Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd

(1988) 165 CLR 107
[1988] HCA 44

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(Judgment by: Mason CJ, Wilson J)

Between: Trident General Insurance Co Ltd
And: McNiece Bros Pty Ltd

Court:

Judges:
Mason CJ
Wilson JBrennan J
Deane J
Dawson J
Toohey J
Gaudron J

Subject References:
Insurance

Hearing date: 3 November 1987
Judgment date: 8 September 1988

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Judgment by:
Mason CJ
Wilson J

This is an appeal from a unanimous decision of the New South Wales Court of Appeal (Hope, Priestley and McHugh JJ.A.) in which that court held that a third party, who was not a party to the insurance policy in question, but fell within the class of persons expressed to be insured by the policy, was indemnified in respect of an award of damages for negligence made against the third party: Trident General Ins. v. McNiece Bros (1987) 8 NSWLR 270. In so finding, the Court of Appeal created an exception to the doctrine of privity of contract and to the requirement that consideration should move from the promisee.

2. McNiece Bros Pty Ltd ("McNiece") was the principal contractor for construction work being carried out at the limestone crushing plant of Blue Circle Southern Cement Ltd ("Blue Circle") at Marulan. Blue Circle had entered into a contract of insurance with the appellant insurer ("Trident").

The policy issued on 13 June 1977. The policy insured contract works, liability to the public, and maintenance/defects liability. "The Assured" were defined as "Blue Circle Southern Cement Limited, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers." The policy schedule specified the three contracts and the work sites covered, the relevant one being "(c) Alterations and extensions to Limestone Crushing Plant at Marulan, N.S.W."

There was an attachment to the policy which provided that no liability should attach in respect of location (c) until the underwriters were advised of "the attachment date for which a suitable endorsement" was to be issued. In relation to Marulan, the period of insurance was to run for "15 months at date to be advised".

3. Under the heading "Public Liability" in Section 2 the policy provided:

"The Insurance ... indemnifies the Assured against all sums which the Assured shall become legally liable to pay in respect of

1.

Death of or bodily injury to or illness of any person not being a person who at the time of the occurrence is engaged in and upon the service of the Assured under a Contract of service or apprenticeship ..."

An exception to Section 2 was stated to be "Any claim arising under any Workmen's Compensation Law".

4. On 4 July 1979 Gary Hammond was seriously injured while driving a crane at the construction site. Hammond was working under the direction of the McNiece site engineer, although he was actually employed by Faro Constructions, a firm which organized workers for contractors such as McNiece.

Hammond subsequently brought an action against McNiece and recovered judgment in his favour in the sum of $541,768.16 less worker's compensation payments already received. McNiece sought indemnity from Trident for the amount of the judgment awarded to Hammond.

Trident denied liability.

5. McNiece then commenced an action against Trident for indemnity. While an appeal was pending by McNiece against the award in favour of Hammond, the action came on for hearing before Yeldham J. who found that there was no contract of service between Hammond and McNiece but that McNiece would be liable for any injuries to Hammond due to its negligence. The effect of this finding was to eliminate the possibility that McNiece could seek indemnity from its worker's compensation insurer. It also meant that McNiece could seek indemnity under the Trident policy as a person legally liable to pay damages for bodily injury to any person "not being a person who at the time of the occurrence is engaged in and upon the service of the Assured under a Contract of service ..."

6. Yeldham J. also found that McNiece was in contemplation as one of "The Assured" at "the attachment date for which a suitable endorsement" was issued in respect of the Marulan contract. No endorsement was actually issued but the action proceeded on the basis that an endorsement had been made, that the period of insurance commenced on the date when work at Marulan began, and that the accident involving Hammond occurred within that period. The learned judge found that consideration was given by McNiece to Trident, because Blue Circle took into account as between itself and McNiece, "in a financial way", that it had contracted with Trident to insure McNiece, and in that sense the latter, through Blue Circle, provided consideration for part of the premium paid to the insurer. Yeldham J. held that it was not established that Blue Circle had actual authority to enter into the insurance policy on behalf of McNiece, but that the service of the statement of claim in the action before him constituted ratification of the policy by McNiece. Thus, his Honour held that there was a contract between McNiece and Trident and that McNiece was entitled to an indemnity from Trident for the amount of Hammond's award less the worker's compensation payments made.

7. Trident appealed to the Court of Appeal. The appeal was dismissed, Hope and Priestley JJ.A. agreeing with the judgment of McHugh J.A. McNiece sought leave to plead an alternative case based on the existence of a trust. Leave was refused.

8. The first question before the Court of Appeal was whether McNiece was one of "The Assured". Trident argued that the expression "The Assured" consisted of a class fixed at the date of issue of the policy and McNiece was not in contemplation as a party at that date. However, McHugh J.A. found that as a matter of business efficacy the policy was intended to cover any contractor, sub-contractor or supplier who was engaged at any time during the contract period. He also found that Blue Circle alone was liable for payment of the premium. These findings dictated the conclusions that McNiece was not a party to the contract of insurance and that it did not provide consideration to Trident. The conclusion that McNiece was not a party to the contract followed from the fact that it was not ascertainable as a principal when the policy issued.

To make a contract on behalf of a principal an agent must contract on behalf of a principal who is then ascertainable.

9. McHugh J.A. also rejected the finding that McNiece had ratified the policy. Although his Honour concluded that a general policy of insurance can be ratified after loss and that commencement of an action on the policy against the insurer may constitute ratification, the policy was not ratified because ratification did not take place within a reasonable time.

10. McHugh J.A. went on to accept the far-reaching submission that at common law a beneficiary under a policy of insurance can sue on the policy even though it is not a party to the policy and provides no consideration. His Honour so decided because he concluded that the two common law rules that only a party to a contract can sue on it and consideration must move from the promisee work injustice in many situations. He considered that the law should allow an intended beneficiary to sue on a policy when commercial convenience and practice demand it. Moreover, he thought that the development of the common law should proceed in parallel fashion with statutory reforms enabling non-party beneficiaries to sue on policies of insurance. His Honour instanced the Motor Vehicles (Third Party Insurance) Act 1942 (N.S.W.) s.10 and the Insurance Contracts Act 1984 (Cth) s.48. See also Life Insurance Act 1945 (Cth) s.94.

11. Trident's case in this Court is that the rules that only a party to a contract can sue on it and that consideration must move from the promisee are fundamental principles of the common law of contract. These principles evolved in the course of the nineteenth century in the development in England of the law of contract and they have been consistently applied, not only in England but also in Australia, to contracts for the benefit of third parties, including insurance contracts. The argument is that the principles are so well accepted and so embedded in our law of contract that they should not be overturned by judicial decision, even if their application to contracts for the benefit of third parties is not altogether satisfactory, a matter which Trident by no means concedes.

According to Trident, the recognition in appropriate circumstances by the courts of the trust of a contractual promise provides an adequate mechanism for protecting the rights of the third party under a third party contract. The concept of the trust of a contractual promise, it is said, overcomes any serious problem which might otherwise arise if the common law principles alone were to govern third party contracts.

12. Although the principle that only a party to a contract can sue on it is described as fundamental, the early common law permitted third parties to enforce contracts made for their benefit: see Flannigan, "Privity - The End of an Era (Error)" (1987) 103 Law Quarterly Review 564, at pp.564-565, esp. fn.6. The decision in Bourne v. Mason (1669) 1 Vent. 6 (86 ER 5) marked the beginning of a shift in the attitude of the common law. In that case the third party, who failed in his action on the contract, was described as "a mere stranger to the consideration": at p.7 (p.6 of ER). Thereafter, until Tweddle v. Atkinson (1861) 1 B. & S. 393 (121 ER 762), the question whether the third party could bring an action on the contract was the subject of conflicting decisions. Compare, for example, Pigott v. Thompson (1802) 3 Bos. & Pul. 147 (127 ER 80) and Carnegie v. Waugh (1823) 1 LJ.(KB) 89 (where the court upheld the right of the third party to enforce the contract) with Price v. Easton (1833) 4 B. & Ad. 433 (110 ER 518) (where the court denied the third party's entitlement to sue on the contract). With reference to the common law before 1861, Windeyer J. observed in Coulls v. Bagot's Executor and Trustee Co. Ltd (1967) 119 CLR 460 , at p 498:

"The law was not in fact 'settled' either way during the two hundred years before 1861. But it was, on the whole, moving towards the doctrine that was to be then and thereafter taken as settled."

13. The received doctrine is that Tweddle v. Atkinson decided that a third party cannot sue on a contract for his benefit, though Denning LJ. considered that it was wrongly decided: Smith and Snipes Hall Farm Ld v. River Douglas Catchment Board [1949] 2 KB 500 , at p 514; White v. John Warwick & Co. Ld (1953) 1 W.LR 1285; [1953] 2 All ER 1021 . There is much to be said for the view that the ratio of Tweddle v. Atkinson was that the plaintiff third party failed because no consideration moved from him. However, this view was not accepted in the years that followed: see, for example, Gandy v. Gandy (1885) 30 ChD 57, at p 69. The decision in Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd [1915] AC 847 firmly entrenched the two principles in the common law of England. So much emerges from the speech of Lord Haldane: at p.853. The Privy Council in Vandepitte v. Preferred Accident Insurance Corporation of New York [1933] AC 70 , at p 79 subsequently applied the law as stated in Dunlop by Lord Haldane to a policy of insurance covering a motor vehicle by which the insurer agreed to indemnify the insured and anyone operating the car with the permission of the insured against third party risks. In the result the insurer was not liable under the policy in respect of a judgment obtained against the insured's daughter for damages for personal injury caused by her negligent driving of the motor vehicle. The Privy Council recognized (at p.79) that the common law rules are qualified by the equitable principle that a party to a contract can constitute himself a trustee for a third party of a right under a contract so that the third party can enforce the promise, making the promisee-trustee a defendant in an action against the promisor. However, Lord Wright went on to say (at pp.79-80) that "the intention to constitute the trust must be affirmatively proved: the intention cannot necessarily be inferred from the mere general words of the policy".

14. This Court has hitherto accepted that a third party cannot sue upon a contract and that a stranger to the consideration cannot maintain an action at law upon it: see, for example, Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd (1956) 95 CLR 43 , per Williams J. at p 56, Fullagar J. (with whom Dixon C.J. agreed) at p 67, Kitto J. at p.80, Taylor J. at p.91; Coulls, per Barwick C.J. at p.478, McTiernan J. at pp.482-483, Taylor and Owen JJ. at pp.486-487, Windeyer J. at p.494.

15. So far we have proceeded on the footing that there are two distinct common law rules. This accords with the law as Lord Haldane stated it in Dunlop: at p.853. See also Vanderpitte, at p 79; Kepong Prospecting Ltd v. Schmidt [1968] AC 810 . However, as Windeyer J. noted in Coulls (at p 494), there is an opposing view that the two rules are but one. In other words, to say that A is not a party to the contract is to say only that he is not a person who gave a promise in exchange for another: see Coote, "Consideration and the Joint Promisee" (1978) Cambridge Law Journal 301, at pp 309-310; Furmston, "Return to Dunlop v. Selfridge?" (1960) 23 Modern Law Review 373, at pp 383-385. As a matter of history this view has much to support it. The consideration requirement was the nub of the earlier cases.

The privity requirement seems to have gained acceptance either as an alternative way of asserting the consideration requirement or as a by-product of it. Nevertheless the weight of authority points to the existence of two distinct, albeit interrelated, principles.

Thus, if A, B and C are parties to a contract and A promises B and C that he will pay C $1,000 if B will erect a gate for him, C cannot compel A to carry out his promise, because, though a party to the contract, C is a stranger to the consideration: see Law Revision Committee (Eng.) Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) par.37, 1937 Cmd. 5449. Contrast par.41 of that Report and its discussion of the privity rule. For the purposes of the present case and contracts for the benefit of third parties, however, it is of little consequence whether the rules are in fact separate.

16. These "fundamental" traditional rules, where they survive, have been under siege throughout the common law world. In the United Kingdom the Law Revision Committee, which included many distinguished lawyers under the chairmanship of Lord Wright, recommended the abolition of the consideration rule and the privity rule in its Sixth Interim Report. The Committee described the consideration rule in its application to the example given in the last paragraph as lacking any reason in logic or public policy: par.37.

The Committee stated that the English common law (an expression which, in the context of the Report in 1937, may be taken to include the Australian common law) was alone among modern systems of law in its insistence on the privity rule and observed that the United States had taken steps to mitigate the rigour of the rule. Even in England, the Committee noted, Parliament had found it necessary to create legislative exceptions: par.41.

The Committee went on to make the point that the trust concept as applied to the promise for the benefit of the third party had not proved to be a satisfactory solution because there was uncertainty surrounding the approach of the courts to the recognition of a trust: par.44. Another criticism of the trust concept was that, once created, the trust was not revocable by the promisor or the promisee: par.47. A third comment was that insistence on the privity rule casts doubts on the enforceability of bankers' commercial credits by sellers of goods as against the banker setting up the credit: par.45. The final point made by the Committee was that the position of the third party is more analogous to that of an assignee of a contractual right than to that of a cestui que trust : par.46.

17. The Committee recommended that the statutory recognition of third party rights should be carefully limited. The proposed limitations were:

(1)

no third party right should be acquired unless given by the express terms of the contract;

(2)

the promisor should be able to raise against the third party any defence available against the promisee; and

(3)

the right of the promisor and of the promisee to cancel the contract at any time should be preserved unless the third party has received notice of the agreement and has adopted it.

It might be noted that this regime is much like that which has developed in the United States. There, the problems arising from the traditional rules have been avoided by not requiring that consideration move from the promisee to the promisor: see Farnsworth, Contracts (1982), ss.2.3, fn.9, 10.2. As it stands now in most American states, third parties can sue directly upon contracts made for their benefit by others: see generally Restatement, Second, Contracts (1979) Ch.14.

18. Despite the criticisms and the proposals for reform, the traditional rules survive in the United Kingdom: see, for example, Midland Silicones Ltd v. Scruttons Ltd [1962] AC 446 ; Beswick v. Beswick [1968] AC 58 ; Woodar Investment Ltd v. Wimpey Ltd (1980) 1 WLR 277 ; [1980] 1 All ER 571 . Legislative procrastination prompted Lord Reid in 1968 to suggest that, if there were to be a further long delay, then the House of Lords might be compelled to deal with the question: Beswick, at p.72. Similarly, Lord Scarman, supported by Lord Keith of Kinkel, expressed the view in 1980 that the House of Lords might "reconsider Tweddle v. Atkinson and the other cases which stand guard over this unjust rule": Woodar, at p 300; p 591 of All ER

In Swain v. The Law Society [1983] 1 AC 598 , at p 611, Lord Diplock described the doctrine of privity as "an anachronistic shortcoming that has for many years been regarded as a reproach to English private law". And in this country, Windeyer J. reflected similar sentiments to those of Lord Scarman when he referred in Olsson v. Dyson (1969) 120 CLR 365 , at p 393 to the possibility "that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear" to reform the traditional rules.

19. In Western Australia dissatisfaction with those rules has resulted in the enactment of s.11 of the Property Law Act 1969 (W.A.), which confers in certain circumstances a right on a third party to sue on a contract for his benefit. In 1973 the Queensland Law Reform Commission recommended that the law be amended so as to allow that a contract conferring a benefit on a third party should be enforceable by him in his own name: see Report No. 16, cl.55 of the draft bill and the commentary on that provision. The recommendation was adopted and is expressed in s.55 of the Property Law Act 1974 (Q.). And in New Zealand the Contracts (Privity) Act 1982 (N.Z.), like the Queensland Act, allows the third party to enforce a contract made for his benefit by imposing an obligation on the promisor in favour of the third party where the parties intend that the third party should be able to enforce the provision for his benefit: compare Property Law Act 1974 (Q.) s.55(6)(c)(ii) with Contracts (Privity) Act 1982 (N.Z.) ss.4, 8.

20. The Australian Law Reform Commission in its Report No. 20 on Insurance Contracts noted (at par.122) that Vandepitte had been legislatively displaced in all Australian jurisdictions in respect of compulsory third party insurance. Otherwise the Commission acknowledged that Vandepitte was alive and well, well enough to cause injustice to third parties. Indeed, as the Commission observed, Vandepitte was invoked by an insurer as a defence to an action on a policy by a person, not a party to the contract, who fell within the class of persons expressed to be insured: Jovanovic v. Broers (1979) 25 ACTR 39. The Commission, concluding that the problems could not be solved by the application of the principles of trust and agency, recommended that persons falling within the class of persons expressed by a policy to be entitled to indemnity should be able to sue on the policy. The Commission stated (at par.124) that this alteration in the law should be uncontroversial because most insurers already act as though they were under such a liability to such persons. Section 48 of the Insurance Contracts Act 1984 (Cth) gives effect to this recommendation.

21. There is much substance in the criticisms directed at the traditional common law rules as questions debated in the cases reveal. First, there is the vexed question whether the promisee can recover substantial damages for breach by the promisor of his promise to confer a benefit on the third party.

The orthodox view is that ordinarily the promisee is entitled to nominal damages only because non-performance by the promisor, though resulting in a loss of the third party benefit, causes no damage to the promisee: see West v. Houghton (1879) 4 CPD 197; Viles v. Viles (1939) SASR 164; but cf. Drimmie v. Davies (1899) 1 IR 176. On the other hand, Lush LJ. in Lloyd's v. Harper (1880) 16 ChD 290, at p 321 said:

"... I consider it to be an established rule of law that where a contract is made with A. for the benefit of B., A. can sue on the contract for the benefit of B., and recover all that B. could have recovered if the contract had been made with B. himself."

Windeyer J. in Coulls (at p.501) thought, correctly in our opinion, that Lush L.J. was referring to a contract where A was trustee of the promised benefit for B, a view in which Lord Upjohn acquiesced in Beswick (at p.101). Windeyer J. went on to say that the promisee could recover more than nominal damages in a situation in which he had sustained actual loss or damage by reason of the promisor's breach of his promise to confer a benefit on the third party. Plainly his Honour correctly stated the law in this respect.

His Honour then (at p.502) expressed his disagreement with suggestions by Lord Esher M.R. and Fry LJ. in Cleaver v. Mutual Reserve Fund Life Association [1892] 1 QB 147 , at pp 153, 157, 158 that the promisee could recover not unliquidated damages but any sum which the promisor had agreed to pay to the third party.

22. It is clear enough that the availability of an action for damages at the suit of the promisee for breach of the promise to benefit the third party is not a sufficient sanction to secure performance of the promise. What is more, the uncertain status of the decision in Jackson v. Horizon Holidays Ltd (1975) 1 WLR 1468 ; (1975) 3 All ER 92 is a telling indictment against the law as it presently stands. There, the plaintiff recovered substantial damages for the travel company's breach of contract to provide a satisfactory family holiday, but the basis on which the decision can be supported is by no means clear, even after the comments by the House of Lords in Woodar: at pp.283-284, 291, 293, 297; pp.576-577, 577, 584, 588 of All E.R. Rules which generate uncertainty in their application to ordinary contracts commonly entered into by the citizen call for reconsideration.

23. Next, there is the question whether the contract to confer a benefit on the third party is capable of specific performance. In Coulls Barwick C.J. considered (at p.478) that where a promisor promises to make a payment to a third party the promisee may obtain specific performance of the promise, at least where the nature of the consideration would have allowed the remedy.

Windeyer J. went even further, asserting (at p.503) that contracts to pay money or transfer property to a third party are always or very often contracts for breach of which damages are an inadequate remedy and that on this ground such contracts are susceptible of specific performance. We agree with his Honour's comment and with his additional observations (at p.503) which point the way to a more general recognition of the availability of specific performance as a remedy. As Lord Upjohn noted in Beswick (at p.102),

"Equity will grant specific performance when damages are inadequate to meet the justice of the case".

See also the dissenting judgment of Sir Garfield Barwick in Loan Investment Corporation of Australasia v. Bonner (1970) NZLR 724, at p 742. There is no reason to doubt that the courts will grant specific performance of a contract of indemnity or insurance, even if it involves payment of a lump sum, at least where the payment is to be made to a third party, damages being an inadequate remedy. But, even if we assume the availability of specific performance at the suit of the promisee in a wide variety of situations, there are nonetheless situations, such as that in Jackson v. Horizon Holidays Ltd, where specific performance is not a suitable remedy and damages are inadequate. In these situations the incapacity of the third party to sue means that the law gives less protection to the promisee and the third party than the promisor: see Collins, The Law of Contract (1986), p.107. And, assuming the availability of specific performance, the third party is nonetheless dependent on the willingness of the promisee to exercise his rights, in the absence of a trust, an agency relationship or an enforceable agreement between the promisee and the third party.

24. Then there is the trust of the contractual promise on which the appellant places particular reliance as a palliative of the difficulties generated by the common law principles. Despite the insistence in Vandepitte (at pp 79-80) and In re Schebsman (1944) Ch 83, at p 104, on the need for a clear expression of intention to create a trust and the warning that such an intention cannot necessarily be inferred from general words, there are a number of authorities which justify the difficulty expressed by Fullagar J. in understanding the reluctance of the courts sometimes to infer trusts (Wilson, at p.67). In Robertson v. Wait (1853) 8 Ex 299 (155 ER 1360), Lloyd's v. Harper, Les Affreteurs Reunis Societe Anonyme v. Leopold Walford (London), Ltd [1919] AC 801 and Williams v. Baltic Insurance Association of London, Ld (1924) 2 KB 282 the courts readily inferred the existence of a trust from the circumstance that the contract was made for the benefit of a third party. The contrast between Vandepitte and Williams is striking. Both cases concerned motor vehicle insurance policies expressed to cover persons driving the vehicle apart from the insured. Fullagar J.'s comment followed a reference to the two decisions. See also "Notes" (1933) 49 Law Quarterly Review 474. As we have seen, critics of the common law rules have pointed to the uncertainty surrounding the circumstances in which the courts will recognize a trust in contracts for the benefit of third parties as a reason for rejecting the trust concept as a sufficient answer to the difficulties caused by those rules: Corbin, "Contracts for the Benefit of Third Persons" (1930) 46 Law Quarterly Review 12, esp. at p.17.

25. This apparent uncertainty should be resolved by stating that the courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.

See Eslea Holdings Ltd v. Butts (1986) 6 NSWLR 175, at p 189.

26. But, even if adherence to this approach produces greater consistency of outcome, there are still the cases where the third party has no remedy because there is no sufficient intention to create a trust.

And there are other consequences which flow from recognizing the existence of a trust. It may circumscribe the freedom of action of the parties to the contract, especially the promisee, to a greater extent than the existence of a right to sue on the part of the third party. How can the promisee terminate the trust once it is created? Lest it be overlooked, we should mention that the creation of a third party trust rests on ascertaining the intention of the promisee, rather than on the intention of the contracting parties. And in the ultimate analysis it seems incongruous that we should be compelled to import the mechanism of a trust to ensure that a third party can enforce the contract if the intention of the contracting parties is that he should benefit from performance of the contract. a fortiori is that so if the intention common to the parties is that the third party should be able to sue the promisor.

27. In order to justify the privity and consideration rules in the face of these problems, three practical policy considerations are sometimes invoked.

First, they preclude the risk of double recovery from the promisor by the third party as well as the promisee.

If the third party is permitted to sue the risk of double recovery arises from the possibility that the one party may seek specific performance after another has recovered damages. The risk is insignificant; joinder of all parties in the first action will make the resulting decision binding on all.

28. The second point is that the privity requirement imposes an effective barrier to liability on the part of a contracting party to a vast range of potential plaintiffs. This may be significant in the case of government contracts intended to benefit a class of persons: see, for example, Martinez v. Socoma Companies, Inc. (1974) 521 P 2d 841. But it is difficult to justify the existence of a rule by reference to one of its indirect results, if in other respects its operation is unsatisfactory.

29. The third matter is more important. The recognition of an unqualified entitlement in a third party to sue on the contract would severely circumscribe the freedom of action of the parties, particularly the promisee.

He may rescind or modify the contract with the assent of the promisor, arrive at a compromise or assign his contractual rights. He may even modify the contract so that he diverts to himself the benefit initially intended for the third party. Professor Corbin suggested that any entitlement in the third party to enforce the provision in his favour would necessarily exist at the expense of the rights, privileges and liberties that the contracting parties enjoy under the common law rules: "Third Party Beneficiary Contracts in England" (1968) 35 University of Chicago Law Review 544, at p.549. But this does not entirely follow. The entitlement of the third party to enforce the provision in his favour can be subordinated to the right of the contracting parties to rescind or modify the contract, in which event the third party would lose his rights except in so far as he relied on the promise to his detriment (cf. Restatement, s.311(3)). To subordinate the third party's entitlement in this way would accord with legal principle and with the protection of the interests of the parties to the contract. There is to our minds no compelling reason why the interests of the third party should be preferred, though we acknowledge that in Queensland the parties lose their right to rescind and modify the contract without the third party's consent on the third party's acceptance of it (Property Law Act 1974 (Q.) ss.55(2), 55(3)(d)) and in Western Australia on the third party's adoption of the contract (Property Law Act 1969 (W.A) s.11(3); see Westralian Farmers v. Southern Meat Packers (1981) WAR 241, at pp 246, 251). The Queensland and Western Australian qualifications trace back to the recommendations of the English Law Revision Committee in 1937.

30. Should it be a sufficient foundation for the existence of a third party entitlement to sue on the contract that there is a contractual intention to benefit a third party? Or, should an intention that the third party should be able to sue on the contract be required? Under s.48 of the Insurance Contracts Act 1984 (Cth) and in the United States an intention to benefit a third party alone is necessary and that seems to be the position in Western Australia. But in Queensland (Property Law Act 1974 (Q.) ss.55(1), 55(6)(c)(ii)) and in New Zealand (Contracts (Privity) Act 1982 (N.Z.) ss.4, 8) an intention that the third party should be able to sue is required. This requirement again seems to have its origin in the recommendations of the English Law Revision Committee. As the contracting parties are unlikely to turn their attention to the enforcement by the third party, the ascertainment of this intention may well be fraught with similar problems to those that have surrounded the trust concept.

31. The variety of these responses to the problems arising from contracts to benefit a third party indicate the range of the policy choices to be made and that there is room for debate about them. A simple departure from the traditional rules would lead to third party enforceability of such a contract, subject to the preservation of a contracting party's right to rescind or vary, in the absence of reliance by the third party to his detriment, and to the availability in an action by the third party of defences against a contracting party. The adoption of this course would represent less of a departure from the traditional exposition of the law than other legislative choices which have been made. Moreover, as we have seen, the traditional rules, which were adopted here as a consequence of their development in the United Kingdom, have been the subject of much criticism and of legislative erosion in the field of insurance contracts. Regardless of the layers of sediment which may have accumulated, we consider that it is the responsibility of this Court to reconsider in appropriate cases common law rules which operate unsatisfactorily and unjustly.

The fact that there have been recent legislative developments in the relevant field is not a reason for continuing to insist on the application of an unjust rule as it stood before its alteration by the Insurance Contracts Act 1984 (Cth).

32. In the ultimate analysis the limited question we have to decide is whether the old rules apply to a policy of insurance.

The injustice which would flow from such a result arises not only from its failure to give effect to the expressed intention of the person who takes out the insurance but also from the common intention of the parties and the circumstance that others, aware of the existence of the policy, will order their affairs accordingly.

We doubt that the doctrine of estoppel provides an adequate protection of the legitimate expectations of such persons and, even if it does, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such an intricate doctrine. In the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind.

33. This argument has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its sub-contractors. It stands to reason that many sub-contractors will assume that such an insurance is an effective indemnity in their favour and that they will refrain from making their own arrangements for insurance on that footing.

That, it seems, is what happened in the present case. But why should the respondent's rights depend entirely on its ability to make out a case of estoppel?

34. In the circumstances, notwithstanding the caution with which the Court ordinarily will review earlier authorities and the operation of long-established principle, we conclude that the principled development of the law requires that it be recognized that McNiece was entitled to succeed in the action.

35. For the foregoing reasons, we would dismiss the appeal.