse
pledged the goods to a bank and sold them later. Bank gave buyer a delivery order.
Warehouseman refused to deliver. Buyer sued the bank for damages.
 no contract between the bank and the buyer – no intention proven; though contract
between buyer and seller, and between the seller and the bank

Shanklin Pier v Detel Products Ltd [1951] 2 KB 854

P employed contractors to paint a pier and instructed them to buy paint made by D. P relied on D’s
warranty that the paint would like 7 years. 3 months in fact. Sale of paint contract between D and the
contractors. Collateral contract found between D and P due to the false representation by D.

-- Hire-purchase: a dealer sells goods to a finance company which will then hire the goods to the
consumer on hire-purchase terms

1) Contracts exist between the dealer and the finance company, and between the finance
company and the consumer
2) Dealer can be liable on breaching a collateral contract or warranty
a. Andrews v Hopkinson [1957] 1 QB 229: dealer’s warranty as to the roadworthiness of
the car gave rise to a collateral contract between the dealer and the consumer  action
to sue for breach of contract
b. The “misrepresentation” induced the consumer to make a hire-purchase; X
misrepresentation because the main contract was not formed between the dealer and
the consumer

(2) Multilateral contracts?

The Satanita [1895] P 248: competitors contracted with the committee of the organizing club but also
with each other

Cf. Ellesmere v Wallace [1929] 2 Ch 1, where the persons who entered horses for races only contracted
with the Jockey Club but not with each other

(3) Agency?

The agent usually falls out of the picture once a contract was formed between his principal and the third
party.

Question: whether the person was acting as an agent or on his own behalf? The constitution of the
company.

(4) A claim in tort (e.g. tort of negligence)

-- The establishment of a duty of care (Customs and Excise Commissioners Barclays Bank Plc [2006] UKHL
28 per Lord Bingham)

1) Test 1: whether A assumed responsibility for what he said and did vis-à-vis the third party, or is
to be treated by the law as having done so
2) Test 2 (“threefold test”): whether loss to the third party was a reasonably foreseeable
consequence of what A did or failed to do; whether the relationship between the parties was
sufficiently proximate; and whether in all the circumstances it is fair, just and reasonable to
impose a duty of care on A towards the third party

White v Jones [1995] 2 AC 207 (Solicitors were alleged to be negligent as they unreasonably delayed the
drafting of a will; P was not included in the existing but would be in the new will)

 Duty of care between solicitors and the beneficiaries?

3. Promisee’s remedies

(1) Specific performance (Beswick v Beswick)

 It is only ordered when other damages are inadequate and other remedies are not available

(2) Restitution of consideration

 Part performance by the promisor may defeat the remedy (e.g. the situation in Beswick v
Beswick), i.e. no total failure of consideration

(3) Agreed sum

 The promisee may claim the payment to himself of the agreed sum, even though the contract
stipulated the payment to a third party

(4) Injunction

1) For the case where a negative promise has been given

2) For a promise not to sue a third party, Gore v Van der Lann [1967] 2 QB 31 stated that in order
to ask for the court’s discretion for a stay at one party’s action against the third party,
a. There must be a definite promise by A to B not to sue C
b. B must have a sufficient interesting the enforcement of A’s promise; need to show that
as a result of A’s breach, B would be exposed to the risk of incurring legal liability to C,
e.g. breach of contractual liability in the contract between B and C

(5) Damages

-- In respect of the promisee’s loss (note the situation like in Beswick v Beswick)

-- In respect of third party’s loss

1. Starting point: claimant cannot recover more than the amount required to compensate for his loss 
cannot recover damages for breach if the loss is suffered by the third party

Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 (CA)

D contracted with P to provide holiday accommodation for him, his wife and children. Accommodation
fell short of the promised demand. Claimed for damages. 500 L awarded for “mental distress”.

 Lord Denning MR questioned the principle – 500 L would be excessive for P himself; this should
be the benefit of the whole family [Rejected by HL in Woodar Investment Development Ltd v
Wimpey Construction Co Ltd)
 May actually be P’s compensation for mental distress, if the unhappiness of the whole family
affected the mental status of P and was thus factored in
 May just be a case of agency: P acted for himself and as an agent for the other family members
in the contract; therefore the other members of the family were also privy to the contract
Woodar Investment Development Ltd v Wimpey Construction Co Ltd [1980] 1 WLR 277

Sale of land. Purchaser should pay 850,000 L to vendor and 150,000 L to third party. Vendor claimed
damages for purchaser’s wrongful repudiation. Held that there was no wrongful repudiation.

 Assumption underlying that case seemed to be that promisee could not recover damages for the
loss suffered by a third party
 “Legal black hole”: situation where the benefit would be conferred by the third party but none
to the promisee  no remedy against the promisor

2. There are, however, exceptions to the general rule. See Treitel 14-024.

Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

Employer and contractor in a building contract. Site was later transferred from the employer to the third
party. Third party suffered financial loss due to breach after the transfer. Employer brought an action.
Contractor argued that no actual loss suffered by the employer. Contractor’s argument rejected by HL.

1) Broader ground, promisee’s loss (Lord Griffith): the employer “suffered financial loss because he
had to spend money to give him the benefit of the bargain which the defendant had promised
but failed to deliver”, i.e. promisee recovering damages he suffered in ensuring that the third
party receives the intended benefit
2) Narrower ground, third party’s loss (Lord Browne-Wilkinson)

Analogous to the Albazero exception: when the shipper and carrier contemplated that the goods
might be transferred after contract concluded, shipper would be treated as making the contract
for the benefit of all persons who might be subsequently be interested in the goods; contractor
foresaw such a possibility that third parties might purchase the property and the breach might
induce loss to the later owners

Restricted scope: third party had not rights under the building contract

4. Himalaya clauses

(1) Originally, a person could only benefit from an exemption clause when the contract was made
through an agent acting either for him or for the other party.

(2) Typically, words to following effect:

“It is agreed by the shipper that all servants, agents sub-contractors of the carrier are to enjoy the
benefits of all exceptions, limitations, provisions, conditions and terms herein whatsoever benefitting
the carrier, as if the shipper had agreed such terms with the carrier acting as for and on behalf of all and
any of its aforesaid servants, agents and sub-contractors.”

-- Agreed that the sub-contractors are entitled to the protection offered by the exemption clauses and
other terms of the bill of lading or contract

(3) The scope of the Himalaya clause depends on the construction of the contract, but will usually
protect the third party only when he is engaging in the performance of the contract. Damages before
and after the performance will not be protected.

(4) The Himalaya clause does not limit the liability of the third party in itself. It achieves so by forming a
separate collateral contract arising from the agency provision. (The “Starsin” [2003] 1 AC 715)

Therefore, if the contract is defected, e.g. misrepresentation (with retrospective effect), the third party
will no longer be protected. (Collateral contract wiped out all together.) [Contrast: breach before
termination and frustration]

(5) It is also subjected to normal reasonableness test of exemption clauses.

(6) Clauses restricting the duty of care: C damaged other property of A  still protected by contract
between A and B?

1) Lord Roskill in the Junior Books case suggested that it might limit the duty of care
2) Doubted by Lord Brandon in The Aliakmon
3) Restricted to cases where A has assented to the clause and C has known about it before
commencing work  “destroys the duty if duty there ever was” (Pacific Associates Inc v Baxter
[1990] 1 QB 993)
4) Restrictive application to relevant exclusion clauses that limit the duty of care

Elder Dempster & Co v Paterson, Zochonis & Co Ltd [1924] AC 522 (HL)

Palm oil casks damaged by bags of palm kernels stowed above them as no ‘tween decks to keep cargoes
separate. Held to be bad stowage and so covered by exemption clause in time charterers’ bill of lading.
So charterers’ liability excluded. Question whether shipowners (sued in tort) could also rely on
exemption clause.

1) The agency reasoning: company acted as agent of the shipowners

2) Bailment on terms: terms of the contract were to be conceived as terms of bailment on the
understanding that the terms can be relied by the agents; breach of bailment
3) Vicarious immunity (Scrutton LJ): where a person employs an agent to perform the contract, the
agent is entitled, in performing the contract, to any liability which the contract confers on the
principal; shipowners acted as agents for the company and thus were protected when in
operation [Rejected by HL in the Midland Silicones case]

Midland Silicones Ltd v Scruttons Ltd [1962] AC 446 (HL)

Stevedores claim the benefit of limitation of liability clause in the bill of lading. Stevedores had
negligently damaged chemical drums in course of discharge. Limited Elder Dempster as to effect of
bailment.

1) Failed on the agency reasoning: no explicit reference to the stevedores in the terms nor other
 evidence of agency could be adduced
2) No implied contract
3) No bailment on terms as they were not entrusted with the goods

-- Lord Reid though rejected the agency argument suggested how it might be successfully argued in the
future:

1) Bill of lading makes I clear that the stevedore is intended to be protected by the provisions in it
which limit liability
2) The bill of lading makes it clear that the carrier, in addition to contracting for these provisions on
his own behalf, is also contracting as agent for the stevedore that these provisions should apply
to the stevedore
3) The carrier has authority from the stevedore to do that, or perhaps later ratification by the
stevedore would suffice
4) That any difficulties about consideration moving from the stevedore were overcome

The “EURYMEDON” [1975] AC 154 (PC)

Stevedores sued in tort for damage caused to goods during discharge. Sought to rely on time bar under
bill of lading. Question of consideration if contractual term enforceable by stevedores. Cf. Brandt v
Liverpool contracts [1924] 1 KB 575.

 The agency argument seemed to stand: (i) Was there any objection on the grounds of public
policy to extend the protection? Negative. (ii) Did the extension give effect to the intention of
the contractual parties? Seemed to be yes.

How did the exemption clause in The “Eurymedon” satisfy the test set out by Lord Reid?

1) Third requirement: there was previous connection between the carrier and the stevedore

Previous connection necessary? The “New York Star” followed (stevedores regularly employed
and partly owned by the carriers); The “Mahkutai”: Lord Goff did not regard having the authority
from the third party as an obstacle to the enforceability of the clause; The “Pioneer Container”
also did not have extrinsic evidence to show previous authorization

Even when previous authorization is not found, may still be ratified later

2) Fourth requirement: the stevedores are prepared to unload/load the goods in consideration of
the promise that they are protected by the exemption clauses

The “NEW YORK STAR” [1981] 1 WLR 138 (PC)

Stevdeores negligently allowed goods being discharged from vessel to be stolen.

"It may indeed be said that the significance of Satterthwaite's case lay not so much in the establishment
of any new legal principle, as in the finding that in the normal situation involving the employment of
stevedores by carriers, accepted principles enable and require the stevedore to enjoy the benefit of
contractual provisions in the bill of lading."

He continued, at p. 144:

"Although, in each case, there will be room for evidence as to the precise relationship of carrier and
stevedore and as to the practice at the relevant port, the decision does not support, and their Lordships
would not encourage, a search for fine distinctions which would diminish the general applicability, in the
light of established commercial practice, of the principle."

The “MAHKUTAI” [1996] AC 650 (PC, HK)

Indonesian shipowners chartered their vessel to the carrier, an Indonesian corporation, which sub-
chartered it to the shippers for the carriage of a cargo from Jakarta, Indonesia, to Shantou in the
People's Republic of China. The carrier's agents issued a shipping order directing the vessel to receive
the cargo for carriage to Shantou subject to the provisions of the carrier's bill of lading. The master
signed the shipping order, which constituted a mate's receipt, and he authorised the carrier's agents to
sign the bill of lading. They issued a bill of lading to the shippers containing a Himalaya clause which
provided, inter alia, that every servant, agent or subcontractor of the carrier was to have the benefit of
all "exemptions, limitations, provision, conditions and liberties" therein benefiting the carrier as if such
provisions had been expressly made for their benefit. The bill of lading also provided that any dispute
should be determined exclusively by the Indonesian courts. On arrival at Shantou some of the cargo was
found to have been damaged by sea water. The vessel proceeded to Hong Kong, and the cargo owners
instituted proceedings in the High Court of Hong Kong against the shipowners claiming damages for
breach of contract, breach of duty or negligence. On application by the shipowners the judge ordered
those proceedings to be stayed, holding that the shipowners, although not parties to the bill of lading,
were entitled to invoke the exclusive jurisdiction clause in it either as a contractual term or as one of the
terms on which the goods had been bailed to them.

Could shipowners rely on exclusive jurisdiction clause in charterers’ bill of lading, providing for courts of
Indonesia to have exclusive jurisdiction? No.

1) Himalaya clause referred to the terms for the carrier’s benefit and protection but not a mutual
agreement
2) Therefore, the exclusive jurisdiction clause in the bill of lading was not within the Himalaya
clause even if the shipowners were subcontractors of the carrier

London Drugs Ltd v Kuehne & Nagel International Ltd (1993) 97 DLR (4th) 261 (SCC)

Limitation clause in storage contract. “The warehouseman’s liability”. Defendants’ employees not
expressly covered. Can D rely on the limited liability clause?

-- Although not party to the contract between their employer and another party, employees may benefit
from a limitation clause in such a contract but:

1) The limitation of liability clause must, either expressly or impliedly, extend its benefit to the
employees seeking to rely on it
 2) The employees seeking the benefit of the limitation of liability clause must have been acting in
the course of their employment and must have been performing the very services provided for
in the contract between their employer and the plaintiff when the loss occurred.

5. Imposition of contractual restrictions or liabilities on non-parties

(1) A and B cannot by a contract between them impose an obligation on C to perform duties arising
under the contract.

(2) Exceptions of the burden rule

1. An obligation not to interfere with other parties’ contracts

 May be liable in tort for inducing breach either by persuading one party to break the contract or
preventing him from performing the contract]

2. Sub-bailment contract

Morris v C W Martin & Sons Ltd [1966] 1 QB 716 (CA)

Question: A contracts with B who sub-contracts with C. There is an exemption clause in B’s sub-contract
with C. If A sues C, is A bound by the exemption clause?

Morris sends fur for cleaning by X. With Morris approval, X sub-contracts to W. W’s servant steals Morris
fur. Is Morris bound by exemption clause in W’s sub-contract with X?

 Diplock and Salmon LJJ found that D owed a duty of care to P and that the exemption clause in
the sub-bailment contract did not extend to cover the liability owed to P; exemption clause
narrowly construed so that “customers” referred to X but not X’s customers; loss occurred not
“during processing”
 Lord Denning suggested that in principle D may rely on the exemption clauses in the sub-
bailment contract; “the owner is bound by the conditions if he expressly or impliedly consented
to the bailee making a sub-bailment containing those conditions, but not otherwise.”

Cf. KH Enterprise v Pioneer Container (The “PIONEER CONTAINER”) [1994] 2 AC 324 (PC, HK)

P (the shipper) contracted with the carriers on terms which entitled the carriers to subcontract “on any
terms”. Subcontracted with shipowners for carriage of goods. Goods lost at sea. P brought an action
against the shipowners. Exclusive jurisdiction clause between the carriers and shipowners would bind P?

Held: Bound by the clause

Lord Goff:

1) “… if the effect of the sub-bailment is that the sub-bailee voluntarily receives into his custody
 the goods of the owner and so assumes towards the owner the responsibility of a bailee, then to
the extent that the terms of the sub-bailment are consented to by the owner, it can properly
be said that the owner has authorized the bailee so to regulate the duties of the sub-bailee in
respect of the goods entrusted to him, not only towards the bailee but also towards the
owner.”
2) “… if the owner seeks to hold a sub-bailee responsible to him as bailee, he has to accept all the
terms of the sub-bailment, warts and all; for either he will have consented to the sub-bailment
on those terms or if not, he will (by holding the sub-bailee liable to him as bailee) be held to
have ratified all the terms of the sub-bailment.”
3) “… a person who voluntarily takes another person’s goods into his custody holds them as bailee
of that person (the owner); and he can only invoke, for example, terms of a sub-bailment under
which he received the goods from an intermediate bailee as qualifying or otherwise affecting his
responsibility to the owner if the owner consented to them…”
4) “… a sub-bailee can only be said for these purposes to have voluntarily taken into his possession
the goods of another if he has sufficient notice that a person other than the bailee is interested
in the goods so that it can be properly be said that (in addition to his duties to the bailee) he has,
by taking the goods into his custody, assumed towards that other person the responsibility for
the goods which is characteristic of a bailee. … their Lordships do not consider this principle to
impose obligations on the sub-bailee which are onerous or unfair, once it is recognized that he
can invoke against the owner terms of the sub-bailment which the owner has actually
(expressly or impliedly) or even ostensibly authorized.”

De Mattos v Gibson (1858) 4 De G & J 276 (per Knight Bruce LJ at 282):-

“Reason and justice seem to prescribe that, at least as a general rule, where [A], by gift or purchase,
acquires property from [B], with knowledge of a previous contract, lawfully and for valuable
consideration made by [B] with a third person, to use and employ the property for a particular purpose
in a specified manner, the acquirer [A] shall not, to the material damage of the third person, in
opposition to the contract and inconsistently with it, use and employ the property in a manner not
allowable to the giver or seller [B]. This rule, applicable alike in general as I conceive to moveable and
immoveable property, and recognized and adopted, as I apprehend, by the English law, may, like other
general rules, be liable to exceptions arising from special circumstances; but I see no room for any
exception in the instance before us.”

X charters (hires) ship from O. O charges ship (pledges the ship as a security) to W (the bank). W has
actual notice of charterparty terms between X and O. O becomes insolvent. W proposes to sell ship. Can
X apply for an injunction stopping W from selling ship for duration of charterparty? Cf. availability of
specific performance.

-- With actual knowledge of the previous contract  may nevertheless be bound by the restrictive
covenant.

-- No positive obligations?

Cf. Lord Strathcona Steamship Co Ltd v Dominion Coal Co Ltd [1926] AC 108 (PC)

Cf. Tulk v. Moxhay (1848) 2 Ph 774 in respect of land

P sold land subjected to a restrictive covenant that the land shall not be built on. Land eventually
conveyed to D. Noticed the restrictive covenant but still sought to build on the land. Court granted an
injunction to restrain the defendant from the building work.

-- Adjacent land?

6. The Future: Consultation Paper on Contracts (Rights of Third Parties) Bill 2013