Privity Reform

REPORTS

Privity of Contract –the Benefits and the Burdens of Law Reform

John N. Adams, Deryck Beyleveld and Roger Brownsword*

Five years after the publication of its provisional recommendations in favour ofreforming the privity rule in English contract law,1 the Law Commission2 hasconfirmed its view – and, indeed, the view of a considerable body of judicial3 andacademic4 opinion, as well as that of the vast majority of the Commission’sconsultees5 – that the doctrine is ripe for reform. Thus, in its centralrecommendation, the Commission proposes that third parties (subject to beingexpressly identified) should have the right to enforce contractual provisions whereeither (i) the contracting parties expressly so provide (the so-called ‘first limb’ ofthe test of enforceability)or (ii) the contracting parties intend to confer a benefit onthe third party (the so-called ‘second limb’ of the test of enforceability) – providedthat the contracting parties do not also intend that the third party beneficiary shouldnot have the right to enforce the contract. So, to take a couple of familiarillustrative examples, the first limb of the test of enforceability would apply to acase such asTweddlev Atkinson6 (where the contracting parties expressly providedfor the third party to have the right to enforce the contract); and the second limbwould apply to a case such as that of Mrs Beswick,7 who famously pleaded that hernephew should not renege on his contractual promise made for her benefit. TheReport thus signals a decisive break from the orthodoxy of the privity doctrinewhich, in the earlier part of the century, was identified by Viscount Haldane LC asone of the fundamental principles of English contract law.8

ß The Modern Law Review Limited 1997 (MLR 60:2, March). Published by Blackwell Publishers,108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.238

*Faculty of Law, University of Sheffield.We are particularly grateful to Professor Andrew Burrows (Law Commission) and Professor Hugh Collinswho supplied detailed comments on earlier drafts of this paper and to our colleague, Professor GrahamBattersby, who gave freely of his time in acting as a sounding board for many of the ideas in it. We aregrateful too to those who participated in seminar presentations of the paper given at the Institute forCommercial Law Studies at the University of Sheffield and at the University of Staffordshire. Of course,the standardcaveatsapply.

1 Privity of Contract: Contracts for the Benefit of Third Parties(Law Com Consultation Paper No121, 1991).

2 Privity of Contract: Contracts for the Benefit of Third Parties(Law Com No 242 Cm 3329 July1996) (hereafter, ‘the Report’).

3 The Report opens with Steyn LJ’s critical observations on the injustice of the privity principle inDarlington Borough Councilv Wiltshier Northern Ltd. [1995] 1 WLR 68, 76 — particularly to theeffect that ‘there is no doctrinal, logical, or policy reason why the law should deny effectiveness to acontract for the benefit of a third party where that is the expressed intention of the parties.’ Forfurther examples of judicial calls for reform, see paras 2.64–2.69 of the Report.

4 In para 2.63 (at note 163) of the Report, the Commission cites some 16 examples, starting withCorbin (1930) 46 LQR 12. The majority of the academic calls for reform to English law, however,lie in the last ten years (including our own initial calls in (1990) 10Legal Studies12 and (1991) 54MLR 48).

5 See para 1.6 of the Report.6 (1861) 1 B & S 393.7 SeeBeswickv Beswick[1968] AC 58.8 Dunlop Pneumatic Tyre Cov Selfridge and Co Ltd. [1915] AC 847, 853.

Thetaskof reformingsuchadiscrediteddoctrineasprivity, however,is far fromstraightforward.It is onething to condemnthedoctrineasunfair andinconvenient,but how is reform besteffected?Essentially,thereare two modelsas to how toproceed.9 According to the first model, in a climate that is no longer rigidlyformalistic,10 reliancemay be placedon the judiciary to relax orthodoxprivityrestrictionswherethey give rise to concern(so that a simpleenablingprovision–for example,of the kind proposedby the Ontario Law Reform Commission11 –explicitly authorisingthecourtsto exercisesucha discretionis all thatis required).The Commission,however, prefers a secondmodel, recommending(as in itsConsultationPaper)that a detailedlegislative schemeis required.The practicaladvantageof laying down a calculablelegislativeschemefor third party rights isobvious;moreover,the Commissionfearsthat it could be accusedof ducking itsresponsibilitiesif it left major questionsof principle to be settledby the courts.12

However, even in an ideal world, free of the pressureto deliver a politically‘sellable’ package,the challenge,asProfessorAndrew Burrowshasput it, is thefamiliar one of striking the right balance between the interestsof certainty(calculability) andflexibility (fairnessin the individual case).13 As might alreadybe apparent,the centrepieceof the proposedscheme,the testof enforceability,isanheroicattemptto compromisetheneedsof contractorsto beableto predictandto planwith theneedto reservesomedegreeof flexibility (conspicuouslysoin theprovisoto the secondlimb of the test).

Evenif we agreethata detailedlegislativeschemeis theright way ahead,thereremaincontroversialquestionsabouthow far, and how fast, we shouldproceed.For example, should the legislation make special provision for consumercontractorsalongthe lines currentlybeingdebatedin the EuropeanUnion?14 Or,shouldthelegislationtacklethevexedquestionof whethersub-contractexclusionsor restrictionsshouldbind a third-party head-contractor?15 In both instances,theCommissionprefers to keep thesequestionsat arm’s length and generally theCommission favours a cautious approach,putting to one side ‘more radicalpossibilities. . . for fearthatthecentralreformwouldotherwisebeendangered’16 –advancinginsteada packageof whatit perceivesto be‘relatively conservativeandmoderatemeasure[s]’17 calculatedto modify theprivity doctrinein a way thatwill

9 A third model invites incrementalrelaxationof the rule in specificcontexts— for example,aswasdonewith bills of lading(seetheBills of LadingAct 1855and,subsequently,theCarriageof Goodsby SeaAct, 1992:andseetheReport,paras2.59and12.7–12.11).However,if thereformof privityis to be of a generalnature,the incrementalmodel is not appropriate.

10 See,eg JohanSteyn, ‘Does Legal Formalism Hold Sway in England?’ (The 1996 PresidentialLecture to the BenthamClub, University College, London); Robert Stevens,‘Judges,Politics,PoliticiansandtheConfusingRoleof theJudiciary’ (HardwickeBuilding Lecture,London,21 May1996); and generally, see John Adams and Roger Brownsword, UnderstandingLaw (London:HarperCollins,1992;SweetandMaxwell, 1996)chs4 and5.

11 For discussion,seethe Reportparas5.5–5.6.12 Seeibid para5.6.13 ProfessorAndrew Burrows, ‘Reforming Privity of Contract: Law CommissionReport No. 242’

SPTL Annual Conference,Cambridge,11 September1996,especially1 and9.14 See EuropeanCommission,Green Paper on Guaranteesfor ConsumerGoods and After-Sales

Services, COM(93)509final, 1993;onwhich,seeStephenWeatherill,‘ConsumerGuarantees’(1994)110LQR 545.Most recently,seethedraft Directive on theSaleof ConsumerGoodsandAssociatedGuarantees,COM (95) 520 final, 1996; on which, seeProposal for a EuropeanParliament andCouncil Directive on the Sale of ConsumerGoodsand AssociatedGuarantees:A ConsultationDocument(Departmentof TradeandIndustry,18 September1996).And, for discussionof whetherthereshouldbea specialtestof enforceabilityfor consumers,seetheReportparas7.54–7.56.

15 Seeeg Morris v C.W.Martin and SonsLtd [1966] 1 QB 716; ThePioneerContainer[1994] 2 AllER 250 (notedby Phang(1995)58 MLR 422); andseediscussionin text below.

16 Seethe Report,para1.9.17 ibid para5.10.

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enjoy widespreadsupport.18 Accordingly, whilst some might think that theCommission’s proposalsare a bit unexciting, the progressiveview is that theyshouldbeseenasinitiating, ratherthanasplacingfinal limits upon,a programmeof modification to the privity doctrine.

The Underlying Principles: Three Background Reservations

In boththeConsultationPaperandtheReport,theCommissiontakesit asaxiomaticthatthelawshouldtracktheintentionsof thecontractingparties.AstheCommissionputs it, its recommendations ‘rest on an underlying policy of effectuatingthecontractingparties’ intentions.’19 Accordingly, if the contractorsintendthat theircontractshouldcreateanenforceableobligationin relationto a third party,thenthecontractshouldhavesuchathirdpartyeffect;if thecontractorsdonotsointend,thenthecontractshouldnot havesucha third partyeffect.However,if a third party isgrantedthe right to enforcea transaction, then the Commissionacceptsthat theinterests (and intentions) of the original contractorsare no longer the onlyconsideration– thepolicy of effectuatingthecontractors’intentionsis qualifiedbythe need to protect the third party’s ‘reasonableexpectationsof the promisedperformance.’20 In general, the Commissionseesthis as unproblematic,‘theintentionsof the contractingpartiesand the reasonableexpectations of the thirdparty[normallybeing]consistentwith eachother’;21 butwherethecontractorswishto vary or canceltheir contract,then(exceptionally) the interestsof thethird partymight haveto prevailoverthoseof thecontractingparties.22

TheCommission’s thinking, therefore,comprisestwo guidingprinciples:respectfor the intentions of the contractingparties; and respectfor the third party’sreasonableexpectations.Beforeweengagewith thedetailof therecommendations,it is as well to flag three backgroundreservationsthat we have about theCommission’sphilosophy.Thesereservationsconcern:(a) therelationshipbetweencontractual intention and the constitutive purpose of a transaction; (b) therelationshipbetweencontractualintention and prescribedtransactionalregimes;and(c) therelationshipbetweencontractualintentionandlegitimateexpectation.

ContractualintentionandconstitutivepurposeOur first reservationis promptedby the pervasiveideathat contractingparties,ifthey so wish, cansimply veto (or contractout of) a third party havinga right toenforce,andthattheycandothisevenwhere(in thelanguageof thesecondlimb oftheproposedtestof enforceability) ‘the contractpurportsto confera benefit’ on aparticular third party. Put shortly, our point is that if partiesA and B intend tocontractfor the benefitof C (that is, if the constitutivepurposeof the transactionbetweenA andB is to confera benefiton C), thenthe contractualintentionof AandB mustbethatanenforceableobligationis therebycreatedin favourof C, andit is notconsistentwith suchcontractualintentionfor A andB to purportto excludeC’s right to enforce– at least,it is not consistentif enforcementby C is the onlyway that the contractualobligationsarecapableof beinghonoured.18 Seeeg ibid para1.9: ‘Our generalapproachhasbeento devisemoderatereformproposalswhich can

be expectedto gain wide support.’19 ibid para1.8.20 Seethe Reportpara9.19.21 ibid para3.2.22 Seebelow 256–257.

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This reservationproceedsfrom whatwe taketo betheuncontroversialpropositionthat, when transactorsintend to contract (to assumecontractual undertakings),then (by definition) they intend to createenforceableobligations.In principle,transactorsmight intendtheir obligationsto beenforceablesimply inter se; or theymight intend that their undertakingsshouldbe enforceableat the suit of a thirdparty. What they cannot intend, however, is that their contract should beunenforceable.It follows that, where the constitutivepurposeof a contract(theraison d’etre of the transaction)is to confer a benefit on a third party, thecontractorscannotintend that the contractualundertakingin favour of the thirdparty should be renderedunenforceable.In other words, such contractorsmustintend that, if necessary,their contractualobligationsin favour of the third partyshouldbe enforceableat the suit of the third party.

We anticipatetwo questions.First, if thosewho contractin order to confer abenefiton a third partycannotsimply excludethe third party’sright to enforce,towhat extent can they regulatetheir relationshipwith the third party? Secondly,wherea contractis of potentialbenefit to a third party, is thereno way that thecontractorscanconfinetheir contractualobligationsinter se?

In responseto the first question,we needonly say that the contractorscanregulatetheir relationshipwith thethird partyin anyway thatis consistentwith theconstitutivepurposeof thecontract.So,for instance,weseenodifficulty aboutthecontractorsreservingthe right to vary or cancel their contract,or making it aconditionof enforcementby the third party that any avenuesof direct contractualrecoursefirst should be exhausted;and it might even be arguable that thecontractorsshouldbeableto stipulatethatthethird party’sright to enforceis to besubjectto veto by the party who hascontractedfor the third party’s benefit. Inessence,the contractorsare restrictedin just onerespect,that they cannotintendthat the third party should be deniedthe right to enforcewhere their standingcontractual undertakingsin favour of the third party will not otherwise beenforceable.

We can give a short answerto the secondquestion,while recognisingthat itraisescomplexmattersof interpretation.The shortansweris that the contractingpartiescanveto a third party’s right to enforcewherethe constitutivepurposeoftheir transactionis other than to confer a benefit on the third party.23 In otherwords, wherea contractis merely of incidental (or potential) benefit to a thirdparty, thereis no contradictionin thecontractorsdeclaringthat the third partyhasno right to enforce– thereis, so to speak,no contradictionbetweenthe parties’exclusionaryintentionsandtheir formationintentions.However,this glossesoverseveralnice pointsof interpretation.In particular,how do we decidewhethertheconstitutivepurposeof acontractis to conferabenefitona third partyor merelytocontractin a way that might be of benefit to a third party?24 And, do we takeexclusionarydeclarationsthat actually identify a third party as‘for the avoidanceof doubt’ provisionsdesignedto emphasisethat the constitutivepurposeof thecontract is not to confer a benefit on such a third party or, to the contrary,asevidencethat thecontractreally is intendedto confera benefiton thenamedthirdparty?Sufficeit to saythat,asthejurisprudenceof thesecondlimb of theproposed

23 Although, strictly speaking,such a veto is unnecessary— because,given the Commission’sproposals,sucha third party (evenif named)doesnot havea presumptiveright to enforceunderthesecondlimb.

24 cf Kit Barker,‘Are We up to Expectations?Solicitors,Beneficiariesandthe Tort/ContractDivide’(1994) 14 OJLS 137. The Commissiondraws extensivelyon Barker’s article in explaining itsproposalsin relationto third partyclaimsarisingfrom negligentwill-drafting: seetheReport,paras7.19–7.27;andseebelow 250–251.



test of enforceability unfolds, we might expect to see some answersto thesequestions.

What,then,is theimport of our reservation?By way of illustration,considerthesituation in Beswick v Beswick.25 Admittedly in Beswick the transactionalrelationshipbetweenthe nephewand the (third party) auntwasslightly unusual,in the sensethat the nephew’sobligation to pay the aunt was contingenton thedeathof theuncleandthesurvivalof theaunt.Nevertheless,Beswicksurelyis theparadigmof a transactionintendedto confera benefiton a third party.Now, let ussupposethat, in Beswick, the uncle and the nephewexpresslydeclaredthat thetransactionwas not to createany enforceableobligationsin favour of the aunt.What shouldwe makeof this?We might interpretthe declarationasa signalthattheuncleandthenephewweresimply not creatingcontractualobligationsof anykind. However,thisseemsanunlikely interpretation.Moreplausibly,therefore,wemight treat the uncle and the nephewas having createdcontractualobligationsinter se, while purporting to deny to the aunt a right to enforcethe nephew’spromise.Sucha denial,however,might be readin two waysasfollows:

(1) as a denial of any contractualundertakingin favour of the aunt (effectivelytreatingthenephewashavingmadea contractualpromiseto paytheuncleanda contingentnon-contractualpromiseto pay the aunt);or

(2) as a denial of any right on the part of the aunt to enforcethe contractualundertakingmadein her favour.

In our submission,the first readingis almostas implausibleas the view that theuncle and the nephew were not creating contractual obligations of anydescription,26 and the secondreadingcannotbe supportedbecauseit involves acontradictionof thevery ideaof a contractualundertakingin favourof theaunt.27

There is only one plausible interpretation. If the nephewgave a contractualundertakingto pay the aunt,andif the constitutivepurposeof the contractwastoconfera benefiton the aunt,thenthe contractingpartiescould not haveintendedthat the auntshouldbe deniedthe right to enforcein preciselythe circumstanceswherethe nephew’sobligationwastriggeredandwhere,failing the aunthavingaright to enforce,the contractwould be unenforceable.

Finally,wecanreturnto thecuefor ourfirst backgroundreservation.Accordingtothesecondlimb of theproposedtestof enforceability,wherea contractpurportstoconferabenefitonathird party,thethird party’spresumptiveright to enforcecanberebuttedbycontrarycontractualintention.Ourreservationis that,if weareguidedbytheCommission’sprincipleof respectfor contractualintention,this overstatesthecontractors’exclusionarypowers.Thecontractors,to besure,might arguethat theconstitutivepurposeof theirtransactionwasnottoconferabenefitonathirdparty,astheymight rely on certainexpressreservations(for example,of theright to vary orcancel).However,wheretheconstitutivepurposeof acontractis to conferabenefitonathirdparty,respectfor thecontractingparties’intentionsentailsnotonlythatthethird party hasa presumptiveright to enforcebut also that that right cannotbeexcludedwherethecontractwouldbeotherwiseunenforceable.

25 [1968] AC 58.26 Sucha meredeclarationof intent looks very much like a trap; and certainly the effect of sucha

transactionwould need to be presentedvery carefully to Mrs Beswick, otherwiseit would bearguablethat the nephewshouldincur liability for defeatingMrs Beswick’slegitimateexpectation.

27 On the facts of Beswick v Beswick, we can discount interpreting an exclusionaryveto as areservationof a right to vary or cancel,or asany otherkind of stipulationthat would be consistentwith the constitutivepurposeof the contract.



ContractualintentionandprescribedtransactionalregimesWhereasour first reservationoffersnochallengeto theCommission’spremisethatthe effect of a transactionshouldbe regulatedby the intentionsof the parties– itsimply spellsout what is involved in treatingthe parties’constitutivepurposesasgoverning– our secondreservationmakesno suchconcession.Rather,it assumesthat there is a place for transactions,the legal effect of which is fully or partlyprescribedby law; that is, the law specifiesthat particular typesof contract(orparticular typesof contractualprovision) involve certain legal effects,and suchprescribedeffectsobtain irrespectiveof contrary declarationsof intentionby thecontracting parties.28 Contractsof this kind come,so to speak,as packagesofstandardrights and obligations, with given third party effects, the particularpackagebeing prescribedby law rather than by the bespokestipulation of thecontractingparties.This is hardlya newidea,regulationof this kind beingfamiliarin manysettings– for examplein thecontextof consumersalescontracts,wherethedealerwhoelectsto enterinto sucha contracttherebyassumesvariousenforceableobligationsin favourof theconsumerpurchaser;it is familiar too in thecontextofvariousstatutoryexceptionsto theprivity rule(particularlywith regardto insuranceand carriageof goodsby sea); and this is the kind of proposalthat we havepreviously made for the treatmentof sub-contractsin contractualnetworks.29

Essentially,wherecontractsof this kind are in place,what mattersis the parties’intention to enter into a particular speciesof contract,not their (contradictory)intentionsoncetheyhaveenteredinto thegiven speciesof transaction.30

The concern arising from this secondreservationis not so much that theCommissionhasnotadoptedour favouredideaof contractualnetworks.Ratherit isa concernthat further consideration(particularly in the courts) of this kind ofdevelopmentin the law shouldnot be inhibited by the Commission’s caution.Itwould be unfortunateif the price to be paid for enacting the Commission’srecommendationswasgeneralacceptanceof the principle that the sovereigntyofcontractualintentionshouldtrump all other(moreradical)arguments.

ContractualintentionandlegitimateexpectationOur third backgroundreservationgoesto theheartof theCommission’sunderlyingphilosophy,to the questionof how we are to understandthe basisof contractualobligation. In our submission,contractual obligation ultimately rests on thelegitimate expectationsgeneratedby inter-agent transactions.31 From this, itfollows that the protectionof legitimate expectationneedsto be the organisingfocusfor anyreformof contractlaw, includingreformof theprivity doctrine.Our

28 In the caseof contracts that purport to confera benefiton a third party, the differencebetweenanintention-basedregime(as in our first reservation)anda prescribedtransactionalregime(as in oursecondreservation)is subtle.In the former, we contendthat the third party’s right to enforceis anentailmentof theparties’intentions(governedonly by the requirementof non-contradiction);in thelatter, evenif our analysisof contractualintention is incorrect,the law might still prescribea thirdparty right to enforce.

29 See,JohnAdamsandRogerBrownsword,‘Privity andthe Conceptof a Network Contract’ (1990)10 Legal Studies12; and Deryck Beyleveld and Roger Brownsword, ‘Privity, Transitivity andRationality’ (1991)54 MLR 48.

30 cf the excellentdiscussionby Simon Whittaker, ‘Privity of Contractand the Tort of Negligence:FutureDirections’ (1996)16 OJLS191.

31 SeeJohnAdamsandRogerBrownsword,KeyIssuesin Contract(London:Butterworths,1995).Forthe relevantdeeptheory, seeDeryck Beyleveld,The Dialectical Necessityof Morality (Chicago:ChicagoUniversityPress,1991).And for aninterestingcritiqueof prevailingtheoriesof contractualobligationseeRandyE. Barnett,‘A ConsentTheoryof Contract’ (1986)86 Col LR 269.



reservationhereis not that the Commissiondoesnot recognisethe importanceofprotectinglegitimateexpectations– or, at any rate,reasonableexpectation.Quiteclearly it does.However, the Commissionapparentlyaligns the protection ofreasonableexpectationwith theprotectionof third party interests.This generatesamisconceivedbalancingexercise,with theprincipleof respectfor theintentionsofthe contractorson one side and the principle of protecting the reasonableexpectationsof third partieson theotherside.However,if legitimateexpectationisthecornerstoneidea,it mustlie behind(andshape)theprincipleof respectfor theintentionsof the contractors,such that a correct appreciationof the balancingexerciseis to seeit as involving respectfor the legitimate expectations of bothcontractingpartiesandthird parties.In short,our concernis that the protectionoflegitimateexpectationshouldbeseenasthegoverningprinciple for theregulationof all phasesandaspectsof contracting,andnot simply as relevantto situationswherethereis a conflict betweenthe interestsof contractorswho wish to vary orcancel and the interestsof third parties who wish to protect their anticipatedbenefits.

SomePreliminary Issues

TheCommission’sReportcomprisesfour sections(A: Background;B: PreliminaryIssues;C: CentralReform Issues;and D: Summary),15 Parts,four Appendices,oneof which (AppendixA) hastheCommission’sDraft Contracts(Rightsof ThirdParties)Bill, anda total of 53 recommendations.We canpassfairly swiftly overthe first two Sectionsof the Reportin which the Commissionessentiallyoutlinesthe existing law, the casefor reform, and the form in which legislative reformshouldbe cast.However,threepreliminarypointsof someimportanceneedto beisolatedfrom theseopeningSectionsof the Report.Thesepointsconcern:(i) thescopeof thereform;(ii) extensionof thereform;and(iii) therelationshipbetweenprivity andconsideration.

The scopeof the reformIt is trite law thattheprivity doctrinehastwo dimensions,onepreventingsomeonenot party to a particular contract from taking its benefit, the other protectingsomeonenot partyto a particularcontractfrom burdenspurportedlyimposeduponthemby the agreementof the contractors.The generalconsensusis that the latterdimension,while not altogethersatisfactory,is lessurgentlyin needof reform. Inline with this view, theCommissiondeclaresthat its proposedreformsdo not seekto amendthe burdensideof the privity doctrine;32 and,in varioussectionsof theReport,the Commissionstopsshortof proposingreform preciselybecauseit seesitself in dangerof crossingthe line betweenthebenefitandtheburdensideof thedoctrine.Hence,for example,theCommission‘reluctantly’ decidesthatarbitrationand jurisdiction clausesmust lie beyondthe scopeof the reform becausesuchclauses‘do not lend themselvesto a splitting of the benefit and the burden’ (thethird party being‘burdened’by suchclauses).33

32 Seethe Reportpara2.1. For contractsfor the internationalcarriageof goodsby road and rail, orcargoby air, wherethe governinginternationalconventionsinvolve both third party benefitsandburdens,seeibid paras12.12–12.15andclauses6(2)(b) and6(3)(b) of the draft Bill.

33 ibid para14.18(andparas14.14–14.19),drawingon Lord Goff’s reasoningin TheMahkutai[1996]3 WLR 1. Similarly, seeparas8.12(the Commission’s‘recognitionthat a company’sright undera



How thoughshouldwe view thedistinctionbetweenbenefitsandburdens?As theCommissionnotedin its Consultation Paper,privity questions(which, of course,might arisein single-contractor multiple-contract(chainsandnetwork)settings)typically arisein oneor moreof the following four forms:34

(1) Where A and B make a contract for the benefit of C, can C enforce thecontract?(We cancall this kind of question,P1).

(2) CanC setup a defencebasedon the termsof a contractbetweenA andB inorder to answera claim (typically, in tort) broughtby A? (P2).

(3) CanC setup a defencebasedon thetermsof his own contractwith B in orderto answera claim (typically, in tort) broughtby A? (P3).

(4) WhereA and B contractfor the benefit of A, can A hold C to the benefitpromisedby B? (P4).

P1 is the paradigmaticform of the benefit question;and, sinceScruttonsLtd vMidlandSiliconesLtd,35 wethink of P2asanextensionof thissamequestion.P4isperhapsthe paradigmaticform of the burdenquestion(certainly in a casesuchasLord StrathconaSteamshipCo v DominionCoal Co).36 But, wheredoesthis leaveP3? In the Commission’s ConsultationPaper,it was not entirely clear how (orwhether)the dual intention test (the Commission’searlier test of enforceability)shouldbeappliedto P3questions;and,in theReport,theCommissionagainis lessthanexplicit in dealingwith this question.

At first impression,the logic of the Commission’sapproachappearsto be thatP3 questionsshouldfall outsidethe proposalsbecausethey seemto raiseburdenissues.37 However, in a later, extendeddiscussionof the boundary betweenbenefitsandburdens,the Commissiondistinguishesbetween‘imposing a burdenon the third party’ and‘conferringa conditionalbenefit’.38 Here,the thrustof thediscussionis that a contractingparty can set up a (burdensome)condition as adefenceto a third party claim, but not asa causeof action in its own right. Forexample,if a contractconfersa right of way to a third party on conditionthat thethird party keepsit in repair, failure by the third party to meet the repairingconditionwould be a gooddefencefor a defendantcontractorbut it would not bea ground for action against the third party.39 Significantly, the Commissioncontinues:40

A very importantexampleof a condition being attachedto the benefit enforceableby thethird party (C) is where in the contractbetweenA and B benefitingC, there is a clauseexcludingor limiting A’s liability to C. C’s right to enforceA’s promiseunderour proposedAct mustbe subjectto the exclusionor limitation clause.

Theseshort remarks,however,receiveno further elaboration.In principle, theexamplecould fit with a single-contract P1situation(andsuchsituationscertainly

pre-incorporationcontractmay be conditionalshouldnot be misconstruedaspermittingobligationsundera pre-incorporationcontractto be imposedon the company’)and 10.10(defences,set-offs,andcounterclaims).

34 SeeJohnAdamsandRogerBrownsword,‘Privity andtheConceptof a NetworkContract’(1990)10Legal Studies12. This typology wasadoptedby the Commissionin its ConsultationPaper(note1above).

35 [1962] AC 446.36 [1926] AC 108.37 Seeegpara2.1 of theReportandfootnote6 thereto.And in correspondenceProfessorBurrowshas

intimatedthat the proposalsareconcernedpurely with P1 andP2 questions,not with P3 or P4.38 ibid para10.25.39 ibid paras10.26–27.40 ibid para10.30.



tendto bulk largein the Commission’sthinking); or, it could fit with a multiple-contractP3 situation.Again, in principle, multiple-contractP3 situationsmightarisewhereA bringsa claim againstC in tort, or (if privity is relaxed)whereAbringsaclaim againstC for breachof thecontractbetweenB andC. GiventhattheCommissionintendsto avoid disturbing third party burdenquestions,we mustassumethat the proposalsdo not cover P3 situationswhere A brings a claimagainstC in tort. However,this leavesP3 situationswhereA’s claim is basedincontractand, here, the Commission’sremarksimply that, say, a sub-contractorcould setup a sub-contractexclusionor limitation asa conditionof a third partyhead-contractortaking the benefit by suing on the sub-contract,and that a thirdparty consumermight only be able to enforcea manufacturer’ssupply contractsubjectto themanufacturer’sexclusionsor limitations.Perhaps,then,theproposalsshouldbeunderstoodasconvertingP3situationsof this kind to P1situations,withthe relevantexclusionsor limitations being treatedas conditions to which thebenefitis subject.Whethersuchexclusionsor limitationsshouldthenbesubjecttoregulationunderthe Unfair ContractTermsAct 1977is an importantquestiontowhich we returnin duecourse.

Extensionof the reformClause6(1) of thedraft Bill providesthat thenewtestof enforceability‘is withoutprejudiceto any right or remedyof a third partywhich existsor is availableapartfrom this Act.’ This preservesthe many existing statutory and common lawexceptionsto the privity doctrine and, crucially, it opensthe way to judicialdevelopmentof third party rights.

Thus,in aninterestingreversalof reformingroles,insteadof thecourtsdecliningto reform the law on the ground that the matter should be left to the LawCommission,we find the Commissionreturningthe compliment:41

We shouldemphasisethatwe do not wishour proposedlegislation. . . to hamperthejudicialdevelopmentof third party rights. Should the Houseof Lords decidethat in a particularsphereour reform doesnot go far enoughand that, for example,a measureof imposedconsumerprotection is required or that employees(even though not mentionedin thecontract)shouldbe able to rely on exclusionclausesthat protect their employersunderadoctrineof vicariousimmunity, we would not wish our proposedlegislationto beconstruedashamperingthat development.

The case of employersand employeesis an important one, and it is worthunderlining. Under the Commission’s proposed test of enforceability, thedefendantthird party employeesin the well-known LondonDrugs42 casewouldnot be able to set up the main contractlimitation of liability – at any rate, theywould not be able to do so unlessthe contractreferenceto ‘warehouseman’ wasinterpretedlooselyto covertheemployees.43 Somemight think this anappropriatecaseto coverwith a bespokeexception(namely,that employeesarepresumedtobecoveredby theiremployer’sprotectivetermsevenif notexpresslydesignatedasbeneficiaries).Others,however,might think this too radical. The Commission’sresponseis to allow thecourtsto settlethematterif andwhenthequestionarises.

41 ibid para5.10.42 LondonDrugs Ltd v Kuehneand Nagel InternationalLtd (1992)97 DLR (4th) 261; on which, see

AdamsandBrownsword(1993)56 MLR 722.43 Accordingto theCommission,theapproachadvocatedby themajority in LondonDrugs is ‘a radical

one and would appearto go beyondour proposedreform by allowing an employee,even if notexpresslyidentified in the exclusionclause,to rely on it’: seethe Reportpara2.67, footnote178.



The Commission’srelianceon the courtsis evident,too, in severalotherpartsoftheReport.Forexample,theextentof thecontractingparty’sremediesonbehalfofthe third party is left to ‘the evolving commonlaw’ in this area;44 the potentialabsurdityinherentin clause8 of thedraft Bill, accordingto which a joint promiseewho hasnot providedconsiderationis not to be regardedasa third party for thepurposesof the reform, is onethat theCommissionconfidentlyexpectsthecourtsto avoid;45 the Commissionalso looks to the courts to mitigate any unfairnessresultingfrom its controversialproposal(which we discussbelow)46 not to extendthe applicationof the Unfair ContractTermsAct 1977to defencesraisedagainstthird partyclaimants;47 andpresumablythecourtscanbetrustedto develop‘moreradicalconsumerprotectionmeasures’48 shouldthe needarise.

The relationshipbetweenprivity andconsiderationIn the Consultation Paper,the Commissiontook the view that the relationshipbetweenprivity and considerationis largely unproblematic– the considerationrequirementrelatesto whetherthere is an enforceablebargain(a contract); theprivity doctrinedetermineswho is permittedto enforcethecontract.49 However,inthe Reportthe matteris reviewedat somelength,PartVI beingdedicatedto thisquestion.

At one level, the discussionis relatively straightforward. If the new test ofenforceabilityis to makeany practicaldifference,it mustbe understoodthat theconsiderationrequirementdoesnotdisqualifythethird party’saction.Accordingly,if theconsiderationrequirementis expressedastherequirementthat‘considerationmustmovefrom thepromisee’this mustnot be readas‘considerationmustmovefrom the (third party) plaintiff’ – otherwisethe test of enforceabilitywould benullified. In otherwords,providedthatlocutionssuchas‘considerationmustmovefrom thepromisee’areunderstoodto relateonly to thequestionof whetherthereisanenforceablebargain,andnot to thequestionof whomayenforceanenforceablebargain,theavenuesof the reformshouldbekept clear.

At anotherlevel, however,thediscussionis ratherpuzzling.For havingsatisfieditself that the considerationrequirement is distinguishablefrom the privityrequirement,the Commissionthen suggeststhat the proposedrelaxationof theprivity doctrineraisesadeeperpolicy questionby implying a relaxation,too,of theconsiderationrequirement.50 At first blush, the ensuingdiscussionof the deeperquestionis strangein two respects:first becauseit seemsto neglectthedistinctionbetweenconsiderationandprivity alreadydrawn;andsecondlybecauseit makesno mentionof the relaxationof considerationalreadyeffectedin the recentcase-law.51 Suchrecentcase-lawmight well justify theCommission’sconclusionthat itis perhapstime to undertakea separatereview of the doctrineof consideration;52

but it is not clear that the privity proposalsnecessitatesucha review.

44 Seethe Reportpara5.15.For the evolving commonlaw seeTheAlbazero[1977] AC 774; LindenGardensTrustLtd v LenestaSludgeDisposalsLtd [1994]1 AC 85;andDarlingtonBoroughCouncilv Wiltshier NorthernLtd [1995] 1 WLR 68.

45 Seethe Reportpara6.11.46 See258–263.47 Seethe Reportpara13.10(iv).48 ibid para7.55.49 Note 1 aboveparas2.5–2.10.50 Seethe Reportpara6.13.51 Moststrikingly, of course,in Williamsv RoffeyBrosandNicholls(Contractors)Ltd [1990]1 All ER

512 (notedby AdamsandBrownsword(1990)53 MLR 536).52 Seethe Reportpara6.17.



The Commission’s reasoningon the deeper policy question runs along thefollowing lines: (i) theproposedright to enforceputsa third partybeneficiaryin abetterposition thana gratuitouspromisee;(ii) neitherthe third party beneficiarynor the gratuitouspromiseeprovidesconsideration;therefore(iii) the proposalmustinvolvearelaxationof theconsiderationrequirement.However,providedthatwe stick to the Commission’sview in the ConsultationPaper,this reasoningisflawed. Quite simply, the considerationrequirementis material only to thequestionof whethera promiseis contractuallyenforceable;if thepromisethat thethird partyis permittedto enforceis partof acontract(supportedby consideration),there is no weakening of the considerationrequirement.The Commission’sproposalsbroadentherangeof eligible plaintiffs who mayenforcea contract;theydo not redefinewhat countsasa contract.

Yet, is this an overly simplistic view? Despitethe conventionalwisdomthat adistinction can be drawn, at a formal level, between the requirement ofconsiderationandtheprivity doctrine,theCommissionapparentlysensesthat thismaybesomewhatsuperficial– and,no doubt,this explainsthetensionunderlyingthe discussionin this part of the Report.To illustrate the deeperproblem, theCommissionsuggeststhehypotheticalcaseof a contractfor thesaleof a car fromB to A, with A intendingto give thecar to C. Now, considerthesetwo variationson the basicsituation:

(i) A, havingmadethecontractwith B, gratuitouslypromisesto give thecarto C;and

(ii) A setsup thecontractwith B in sucha way thatC will havea right to enforceunderthe proposedtestof enforceability.

In (i), C hasno right to hold A to his promise;but in (ii) C hastheright to enforcethepromise(which would bea contractualpromisemadeby B) to deliver thecar.The Commission observes that, as a matter of justice, the cases seemindistinguishable.If, for the sake of argument,we allow that the casesareindistinguishable,neverthelesswecouldbecharacterisingthesituationin two verydifferentways.Wecouldbesaying:(a) thatthecoreof thesituationis theexistenceof anenforceablebargainbetweenA andB; (b) thatA’s gratuitouspromiseto C insituation(i) is anincidentof thebargainbetweenA andB; (c) that,in situation(i),C is really trying to enforcean incident of the contractbetweenA and B; fromwhich it follows (d) that the only questionis a privity question,namelywhy Cshouldbeableto enforcethecontract(betweenA andB) in situation(ii) but not insituation(i). Alternatively,wecouldbesaying:(aa)that,in thecontextof situation(i), C is trying to enforceA’s gratuitouspromise;(bb) that, in situation(i), A’spromiseto C is independentof thecontractbetweenA andB; but (cc) that thereisnoobviousreasonwhy thelaw shouldnotholdA to hispromise(albeitgratuitous);in which case(dd) thequestionraisedby situation(i) is a considerationissue.

Thereis muchmorethat could be saidaboutthis hypothetical exampleandtheissuesit raises.However, here it must suffice to say that the Commission’sthinking on privity has brought it to a point at which it sensesthat, in somecontexts,53 there is no good reasonfor refusingto treat a gratuitouspromiseascontractually enforceable. Although we are not entirely clear about theCommission’s reasoningin arriving at this view, we haveno doubt that the end

53 ibid para 6.17, where the Commissioncites documentaryletters of credit, compositionswithcreditors,andsituationscoveredby promissoryestoppelasexamplesof contextsin which the lawalreadytreatsgratuitouspromisesascontractuallybinding.



point of the reasoningis correct. Accordingly, we welcomethe Commission’ssuggestionthat a review of the dotrineof considerationmight be timely.

Central Reform Issues

SectionC of the Reportdealswith the centraldoctrinal issuesto be addressedbythereform.We canconcentrateon threemajor issues:(i) thetestof enforceability;(ii) the contractors’ right to vary or cancel their contract (and the proposedcrystallisationtest);and(iii) theavailability of defences(includingdefenceswhichmight be opento challengeunderthe Unfair ContractTermsAct 1977).

The testof enforceabilityThecentrepieceof theproposedreformis the testof enforceability.In clause1(1)of the draft Bill, a third party is given the right to enforcea contractif

(a) the contractcontainsan expressterm to that effect; or(b) [subjectto clause1(2)] the contractpurportsto confera benefiton the third party.

According to clause1(2), the secondlimb of the test (ie the teststatedin clause1(1)(b))

doesnot apply if on a properconstructionof the contractit appearsthat the partiesdid notintendthe contractto be enforceableby the third party.54

To takeadvantageof theseprovisions,the third party (asclause1(3) stipulates)

mustbeexpresslyidentified in thecontractby name,asa memberof a classor asansweringa particulardescriptionbut neednot be in existencewhenthe contractis enteredinto.55

Wherethe test of enforceabilityis satisfied,the third party hasthe full rangeofremediesavailableto a plaintiff contractingparty,with thenormalrulesrelatingtoremotenessandmitigation,andthelike, applyingby analogy.56 Finally, clause1(5)makesit clearthat referencesto a third partyenforcinga contractincludethethirdparty ‘availing himself’ of exclusionsor limitations of liability.

At first glance,the import of theseprovisionslooks pretty straigthforward. Aswe remarkedat the outset,in a casesuch as Tweddlev Atkinson,57 where thecontractorsexpresslyprovidefor a namedthird party to havethe right to enforcethecontract,thefirst limb of thetest(clause1(1)(a))applies– andthis is soevenif,unlike in Tweddlev Atkinson, the contractdoesnot purportto confera benefitonthe third party.58 If the contractorsdo not expresslyprovide for the third partyhavingtheright to enforcethecontract,butclearlyintendto conferabenefiton thethird party(as,say,in Beswickv Beswick),59 thenunderthesecondlimb of thetest(clause1(1)(b)) the third party will havethe right to enforcethe contract– at anyrate, the third party will have this right subject to the proviso in clause1(2).Similarly, in morecomplexcontractualsituationsof the kind encounteredin such

54 cf section 4 of the Contracts (Privity) Act 1982 (New Zealand), which is the sole test ofenforceability in the New Zealandstatuteand which closely resemblesthe secondlimb of (andprovisoto) the Commission’sproposedtest.

55 For discussionof the issuesunderlyingthe designation,existence,andascertainabilityof the thirdparty, seePartVIII of the Report.

56 Seeclause1(4) of the draft Bill.57 (1861)1 B & S 393.58 For discussion,seethe Reportparas7.12–7.16.59 [1968] AC 58.



leadingcasesasScruttonsLtd v Midland SiliconesLtd60 andTheEurymedon,61

the defendantstevedorethird parties will be able to rely on exclusions orlimitations in the carriagecontractif the right to enforce62 is expresslygranted(under the first limb) or if the relevantprovisionsof the carriagecontractaredesignedto confera benefiton the stevedoresand,on its properconstruction,thecarriagecontractdoesnot negativethe third party having a right to enforcetheterms(underthe secondlimb andthe proviso).

Wemightalsothink thatclause1 gives,via thesecondlimb of thetest,aWhitevJones63 right to a disappointed third party legatee(ie a right to suea negligentsolicitor for breachof contract).This,however,is not theCommission’s intention.In anextendeddiscussionof this matter,theCommissionexplainsthat it regardsitas somethingof a distortion to characterisea contractbetweena testatorand asolicitor asoneintendedto confera benefiton a third party– and,of course,giventhe Houseof Lords’ openingof a tortious line of relief in White v JonestheCommissionseesno pressingpractical urgencyto encouragesuch distortion.64

Thus:

It is our view, therefore,that thenegligentwill-drafting situationoughtto lie . . . just outsideour proposedreform.It is anexampleof therarecasewherethethird party,albeitexpresslydesignated‘asabeneficiary’in thecontract,hasno presumedright of enforcement.Indeeditis arguablethat,by merelyadjustingthewordingof thesecondlimb to includepromisesthatare ‘of benefit to’ expresslydesignatedthird parties,ratherthanthosethat ‘confer benefitson’ third parties,we would have brought the negligentwill-drafting situation within ourreform. But we believe that thesewords draw a crucial distinction betweenthe situationwhereit is naturalto presumethat the contractingpartiesintendedto confer legal rights onthe third party andthe situationwherethat presumptionis forcedandartificial.65

Now this is particularlyinstructive.To block thethird party’sright in thenegligentwill-drafting situation,theCommissionmighthavebeenexpectedto havereliedontheprovisowritten into clause1(2)– onthebasisthat,normally,thepresumptionisthat a testatorand his solicitor do not intend the contractfor professionallegalservicesto be enforceableat the suit of a beneficiary (a presumptionthat thecontracting parties might seek to re-inforce by explicit declaration). Instead,however,the Commissionprefersto deal with this by signalling that the phrase‘purports to confer a benefit’ in clause 1(1)(b) has been carefully chosenspecifically to excludeWhitev Jonesplaintiffs. In this way, the Commissionnotonly avoidsany doubt; it avoidsprovokingour reservationthat, wherecontractsare madefor the benefitof third parties, the principle of respectingcontractualintentionshouldnot operateasan unqualifiedlicenceto excludethe third party’sright to enforce.

As thecodedexclusionof Whitev Jonesplaintiffs reveals,theapplicationof thetest of enforceabililty is not entirely straightforward. For one thing, as weforeshadowedin our backgroundreservations,thereareboundto beproblemswiththeapplicationof adistinctionbetweencontractsthatpurportto conferabenefiton

60 [1962] AC 446.61 NewZealandShippingCo Ltd v A.M. Satterthwaiteand Co Ltd [1975] AC 154.62 Theideaof ‘enforcing’ anexemptionor limitation clausemight seema straineduseof thelanguage.

However,as the explanatorynotesto the draft Bill state,the purposeof clause1(5) is to make‘itclear that the Bill is to apply so as to entitle a third party to take advantageof an exclusionorlimitation clause,aswell as to enforce‘‘positive’’ rights.’

63 [1995] 2 AC 207.64 Seethe Reportparas7.19–7.27.65 ibid para7.25.



a third partyandthosecontractsthatsimplyareof potentialbenefitto a third party.To someextent,theproblemis easedby the requirementthat the third partymustbe expresslyidentified; and the Commissionhasalreadyclassifiedcontractsforprofessionalservices(at least,in the contextof negligentwill-drafting) asmerelyof potentialbenefit to a third party. Nevertheless,difficult casessurelywill arisefor decision;66 andit will beinterestingto seenot simply how suchdifficulties areresolvedin particularcasesbut alsohow far thecourtsareableto maintaina clearline betweenthequestionof whetherthecontractpurportsto confera benefiton athird party andthe questionof whetherthe contractorsintendedto createlegallyenforceablerights in favourof a third party– thepoint beingthatdraftsmenmightattemptto signalthata contractis not intendedto confera benefiton a third partyby providingthat it is not intendedthat third partiesshouldhavea right to enforcethe contract.

This fairly obviousdifficulty apart,thereare,in our view, threemajoraspectsofthe testof enforceabilitythat invite clarification. First, in relation to clause1(2),how significant is it that the contractingpartiesdo not draft the contractin a waythatgivesthethird partybeneficiarya directright to enforceunderthefirst limb ofthe test?Secondly,what precisely is the default position under clause1(2) inrelation to the rebuttalof the presumptionof enforceability(and,concomitantly,which featuresof the contractualmatrix might be material for the purposesofrebuttingthepresumption)?And, thirdly, whererelianceis placedonstandardheadcontractexclusionsand limitations of liability for the benefit of sub-contractors,arewe to treatthis asanargumentunderthe first or thesecondlimb of the testofenforceability?

With regardto the first of thesequestions,consideragainBeswickv Beswick.There,althoughthe contractbetweenold PeterBeswickandhis nephewdid notgive Mrs Beswick(thethird party)a directright to enforce,theintentionwasquiteclearly to confer a benefit (in the form of an annuity) on Mrs Beswick. TheCommissionpresentsthis asa casewherethesecondlimb would applyto give thethird party‘a presumedright of enforceability’.67 But, whatof theprovisoin clause1(2)?Accordingto the Commission:68

This presumption[of enforceability]couldonly berebuttedif thenephewcoulddemonstratethat,on the properconstructionof the contract,he andold Mr Beswickhadno intentionatthe time of contractingthat Mrs Beswickshouldhavethe right to enforcethe provision.Inour view, the nephewwould not be able to satisfy that onusof proof so that Mrs Beswickwould havethe right of enforcement.

Given our background reservations,the Commission’s interpretation of theparticularfactsof Beswickv Beswicksurelyis compelling.However,if (notwith-standingour reservations)a third party’s presumptiveright to enforce can berebutted,it is important to know what weight (if any) a court might give to thecontractors’failure to provide for a direct right to enforcein favour of the thirdparty (ie a failure to invoke the first limb of the testof enforceability).Accordingto theCommission,therebuttalof thepresumptionin favourof a third party(underthesecondlimb of the testof enforceability) involvesanobjectiveconstructionofthecontract,particularlylooking at thetermsof thecontractor someotherfeature

66 SeetheReportpara7.41for thedistinctionbetween(in text) a contractof salein which goodsaretobedeliveredto a third party(arguablya contractto confera benefiton a third party)and(in footnote31 thereto)sucha contractwithout delivery to a third party (arguablymerelya contractof potentialbenefit to a third party).

67 ibid para7.46.68 ibid.



of the contractualmatrix.69 In principle, a contract might (a) declare that aparticularthird partyis intendednot to havetheright to enforce,or (b) declarethata particular third party is intendedto have the right to enforce,or (c) leave itunclearwhethera particularthird party is intendedto havethe right to enforce.If(again,notwithstandingour reservations)we follow the Commission’sapproachwhereby‘[a] promisorwho wishesto put the positionbeyonddoubtcanexcludeany liability to the third party that he might otherwisehave had’,70 case(a) isstraightforward. Case(b) is alsoplain – this is theway to draft thecontractunderthe first limb of the testof enforceability.Case(c), however,is the problem;andthe difficulty is compoundedwhere the law leaves it unclear whether thecontractors’failure explicitly to declarethat the third party is intendedto havetheright to enforceis neverto countagainstthe third party or may sometimescount(and,if so,in whatcircumstances).It seemsunlikely that theCommissionintendsto excludealtogetherthe relevanceof sucha failure. After all, if the contractorsdraft their agreementwith legaladviceandif somethird partybeneficiariesbutnotothersaregiven a direct right to enforce,this invites the view that the contractorsdid not intendthelatterbeneficiariesto havetheright to enforce(eventhoughsucha negativeintention wasnot explicitly declared).If, however,the Commission’sintentionis that the contractors’failure explicitly to declarethat the third party isintendedto havetheright to enforceis neverto countagainstthe third party (ie isneverto assistthedefendantin rebuttingthepresumptionunderthesecondlimb),thenthe legislationshouldmakethis clear.

Thesecondpoint of clarificationconcernsthedefaultpositionunderclause1(2)(in relation to the rebuttal of the presumptionof enforceability).The draft Billgivesno guidancehere.However,thetenorof theReportis that,in general,onceathird party hasshownthat the contractpurportsto confera benefit (asper clause1(1)(b)), then a presumptiveright to enforcearisesand the onus shifts to thedefendant(under clause1(2)) to rebut the presumption.71 Moreover, ProfessorBurrowshassuggestedthat,althoughtheReport(let alonethedraft Bill) doesnotspell this out, the presumptionin favour of the third party ‘is a strongone’, notnormally to be rebutted

unlessthereis a term in the contractexpresslynegatingthe third party’s legal rights,or anexpresstermthat is otherwiseinconsistentwith the third partyhavinglegal rights,or unlessthe partieshaveenteredinto a chainof contractswhich gives the third party a contractualright againstanotherparty for breachof the promisor’sobligationsunderthe alleged‘thirdparty’ contract(as for exampleis presentlythe position in the constructionindustry).72

The latter point is important,for oneof the Commission’sprimary concernsis toallay the fearsof theconstructionindustrythat theproposedreformof privity willre-opensub-contractors’ liability after the fashionof Junior Books.73 Thus, in atelling sectionof the Report,the Commissionstates:74

[E]ven if there is no expresscontractingout of our proposedreform, we do not seeoursecondlimb ascuttingacrossthechainof sub-contractsthathavetraditionallybeena featureof [the construction]industry.For example,we do not think that in normalcircumstancesanownerwould beableto suea sub-contractorfor breachof thelatter’scontractwith thehead-contractor.This is because,evenif thesub-contractorhaspromisedto conferabenefiton the

69 Seeibid paras7.18(iii) and7.28 wherethis minimal guidanceon the proviso is offered.70 Seeibid para7.18(iii).71 Seeeg ibid para7.17.72 n 13 above.73 Junior BooksLtd v Veitchi Co Ltd [1983] 1 AC 520.74 Reportpara7.18(iii).



expresslydesignatedowner,the partieshavedeliberatelysetup a chainof contractswhichare well understoodin the constructionindustry as ensuringthat a party’s remedieslieagainstthe othercontractingparty only . . . On the assumptionthat that deliberatelycreatedchain of liability continuesto thrive subsequentto our reform, our reform would not cutacrossit becauseon a properconstructionof the contract– construedin the light of thesurroundingcircumstances(that is, the existenceof the connectedhead-contractand thebackgroundpracticeandunderstandingof theconstructionindustry)– thecontractingparties. . . did not intendthe third party to havethe right of enforceability.

TheCommissiongoesonto saythat,for similar reasons,thesecondlimb of thetestwould not normally cut acrosschainsof salescontractsto give a purchaserofgoodsfrom aretailera right to enforceamanufacturer’squality promises.75 Ontheotherhand,the Commissionimplies that the positionmight be different whereBpurchasesgoodsfrom retailerA, makingit clearthatthegoodsarebeingpurchasedas a gift for C (and with delivery to be direct to C).76 Here, the CommissionsuggeststhatC might havea contractualclaim againstA for breachof thequalityundertakings(although it qualifies this by saying that such a claim would besubjectto rebuttalby A underthe proviso).77 What arewe to makeof this?

One view is that we need not try to make anything of it at all. What theCommissioncollectively thinks, or what individual Commissionersmight think,matters little once the legislation is put into circulation. From that point on,assumingthat the Bill is enactedin its presentform, the courts(with or withoutassistancefrom Pepperv Hart78) will glossthestatutoryframeworkastheyseefit.Anotherview is that,althoughtheBill leavestheoperationof clause1(2) unclear,theCommission’s fall-backpositionis thatthepartiescanalwayscoverthemselvesby expressprovision (and,perhaps,shouldbe encouragedto do so). Thus, if thecontractorsdonot intendthethird partyto havetheright to enforce,theycansimplysay so and the presumptionwill be rebutted.Alternatively, if the contractorsdointendthethird partyto havetheright to enforce,theycansaysoandtherebyinvokethe first limb of the test of enforceability.Neither of theseviews, however,willsatisfythosewho want to know wherethey standat the time of enactmentratherthan after somelater litigious engagement– nor, of course,doesit assuageourconcernthatweshouldbecarefulwith theideathatpartiesarefreeto contractoutofthe reformswheneverit suits them.The Commission,it seems,hastried to givesome‘unofficial’ guidanceon this matterin theReport,but it looksratherad hoc.On theonehand,wearegivento understandthat,in acaselike Beswickv Beswick,thepresumptionin favourof the third party is strong,andthecontractorpromisorwill noteasilybeableto rebutit (andcertainlynotby simplypointingto theabsenceof a termexplicitly giving thethird partytheright to enforce).Ontheotherhand,ina caselike Junior Booksv Veitchi, the presumptionin favourof the third party isweak (and, presumably,in this context, the fact that the contractorshave notexplicitly giventhethird partya right to enforcewill countagainstthethird party).Quite apartfrom our backgroundreservations,doesthis not look like onerule forvulnerablethird partybeneficiariesandanotherrule for theconstructionindustry?

If the operationof clause1(2) is to be transparent,it will not do to haveundiscloseddefaultrulesthatvary from onecontextto another.Now, asProfessor

75 ibid.76 cf ibid note 31 on page89: if delivery is not to be direct to C, theremight be somedifficulty in

showingthat the contractof salewasintendedto confera benefiton C. (Seenote66 above).77 SeetheReportpara7.41(illustrativeexample14); cf, too, note14 above.And quaere: if thesecond

limb doesnot normally cut acrosschainsof salescontracts,would the proposalsenablethe thirdparty in Donoghuev Stevenson[1932] AC 562 to enforcethe salescontractagainstthe retailer?

78 [1993] AC 598 (notedby Miers (1993)56 MLR 695).



Burrowshasintimated,onesignificantconsiderationis whetherthethird partyhasa standardavenueof contractualrecoursewithout leapingacrosscontracts.Thiscertainly suggestsone ground for distinguishing between claims made bycontractorsin the constructionindustryandclaimsmadeby third partiessuchasMrs Beswick,for, other thingsbeingequal,whereascontractorsin networksandchains have such contractual recourse, free-standing third parties do not.Transparency,therefore,might be promotedif the Bill were to provide that theexistenceof an alternativecontractualrecoursewill normally count againstanypresumptionin favourof thethird party(although,onourview, theright to enforcemustremain,at the very leastasa last resort).

Turningto the third point of clarification, thequestionis whetherstandardheadcontractexclusionsandlimitationsof liability for thebenefitof third partiesaretobe read as conferring a right to enforceunder the first limb of the test or asconferring a benefit under the secondlimb of the test. In its relatively briefelaborationof the first limb of the test, the Commissionseemsto treat suchprovisionsasconferringa direct right to enforce.Thus,we read:79

In our view, [the first limb] would . . . coveran exclusion(or limitation) clausedesignatingthird parties(eg ‘C shallbeexcludedfrom all liability to A for damagecausedin unloadingthe goods’) becausean exclusionclause,as a legal concept,hasno meaningunlessit isintendedto affect legal rightsand,wherethe third party is expresslydesignatedasa personwhoseliability is excluded,theplain meaningof theexclusionclauseis thatthethird partyisto have the benefit of it without having to rely on enforcementby the promisee. . . Ofcourse,evenexpresswords sometimesgive rise to questionsof interpretation. . . but thegreatmerit of this limb of the test is that it shouldgive rise to very few disputes.

This, we suggest,is persuasive,for it seemsimplausiblethat, in a commercialcontext,anexclusionor limitation clausedraftedin favourof a third partycouldbeof any practical significance without being enforceableby the third party.Nevertheless,it will be observed that, in the passagequoted above, theCommissiondrifts into languagethat fits betterwith the secondlimb (the thirdpartyhavingthebenefitof theexclusionwithout havingto rely on enforcementbythepromisee)andthepossibilityof questionsof interpretationarisingis conceded.

WhentheCommissionproceedsto its extendeddiscussionof thesecondlimb ofthe test of enforceability, any lingering doubts about the characterisationofexclusionsandlimitations arenot removed.In fact, althoughmuchof themodernlitigation about privity has arisen in the context of contractualnetworks andprotectiveclauses,the Report follows the patternof the ConsultationPaperinfocusingon the position of the third party beneficiaryin the settingof a singlecontract.It is truethat theReportdeclaresthat theproposedreform‘would permitcontractorsand clients straightforwardly and uncontroversiallyto extend thebenefit of exclusionclausesin their contractsto employees,sub-contractorsandothers.’80 Yet, only two of theCommission’s17 illustrativeexamplesapproachthepoint at issue;81 andonly the Trident82 casein the Commission’ssampleof ‘themost celebratedcaseswhere the third party rule has causeddifficulty’ 83 getsanywherenear to this kind of network dispute.In the first illustrative example(hypothetical case 16 in the Report), B’s standardform of building contractcontainsa clausethat purports‘to excludethe liability to its clientsof all agents,

79 Seethe Reportpara7.10.80 ibid para3.20.81 ibid paras7.28–7.44.82 Trident GeneralInsuranceCo Ltd v McNieceBros Proprietary Ltd (1988)165 CLR 107.83 Seethe Reportpara7.45.



servants,employeesandsubcontractors engagedby B & Co. in theperformance ofthe contractworks for any lossanddamageoccasionedotherthanthroughwilfulmisconduct.’84 Onthehypothesisedfacts(whichneednotconcernus),thequestionariseswhetherMr C, asurveyoremployedby B in pursuitof acontractwith A, willbe permittedto rely on B’s standardform exclusionin an action for professionalnegligencebroughtagainsthim by A. The Commission’s responseis thus:85

Mr C would succeedunderthefirst limb of our testor, on thebasisthat theexclusionclauseis a promise to confer a benefit (the exclusionof liability) on Mr C, who is expresslyidentified by class,underthe secondlimb.

Clearly, Mr C would want the first limb to apply. Equally clearly, however,Awould want the issueto be treatedas a secondlimb questionbecause(on theCommission’sown reasoning)A would then have the opportunity to rebut thepresumptionin favour of Mr C.86

In asecondillustrativeexample(hypotheticalcase17 in theReport),B, acarrier,contractswith a client A on the basisthat the valueof packagesis ‘deemedto benot over£100unlessotherwisedeclared.’87 B sub-contractsto C, who negligentlylosesA’s package(worth £1,000).The questionis whetherC is permittedto relyon the deemedvalueexclusionin responseto A’s claim in negligence.Here,theCommission offers a compelling reason (relative to its proposed test ofenforceability)88 why C would not be permittedso to rely:89

C hasno rights to enforcethe ‘deemedvalue’ clauseunderour proposalsbecauseC hasnotbeenexpresslyidentifiedasa beneficiaryof thatclause.Nor hasC beenexpresslygiventheright to enforcethe clauseunderthe first limb of the testof enforceability.

Suppose,though,that the deemedvalueclausehadbeenexpressedto be equallyapplicableif B employedsub-contractors,therebycancellingout theCommission’sessentialreasonfor denyingC. Would theCommissionstill arguethatC hadbeengivenno right to enforcetheclauseunderthefirst limb? Again, it would bein C’sintereststo presentthe caseasfalling underthe first limb andit would be in A’sinterestto presentit asa secondlimb question.

Grantedthat the characterisation of standardform exclusionsandlimitations isnot entirelyclear,it might bearguedthat furtherclarification would beunhelpful.TheReportgenerallyencouragesa presumptionthatexclusionsandlimitationsareto be dealtwith underthe first limb; and,if draftsmenwish to be absolutelysafe,theycanalwaysadoptanexplicit form of words– for example,by usingwordstothe effect that the third partiesmentionedin particularexclusionsandlimitationsare to be treatedashavingthe right to enforcesuchtermswithin the meaningofclause1(1)(a) (ie the first limb of the test of enforceability).However, if thelegislationneithersignalstheproblem,noroffersguidance,wemayfind thata nodand a wink from the Commission leads to old problems concerning thecharacterisationof protective provisions – with shadesof rules of law versusprinciplesof construction– beinggiven a freshtwist.90

84 ibid para7.43.85 ibid.86 A point that the Reportomits to mentionin this particularillustrative example.87 Reportpara7.44.88 Relativeto other criteria, this reasoningmight look like lesscompelling.After all, A and B have

apportionedtheinsurancerisks;and,if C cannotrely on the‘deemedvalue’ clause,A’s insurerturnsout to be the third party beneficiary.

89 Reportpara7.44.90 cf Brian Coote,ExceptionClauses(London:SweetandMaxwell, 1964).



The contractors’right to vary or canceltheir contract(andthecrystallisationtest)The questionof whethercontractors,having conferreda right to enforceupon athird party,shouldthenbeableto vary or canceltheir agreement(to thedetrimentof the third party)wasoneto which the consultationexerciseproducedno agreedanswer.At oneextreme,the Commissionrejectsthe view that contractingpartiesshouldbe allowedto vary or cancelat any time:91

At the core of this issueis a conflict betweenpreservingthe freedomof the contractingpartiesto implementtheir intentionsasthey seefit at any particulartime, andallowing thecreationof effectivethird party rightsso that a third party canarrangeits affairs with somecertainty.We considerthat the former policy is outweighedby the latter.

At the otherextreme,the Commissionrejectsas too restrictivethe view that thecontractingpartiesshouldbedeniedanyright to vary or cancel– afterall, thethirdparty may not even be aware of the original contract.92 In the event, thecompromisebetweenthecontractors’freedomto changetheir mindsandthe thirdparty’s interestsis struck in clause2 of the draft Bill. According to clause2(1),wherea contractis enforceableby a third party, the contractorsmay not withoutthe third party’s consentvary or cancelin the following threesituations:

(a) [if] the third partyhascommunicatedhis assent[‘assent’beingdefinedin clause2(2) ascoveringboth wordsandconduct]to the contractto the promisor;(b) [if] the promisoris awarethat the third party hasrelied on the contract;or(c) [if] thepromisorcanreasonablybeexpectedto haveforeseenthat the third partywouldrely on the contractandthe third party hasin fact relied on it.

The strengthof initial contractualintent, however,is preservedby clause2(3) ofthe draft Bill, which reservesto the contractorsthe right expresslyto provide:

(a) that [the contract]shallbecapableof cancellationor variationwithout theconsentof thethird party; or(b) that his consentis to be requiredin circumstancesspecifiedin the contractinsteadofthosespecified[by the defaultprovisionsof clause2(1)].

Seemingly,the Commission’s intention is that the exerciseof an expressright tovary or cancelwithout theconsentof the third party (underclause2(3)(a))shouldbeeffectiveeventhoughthethird partywasunawareof thereservation(or, quaere,the exercise of the right).93 On the other hand, in the absenceof expressreservation,if the contractingpartiescannotreasonablyascertainwhetheror notthethird partyhasin fact reliedon thecontract,clause2(5) authorisesthecourt todispensewith the third party’s consent– and similar authorisationis given byclause2(4), where the third party’s consentis requiredbut where it cannotbeobtainedeitherbecausehis whereaboutscannotreasonablybeascertainedor he ismentallyincapableof giving consent.Whereacourtdispenseswith consent,clause2(6) providesthat ‘it may imposesuch conditionsas it thinks fit, including aconditionrequiringcompensationto the third party.’

Put simply, the ‘crystallisationtest’ proposedby the Commissionis third partyacceptanceor reliance,94 but this is qualified by expressreservation.Although91 Reportpara9.8.92 ibid para9.10.93 ibid para9.39.94 Drawing on the analogy of promissoryestoppel(where the party seekingthe protection of the

estoppelhas the burdenof proving reliance),the Commissionarguesthat the burdenof provingrelianceshouldlie with the third party (seethe Reportpara9.34).However,the Commissionalsoremarksthat it would beunfair to expectthecontractingpartiesto provethat the third partyhasnot



somewill favour different featuresof this compromise,it is unclearquite how itfits with the Commission’saspirationto reconcile the third party’s reasonableexpectationswith the contractors’intentions.The Reportgoesout of its way toemphasisethat the third party’s relianceneednot be detrimental.95 For example,the third party may have ‘relied’ by making investmentsin anticipation ofcontractualperformancein its favour,which investmentsproveso profitable thatthe third party is better off even if the contractual performancedoes notmaterialise.As the Commissionrightly states,if the requirementis detrimentalreliance,then this ‘tends to shift the focus away from protectingthe plaintiff’sexpectationinterestto protectingtheplaintiff’s relianceinterest.’96 However,if theintention is to protectthe third party plaintiff’s expectationinterest,it is unclearwhy actual relianceof anydescriptionshouldberequired.97 Indeed,insofarastheCommission’sproposedcrystallisationtest turns on acceptance(the third partycommunicatingassent),there need be no reliance, so why insist upon actualreliance(albeit not detrimentalreliance)wheretherehasnot beenacceptance?

As we have already declared,our view is that the protection of legitimateexpectationis thecornerstoneprincipleon which thelaw of contract,includingthedoctrineof privity, shouldbebased.If A andB arein nosenseindebtedto C, thereis noreasonwhy A andB shouldcontractfor thebenefitof C. To thisextent,it is inline with theprotectionof legitimateexpectationto treatthe intentionsof A andBasdecisive.However,onceA andB havefreelychosento contractfor thebenefitofC, the positionis materiallydifferent.As we havesaidalready,if the constitutivepurposeof a contractis to confera benefiton a third party,this cannotbenullifiedby simpledenial(non-performance)or by contrary(contradictory)declarationsofintent.Equally,whetherA andB arenow freeto changetheir mindsandcancelorvary thecontractdependson theexpectationsthatC legitimatelyhasin thealteredsituation.WhereA andB havenotexpresslyreservedtheright to varyor cancelthecontract,andwhereC is awareof thecontract(with theauthorisationof A andB),thenit is plausibleto reasonthatC hasa right to holdA andB to thecontract(ie tobarcancellationor variationof the contract).

Gatheringtogetherthesethreads,we suggestthat a crystallisationtestbasedonawarenessis the mostdirect way of protectingthe legitimateexpectationsof thethird party; that,if (takingtheCommission’sline) mereawarenessis to berejectedas the test,98 then mere acceptanceor communicatedacceptance(as per theCommission)is perhapsthe next best test; and that, oncethe crystallisationtestturnson actualreliance(albeit not necessarilydetrimentalreliance),thenthe linkwith the protectionof the third party’s legitimate expectation, if not broken, iscertainlyattenuated.99

relied (ibid) — althoughthe difficulty of proving a negativedoesnot seemto have troubled theCommissionso much in formulating its proposalsin relation to the testof enforceability.

95 Seeeg paras9.14and9.19.96 ibid para9.19.97 Although, no doubt,actualreliancecould be pleadedasevidenceof expectation.98 See the Report para 9.12, for the Commission’s rejection of a ‘mere awareness’test. The

Commissionfirst citesthecaseof a third partywho ‘while awareof thetermsof thecontract,hasnowish to takeadvantageof themor whodoesnot believethatthepromisewill beperformedor thatheor shehasanentitlementto performance.’But this is a caseof waiveror non-expectation.Theacidtest is a third party with a legitimate expectation.The Commissionthen suggeststhat mereawarenesswill not do becausethere might be a dispute where the third party encouragesoracquiescesin a variationor cancellationof the contractandthendecidesthat it wantsperformanceafter all. Again, though, in a legal regimeorganisedaroundthe idea of protectingthe legitimateexpectationsof all participantsin a situation(includingthecontractors),this is lessthanconvincing.

99 In defenceof the Commission’sproposals,it may be arguedthat the combinationof testsbasedonacceptanceandreliancesatisfiesevidentialconcernsaboutthereality of thethird party’sexpectation



The availability of defences(including defenceswhich might beopento challengeunderthe Unfair ContractTermsAct 1977)Giving effect to one of the Commission’s most contentiousrecommendations,clause6(4) of theBill providesthatsection2(2) of theUnfair ContractTermsAct1977(UCTA) is not to apply wherea plaintiff, makinga third party contractualclaim (that is, under the proposedtest of enforceability),seeksto challengeacontractualprovision excludingor restrictingthe defendantcontractor’sliabilityfor negligentlycausinglossor damage(other thandeathor personalinjury). Thedisapplicationof section2(2) of UCTA mustbesetalongsidethreeotherdoctrinalelements:first, that (exceptionally)section2(1) of UCTA will be availableto aplaintiff making a third party contractual claim;100 secondly, that theCommission’s generalapproachis to leaveUCTA unamendedand,as presentlyunderstood,unavailableto third party contractualclaimants(section2(1) apart);and,thirdly, that section2 of UCTA will remainavailableto plaintiffs who pleadtheir actionin the tort of negligence.

The Commission confesses to agonising about the application (anddisapplication)of UCTA to third party claimants101 – and, understandablyso,for the proposalproducessome strangeoutcomes.For instance,consider theCommission’s hypotheticalillustrative case14, whereB buysan expensivethreepiece suite from A, a ‘well known Central London departmentstore with areputationfor quality.’102 B makesit clearto A thatthegoodsarebeingpurchasedasa weddinggift for Mr andMrs C andB instructsA to deliver the goodsto Mrand Mrs C directly. After two weeks’ use, the furniture proves defective.Accordingto theCommission,this is a casewhere,subjectto rebuttal,Mr andMrsC will havea right to sueA (underthesecondlimb of thetestof enforceability)forbreachof an implied term asto quality. Now, if the contractpurportsto excludeliability for breachof the statutoryimplied term as to quality, the effect of theCommission’s proposalsis that suchan exclusionwill be void againstB (undersection6(2) of UCTA) but immuneagainstany UCTA-challengepleadedby MrandMrs C. (For themoment,wepassoveranotherdifficulty here,namelywhetherA’s exclusionof liability might serveto rebutMr andMrs C’s presumptiveright toenforcethe contract).On the otherhand,if Mr andMrs C canframetheir actionagainstA in the tort of negligence(where,for example,A negligentlydamagesgoodsbelongingto Mr and Mrs C when delivering the furniture, or negligentlyinjures Mr C), then section2 of UCTA appliesin the ordinary way.103 And, ofcourse,even if Mr and Mrs C cannot frame their action in negligence,theirinterestsmight beprotectedif B (asa contractingparty)takesup theclaim on theirbehalf104 – for, asclause4 of the draft Bill makesclear, the openingup of thirdparty claimsin no way prejudicesthe independentclaimsof the contractingpartypromisee.Nevertheless,the immediateimpressionis that the proposalsproduce

(cf note97 above),andensuresthat third partieswho actuallyrely (on thebasisof their expectationof benefit) are not prejudicedby not knowing that a communicatedacceptancewill protect theirexpectation;cf para9.24of theReport,wheretheCommissionarguesalongtheselinesin rejectingasingletestbasedonacceptance(but,noticetheway in which thepossibilityof detrimentalrelianceisusedto give persuasiveforce to this argument).

100 SeetheReportpara13.12.Sedquaere: why would sucha claim bepleadedin contractratherthaninnegligence?

101 Seeibid para13.7andthenparas13.9–13.13.102 ibid para7.41.103 ibid para13.12.104 Oneof the pointspleadedin mitigation by the Commission:seeibid para13.10(vi).



some unevennessin the law,105 and the obvious question is whether this isdefensible.

Thekey to theCommission’sthinking,hereaselsewhere,is that thecontractingparties’intentionsmustgovernwhetheror not thethird partyhasa right to enforcethe agreement.If the partiesdo not intend to createthird party rights, they mustalwaysbefreesoto stipulate.106 At all costs,therefore,theremustbenodoubtthatthepartiesremainfreeto excludethecreationof rightsin favourof a third party.Acorollaryof this guidingprinciple is that, if thepartiesdo intendto createrightsinfavourof athird party,theymustalsoremainfreeto setconditionsuponor limits tothe liability that goeswith such rights (as we saw in our earlier discussionofconditionalbenefits).Fromthisperspective,toallowthethirdpartyto runargumentsbasedonUCTA mightbeseenasgiving ahostageto fortune,encouraginglitigationon thedistinctionbetween‘exclusions(andlimitations) thataremereUCTA-typedefences’and‘exclusions(andlimitations)thatserveto preclude,rebut,or qualify athird party’spresumptiveright to enforce’,potentiallyinviting furtherextensionofthe scope of UCTA,107 and duly diminishing the fundamentalpower of thecontractorsto regulatetheir relationshipswith third parties.

Are we to conclude,therefore,that an elementof doctrinal unevennessis theprice that we must pay for respectingthe contractors’intention?We think not.Certainly,beforewe canendorsetheCommission’s position,two otherconsidera-tions needto be broughtinto the picture.First, we needto review the Commis-sion’s generalapproachto the availability of defencesthat canbe setup againstthird party claimants.And, secondly,we needto reflect on whetherthe proposedside-liningof UCTA really is requiredif weareto keepfaith with theprinciplesofrespectfor contractualintentionandprotectionof legitimateexpectation.

TheCommission’sapproachto defencesAs elsewherein its Report,the Commission’sapproachto defences108 centresonestablishinga default position that the contractorsare free to modify by expressprovision. The default position is provided for by clause3(2) of the draft Bill,accordingto which thedefendantpromisor(contractor)is to haveavailableby wayof defenceor set-off (againsta third party who satisfiesthe testof enforceability)any matterthat:

(a) arisesfrom or in connectionwith the contract [or, insofar as a particular contractualprovisionis beingenforcedby the third party,anymatterthat arisesout of or in connectionwith the contractandis relevantto that contractualprovision]109; and(b) would havebeenavailableto him by way of defenceor set-off in proceedingsfor theenforcementof the contractif thoseproceedingshadbeenbroughtby the promisee.

This defaultpositiontakesa middle pathbetweentwo outlying positions– eitherallowingonly suchdefencesasaffecttheexistenceor validity of thecontractor theparticular contractualprovision purporting to benefit the third party (which the

105 ibid para13.9.106 Seminally,seeibid para1.8.107 SeeElizabethMacdonald,‘Exclusion Clauses:the Ambit of s 13(1) of the Unfair ContractTerms

Act 1977’ (1992)12 LegalStudies277,and‘Mapping the Unfair ContractTermsAct 1977andtheDirective on Unfair Termsin ConsumerContracts’[1994] JBL 441; and JohnAdamsand RogerBrownsword,Key Issuesin Contract (London:Butterworths,1995)269 et seq.

108 By ‘defences’, the Commissionintends to cover ‘matters which render the contract void (forexample,fundamentalmistake)or voidable(for example,the promisee’smisrepresentation,duressor undueinfluence)or that haveled to the contractbeing discharged(for example,frustrationorseriousbreachby the promisee)’(seethe Reportpara10.2).

109 Seepara10.12of the Reportandclause7(2)(b) of the draft Bill.



Commission rejects as too narrow), or allowing all defences,set-offs, andcounterclaimsthat would have beenavailableagainstthe contractualpromisee(whichtheCommissionrejectsastoowide).110However,clause3(3)of thedraftBillreservesto the contractorsthe right to narrow or widen the defencesor set-offsotherwiseavailableunderclause3(2). Similarly, clause3(4) specifiesthe defaultpositionwith regardto defences,set-offs,andcounterclaimsthatarespecificto thethirdparty(ratherthanarisingfromthecontract)–thedefaultpositionbeingthatsuchdefencesareavailable–butclause3(5)reservestothecontractorsthepowerexpresslyto providefor a lessinclusiverangeof defences,set-offs,andcounterclaims.

If the Commission’s generalapproachis that the defendantcontractorshouldhaveavailableagainstthe third party suchdefencesaswould havebeenavailableagainsttheothercontractingparty(plusanydefencesspecificallyavailableagainstthe third party), thenit is temptingto reasonthat the defendantcontractorshouldnothaveavailableagainstthethird partysuch(non-specific)defencesaswouldnothavebeengoodagainsttheothercontractingparty.Following this line of thinking,if a contractualexclusionclausewould not be a good defenceagainsta fellowcontracting party (because,say, it would be void or it would be judgedunreasonableunder UCTA), why should it be a good defenceagainsta thirdparty?This line of reasoning,aswe havesaid,is tempting.111 However,logically,the premisethat the defendantcontractorshouldhaveavailableagainstthe thirdpartysuchdefencesaswould beavailableagainsttheothercontractingparty,doesnot entail that suchdefencesshouldbe the only onesavailableto the defendantcontractor.And indeed, the Commissionalreadyallows the defendantto haverecourseto defencesthat arespecificto the third party (suchasfraudby the thirdparty). Nevertheless,both thesecategoriesof defencesare in themselves‘good’defencesand it seemingly defeats the principle of protection of legitimateexpectationthat the Commissionshouldallow the defendantto setup againstthethird party what would otherwisebe ‘bad’ defences– therebyputting the thirdpartyin a worsepositionthanthatof the(non-defendant)contractingparty.112 Thequestionthat we needto ask, therefore,is whetherit makessense– given theCommission’s generalpolicy of respectingcontractualintention,and its specificconcern that contractors should not be prevented from ‘contracting out ofconferringlegal rightson third parties’113 – to side-lineUCTA and,thus,to allowin otherwise‘bad’ defences.114

Respectfor contractualintentionFor two principalreasons,it is ourcontentionthattheexclusionof UCTA betraysamisplacedrespectfor theintentionsof thecontractingparties.First, theprincipleof

110 Seeparas10.8–10.12of the Report.111 Another tempting thought is that much of the presentdifficulty stemsfrom setting up the third

party’s claim asan independentcauseof action.Quaere, why not treat the claim asanalogousto asubrogatedright of action?

112 Moreover, the senseof this is even more questionableif the contractualprovision that we areterminga ‘defence’would not serveto rebutthethird party’spresumptiveright to enforce.In suchacase,to disallow the defencewould not be to interferewith the contractingparties’ right to veto acontractualrelationshipwith the third party. However,to allow the defence,would be to allow thecontractorsto avoid UCTA in their contractualdealingswith the third party.

113 Seethe Reportpara13.10(viii).114 It shouldbe notedthat, in the reversesituation,wherethe third party is seekingto rely on a main

contractexclusionor limitation, theCommission’srecommendationis that theplaintiff contractoristo beallowedto challengetheprovision(asa baddefence)underUCTA: seeibid paras10.22–10.23and13.11.To this extent(but only to this extent),thethird party is to betreatedasif hewerea partyto the contract:seeclauses3(6) and6)6) of the draft Bill.



respectfor contractualintentionimplies respectonly for the joint intentionsof thecontractors.By disapplying(not extending)UCTA, theCommissionexposesthirdpartiesto therisk of beingdenieda remedyby a contractorwho unilaterallyrelieson otherwisebad defences– and all for the sakeof respectingsupposedlyjointcontractualintention. Secondly,even if a particular contractualexclusiondoesrepresentthe joint intentionsof the parties,the Commission’sproposalexposesthird partiesto therisk of acontractorbeingallowedto defendagainsta third partyclaim in a way thatviolatestheintegrity of theconstitutivepurposeof thecontract(therebyviolating the principle of respectfor contractualintention).

To take up the first of thesereasons,the Commission’sthinking in relation toUCTA presupposesa settingin which the contractorsjointly intend the specifiedthird party effectsof their contract.However,sucha presupposition makeslittlesensein relation to much of the standardiseddealing regulatedby UCTA. Forinstance,in casessuch as the Commission’s hypotheticalillustration (14) of Bbuyinganexpensivethreepiecesuitefrom A, how plausibleis it thatA’s standardform exclusionswill havebeenjointly agreedby thecontractors– let alonejointlyintendedto regulatein a legitimateandspecificway their relationshipwith a thirdparty beneficiary?In the ordinary courseof consumerdealing, it surely is anonsenseto supposethat A andB will havejointly agreedthat C shouldhavetheright to enforcebut subjectto A’s standardexclusionsor restrictionson liability(which might or might not be valid under UCTA). Admittedly, A’s SalesAgreementwill rehearsethe standardterms,but to equatethis with the parties’intentionsis absurd– certainly,if B wereto succeedin challenginganexclusioninA’s standardform, it would be odd to find B complainingabouta lack of respectfor contractualintention(although,nodoubt,thiswouldbepreciselywhatA wouldsay). It is important, therefore, to distinguish betweenthose caseswhere thecontractorsgenuinelyagreethatthethird party’sright to enforceshallbeexcludedandthosecaseswherethe contractpurportsto containan exemptionclausebut itcannotbe equatedwith the genuineagreement(or intention)of the parties.

It is important,too, to appreciatethat,althoughmuchof the regulatoryrhetoricof UCTA is about termsbeing reasonableor unreasonable(which suggeststhatideasof substantivefairnessarebeingintroducedto limit freedomof contract),infact, UCTA operates largely by reference to the reality of the parties’agreement.115 In otherwords,whereUCTA strikesdown a contractualprovisionasunreasonable,this usuallysignifiesthat theprovisionhasnot beenfreely agreed– in whichcaseit wouldbeadistortionto treatsuchaprovisionasrepresentingthecontractors’ intentions. Conversely,where a contractualprovision survives anUCTA challenge,this normallysignifiesthat thebargainingprocesswascleanandthat the provision genuinely representedthe parties’ intentions at the time ofcontracting.As for thosecontractualprovisionsthatUCTA declaresto bevoid, theCommissionis correctto observethat,here,UCTA appearsto operate‘irrespectiveof thetrueconstructionof a contract’.116 However,we might equallywell saythatsuchprovisionsin UCTA build on assumptionsaboutwhat contractorsnormallyintend,electingto effectuatesuchintentionsthrougha generalrule ratherthanacase-by-caseinquiry (discretion).Seenin this light, UCTA canbe understoodnotonly asrunningwith thegrainof theCommission’spolicy,117butasoneof thebest

115 cf AdamsandBrownsword,Key Issuesin Contract (London:Butterworths,1995)ch 8.116 Seethe Reportpara13.10(i).117 Such an analysisalso respondsto the Commission’sdifficulties concerningwhether, if UCTA

applied,‘reasonablenessshouldbe judgedasbetweenthe promisorandthe promiseeor asbetweenthepromisorandthethird party’, ibid para13.10(vii).Clearly,if UCTA is designedto filter standard



resourcesthat we havefor checkingwhetherdefencesadvancedin the nameofcontractualintentionactually reflect the contractors’joint intentions.

In mitigation, the Commissionpleadsthat ‘the common law rules as to theincorporationand constructionof exclusionclausescan go much of the way tostopping,for example,promisorsrelying on exclusionclauseshidden away insmall print.’118 Yet, if thecommonlaw goesmuchof theway, why not go all theway by applyingUCTA? Why makeany concessionto exclusionsthat simply donot look like the productsof joint contractualintention?

This brings us to our secondreason.Supposethat the relevantexclusiondoeslook like anexplicit, andjointly agreed,attemptto precludeenforcementby thirdparties(or by a particularthird party). Is it now a mistaketo apply UCTA to thecontractors’exclusion?Here, we can identify three ways in which a defendantcontractormight seek to rely on such an exclusionaryprovision. Namely, thedefendantmight argue:(a) that therewasno intention to confera benefiton a third party; or,(b) that,althoughtherewasanintentionto confera benefiton a third party,it was

not intendedthat the third party shouldhavea right to enforce;or,(c) that,althoughtherewasanintentionto confera benefiton a third party,it was

not intendedthat the defendantshouldbe liable for breach.If weaccepttheCommission’spolicy of respectingcontractualintention,andif weacceptthe logic of the relationshipbetweenconstitutivepurposeandexclusionaryintention (asoutlined in our backgroundreservations),the defendantcontractor’sargumentsin both(b) and(c) mustberejected.Thereis, therefore,no goodreasonfor disapplyingUCTA where the defendantso argues;and if UCTA servestodefeatsucharguments,so much the better.However,the defendantcontractor’sargumentin (a) cannotbe dismissedso lightly.

In principle, the contractors(on both the Commission’sapproachand on ourown view) mustbefreeto form a contract,theconstitutivepurposeof which is notto confer a benefit on any third party. Whetheror not the contractorsso intenddependsupon our best interpretationof all the material evidence;and, in thisrespect,an explicit exclusionof any third party claim might well be a relevantconsideration.It mustbe conceded,therefore,that it would be unfortunateif theapplicationof UCTA wereto leadto the indiscriminatestriking out of exclusionsthat were designedto underline that particular contractswere not intendedtoconferabenefitonthird partiesandif, in consequence,contractorswereexposedtounintendedthird party liabilities. Such a concession,however, should not bethoughtto entail the full disapplicationof UCTA. For, whilst theremight be anargument for disapplying UCTA in relation to the question of whether thecontractorsintendedto confera benefiton theplaintiff third party, thereseemsnogoodreasonfor denyingthethird partytheprotectionof UCTA (at least,in relationto clausesthat purport to exclude liability) 119 once it is establishedthat thecontractorsintendedto confera benefiton the third party.

form legalesewith a view to ascertainingwhatthepartiesreally intended,theCommission’sgeneralapproachentailsthat the reasonablenessquestionmust lie betweenthe contractingparties.

118 Seethe Reportpara13.10(iv).119 Theargumentis morecomplexin relationto limitationsof liability. It is arguablethatUCTA should

be disappliednot only wherethe issueis whetherthe partiesintendedto confer a benefit but alsowherethe questionis whetherthey intendedto limit their liability to a third party. On this view,wherethepartiesintendedto confera benefit,UCTA would applyto exclusionsbut (arguably)not tolimitations. This would look odd and the temptationthen would be to extendthe applicationofUCTA to limitations. Sedquaere, why should this be a problem?The contractorswould remainsovereignin decidingwhetherthey wishedto confera benefiton a third party.



In sum,the Commission’sproposalto disapply(not extend)UCTA is designedto ensurethatthecontractorsremainfreeto declarethattheyarenotcontractingforthebenefitof a third party.Assumingthat theygenuinelydo not intendto contractfor the benefit of third parties, the contractorsshould be allowed to pleadexclusionary declarations in their defence.120 However, the price that theCommissionproposesthatwe shouldpay for preservingthis aspectof contractualfreedomis that defendantcontractorsare to be given a clear run (free of UCTAregulation) to plead various ‘bad’ defencesagainst third party plaintiffs, inparticulardefencesthat arenot the productof joint agreementanddefencesthatoverreachthe contractors’exclusionarypowers(consistentwith respectfor theintegrity of their constitutivepurposes).This, we suggest,is a burdenthat thirdpartiescannotreasonablybe askedto bear.

Conclusion

In somerespects,the Commission’s work on privity canbe regardedascarryingforward the project initiated by the Law Revision Committee’s pre-warrecommendationthat the doctrine of privity should be relaxed to enablethirdpartiesto enforcecontractsexpresslypurportingto confera benefituponthem.121

Yet, theLaw RevisionCommittee’sproposalsfailed to materialisein legislation–and, in this sense,the Commissionis having a secondbite at the cherry.122 Toavoid any doubt, therefore,we should emphasisethat, whatevercriticisms wemight haveof the Commission’sproposals,the instinct that the privity rule is inneedof reform is surelycorrectandit is importantthat the draft Bill survivestheParliamentaryprocessto put a legislativesealof approvalon this overduereform.

What thenis our overall assessmentof the Commission’sproposals?Basically,theCommissionis guided(quiterightly) by two principles:oneprincipleis thatweshouldrespectthe intentionsof contractingparties;the otherprinciple is that weshould protect the (legitimate) expectations of parties who are potentialbeneficiariesof transactions.However, in our submission,the former principleneedsto be understoodin the light of the constitutivepurposeof any particulartransaction– a matterof considerableimportancewherewe are consideringthepossiblerebuttalof, or restrictionupon,a third party’spresumptiveright to enforce– and,in the final analysis,it hasto besquaredwith theprincipleof protectionoflegitimate expectation(this principle applying both to third parties and to thecontractorsthemselves).It is truethatin manycasestheoutcomeis notaffectedbythe priority setbetweenthesetwo principles,becausetheyeachpoint to the sameresult. Nevertheless,as we have arguedpreviously, it sometimesdoes matterwhetherlegitimateexpectationor contractualintention is takenasthe criterion –and certainly in contractualnetworks,where main contractsand sub-contractsjointly servea unifying purpose,it is asmucha matterof logic asexpectationto

120 Thereis no reason,of course,for respectingshamdeclarationsof intention,designedto convertwhatis essentiallya contractfor the benefitof a namedthird party into a contractintendedto confernobenefiton any third party.

121 See Law Revision Committee, Sixth Interim Report, Statute of Frauds and the Doctrine ofConsideration (1937) Cmd 5449. The Commission also broadly follows the Law RevisionCommitteein allowing a contractorto raisedefencesthatwould havebeenavailableagainsta fellowcontractor and in allowing the contractorssome right to vary or cancel their agreement.Fordiscussion,seethe Reportparas4.2–4.4

122 SeeJ. Beatson,‘Reforming the Law of Contractsfor the Benefit of Third Parties:A SecondBite atthe Cherry’ (1992)45 CLP 1.



treat the transacting parties as contractually joined.123 The failure to giveexpectationits due weight is apparenttoo in the Commission’streatmentof thecontractingparties’ right to vary or cancel(wherethe link betweenthe proposedcrystallisationtest andprotectionof the third party’s legitimateexpectationis atleastattenuated);and,in displacing(not extending)theapplicability of theUnfairContractTermsAct, the Commissionnot only fails to give legitimateexpectationits properweight, it distortsthe principle of respectfor contractualintention.Onthe other hand, the Commission’s readinessto review the enforceability ofgratuitouspromisesis a welcomeindicationof a renewedconcernwith protectinglegitimateexpectation.

Having resolvedto baseits proposalson respectfor the contractingparties’intentions,the Commission’sprincipal difficulty was to strike the right balancebetweencalculabilityandflexibility. Thisbalancingexerciseis at its mostsensitivein thesecondlimb of thetestof enforceability.Althoughthedesignof this limb ofthetest(including theproviso)is not without precedent– in fact, it is very closelymodelledon the testlaid downby section4 of theContracts(Privity) Act 1982inNew Zealand– the adoptionof a two-limbed test of enforceabilitygives rise touncertaintiesthat make no positive contribution to the desired element offlexibility. In a sense,theCommissionhassubstituteda dual-trackapproachfor itsearlierdual intentiontestwithout altogethereliminatingunproductiveuncertainty.As we havesuggested,theconjunctionof thetwo limbs invites litigation aboutthepreciserelationshipbetweenthe first andthe secondlimb (particularly,wherethedefendantcontractorseeksto rebutthepresumptionundertheproviso);and,wherea third partyseeksto rely onexclusionsor otherprotectiveterms,thereis scopeforargumentin relationto whethersuchtermsfall underthe first or thesecondlimb.Moreover,althoughthe proviso is intendedto allow for flexibility, the draft Billcouldoffer moreassistance(throughindicativeguidelines)in relationto theway inwhich the discretionthat accompaniesthis flexibility is structured.Is thereanyreason,for example,why guidelinesshouldnot indicatethat the availability of adirect contractualrecourseis normally to be takenas countingagainstthe thirdparty having a right to enforce, and indicating that exclusionsdrawn by anemployerin favour of his third party employeesshouldbe treatednormally asenforceableby theemployees?Or, evenbetter,for theavoidanceof doubt,why nottreatsuchexclusionsasgiving employeesa right to enforceunderthe first limb?Or, evenbetter,for the avoidanceof disputessuchasthat in LondonDrugs, whynot provide that exclusionsdrawn by employersare to be construedas givingemployeesa right to enforceevenif the employeesare not expresslydesignated?

We should finish, however, by once again accentuatingthe positive. TheCommission’s determinationto bring forward proposalsfor the reform of theprivity doctrine is to be applauded.The benefit of theseproposalsis that theypromiseto breakthe strangleholdof the privity orthodoxy– not simply in the adhocwayachievedby theexistingstatutoryexceptionsto thedoctrine,124butacrosstheboardthroughthegeneralapplicationof thetestof enforceability.However,theburden of implementing these proposals,of ironing out any difficulties thatemerge,and of developingmore radical regimesof third party rights, hasbeenhandedbackto the courts.

123 Seetheargumentin D. BeyleveldandR. Brownsword,‘Privity, Transitivity, andRationality’ (1991)54 MLR 48; andJ.N. AdamsandR. Brownsword,Key Issuesin Contract (London:Butterworths,1995)ch 5.

124 Clause6(1) of the draft Bill, it will be recalled,preservesthe existing statutoryexceptionsto thethird party rule.



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