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You are here: BAILII >> Databases >> The Law Commission >> Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(11) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(11).html Cite as: [1996] EWLC 242(11)

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PART XI

Overlapping Claims

1. More Than One Plaintiff: Claims by the Third Party and by the Promisee

(1) Promisee's Rights

11.1 If our principal proposed reform is accepted, so that where the test of enforceability is satisfied a third party will have the right to enforce the contract, the question arises as to the promisee's rights. Does the recognition of the third party's rights mean that the promisee has no right to sue on the contract?

11.2 In the Consultation Paper, (1) the provisional recommendation was made that the promisor's duty to perform should be owed both to the third party and to the promisee: that is, the third party's rights should be additional to, and not at the expense of, the promisee's rights. This was supported by the vast majority of consultees. It also appears to be the position in the other common law jurisdictions that have departed from the third party rule. (2)

11.3 We are convinced that permitting a double action is the correct approach. There is no reason to remove a contractual right from the promisee (for which, in a contract supported by consideration, he or she has bargained) merely because the contract gives rights of enforcement to a third party.

11.4 We therefore recommend that:

(27)the promisor's duty to perform should be owed to both the promisee and the third party and, consequently, unless otherwise agreed between the contracting parties, the promisee should retain the right to enforce a contract even if the contract is also enforceable at the suit of the third party. (Draft Bill, clause 4)

(2) Promisee's Rights Where Performance by Promisor to Third Party

11.5 It was provisionally proposed in the Consultation Paper that a promisor who performs his obligation to the third party should be discharged from any further obligation to the promisee. (3) This seems self-evident and there was no dissent from it on consultation. This is also in accordance with section 305(2) of the United States Second Restatement which lays down that, "Whole or partial satisfaction of the promisor's duty to the beneficiary satisfies to that extent the promisor's duty to the promisee."

11.6 We therefore recommend that:

(28)although no legislative provision on this is necessary, a promisor who has fulfilled its duty to the third party, whether wholly or partly, should to that extent be discharged from its duty to the promisee.

(3) Promisee's Rights Where Release of/Settlement with Promisor by Third Party

11.7 It was provisionally proposed in the Consultation Paper that a promisor who has been released by the third party should be discharged from any further obligation to the promisee. (4) However, it was pointed out to us on consultation that the performance of a single promise might benefit both promisee and third party, rather than being for the exclusive benefit of the third party. In that situation, at the very least, the promisee should not be deprived of his right of action by the third party's release of the promisor from further obligations to him. Our initial reaction to this was to think in terms of a provision which drew a distinction between releases where the contract was for the exclusive benefit of the third party and releases where the contract was for the benefit of both promisee and third party: only the former type of release given by the third party would operate to release the promisor's obligation to the promisee. But such a provision would not only be very complex but would run the danger of creating litigation on the issue of whether the contract was for the exclusive benefit of the third party or not. We have therefore ultimately opted for the simpler clearer solution that a third party cannot release the promisor's obligation to the promisee (unless otherwise agreed in the original contract). This seems to us to accord with the fact that the promisee is, after all, the contracting party and we think it right that the promisor should seek a release from him as well as from the third party. Moreover this approach follows from a standard principle, relating to a release given by a ?several creditor', namely that a several creditor can only give an effective release of an obligation owed to himself and not to someone else. (5) Of course, it would be a very odd situation where a third party wishes to release the promisor and the promisee does not wish to do so and yet the promisee has nothing to gain from performance.

11.8 We therefore recommend that:

(29)although no legislative provision on this is necessary, a release given to the promisor by the third party should not discharge the promisor's obligation to the promisee (unless otherwise agreed in the original contract).

(4) Releases Where More Than One Third Party

11.9 Although not relating to a promisee's rights or to overlapping claims, this seems the most convenient place to mention releases where there is more than one third party, who has the right to enforce the contract. What is the impact of a release by one third party on the promisor's obligation to the others? (6) In our view, (and unless otherwise agreed in the original contract) this turns on whether the promise is intended to confer enforceable rights that are to be separately, or jointly, enjoyed with other third parties. If the promised benefit is to be enjoyed separately or independently, the release by one third party should not discharge the promisor's obligation to the other third parties. Say, for example, A contracts with B to pay C £100 and D £150. A release by C should not operate to discharge A's liability to D. (7) The promises of payment are independent of each other. The same would apply if terms in a construction contract are to be for the benefit of each subsequent occupier of the building. In contrast, if A contractually promises B to pay £100 to C and D jointly or to transfer land into the joint ownership of C and D, the promise is for the benefit of C and D jointly. A release given by either C or D should normally release A's obligations to C and D. (8) All these consequences follow directly, or by analogy, from standard principles relating to releases where there is a plurality of creditors. (9)

11.10 We therefore recommend that:

(30)although no legislative provision on this is necessary, (10) the effect of a release of the promisor by one third party on the promisor's obligations to another third party is dependent (unless otherwise agreed in the original contract) on whether the promise is for the benefit of the third parties independently of each other, or whether it is for the benefit of the third parties jointly. If the promised benefit is to be enjoyed independently, the release by one third party should not discharge the promisor's obligation to the other third parties. But if the promise is for the joint benefit of the third parties, the release by one third party should normally discharge the promisor's obligation to the other third parties.

(5) Third Party's Rights Where Performance by Promisor to Promisee (Rather than to Third Party), or Release of/Settlement with Promisor by Promisee

11.11 This issue is closely linked with that of variation or cancellation of the third party's right by the contracting parties. The vast majority of consultees accepted our suggestion that, "[s]o long as the contract can still be varied, performance in favour of the promisee should arguably discharge the promisor and the third party would have no rights. Once the contract cannot be varied, the promisor should arguably have to perform in favour of his creditor, ie the third party." (11) We therefore now adopt this approach and consider that it should be extended to where the promisee releases or settles with the promisor.

11.12 Hence we recommend that:

(31)performance by the promisor to the promisee (rather than to the third party) and accepted by the promisee, or the release of the promisor by the promisee, should be straightforwardly regarded as a variation or cancellation of the contract and should therefore be governed by the recommendations in Part IX above.

11.13 A number of respondents suggested that this solution might be unfair if the promisor was not aware that the contract could not be varied when he rendered performance to the promisee. We do not agree. First, the promisor should take steps to discover whether the contract can still be varied before performing in a way that does not conform to his original obligation. Secondly, it would presumably be possible in most cases (12) for the promisor to recover money paid or the value of services rendered to the promisee by mistake via an action in restitution. Of course, there is the danger that in the meantime the promisee will have become insolvent, but that is a risk the promisor must take if he chooses unilaterally to vary the contract.

(6) Priority of Action?

11.14 If the promisee is to have a right of action, it must be asked whether he or she should be able to exercise that right at any time. It could be argued that some order of priority of actions should be developed; for if both the promisee and the third party sue in separate actions, the promisor would be confronted with the costs and inconvenience of two actions for enforcement of the same duty. It might be argued, for example, that the third party should have the first option to sue, and that it should only be open to the promisee to sue if the third party does not take the opportunity to sue. However, we regard the promisee and the third party as having separate rights so that it would seem wrong in principle to bar the promisee's claim by such a rule of priority of action. Rather the appropriate procedural approach in many cases (although we do not think that this should be a requirement) is for the third party to be joined as a party where the promisee sues. (13)

11.15 We therefore recommend that:

(32)there should be no order of priority between promisee and third party.

(7) Avoidance of Double Liability

11.16 The above recommendations (especially recommendation 27) may be thought to raise the problem of double liability: that is, of the promisor being liable to pay substantial damages to both the promisee and the third party for essentially the same loss. This problem will not arise if the promisee is entitled merely to nominal damages or if he or she is granted specific performance of the promisor's obligation to benefit the third party. Nor will there be a problem if the third party first recovered damages because then the promisee would be left with no corresponding loss outstanding.

11.17 We also do not think that there is a risk of double liability where the promisee recovers the third party's loss under one of the exceptions to the standard rule that the promisee is entitled to damages for its own loss only. Our understanding of the relevant law is that, in that situation, the third party could not subsequently recover substantial damages from the promisor under our proposals. In The Albazero (14), in which the House of Lords drew together the exceptions where the promisee can recover the third party's loss (for example, a consignee suing a carrier for damage to the owners' goods; and a bailee suing a tortfeasor for damage to his bailor's goods), Lord Diplock appeared to regard the promisee as being accountable for the damages received, in an action for money had and received, to the third party. (15) The duty to account means that the third party has no loss to recover from the promisor. And although the question of there being a duty to account was not specifically addressed in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (16) it is important to note that Lord Browne-Wilkinson said that, where the third party itself had a direct cause of action, the rationale for allowing the promisee to recover the third party's loss was inapplicable. (17) If so, the promisee would be unable to recover damages for the third party's loss where our Act gives the third party a right of enforceability.

11.18 The position is more difficult where the promisee recovers substantial damages for its own loss in circumstances where that loss is assessed on the basis that the promisee will "cure" the breach and yet the promisee does not then do so. (18) Say, for example, B has contracted for A to build a wall on C's land and C has been expressly given the right of enforceability. On a failure by A to build the wall, B recovers substantial damages on the basis that it will now pay for another builder to construct the wall. If the wall is not then built and C subsequently sues A, it would appear that C too has a claim against A for substantial damages. Or, let us assume that the promisee has a pre-existing liability to pay the third party £1000 and hence renders it a term of its contract with the promisor, in return for services rendered by the promisee, that the promisor pays £1000 to the third party. If the promisor fails to pay £1000 and if the third party can satisfy the test of enforceability, it would appear that both the promisee (because he will now have to find another £1000 to pay the third party) and the third party (in a subsequent action where the promisee has not paid him) have a claim against the promisor for damages (or the award of the agreed sum) of £1000. (19)

11.19 One possible answer to the risk of double liability in this situation is that, where the third party sues, the promisor could require the promisee to account to the third party for the damages recovered. In Corbin on Contracts there is the following illuminating passage: "The possibility of injustice to the promisor in allowing double recovery in separate actions appears to be slight. It is true that the third party may get judgment for the full value of the promised performance; also, that the promisee may get judgment for an equally large amount, being the amount of the debt owed by him to the third party - a debt that would have been satisfied by the promised performance. In neither suit does the jury have to consider the possibility that the promisor may later be compelled to perform under another judgment. But if the promisor does so perform, he is not without remedy. If he satisfies the judgment of the promisee he has an equitable right that the promisee shall use the proceeds, other than costs, in satisfaction of the judgment obtained by the third party. If he satisfies the judgment of the third party, this would operate to satisfy pro tanto the debt of the promisee to the third party and should also be provable in a supplementary proceeding to reduce the judgment of the promisee against the promisor". (20) For the equitable right referred to, Corbin relies on the case of Joseph W North & Son Inc v North. (21) Here the plaintiff bought the defendant's business and agreed to fulfil all outstanding orders to existing customers. The plaintiff also agreed to indemnify the defendant against existing liabilities. The plaintiff committed a breach, and the defendant sued on the indemnity, obtaining judgment. This did not discharge the plaintiff's duty to the existing customers, but it was held that he had an equity to avoid double liability for the same harm, and that the amount of the judgment should be so applied as to prevent such double liability. (22) Some support for such a proposition in English law may be deduced fromLoosemore v Radford, (23) which was cited in Joseph W North & Son v North. In that case, the plaintiff was surety for the defendant's liability to X. Fearful that the defendant would default and that he would be left with inadequate remedies against him, the plaintiff obtained from the defendant a separate covenant to pay him the amount of the principal debt. The plaintiff then sued on this and recovered judgment for the full amount. The defendant appealed, pointing out that the plaintiff had not been called upon to pay under the guarantee. Parke B said that the defendant might have an equity that any sums he might pay to the plaintiff should be applied in discharge of his debt to X, but since the action was one at law, the plaintiff was entitled to recover full damages under his separate covenant with the defendant. Although not precisely on the point, the case seems to suggest that equity would prevent a debtor from being forced to pay twice for what was in substance the same loss. Such a principle, applied by analogy to our third party beneficiary situation, would prevent double liability of the promisor to both the promisee and the third party. (24)

11.20 It must be recognised, however, that the basis of this equitable right, if it exists at all, is unclear. Although one may be tempted to think that the principle against unjust enrichment is involved, it is not easy to see on what conventional ground the promisee is thought to be unjustly enriched at the expense of the promisor (or the third party). In our view, therefore, it is preferable to ensure the protection of the promisor by a statutory provision designed to avoid double liability. (25) And if the legislation is to include a provision to deal with this situation (where the promisee has recovered damages for its own loss) it would be prudent, so as to avoid confusion, to incorporate the exceptional situations where the promisee has recovered the third party's loss (although, as we have explained above, (26) we believe that, in any event, there would be no realistic prospect of double liability in those situations).

11.21 We therefore recommend that:

(33)where the promisee has recovered substantial damages (or an agreed sum) representing the third party's loss or assessed on the basis that the promisee will "cure" the breach for the third party, the third party will not be entitled under our proposed Act to an award which duplicates that sum and thereby imposes double liability on the promisor. (Draft Bill, clause 5)

11.22 We should add that our concern here is to protect the promisor against double liability. We consider that it is best left to the courts to determine precisely when the promisee may be under a duty to account to the third party for the sum that the promisee has recovered. In the event of the promisee's insolvency, it will also be necessary for the courts to determine whether the third party has a proprietary remedy (through a trust or lien) or a personal remedy against the promisee. (27)

2. More Than One Defendant: Claims by the Third Party Against the Promisor, and Against the Promisee on a Pre-Existing Liability

11.23 A situation discussed in the consultation paper was that of where the contractual benefit to the third party comprises the performance by the promisor of a pre-existing liability that the promisee owed to the third party. We provisionally recommended that, "where the promisor's performance is designed to discharge an existing obligation of the promisee to the third party, the third party should be able to pursue claims against either the promisor or the promisee, and his acceptance of benefits under the contract should discharge his rights against the promisee only to the extent that such obligation is thereby fulfilled". (28) Through that provisional recommendation, we were concerned to clarify that the giving of rights to the third party against the promisor does not automatically lead to it losing its rights against the promisee. While we adhere to that position, we believe that the position is so plain that no legislative provision to that effect is required.

11.24 Of course this does not mean that the third party can recover twice over. Performance by the promisor will operate to discharge the promisee's pre-existing liability to the third party. Similarly, if the third party chooses to pursue the promisee, performance by the promisee will operate to discharge the promisor's contractual liability to the third party. In the latter situation, the promisee will be able to obtain an indemnity or reimbursement from the promisor: even if that is not provided for in the contract between the promisor and the promisee, this would be imposed by the law of restitution on the basis that, under legal compulsion, the promisee has discharged the promisor's liability where, as between the promisor and the promisee (according to their contract), the promisor is the primary debtor. (29) In the Consultation Paper (30) we also briefly questioned whether the third party should be required to pursue the promisor first before pursuing the promisee. We now confirm that, as is the standard position where a person has several separate rights against the same person, we do not believe that there should be any order of priority for enforcement of the third party's right.

11.25 However, several consultees drew attention to the need to ensure that, where the third party had agreed that the promisor's promise to perform will constitute a settlement or discharge of the promisee's obligation to him, the third party would not be permitted to resile from this by suing the promisee on the pre-existing obligation. We agree that this should be the legal position but we do not think that any legislative provision is needed to ensure this; the application of standard contractual principles is sufficient.

11.26 Therefore we recommend that:

(34)while no legislative provision to this effect is required, where a third party has pre-existing legal rights against the promisee, he should not lose those rights because the promisor and promisee enter into a contract whereby the promisor agrees to discharge the promisee's liability to the third party, but should acquire an additional right against the promisor;

(35)while it is unnecessary for there to be a legislative provision on this, no compromise or settlement of the promisee's liability to the third party by the conferral of enforceable contractual rights against the promisor should be disturbed.

11.27 The operation of those two recommendations can be illustrated as follows. Say, B owes C a sum of money. If B contracts with A that A will pay the sum to C then, under our proposals, C will have a third party action against A, provided C can satisfy the test of enforceability. Alternatively, C could sue B (recommendation 34). However, if C agrees with B that B's liability should be discharged by B securing A's promise to pay C, then B should be discharged and C's only right of action would lie against A (recommendation 35). It should be emphasised that, for recommendation 35 to operate, B and C must have contracted to discharge B's liability; B would still remain liable if, for example, the true construction of the agreement was that C agreed not to sue B unless A defaulted on the obligation and A then does default.

Footnotes to Part XI

(1) Consultation Paper No 121, para 5.34.

(2) See, eg, the New Zealand Contracts (Privity) Act 1982, s 14(1)(a); Queensland Property Law Act 1974 s 55(7) (although those provisions are probably primarily concerned with preserving the third party's existing rights). See also Manitoba Law Reform Commission, Privity of Contract (1993) pp 64-5. The United States Restatement (2d) Contracts § 305(1) allows the promisee to enforce the promise; it speaks of the promise creating duties to both promisee and third party. Corbin states, "...several actions on one promise are not necessarily regarded as unjust...[this] is witnessed by the law of joint and several contracts". Corbin on Contracts (1951 with supplements) vol 4 para 824 cites Baurer v Devenis, 121 A 566, 570 (1923) per Wheeler CJ: "Nor can the injustice of possibly permitting two actions against a promisor be allowed the consideration heretofore given it. It was optional with the promisor whether he should engage in this performance for the third party. Having voluntarily so agreed, it is no hardship to require him to fulfil his agreement".

(3)Consultation Paper No 121, para 5.34.

(4)Consultation Paper No 121, para 5.34.

(5)See Treitel, Law of Contract (9th ed, 1995) p 532.

(6)An analogous issue is whether a variation or cancellation made by the contracting parties with the consent of one party (whose rights have crystallised) is valid vis-a-vis another non-consenting third party (whose rights have crystallised). For the somewhat similar question as to when there is a crystallisation of a third party's rights, where there is more than one third party, see para 9.43 above.

(7)In support of this see, eg, Wilson & Co Inc v Hartford Fire Insurance Co, 254 SW 266 (1923).

(8)This is to apply the standard law on releases given by joint creditors: a well-recognised exception is that, if the release is given by one joint creditor in clear fraud of another, the latter can have it set aside. See, eg, Jones v Herbert (1817) 7 Taunt 421; 129 ER 168; Innell v Newman (1821) 4 B & Ald 419; 106 ER 990; Barker v Richardson (1827) 1 Y & J 362; 148 ER 710; Wallace v Kelsall (1840) 7 M & W 264; 151 ER 765; Phillips v Clagett (1843) 11 M & W 84; 152 ER 725.

(9)See Treitel, The Law of Contract (9th ed, 1995) p 532.

(10)See para 9.44, note 35, above.

(11)Consultation Paper No 121, para 5.34.

(12)12Where the money was paid or the services rendered under a mistake of fact. The dividing line between mistakes of fact and of law is difficult to draw. We have recommended that the distinction should be abolished: Restitution: Mistakes of Law and Ultra Vires Public Authority Receipts and Payments (1994) Law Com No 227.

(13)13We discuss in paras 14.1-14.5 below the rules as to joinder, in the context of whether the promisee should be joined in an action by the third party. Those rules are equally applicable in the context of whether the third party should be joined in an action by the promisee. Note also that under RSC, O 4, r 9 the court has the power to order consolidation of actions where "some common question of law or fact arises in both...of them, or...the rights to relief claimed therein are in respect of or arise out of the same transaction or series of transactions, or ... for some other reason it is desirable to make an order".

(14)14[1977] AC 774.

(15)15[1977] AC 774, 845-846. See also Treitel, The Law of Contract (9th ed, 1995) p 550.

(16)16[1994] 1 AC 85. See above paras 2.39-2.46.

(17)17[1994] 1 AC 85, 115. See para 2.40 above.

(18)A possible analogous problem is where the promisee recovers substantial damages representing the cost of cure and then the third party sues for specific performance. However, it would seem that in that situation the flexibility of the principles governing specific performance would enable the courts straightforwardly to avoid the promisor's double liability (eg, by refusing specific performance on the ground that damages are adequate or, possibly, by making the order conditional on the promisor being repaid its damages by the promisee).

(19)Quaere whether the appropriate remedy for the third party lies in an action for the agreed sum. Note that, as is discussed below, the third party also has a claim against the promisee on the pre- existing liability. See paras 11.23-11.27, below.

(20)(1951, with supplements) vol 4, para 824 (emphasis added). See also Restatement (2d) Contracts § 305.

(21)110 A 581 (1920).

(22)22Backes VC of New Jersey said, at p 582, "[T]he proposition that the complainant ought not to be twice mulcted (sic) in damages for breaches of covenants involving the same subject matter and resulting in a single injury, and that equity will protect against such evil consequences, is sound in principle and supported by authority". However he refused to find a trust in the complainant's favour of sums paid over under the first judgment, and instead held that a bare equity of appropriation of the proceeds of judgment existed, to the extinguishment of the defendant's dual liability so far as they might be necessary for that purpose and no more.

(23)(1842) 9 M & W 655; 152 ER 277.

(24)24It must be noted, however, that there are cases which, arguably, cast doubt on the suggestion made in Loosemore v Radford. See Re Law Guarantee Trust & Accident Society Ltd [1914] 2 Ch 617; Carr v Roberts (1833) 5 B & Ad 78; 110 ER 721; Re Walker, Sheffield Banking Co v Clayton [1892] 1 Ch 621. See also Philips & O'Donovan, The Modern Contract of Guarantee (2nd ed, 1992) p 479.

(25)See, analogously, s 7 of the Torts (Interference with Goods) Act 1977. Cf O'Sullivan v Williams [1992] 3 All ER 385.

(26)26See para 11.17 above.

(27)27See, analogously, Lord Napier and Ettrick v Hunter [1993] AC 713; Hunt v Severs [1994] 2 AC 350.

(28)Consultation Paper No 121, para 6.16. See also para 5.35.

(29)See Goff and Jones, The Law of Restitution (4th ed, 1993) chapter 14; A Burrows The Law of Restitution (1993), chapter 7.

(30)Consultation Paper No 121, para. 5.35.