Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd

(1988) 165 CLR 107
[1988] HCA 44

---

(Judgment by: Dawson J)

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

Court:

Judges: Mason CJ
Wilson J
Brennan J
Deane J

Dawson JToohey J
Gaudron J

Subject References:
Insurance

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

---

Judgment by:
Dawson J

The appellant ("Trident") was the insurer under an insurance policy taken out by Blue Circle Southern Cement Ltd. ("Blue Circle") against, amongst other things, liability to the public for accidents occurring during the course of alterations and extensions to its limestone crushing plant at Marulan in New South Wales. The assured under the policy were expressed to be Blue Circle, all its subsidiary, associated and related companies, all contractors and sub-contractors and/or suppliers. The respondent ("McNiece") was the principal contractor engaged in the work at the plant. It was held liable in damages for injuries sustained by a workman in the course of his employment at the plant. The workman was not employed by McNiece but by a sub-contractor. The sole question argued in this Court was whether the New South Wales Court of Appeal was correct in holding, as it did, that McNiece could compel Trident to indemnify it under the insurance policy against its liability to the workman, notwithstanding that it, McNiece, was not a party to the contract of insurance and had given no consideration.

2. The decision of the Court of Appeal rejected, at least so far as an insurance policy is concerned, the established doctrine that only a person who is a party to a contract and who provides consideration may sue upon it. The rejection was a departure from accepted principle, for the Court of Appeal did not question that the decided cases lead to an opposite result. Nor was that questioned in argument before us. It is, for that reason, unnecessary to retrace in any detail the familiar course of the law since Tweddle v. Atkinson (1861) 1 B & S 393 (121 ER 762) established that a third person cannot sue upon a contract made between others even though made for his benefit. It matters not for present purposes whether that case turned upon the fact that the third person was not a party to the contract or upon the fact that consideration did not move from him; the one may in many circumstances be no more than the corollary of the other. What is important is that the doctrine of privity of contract has long been accepted and from it stems a long line of cases each affirming the doctrine as inescapable having regard to the place which the promise occupies in our concept of contract: see Fried, Contract as Promise, (1981).

3. The House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847 held the principle that only a person who is a party to a contract can sue on it to be fundamental. The principle was applied by the Privy Council in Vandepitte v. Preferred Accident Insurance Corporation of New York [1933] AC 70 to an insurance policy expressed to be for the benefit of persons not parties to the contract. The House of Lords reaffirmed the principle in Midland Silicones Ltd. v. Scruttons Ltd. [1962] AC 446 and in Beswick v. Beswick [1968] AC 58 the principle was not challenged.

4. All of this is against the background that in latter years privity of contract has had many more detractors than supporters. It is true that in a number of cases, with the law in its present state of development, it may work injustice. In Dunlop v. Selfridge, at p 855, Lord Dunedin was led to say of that case that it was "apt to nip any budding affection which one might have had for the doctrine of consideration" and that its effect was "to make it possible for a person to snap his fingers at a bargain deliberately made, a bargain not in itself unfair, and which the person seeking to enforce it has a legitimate interest to enforce". In 1937 a Law Revision Committee recommended in England (Cmnd. 5449) that where a contract by its express terms purported to confer a benefit directly upon a third party, it should be enforceable by the third party in his own name subject to any defences that would have been valid between the contracting parties. Then there were the efforts of some, notably Lord Denning, to deny unsuccessfully the principle and to find, equally unsuccessfully, an answer to it in s.56(1) of the Law of Property Act 1925 (U.K.). See Smith and Snipes Hall Farm Ltd. v. River Douglas Catchment Board [1949] 2 KB 500 ; Drive Yourself Hire Co. (London) Ltd. v. Strutt [1954] 1 QB 250; Beswick v. Beswick.

5. Equity, however, provided a means of averting the hardship which might otherwise arise from the application of the common law doctrine whilst at the same time preserving the conceptual basis of the law of contract. Any benefit promised to a third person under a contract cannot be enforced by the third person himself, but the promisee might be seen to hold his right under the contract on trust for the third person and to be compellable at the suit of the third person to exercise that right. In Lloyd's v. Harper (1880) 16 ChD 290 the Court of Appeal had no difficulty in endorsing the judgment of Fry J. at first instance (at p.309) where he said:

"... where a contract is made for the benefit and on behalf of a third person, there is an equity in that third person to sue on the contract, and the person who has entered into the contract may be treated as a trustee for the person for whose benefit it has been entered into."

See also Les Affreteurs Reunis Societe Anonyme v. Leopold Walford (London), Ltd. [1919] AC 801 . But in Vandepitte at pp 79-80 the Privy Council laid it down that the intention to create a trust "must be affirmatively proved" and cannot necessarily be inferred from the mere general words of the contract. Subsequently in In re Schebsman (1944) Ch 83, at p 104 du Parcq LJ. observed that a "court ought not to be astute to discover indications of such an intention". This led Fullagar J. in Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. (1956) 95 CLR 43 , at pp 67-68 to query any reluctance to infer a trust in cases of this sort. Particularly in the case of an insurance policy for the benefit of third persons, where equitable principle may, without undue complication, be employed to temper any harshness arising from the common law concept, there is every reason why the rules of equity should be given a generous application. Cf. Williams v. Baltic Insurance Association of London, Ltd. [1924] 2 KB 282 ; In re Engelbach's Estate (1924) 2 Ch 348; and see generally Starke, "Contracts for the Benefit of Third Parties. Part III", (1948) 21 Australian Law Journal 455. And as was recently said in this Court in Bahr v. Nicolay (1988) 62 ALJR 268, at p 272; 78 ALR 1 , at p 9:

"If the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting the interest or of giving effect to the intention, then there is no reason why in a given case an intention to create a trust should not be inferred."

The future development of this approach in facilitating recovery by a third person under a contract to which he is not a party must await other cases. In this case no trust was pleaded and an amendment to cure the defect was refused at the appeal stage because of the possibility that evidence might be called.

There is no appeal before us against that decision.

6. In the United States the doctrine of privity of contract has not been generally accepted since the decision of the New York Court of Appeals in Lawrence v. Fox (1859) 20 N.Y. 268: see Restatement, Second, Contracts (1979) Ch 14. In Australia, however, its acceptance was made inevitable by the decisions in Dunlop v. Selfridge and Vandepitte. There is no question that it is part of our law: Wilson v. Darling Island Stevedoring, per Fullagar J. at p 67; per Kitto J. at p 80; Coulls v. Bagot's Executor and Trustee Co. Ltd. (1967) 119 CLR 460 , per Barwick C.J. at p 478; per McTiernan J. at p 483; per Taylor and Owen JJ. at p 487; and per Windeyer J. at p.494. But equally in this country the doctrine has had its critics. In Olsson v. Dyson (1969) 120 CLR 365, at p 393 Windeyer J. referred to a suggestion by Lord Reid in Beswick v. Beswick at p 72 that if, having regard to the time which had elapsed since the recommendation of the Law Revision Committee, one had to contemplate a further long period of parliamentary procrastination, the House of Lords might find it necessary to deal with the matter. Windeyer J. then observed:

"And it may be that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear to take the same path. But, for the present time at all events, decisions of high authority stand directly in the way. We must take the law as it is and refuse to recognize a ius tertii arising by way of contract. In jurisprudence and legal theory and for recent commentators, this may be seen as a regrettable example of the rigidity of conceptual thinking.

Doubtless the common law of contract is developing in England, and along parallel lines here, by the application of old principles in new situations. But we cannot yet go further than the decisions in In re Schebsman; The Official Receiver v. Cargo Superintendents (London) Ltd. and Schebsman and Beswick v. Beswick in England and Coulls's Case here can carry us."

7. Even if an intention on the part of the promisee to hold his right under the contract upon trust cannot be discerned, either as a matter of express provision or as a matter of reasonable inference, a contract for the benefit of a third person is not entirely ineffective. It is binding both at law and in equity as between the promisor and promisee and the failure to perform it is a breach of contract. Damages recoverable by the promisee for breach may be only nominal, although if the relationship between the promisee and the third party is such that the promisee suffers detriment - for example, where the promise is to pay a sum which will reduce the promisee's indebtedness to the third person - substantial damages may be awarded. And as Windeyer J. pointed out in Coulls at p.503 there is every reason why, if damages to the promisee may only be nominal, the remedy is inadequate and an order for specific performance to pay money or transfer property may be made. See also Beswick v. Beswick. Cf. Jackson v. Horizon Holidays Ltd. (1975) 1 WLR 1468 ; [1975] 3 All ER 92 ; Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. (1980) 1 WLR 277 ; [1980] 1 All ER 571 . But it is one thing to expand the law or to change its direction by the application of recognized principles to new situations. It is quite another thing to confront the law head-on by the rejection of a rule which has stood for a century or more.

8. To say the least, one may question the role of the court below, as an intermediate court of appeal bound by the decisions of this Court, in purporting to determine this case by the abandonment of established doctrine.

See Dugan v. Mirror Newspapers Ltd. (1978) 142 CLR 583 ; State Government Insurance Commission v. Trigwell (1979) 142 CLR 617 ; Public Service Board of N.S.W. v. Osmond (1986) 159 CLR 656 ; Australian Conservation Foundation v. The Commonwealth (1980) 146 CLR 493 , per Gibbs J. at p 529; per Stephen J. at p 540; per Mason J. at p 552; McHugh, "Law Making in an Intermediate Appellate Court: The New South Wales Court of Appeal", (1987) 11 Sydney Law Review 183.

Like it or not, there can be no doubt, nor did the Court of Appeal entertain any, that this Court has accepted the rule that only those who are parties to a contract can sue upon it. If Wilson v. Darling Island Stevedoring did not establish that to be so, then Coulls clearly did. Indeed, in the latter case at p 494 Windeyer J. described the rule as incontrovertible. Those decisions, read in the light of Vandepitte, leave no room for argument whether or not the doctrine of privity applies to insurance policies expressed to be for the benefit of third persons. By what authority then, other than preference for a particular result, did the Court of Appeal decide that the rule has no application to the policy in this case?

9. The justification was said to lie in the fact that the Motor Vehicles (Third Party Insurance) Act 1942 (N.S.W.) s.10, the Life Insurance Act 1945 (Cth) s.94, and the Insurance Contracts Act 1984 (Cth) show that statute law applying in New South Wales has been progressively amended to give third person beneficiaries the right to sue on policies of insurance. So much may be conceded. Indeed, s.48 of the Insurance Contracts Act, had it been in force at the time, would have covered the very circumstances of this case. It provides, so far as is relevant, that:

"(1)

Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of his loss from the insurer in accordance with the contract notwithstanding that he is not a party to the contract.

(2)

Subject to the contract, a person who has such a right

(a)

has, in relation to his claim, the same obligations to the insurer as he would have if he were the insured; and

(b)

may discharge the insured's obligations in relation to the loss.

(3)

The insurer has the same defences to an action under this section as he would have in an action by the insured."

10. To establish the relevance of the legislative changes, reliance was placed upon a passage in the speech of Lord Diplock in Warnink v. Townend & Sons (Hull) Ltd. [1979] AC 731 , at p 743:

"Where over a period of years there can be discerned a steady trend in legislation which reflects the view of successive Parliaments as to what the public interest demands in a particular field of law, development of the common law in that part of the same field which has been left to it ought to proceed upon a parallel rather than a diverging course."

This Court commented upon that passage in Lamb v. Cotogno (1987) 61 ALJR 549, at p 552; 74 ALR 188 , at p 194 and pointed out that it represents an attenuated version of an idea first suggested by Pound in 1908: see Pound, "Common Law and Legislation", 21 Harvard Law Review 383. Pound's suggestion was that it should be possible in appropriate cases to go beyond the express provisions of a statute and to draw from it some principle to be applied by way of analogy in shaping the common law. The Court observed in Lamb v. Cotogno that Pound's approach never really gained general acceptance in the form in which he conceived it. If the more restricted approach adopted by Lord Diplock were to have any application, it could only be where it was possible to discern some general principle or trend from a series of enactments and where there was room for development of the common law along parallel lines. In other words, his Lordship was not suggesting that a court would be justified in departing from accepted doctrine where there was no room for departure or where there were only limited statutory changes to the law which afforded no indication of any policy beyond the actual provisions themselves. See also Public Service Board of N.S.W. v. Osmond, at pp 669-670.

11. Legislatures in this part of the world and in England have on a number of occasions been invited to abrogate the doctrine of privity of contract and to substitute for it the right of a third person to sue, in specified circumstances, upon a contract to which he is not a party. In Queensland and in New Zealand, following upon the reports of Law Reform Commissions, the common law rule has been abolished: see Property Law Act 1974 (Q.); Contracts (Privity) Act (N.Z.) 1982. Western Australia had passed similar legislation earlier: Property Law Act 1969 (W.A.) s.11(2) and (3). In England there was the recommendation of the Law Revision Committee in 1937 to which I have already referred. Against all of this it can hardly be said that the statutory provisions relied upon, which modify the application of the common law rule in New South Wales in several discrete instances only, involve anything like the sort of general trend which Lord Diplock had in mind. Moreover, his Lordship speaks of development and not abrogation of the common law making it plain that there must be some conceptual foundation for the parallel course which he advocates, not merely the arbitrary abandonment of an established doctrine in emulation of some particular statutory provision. And, of course, s.48 of the Insurance Contracts Act, which was relied upon by the Court of Appeal, proves too much. Not only does that Act make it plain that the legislature did not intend to interfere with the doctrine of privity in any manner other than that adopted by it, but it did not make s.48, the terms of which would cover this case, retrospective in its operation. It is a curious notion that a court should be able to do by way of analogous action that which the legislature did not do and manifestly did not intend to do.

12. This Court, whilst adhering to the doctrine of precedent, has always held itself able to depart from its own decisions when that is required for the proper exposition and development of the law. It is, therefore, not as confined as the court below which is bound by decisions of this Court. The argument before us accordingly took the higher ground that we ought to abandon, at least in the case of contracts of insurance, the rule that only a party to a contract can sue upon it, because it has produced results which are unsatisfactory.

But the invitation was not so much to engage in judicial creativity as to engage in the destruction of accepted principle, which is a very different thing. The difference was pointed out by Viscount Simonds in Midland Silicones Ltd. v. Scruttons Ltd. at pp 467-468:

"'Our law,' said Lord Haldane, 'knows nothing of a jus quaesitum tertio arising by way of contract.'

Learned counsel for the respondents claimed that this was the orthodox view and asked your Lordships to reject any proposition that impinged upon it.

To that invitation I readily respond. For to me heterodoxy, or, as some might say, heresy, is not the more attractive because it is dignified by the name of reform. Nor will I easily be led by an undiscerning zeal for some abstract kind of justice to ignore our first duty, which is to administer justice according to law, the law which is established for us by Act of Parliament or the binding authority of precedent. The law is developed by the application of old principles to new circumstances. Therein lies its genius. Its reform by the abrogation of those principles is the task not of the courts of law but of Parliament."

The same notion was elaborated by Sir Owen Dixon, "Concerning Judicial Method" in Jesting Pilate, (1965), p.152, at p.158:

"It is one thing for a court to seek to extend the application of accepted principles to new cases or to reason from the more fundamental of settled legal principles to new conclusions or to decide that a category is not closed against unforeseen instances which in reason might be subsumed thereunder.

It is an entirely different thing for a judge, who is discontented with a result held to flow from a long accepted legal principle, deliberately to abandon the principle in the name of justice or of social necessity or of social convenience.

The former accords with the technique of the common law and amounts to no more than an enlightened application of modes of reasoning traditionally respected in the courts.

It is a process by the repeated use of which the law is developed, is adapted to new conditions, and is improved in content. The latter means an abrupt and almost arbitrary change."

13. There are compelling reasons for this approach. Ordinarily the abrogation of settled principle leaves a gap which a court acting judicially is unable to fill. The fashioning of any replacement invariably requires the choice, as a matter of policy, between competing alternatives. The review required to form the appropriate policy is unsuited to judicial procedures, which necessarily impose a practical limit upon the capacity of a court for judicial innovation.

See State Government Insurance Commission v. Trigwell, at p 633.

This case provides a good illustration. Rejection of the doctrine of privity of contract by judicial decision could not be restricted upon any conceptual basis to contracts of insurance. There may be practical reasons for wishing to retain the doctrine in its application to some kinds of contract, but such a choice could not be made by a court by reference to any coherent body of principle. However, the rejection of the doctrine in anything other than a restricted manner requires the elaboration of a number of matters without which the law would be left unacceptably confused and uncertain. A glance at the legislation in those jurisdictions in which the doctrine has been abolished shows that it has been found necessary to provide for such matters as the manner in which the third person is to be specified in the contract, whether the benefit to the third person must be direct, whether any defence which is available against the promisee should be available against the third person and whether the promisee not being a party to any action should nevertheless be bound by the result, whether the third person should be bound by any obligations imposed upon him by the contract, whether acceptance of the contract by the third person is required and whether the contract may be discharged or varied without the consent of the third person. These are things which are beyond the purview of a court in its task of expounding the law in the context of resolving individual disputes.

14. No doubt there is still a considerable capacity in the law for the amelioration of any hardship which a third person beneficiary may suffer under the present rule. Windeyer J. thought so. But in the passage which I have cited from his judgment in Olsson v. Dyson he did not conceive of future development being other than by the adaptation of existing principles to meet new situations. The role of the Court must be limited. As was pointed out in State Government Insurance Commission v. Trigwell, at p 633, it is neither a legislature nor a law reform agency. It would do more harm than good to attempt to reach a right result by the wrong means.

15. I would allow the appeal.