Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd

(1988) 165 CLR 107
[1988] HCA 44

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(Judgment by: Toohey J)

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

Court:

Judges: Mason CJ
Wilson J
Brennan J
Deane J
Dawson J

Toohey JGaudron J

Subject References:
Insurance

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

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Judgment by:
Toohey J

The background to this appeal is set out in the judgment of Mason C.J. and Wilson J. It is unnecessary to repeat what is said there. Because of the terms on which special leave to appeal was granted, this Court is concerned with the application of the doctrine of privity of contract only in relation to a public liability indemnity policy. It is not called upon to deal with the doctrine in all its aspects. Still, it would be unreal to think that a decision upholding the Court of Appeal would not have implications for privity of contract in other situations. And the disposition of this appeal inevitably takes the Court into areas that lie outside the field of insurance.

2. The proposition that "... only a person who is a party to a contract can sue on it" (Viscount Haldane L.C. in Dunlop Pneumatic Tyre Company, Limited v. Selfridge and Company, Limited [1915] AC 847 , at p 853) has been the subject of much criticism by judges, academics and law reform agencies. Its origin is of doubtful legitimacy, as Professor Flannigan has demonstrated in "Privity - The End of an Era (Error)" (1987) 103 Law Quarterly Review 564. The law, although still fluid by the middle of the nineteenth century, is generally taken to have been settled by Tweddle v. Atkinson (1861) 1 B & S 393 (121 ER 762) in favour of the view that at common law a third party cannot sue on a contract made for his benefit. Nevertheless doubts surround the true ratio of this case. It may be that it was decided on the basis that the plaintiff was a stranger to the consideration rather than on the ground that he was not a party to the agreement (see Atiyah, The Rise and Fall of Freedom of Contract, (1979), pp.413-414, although this is disputed by Jacobs, "Judicial Reform of Privity and Consideration" (1986) Journal of Business Law 466, at p.467, n.12) or, as the defendant argued in Tweddle, on both grounds. The reports of the case do not provide a conclusive answer. Those found in (1861) 1 B. & S. 393, 4 L.T. 468, 9 W.R. 781 and 8 The Jurist, Pt. 1, 332 suggest that the plaintiff failed because he gave no consideration. However, the report in (1861) 30 L.J. (N.S.) Q.B. 265, especially the judgment of Wightman J., at p.267, supports the view that the absence of privity and lack of consideration moving from the plaintiff formed the basis of the decision.

3. If this conflict had to be resolved, the better view seems to be that the plaintiff in Tweddle failed because he was not a party to the contract and because he had not provided any consideration. This conclusion follows from the facts of the case and the parties' submissions. The facts are straightforward.

After marriage between the plaintiff (J.T.'s son) and X (W.G.'s daughter) J.T. and W.G. entered into a written agreement whereby W.G. agreed to pay 200 to the plaintiff and J.T. agreed to pay 100 to the plaintiff. The plaintiff was not a party to this written agreement although he and his wife later ratified and assented to the agreement. W.G. failed to provide the 200. W.G. having died, the plaintiff brought action against his executor. The defendant demurred. In support of the demurrer the defendant argued that the plaintiff could not sue upon the contract because he was a stranger to the agreement and to the consideration. The plaintiff's counsel conceded that if the general rule (as stated by the defendant) applied the action would not be maintainable. Nevertheless the plaintiff argued for an exception to this general rule on the grounds of "natural love and affection".

The argument seems to have been that a promise made to a father and consideration provided by him could extend to his children due to the natural love and affection that a father had for his children. In other words, the exception was being invoked to get over the hurdle of the plaintiff not being a party and not having provided any consideration. The judges in Tweddle were of the opinion that no such exception existed. Even if some "old" cases could be found in support of such an exception, it was no longer justified.

4. It follows then that Professor Flannigan's assertion, at p.569, that Tweddle was "decided exclusively on the absence of consideration moving from the third party" is open to challenge. It has been said that with the decision in Dunlop v. Selfridge: "From this day forward the two rules, the 'privity' rule and the consideration rule, were cemented into the common law as two separate rules" (Flannigan, p.572; and see Treitel, The Law of Contract, 7th ed. (1987), p.458). Nevertheless there are those who contend that there is but one rule, as for instance Furmston, "Return to Dunlop v. Selfridge?" (1960) 23 Modern Law Review 373, at pp 382-385. What authority there is in Australia favours the view that the two doctrines are separate: see Coulls v. Bagot's Executor and Trustee Co. Ltd. (1967) 119 CLR 460 .

5. In Vandepitte v. Preferred Accident Insurance Corporation of New York [1933] AC 70 the Privy Council acknowledged that "at common law no one can sue on a contract except those who are contracting parties and (if the contract is not under seal) from and between whom consideration proceeds" (at p.79). That decision is relevant so far as the present appeal is concerned because the Privy Council held that an insurer under a third party policy was not liable to a plaintiff who had obtained a judgment against the insured's daughter for damages for personal injuries caused by her negligence while driving the insured's car with his permission.

The privity rule was applied by the House of Lords in Midland Silicones Ltd. v. Scruttons Ltd. [1962] AC 446 and by the Privy Council in N.Z. Shipping v. Satterthwaite Ltd. [1975] AC 154 .

6. Notwithstanding, several law lords have expressed their unease at a law which precludes a third party from suing on a contract taken by another for his benefit. Lord Reid in Beswick v. Beswick [1968] AC 58 , at p 72; Lords Keith of Kinkel and Scarman in Woodar Ltd. v. Wimpey Ltd. (1980) 1 WLR 277 , at pp 297-298, 300, 1 All ER 571, at pp 588-589, 591; Lord Diplock in Swain v. The Law Society [1983] 1 AC 598 , at p 611, provide instances. "Unease" is perhaps too mild a word, at any rate for Lord Diplock, who spoke of the non-recognition of a jus quaesitium tertio as "an anachronistic shortcoming that has for many years been regarded as a reproach to English private law".

7. In Australia the privity rule has been recognized in Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. (1956) 95 CLR 43 ; Coulls v. Bagot's Executor and Trustee Co. Ltd. and in Olsson v. Dyson (1969) 120 CLR 365 . In the last of these cases Windeyer J. joined the critics, commenting, at p 393:

"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."

The Canadian courts have followed Midland Silicones Ltd. v. Scruttons Ltd. (see Canadian General Electric Co. Ltd. v. Pickford & Black Ltd. (1970) 14 DLR(3d) 372) and N.Z. Shipping v. Satterthwaite Ltd. (see ITO Limited v. Miida Electronics Inc. (1986) 28 DLR(4th) 641) and treat the concept as "one of general application" (Greenwood Shopping Plaza Ltd. v. Beattie (1980) 111 DLR(3d) 257, at p 263).

8. Not all are critical of the notion of privity. Thus, Barwick C.J. in Coulls v. Bagot's Executor and Trustee Co. Ltd., at p 478:

"It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another."

9. But this debate does not go to the issue which lies at the heart of this appeal. That issue, as I see it, is whether the principled development of the common law supports the conclusion of the Court of Appeal that "this Court should now declare that at common law a non party assured is, and has been for some time at common law, able to sue on a written policy of liability insurance" (McHugh J.A., with whom Hope and Priestley JJ.A. agreed. See now (1987) 8 N.S.W.L.R. 270, at p.287.)

10. Even when courts have expressed their impatience with the limitations imposed by privity of contract, they have applied the doctrine. At the same time they have not withheld approval from developments in the law that have by-passed privity of contract, so that, for instance, a promisee might be regarded as holding his right under a contract on trust for a third person to whom a benefit had been promised and might be required to exercise that right at the instance of the third person. There is no doubt considerable scope for the development of the law of trusts in this direction, and with reference to contracts of insurance. As Fullagar J. noted in Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd., at p 67:

"It is difficult to understand the reluctance which courts have sometimes shown to infer a trust in such cases."

But, in the present case, no trust was pleaded and the Court of Appeal refused to allow an amendment to the statement of claim to raise such an issue. The decision of the Court of Appeal did not involve sidestepping privity of contract; rather it rejected the notion in its application to contracts of insurance.

11. In my view, the proposition enunciated by the Court of Appeal that for some time at common law a non-party assured has been able to sue on a written policy of liability insurance is not supported by authority. The proposition seems to rest on the tenuous foundation that contracts of liability insurance have from time to time been enforced by persons who were not parties to those contracts. That may well be so where no objection has been taken by an insurer to a claim made by someone within the apparent scope of a policy, though not a contracting party to it. But that is to say no more than that commercial reality has not put obstacles in the way of the enforcement of such arrangements. It says nothing as to what the state of the law is. The generality of the statements in the authorities already mentioned, Australian and English, are against the proposition; I would add a reference to the decision of Connor J. in Jovanovic v. Broers (1979) 25 ACTR 39. And it is not to the point, except to demonstrate the unsatisfactory state of the law, to know that at times the courts have turned a blind eye to the consequences of privity. Thus in Gardner v. Moore [1984] AC 548 , a case involving agreements between the Motor Insurers' Bureau and the Minister of Transport in which the former agreed to compensate persons injured by uninsured drivers, Lord Hailsham of St. Marylebone L.C. said of the agreements, at p.556:

"Their foundations in jurisprudence are better not questioned any more than were the demises of John Doe and the behaviour of Richard Roe in the old ejectment actions."

12. To cite, as did McHugh J.A., examples of statutes which permit the enforcement of contracts by persons not parties to those contracts does not truly enlighten the development of the common law. Those statutes may amount to no more than acceptance of the need for legislative action because judicial change appears not to be available. It is a considerable step to draw from them "some principle to be applied by way of analogy in fashioning the common law" (Lamb v. Cotogno (1987) 61 ALJR 549, at p 552; 74 ALR 188 , at p 194).

13. To hold, as in the present case, that a person not a party to a contract of insurance may sue on that contract represents a change in the common law and that must be acknowledged. Against the background of the decisions of this Court in Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd.; Coulls v. Bagot's Executor and Trustee Co. Ltd. and Olsson v. Dyson, it is not, I think, a change to be made by an intermediate court of appeal. The change is not disguised by pointing to the various ways in which third parties have been permitted to sue, whether by way of trust, agency or the like; in this regard see Treitel, pp.484-496; Jacobs' Law of Trusts in Australia, 5th ed. (1986), pp.18-27. In the circumstances of the present case, given the scope of the insurance cover as formulated in the policy, it might not have been difficult to spell out a trust in favour of the respondent. But, for reasons already mentioned, that course is not open, at least not without an amendment to the statement of claim. It would require a remission to the trial judge to hear whatever evidence bore on the existence or non-existence of a trust; that course is not warranted nor, importantly, was it urged by the respondent.

14. In a quite different context, that of hearsay evidence, Lord Reid said in Myers v. Director of Public Prosecutions [1965] AC 1001 , at pp 1021-1022:

"The common law must be developed to meet changing economic conditions and habits of thought, and I would not be deterred by expressions of opinion in this House in old cases. But there are limits to what we can or should do. If we are to extend the law it must be by the development and application of fundamental principles. We cannot introduce arbitrary conditions or limitations: that must be left to legislation. And if we do in effect change the law, we ought in my opinion only to do that in cases where our decision will produce some finality or certainty....

The most powerful argument of those who support the strict doctrine of precedent is that if it is relaxed judges will be tempted to encroach on the proper field of the legislature, and this case to my mind offers a strong temptation to do that which ought to be resisted."

Can it be said that, in the present case, to uphold the Court of Appeal is to encroach on what is the proper field of the legislature, given the very strong preponderance of authority against the enforcement of a contract by a person who is not a party thereto?

15. The insurance policy in the present case indemnifies the assured against liability in respect of death or bodily injury to third parties. "The Assured" is defined as:

"Blue Circle Southern Cement Limited, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers."

16. The trial judge, Yeldham J., found that the respondent was within the description "The Assured" and that it was "sufficiently designated as a contractor". The respondent was the principal contractor for work being carried out by Blue Circle on one of the work sites identified in the policy.

Although the notice of appeal challenged the finding of Yeldham J., the appellant did not press the point in argument and this Court must accept the finding. Yeldham J. held that the act of issuing a statement of claim against the appellant "was an act of ratification so as to render the (respondent and appellant) parties to the contract of insurance". The Court of Appeal rejected the argument based on ratification and that point was not pursued before this Court. However the Court of Appeal, as already indicated, upheld the respondent's claim on the broader basis that a non-party assured is able, at common law, to sue on a written policy of liability insurance.

17. I do not accept that a non-party assured is, as the common law presently stands, able to sue. But equally I accept that the law which precludes him from doing so is based on shaky foundations and, in its widest form, lacks support both in logic or in jurisprudence. My concern is whether the law is so well entrenched that nothing short of legislative interference can fairly budge it.

18. My conclusion is that the law is not so well entrenched as to be incapable of change. Lord Reid commented in Tomlinson (A) (Hauliers) Ltd. v. Hepburn [1966] AC 451 , at pp 470-471:

"No doubt the principle preventing jus quaesitum tertio has been firmly established for at least half a century. But it does not appear to me to be a primeval or necessary principle of the law of England."

It is true that his lordship added:

"We must uphold it until it is altered."

But I do not understand Lord Reid to be excluding the possibility of alteration judicially as well as legislatively; the same may be said of Windeyer J. in Olsson v. Dyson, at p 393.

19. Although the use of trusts has been formally circumscribed by the requirement that "the intention to constitute the trust must be affirmatively proved" (Vandepitte, at pp 79-80; see also In re Schebsman (1944) Ch 83, at p 104), there is no doubt that they have enjoyed some success as a means of avoiding the consequences of privity of contract. The cases noted in Halsbury's Laws of England, 4th ed. (1974), vol.9, pars 339-341 and in Treitel, at pp.485-490 bear witness to this. Nevertheless there is force in the comment in Cheshire & Fifoot's Law of Contract, 5th Australian ed. (1988), par.(1535):

"But, despite its promising appearance and the positive terms in which it has occasionally been acclaimed, the (trust) device has in practice proved a disappointing and unreliable instrument, employed and rejected on some occasions on no very obvious principle."

20. At common law apparent exceptions have been recognized in the fields of agency, assignment of choses in action, carriage of goods, commercial letters of credit, covenants concerning land, claims in tort and proprietary or possessory rights: Halsbury, at par.336. Jacobs' Law of Trusts in Australia notes thirteen "common law modifications of the principles governing third party contracts" (at p.23). Within the area of insurance there has arisen a number of exceptions to privity of contract, though generally statutory in origin. Section 48 of the Insurance Contracts Act 1984 (Cth) now authorizes the sort of action which the respondent brought against the appellant. While the enactment of s.48 should not be taken as more than legislative recognition of the abrogation of privity of contract in the circumstances to which it refers, equally it does not stand in the way of this Court upholding the Court of Appeal if that course is otherwise warranted.

21. The Supreme Judicial Court of Massachusetts, in Choate, Hall and Stewart v. SCA Services Inc. (1979) 392 NE 2d 1045, took the step which had been taken more than a hundred years earlier by the New York Court of Appeals in Lawrence v. Fox (1859) 20 N.Y. 268 of permitting a plaintiff to sue on a contract to which he was not a party. In the Massachusetts case Kaplan J. referred to the various exceptions to privity of contract that had grown up, some of which he described as "rationalization(s) after the event" (at p.1051) and continued:

"The rather confusing patchwork should be supplanted by the general rule now prevalent, (a reference to the rule prevailing in other State jurisdictions allowing third party enforcement) which avoids circuity of action and is calculated to accord with the probable intentions of the contracting parties and to respond to the reasonable reliance of the third party creditor."

22. The same criticism may be made of privity of contract as it has developed in this country. There is a powerful statement by Professor Corbin in "Contracts for the Benefit of Third Persons" (1930) 46 Law Quarterly Review 12, at pp.44-45:

"Law is not a complete and perfect system of pre-existing and unchangeable rules, handed down on some Sinai in the dark infinity of the past. Instead it is an ever-changing and developing system of rules, every judicial decision as well as every legislative act being a part of the never-ending process of creation.

Every stated rule can be traced to some specific human inventor of the formula. Step by step, its life history can be traced, with every change in its wording created by a new jurist, and with every variation caused by the judicial decisions respecting new facts.

It may well be that the expansion of the trust concept to include cases such as these is an instance of the growth of law by fiction. It has often been by fiction that old rules have been avoided, discredited, and finally broken down.

No one familiar with the history of debt and assumpsit can doubt the growth of law through the giving of new meanings to old terms or can doubt the beneficence of the process. The result is the same whether reached by fiction or not. It is merely a question as to when independent judicial minds will openly recognize the fact that fiction has been employed, that a change has been worked in the law by its use, and that the time has come to state the result in terms that will no longer mislead able judges and mystify the lawyers who must advise their clients and predict judicial action."

Whether the expansion of the trust concept in this context is fairly described as a fiction is debatable.

But when a rule of the common law harks back no further than the middle of the last century, when it has been the subject of constant criticism and when, in its widest form, it lacks a sound foundation in jurisprudence and logic and further, when that rule has been so affected by exceptions or qualifications, I see nothing inimical to principled development in this Court now declaring the law to be otherwise in the circumstances of the present case. That view is strengthened when, as Windeyer J. pointed out in Olsson v. Dyson, at p 393: "It is not however a rule which is necessarily inherent in the idea of contract." The appellant entered into a contractual obligation with Blue Circle Southern Cement Ltd. and it did so with the intention that the benefit of that obligation should extend to those involved with Blue Circle as contractors and sub-contractors on the work sites in question. That is borne out by the terms of the policy. The respondent was sufficiently identified as one of those involved. The policy was intended by both the appellant and Blue Circle to be a basis of insurance in respect of the work being carried out on the sites and Blue Circle and its contractors and sub-contractors could be expected to arrange their business in that light.

23. Certainly a court must look long and hard at the implications of declaring the law to be otherwise than hitherto accepted. In particular the court must consider the impact of any change on existing rights and obligations. But in the present case, to allow the respondent to sue the appellant is to give effect to the presumed intention of the appellant at the time it issued the insurance policy. If that not be the case, then as Professor Flannigan noted, at p.579:

"If we are concerned with retaining the status quo in order to protect the planning interest, it is well to point out that those who plan on the basis of the rule are those who contract with the knowledge that they will not have to perform the contract, a very odd position for the common law to support."

24. When a final court of appeal is minded to change the common law, the notion of prospective overruling aims to deal with problems created by "departures from precedents on which expectations have been built" (Stone, Precedent and Law, (1985), p.186). It seeks to mitigate the hardship and possible injustice caused by overturning a law on which the parties have reasonably relied when ordering their affairs. The possible application of prospectivity does not arise in the present case for to declare that the law permits the respondent to bring action against the appellant does not frustrate the intentions of those involved; rather it gives effect to those intentions.

25. Yeldham J. was of opinion that "the inference is irresistible that, whether with or without the knowledge of the plaintiff (i.e. the respondent in the present appeal), Blue Circle took into account, as between itself and the plaintiff, in a financial way that it had contracted with the second defendant (i.e. the appellant in the present appeal) to insure the plaintiff, and in that sense the latter through Blue Circle provided consideration for part of the premium paid to the insurer".

26. McHugh J.A., at p.278, rejected this approach because there was no direct evidence to support it and because of what his Honour described as "a more basic objection", that there was "no evidence to suggest that McNiece made or authorized any payment or deduction in reliance on the indemnity given to The Assured". The respondent did not submit that McHugh J.A. erred in this view of the case so that the doctrine of estoppel provides no firm footing for the respondent. But it is enough, for present purposes, that the insurance policy was expressed to be and was intended to be for the benefit of others, of which the respondent was one and that the others might be expected to order their affairs accordingly.

27. The proposition which I consider this Court should now endorse may be formulated along these lines. When an insurer issues a liability insurance policy, identifying the assured in terms that evidence an intention on the part of both insurer and assured that the policy will indemnify as well those with whom the assured contracts for the purpose of the venture covered by the policy, and it is reasonable to expect that such a contractor may order its affairs by reference to the existence of the policy, the contractor may sue the insurer on the policy, notwithstanding that consideration may not have moved from the contractor to the insurer and notwithstanding that the contractor is not a party to the contract between the insurer and assured.

28. No doubt, a decision upholding the Court of Appeal will itself give rise to a number of questions. Are there other situations in which a third party may sue on a contract when consideration has not moved from the third party to the promisor? What defences are available to the promisor in such cases?

These are questions which do not now require an answer. Other situations must await another day; the terms on which special leave to appeal was granted preclude a decision in wider terms than have been expressed in these reasons.

The defences available to an insurer against whom action may lie at the suit of a third party do not have to be explored for none was advanced on behalf of the appellant before this Court.

29. The appeal should be dismissed.