Contracts - Privity lecture

Contracts 200011
Privity of Contract
Lecturer: Francois Brun

1

Overview of Privity
• BeswickvBeswick[1968] AC 58
• Trident General Insurance Co Ltd vMcNiece
Bros P/L (1988) 165 CLR 107
• Coullsv Bagot’s Executor & Trustee Co Ltd
(1967) 119 CLR 460
• Port Jackson Stevedoring
vSalmond&Spraggon(Aust) (The ‘New York
Star’)(1978) 139 CLR 231
2

BeswickvBeswick[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.
3

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.
4

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.
5

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.

6

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
7

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.
8

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.
9

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.
10

Trident General Insurance Co Ltd
vMcNiece 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.
11

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”.
12

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.

13

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.

14

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 Vandepittev 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…
15

Trident (context)
• The end effect being that the promiseetrustee 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.
16

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.
17

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.

18

Trident (Deane J)
• Deane J: Trident held the insurance payments by
Blue Circle on trust for the benefit of Subcontractors 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…”
19

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.

20

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.
21

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.

22

Trident (Dawson J)
• Dawson J (Dissenting): Argued the court
should follow Wilson v Darling Island
Stevedoring (1956) and Coullson 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.
23

Privity restricted to parties with
consideration
• Coullsv 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.”
24

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.

25

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.”

26

Himalaya Clauses in Privity
• Port Jackson Stevedoring vSalmond (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).
27

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.’
28

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.
29

Contracts - Privity lecture

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