Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(6) (31 July 1996)

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1. Introduction and Consultation

6.1 The relationship between the doctrine of consideration and the third party rule has long been debated. We argued in the Consultation Paper (1) that a reform of the third party rule did not require an associated review of the doctrine of consideration. Our view was that the rule that only a party to a contract can enforce it and the rule that consideration must move from the promisee could be distinguished in policy terms: the third party rule determines who can enforce a contract; while the rule that consideration must move from the promisee determines the types of promises that can be enforced. We pointed out that the view that the rules are distinct is supported by authority (2) and by the Report of the Law Revision Committee (3) although it has been questioned by some academics. (4)

6.2 We now wish to address this difficult question again and, in the light of the response of consultees, (5) to discuss it in a little more detail than in the Consultation Paper. In particular, it is now apparent to us that some of this debate has been bedeviled by the ambiguity of the phrase "consideration must move from the promisee". We are also concerned to acknowledge that the belief of some that it is unacceptable to reform privity without reforming consideration is not concerned to deny that it might, at a formal level, be possible to do one without the other. Rather the belief is that, at a deeper policy level, the reform of privity involves relaxing the importance attached to consideration.

6.3 This maxim is ambiguous. On the one hand, it can be taken to mean that to be binding a promise must be supported by consideration. If A promises B £100, B cannot enforce the promise (unless made under deed) because there is no consideration for A's promise. The promise is a gratuitous one. This fundamental requirement of consideration could be expressed by saying that B cannot succeed because, although B is a promisee, it has not provided consideration and consideration must move from the promisee.

6.4 In the Consultation Paper, the maxim "consideration must move from the promisee" was essentially used in this first sense of consideration being a necessary requirement for a valid contract. Hence the Paper included the following two passages: "[t]wo of the central questions of policy in the law of contract are: (i) which promises are legally enforceable; and (ii) who can enforce them? The first question is associated with the doctrine of consideration; the second with the doctrine of privity...."; (6) "we believe that the third party rule, ie, that third parties cannot enforce contracts made for their benefit, can be reformed without prejudicing the rule that consideration must move from the promisee." (7) Certainly once one has interpreted the maxim that consideration must move from the promisee as meaning merely that consideration is necessary, one can see that, at a formal level, there is no difficulty in reforming privity without altering the need for consideration. That is, one can insist that, provided there is a contract supported by consideration (or made by deed), it may then be enforceable by a third party beneficiary who has not provided consideration.

6.5 But the maxim "consideration must move from the promisee" can also be used to mean, and is probably generally understood to mean, that, even though the promise is supported by consideration, the consideration must move from the plaintiff. That is, the party seeking to enforce the contract must have provided the consideration. Used in this sense one cannot, even at a formal level, reform the privity doctrine while leaving untouched the rule that consideration must move from the promisee. A reform allowing a third party to sue would achieve nothing, or almost nothing, unless there was also a departure from the rule that a plaintiff could not sue on a contract if it has not provided consideration. Used in this sense, the rule that consideration must move from the promisee and the rule of privity that only a party to a contract can enforce it are so closely linked that the essential dispute is whether they are distinguishable at all; whether, in other words, there are two rules or one.

6.6 That dispute ultimately turns on what one means by "a party" to a contract where the contract is supported by consideration rather than being made under deed. It can best be illustrated by reference to the situation of joint promisees. Say, for example, that A promises B and C to pay C £100 if B will do certain work desired by A. If B does the work, and A declines to pay the £100 to C, can C sue? On the face of it, C, not having provided consideration, cannot sue. This can be expressed in one of two ways: either (i) that C cannot sue because, although a party to the contract and privy to it, C falls foul of the rule that consideration must move from the promisee; or (ii) that C cannot sue because, not having provided consideration for A's promise, C is not a party to the contract and therefore falls foul of both the privity rule and the rule that consideration must move from the promisee (which are merely two ways of expressing exactly the same point).

6.7 Whichever of these two views is taken (and the practical significance of choosing between them seems to relate only to how one deals with joint promisees, which we discuss below) the central point is that the legislation must recognise that if, by "consideration must move from the promisee" one means "consideration must move from the plaintiff" one cannot sensibly reform privity without also departing from that rule.

3. The Joint Promisee Exception

6.9 A difficult linked issue is how we should deal with the question as to whether a joint promisee can sue even though it has not provided consideration in a contract not made by deed. In other words, how should we deal with the so-called ?joint promisee exception'? (9) The present English law on joint promisees is not entirely clear. However, it seems likely that an English court would apply the approach of the High Court of Australia in Coulls v Bagot's Executor & Trustee Co Ltd. (10) In that case, four members of the High Court suggested that a joint promisee could sue despite not having provided consideration (11) (although Windeyer J suggested that one could regard B as having provided consideration on behalf of C). (12) Barwick CJ explained that the justification for this exception to the need for consideration to move from the promisee was that the promise had been made to C and consideration for the promise had been provided, albeit by B not C. This approach is reminiscent of the view of the Law Revision Committee in 1937. Having cited the joint promisee example given above, the Committee continued, "[W]e can see no reason either of logic or of public policy why A, who has got what he wanted from B in exchange for his promise, should not be compelled by C to carry out that promise merely because C, a party to the contract, did not furnish the consideration". (13)

6.10 We agree that C should have the entitlement to sue A. Indeed, given our reform of the privity doctrine, it would be absurd if this were not so: that is, it would be absurd if a joint promisee had no right to enforce the contract whereas a third party (to whom the promise has not been given or made) would have that right. The much more difficult question, however, is what should be the precise rights of enforcement of the joint promisee (who has not provided consideration)? And, in particular, should such a joint promisee be regarded as a third party within our proposed reforms? The advantage of treating such a joint promisee as a third party is that the absurdity referred to above would be avoided. But there are at least two possible disadvantages of this approach. The first is that it is arguable that a joint promisee should have a more secure entitlement to sue than (other) third parties on the basis that the promise was directly addressed, or given, to him. On this basis, the joint promisee should not have to satisfy the test of enforceability laid down in our proposals (discussed in Part VII below) and ought not to be caught by the provisions allowing variation or cancellation without his consent (discussed in Part IX below). The second disadvantage, and in a sense cutting the other way from the first disadvantage, is that precisely because the promisee is a joint promisee - and is therefore closely connected with the other joint promisee vis-a-vis the promise - it is arguable that traditional rules on joint creditors (14) should apply and some of these rules (for example, requiring joinder of the other joint creditor to any action (15) and allowing one joint creditor to release the promisor provided not in fraud of the other) (16) differ from our proposals for third parties. (17)

6.11 We have found these questions as to the precise rights of a joint promisee who has not provided consideration difficult to resolve. As they were not put out to consultation, and as the position of joint promisees is somewhat peripheral to the central focus of our reform, we think it preferable to leave them to the courts to resolve if and when they arise. In line with the implicit assumption of the Consultation Paper, (18) we therefore consider that a joint promisee who has not provided consideration should not count as a third party within our proposed reforms. We adopt this approach in the confident expectation that, particularly in the light of our reforms, the English courts will avoid the absurdity referred to above by accepting the ?joint promisee exception' so that a joint promisee who has not provided consideration will not be left without a basic right to enforce the contract.

4. Reforming Privity Without Reforming Consideration: The Deeper Policy Question

6.13 We have said above that, while at a formal level, it is possible to reform privity without reforming the need for consideration, the question must be addressed at a deeper policy level as to whether this involves relaxing the importance attached to consideration. The argument that a reform of privity does relax the importance of consideration rests on the proposition that a third party who has not provided consideration, and hence not "earned" the promise, should be afforded no better rights than a gratuitous promisee. The fact that someone else has provided consideration for the promise is an irrelevance vis-à-vis the claim by the third party. Yet our proposed reform not only affords a third party better rights than a gratuitous promisee, it also allows the claim of the third party, who has provided no consideration, to trump the rights of the contracting parties, who have provided consideration and hence have earned each other's promise, to vary or cancel the contract. (19)

6.14 This argument can be illustrated by the following hypothetical example. A wants to give a car to C that he is buying from B and also wants to assure C, in advance, that the car will be his. In a first situation, in addition to its contract with B, A makes a gratuitous promise to C. In a second situation A insists on a term of the contract with B being that the car should be delivered, and title should pass, to C. A informs C of that contract for his benefit. It is argued that the position of C, and the justice underpinning whether C can sue A in the first situation or B in the second situation for failure to deliver the car, is indistinguishable. But according to our proposed reform C would be able to sue in the second situation, subject to satisfying the test of enforceability, but not in the first situation.

6.15 At first blush one can resist this argument by emphasising that to allow a third party to sue is to ensure that the intentions of the parties, who have provided consideration, are upheld. That, in other words, there is a crucial difference between the situation where a promise is supported by consideration, albeit enforced by a third party, and the situation where the relevant promise is gratuitous. The overall coherent policy may be presented as the enforcement of bargains, the upholding of the intentions of those who have provided consideration, not the enforcement of gratuitous promises. But the difficulty then lies in explaining why the third party's right trumps the contracting parties' rights to vary or cancel the contract. True adherence to consideration would appear to dictate that the contracting parties should be free to change their intentions at any time. Yet, as we have argued in Part III and will argue in more detail in Part IX below, our reform recognises that consideration should give way to the need to avoid the injustice of disappointing the reasonable expectations of the third party, where that third party has relied on the contract or has accepted it by communicating its assent to the promisor.

6.16 One possible answer to that difficulty is to draw a distinction between the formation of a contract and its variation or cancellation and to argue that consideration is less important in relation to the latter than to the former. In other words, that in relation to variation but not formation, the intentions of those providing consideration may be overridden by the need not to disappoint the expectations of a gratuitous promisee or a third party beneficiary.

6.17 Alternatively we see no objection to accepting that, while formally, our reform does not affect the requirement of consideration, at a deeper policy level, and within the area of third party rights, it may represent a relaxation of the importance attached to consideration. (20) After all, promises under deed are enforceable without the need for consideration. And there are other established examples in the law of exceptions to the need for consideration: for example, documentary letters of credit, compositions with creditors, and the doctrine of promissory estoppel. The recognition of such exceptions, allied to academic criticisms of the requirement of consideration (in its classic sense of there needing to be a requested counter-performance or counter-promise), suggests that the doctrine of consideration may be a suitable topic for a future separate review by the Law Commission. But for the present we see no practical difficulty in taking the limited step in this paper of recommending what may be regarded as a relaxation of the requirement of consideration to the limited extent necessary to give third parties rights to enforce valid contracts in accordance with the contracting parties' intentions.

Footnotes to Part VI

(2)See, eg, Tweddle v Atkinson (1861) 1 B & S 393; 121 ER 262; Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847, 853. See also Kepong Prospecting Ltd v Schmidt [1968] AC 810, 826.

(3)The Law Revision Committee, Sixth Interim Report, (1937) para 37. See further above, paras 4.2-4.4.

(4)M Furmston, "Return to Dunlop v Selfridge" (1960) 23 MLR 373, 382-384; B Coote, "Consideration and the Joint Promisee" [1978] CLJ 301; R Flannigan "Privity - the End of an Era (Error)" (1987) 103 LQR 564, 568-569. Cf H Collins, The Law of Contract (2nd ed, 1993) pp 283-292 who supports the view that the third party rule is not inseparably linked with the doctrine of consideration; Chitty on Contracts (27th ed, 1994) para 3-032 which accepts the view that the rule that consideration must move from the promisee and the third party rule are not inextricably linked; Anson's Law of Contract (ed Guest) (26th ed, 1984) pp 86-87; Treitel, The Law of Contract (9th ed, 1995) p 539 is less categorical but also on balance supports this view.

(8)After discussions with the draftsman, we are satisfied that this recommendation will automatically be met by the central clause of the legislation which gives a third party a right to enforce the contract; such a clause can only be interpreted as also reforming the rule that consideration must move from the promisee (where that rule means that consideration must move from the plaintiff).

(9)This point is left unclear in the legislation enacted in, eg, New Zealand and Western Australia.

(10)(1967) 119 CLR 461. For support in England see, for example, New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154, 180 (per Lord Simon of Glaisdale). See alsoMcEvoy v Belfast Banking Co Ltd [1935] AC 24, 43 (per Lord Atkin). See, generally, Chitty on Contracts (27th ed, 1994) paras 3-035-3-036 and Treitel, The Law of Contract (9th ed) pp 532- 533 which draw a distinction between joint, joint and several, and several promises.

(11)On the facts the majority (McTiernan, Taylor and Owen JJ) considered that Mrs Coulls was not a promisee so that this joint promisee exception did not come into play. Barwick CJ and Windeyer J dissented taking the view that Mrs Coulls was a joint promisee.

(12)In his powerful article, "Consideration and the Joint Promisee" [1978] CLJ 301, Coote argues that, in a bilateral contract, C can only be regarded as having provided consideration if it has undertaken an obligation to A.

(17)For our proposals regarding joinder see paras 14.1-14.5 below. For our proposals regarding releases, see paras 11.7-11.8 and 11.11-11.12 below.

(18)It was implicit in the Consultation paper No 121, paras 2.7, 3.33, that a joint promisee should not count as a third party for the purposes of our proposed reform.

(20)This is also openly recognised by the New Zealand Contracts and Commercial Law Reform Committee in Privity of Contract (1981) para 8.2.4: "The benefit to the third party is, we think, analogous to a gift to him. If the donee of that ?gift' is to be able to enforce it, this right must to that extent relax the doctrine of consideration. We think the doctrine should be relaxed to that extent. In other words, our view is that the consideration necessary to support the contract ought not to have to be provided by the third party; it should be sufficient, we think, that the consideration for the promise be supplied by a party to the contract."

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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(6) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(6).html Cite as: [1996] EWLC 242(6)

The Law Commission

1. Introduction and Consultation

3. The Joint Promisee Exception

Footnotes to Part VI