Review of Australian Contract Law: Submission on Privity of Contract and Third Party
Rights
Infolet 5: Should contract law be harmonised?
Infolet 5 raises for consideration whether Australian contract law needs to be harmonised,
and if so, in what area? The Infolet also cites, inter alia, the matter of third parties’ rights
under a contract where there are differences between jurisdictions.
This submission addresses this specific issue and submits firstly that the privity doctrine
should be abolished and that third parties rights should be statutorily recognised; secondly,
that the present statutory laws providing for third party rights in Western Australia (WA),
Queensland (Qld) and Northern Territory (NT) need to be harmonised.1
A. Abolition of the privity doctrine and need for statutory recognition of third party
rights
The rule of privity was established as early as 1861 in the case of Tweedle v Atkinson. 2 In
Australia, the doctrine of privity was recognized in a number of High Court decisions, see for
example Coulls v Bagot’s Executor and Trustee Co Ltd.3 However the privity rule is heavily
criticised for its inability to give effect to the intention of contracting parties to allow a third
party to enforce a contract for promises made in his or he favour. The shortcomings of the
privity doctrine and support for its reform have received much academic attention in the
United Kingdom4 as well as in Australia. Although the Australian High Court decision in
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd created a new exception (the
‘Trident exception’),5 there are limitations in the uncertainty on the extent of its scope. The
cases decided after Trident shows that there are two views on this matter; first the cases
that limits the application of the exception to insurance contracts only6 and secondly, cases
that apply the exception to situations outside the context of insurance contracts.
1
The NT statute is similar to the Qld statute, thus in this submission only the WA and Qld statute will be
referred and compared. Further, to date there has been no decision on the NT statute.
2
(1861) 763 All ER 369. For a historical review, see Palmer, Vernon V, The Paths to Privity: The History of Third
Party Beneficiary Contracts (San Francisco: Austin & Winfield, 1992); Hallebeek, Jan & Dondorp, H, Eds,
Contracts for a Third-Party Beneficiary – A Historical and Comparative Account (Martinus Nijhoff Publishers,
2008).
3
(1967) 119 CLR 460.
4
See for eg, Flannigan, R, “The End of an Era (Error)”103 LQR 564; Adams, JN, Deryck Beyleveld and Roger
Brownsword, “Privity of Contract – the Benefits and the Burdens of Law Reform” [1997] Modern Law Review
238–264; Beatson, Jack, “Reforming the Law of Contracts for the Benefit of Third Parties: A Second Bite at the
Cherry” (1992) 45 CLP 1-28; Dean, Meryll, “Removing a Blot on the Landscape – The Reform of the Doctrine of
Privity” [2000] JBL 143–152; Forbes, Robert E, “Practical Approaches to Privity of Contract Problems” (2002) 37
CBLJ 357-387; Macmillan, Catherine, “Privity and the Third Party Beneficiary: ‘The Monstrous Proposition’”
[1994] LMCLQ 22–29; McCamus, John D, “Loosening the Privity Fetters: Should Common Law of Canada
Recognize Contracts for the Benefit of Third Parties?” (2001) 35 CBLJ 173-215; Kelly, Cliona, “Privity of Contract
– The Benefits of Reform” [2008] 1 Judicial Studies Institute Journal 145-170.
5
(1988) 165 CLR 107.
6
See for eg Rail Corporation of New South Wales v Fluor Australia Pty Ltd [2008] NSWSC 1348; Westina
Corporation Pty Ltd v BCG Contracting Pty Ltd [2008] WADC 183, District Court of Western Australia..
1
In the United Kingdom, the inadequacies of the privity doctrine have been recognised and
legislative intervention7 led to the Contract (Third Parties) Act 1999 which sets out the
criticisms and justifications for reform which has been well summarised as follows:8
(1) the privity rule defeats the intention of contracting parties by preventing third
parties from suing when this was intended by them, (2) the rule is unjust to third
parties in defeating their expectation and reliance interests, (3) the rule creates
difficulties in commercial life, (4) the rule creates a ‘legal black hole’ into which
contractual rights and liabilities simply disappear, (5) exceptions to the privity rule
are piecemeal, complex and uncertain and (6) the rule has been abrogated
throughout much of the common law world including the United States, New
Zealand and parts of Australia. Moreover, the legal systems of most of the member
states of the European Union recognize and enforce the rights of third parties under
contracts.
It is useful to cite the view of Hugh Beale which may be considered as a fair review of this
statute, as follows:
While it is perhaps too soon to claim that the Contracts (Rights of Third Parties) Act
1999 has been an outstanding success, in that as yet its use seems to be limited, I
think we can say that it has certainly not been a failure. Rather I regard it as useful
but still underused.9
For considerations strengthening the internationalisation of Australian contract law and in
view that English common law (from which Australian common law originated) has already
adopted changes, this is a suitable time to seriously consider abolishing the privity rule
towards a federal law statutorily recognising third party rights. The need for statutory
recognition has already been acted upon and initiated in three Australian states.
B. Statutory modifications and need for harmonisation
Statutory modifications have been made to the privity rule in Australia in Western Australia
(s 11 Property Law Act 1969 (WA)), in Queensland (s 55 Property Law Act 1974 (Qld)) and in
Northern Territory (s 56 Law of Property Act 2000 (NT)). However the legislative approach is
different as seen in the three important aspects: (i) the main provision allowing a third party
beneficiary to enforce a benefit in a contract intended for him or her, (ii) the contracting
parties’ rights to vary or discharge the contract and (iii) defences available to defendants in
proceedings brought by a third party beneficiary as would be available if the third party had
been named as a party.
7
See Chen-Wishart, Mindy, Contract Law (Oxford University Press, 3rd ed, 2010) 189-190.
The Law Commission Report: Privity of Contract: Contract for the Benefit of Third Parties, Law Com 242 Cm
3329, 1996
9
See Beale, Hugh, “A Review of the Contracts (Rights of Third Parties) Act 1999” in Burrows, Andrew and Peel,
Edwin (eds) Contract Formation and Parties (OUP, 2010) 225-250.
8
2
In relation to (i), as seen in the provisions of the Western Australia Act,10 and the
Queensland Act,11 there are two different approaches;12 the ‘adoption’ test under s 11(2)
10
Section 11 provides as follows:
(1) A person may take an immediate or other interest in land or other property, or the benefit of any
condition, right of entry, covenant or agreement over or respecting land or other property, although he is not
named as a party to the conveyance or other instrument that relates to the land or property.
(2) Except in the case of a conveyance or other instrument to which subsection (1) applies, where a contract
expressly in its terms purports to confer a benefit directly on a person who is not named as a party to the
contract, the contract is, subject to subsection (3), enforceable by that person in his own name but —
(a) all defences that would have been available to the defendant in an action or proceeding in a court of
competent jurisdiction to enforce the contract had the plaintiff in the action or proceeding been named as a
party to the contract, shall be so available;
(b) each person named as a party to the contract shall be joined as a party to the action or proceeding; and
(c) such defendant in the action or proceeding shall be entitled to enforce as against such plaintiff, all the
obligations that in the terms of the contract are imposed on the plaintiff for the benefit of the defendant.
(3) Unless the contract referred to in subsection (2) otherwise provides, the contract may be cancelled or
modified by the mutual consent of the persons named as parties thereto at any time before the person
referred to in that subsection has adopted it either expressly or by conduct.
11
Section 55 provides as follows:
(1) A promisor who, for a valuable consideration moving from the promisee, promises to do or to refrain from
doing an act or acts for the benefit of a beneficiary shall, upon acceptance by the beneficiary, be subject to a
duty enforceable by the beneficiary to perform that promise.
(2) Prior to acceptance the promisor and promisee may, without the consent of the beneficiary, vary or
discharge the terms of the promise and any duty arising from it.
(3) Upon acceptance—
(a) the beneficiary shall be entitled in the beneficiary’s own name to such remedies and relief as may be just
and convenient for the enforcement of the duty of the promisor, and relief by way of specific performance,
injunction or otherwise shall not be refused solely on the ground that, as against the promisor, the beneficiary
may be a volunteer; and
(b) the beneficiary shall be bound by the promise and subject to a duty enforceable against the beneficiary in
the beneficiary’s own name to do or refrain from doing such act or acts (if any) as may by the terms of the
promise be required of the beneficiary; and
(c) the promisor shall be entitled to such remedies and relief as may be just and convenient for the
enforcement of the duty of the beneficiary; and
(d) the terms of the promise and the duty of the promisor or the beneficiary may be varied or discharged with
the consent of the promisor and the beneficiary.
(4) Subject to subsection (1), any matter which would in proceedings not brought in reliance on this section
render a promise void, voidable or unenforceable, whether wholly or in part, or which in proceedings (not
brought in reliance on this section) to enforce a promissory duty arising from a promise is available by way of
defence shall, in like manner and to the like extent, render void, voidable or unenforceable or be available by
way of defence in proceedings for the enforcement of a duty to which this section gives effect.
(5) In so far as a duty to which this section gives effect may be capable of creating and creates an interest in
land, such interest shall, subject to section 12, be capable of being created and of subsisting in land under any
Act but subject to that Act.
(6) In this section—
acceptance means an assent by words or conduct communicated by or on behalf of the beneficiary to the
promisor, or to some person authorised on the promisor’s behalf, in the manner (if any), and within the time,
specified in the promise or, if no time is specified, within a reasonable time of the promise coming to the
notice of the beneficiary.
beneficiary means a person other than the promisor or promisee, and includes a person who, at the time of
acceptance is identified and in existence, although that person may not have been identified or in existence at
the time when the promise was given.
promise means a promise—
(a) which is or appears to be intended to be legally binding;
and
3
and the ‘acceptance’ test under s 56. The s 11(2) test for a third party enforcement is in line
with the position in England and New Zealand. Both the latter statutes however have the
additional feature of a “rebuttable presumption” to determine whether a third party should
be granted enforcement rights over a contract. Essentially in the term which a third party
seeks to enforce ‘purports to confer a benefit to him’, there would be a ‘rebuttable
presumption’ that the third party is able to enforce the contract.13 This presumption can be
rebutted if the promisor can prove that the contracting parties do not intend the third party
to enforce the contract. The benefit of flexibility from the use of a ‘rebuttable presumption’
is useful as there may be situations where the contracting parties fail to mention in their
contract that the third party is entitled to enforce the contract despite the fact that it is
made for his benefit. In these situations, the presumption can relieve the third party from
the burden to prove that they intend for him to enforce the contract. Besides, the
presumption allows the contracting parties, particularly, the promisor an opportunity to
rebut it by showing that they do not intend to grant any enforceable rights to the third
party.
Another matter related to the enforceability of third party rights is the formal requirements
necessary for the contract conferring this right. In Western Australia, due to s 11(2)’s
wording that the ‘contract expressly in its terms purport to confer a benefit’ on a third
party, it has been interpreted to be confined to formal written agreements. In contrast, s
55(6) provides that the promise (to do or to refrain to do an act for the benefit of a
beneficiary) may be made by deed, oral or in writing.14 In relation to the beneficiary, he
does not need to be in existence at the time the promise is created. He only needs to be
identified and exist at the time of the acceptance of the promise.15 In this regard, s 55(6) is
explicit and does not suffer from the difficulties of the Western Australia statute. Thus, in
relation to this matter of formal requirements, the position under s 55(6) is preferable to s
11(2). It is foreseeable that a large number of the contracts made for the benefit of third
parties involved commercial parties and therefore such contracts would most likely be in
writing. But to exclude oral contracts and contracts which are partly written and partly oral
seems harsh and may exclude some deserving third parties. Perhaps, this is the reason why
(b) which creates or appears to be intended to create a duty enforceable by a beneficiary;
and includes a promise whether made by deed, or in writing, or, subject to this Act, orally, or partly in writing
and partly orally.
promisee means a person to whom a promise is made or given.
promisor means a person by whom a promise is made or given.
(7) Nothing in this section affects any right or remedy which exists or is available apart from this section.
(8) This section applies only to promises made after the
commencement of this Act.
12
See also Vroegop “The New Zealand Contracts (Privity) Act 1982” (1984) 58 Australian Law Journal 5, 6 who
opines that ‘adoption’ is similar to ‘acceptance’ which effectively means the point of time at which the
contracting parties to the contract become unable to vary it. There are however differences as acceptance is
defined further in s 55(6) and a third party beneficiary has to accept within the time specified in the promise or
if no time is specified, within a reasonable time. Under s 11(3), the section is silent whether notification of the
adoption needs to be given by a third party beneficiary.
13
For the English position, see s 1(1)(b) Contracts (Rights of Third Parties ) Act 1999, see also s 4 of the New
Zealand Contracts (Privity) Act 1982.
14
Section 55(6)(b). On the contrary, in Northern Territory, the statutory reform is limited to promises in
writing only, see s 56(6) Law of Property Act 2000 (NT). Arguably, this is too restrictive as there are contracts
made for the benefit of third parties which are not in writing or partly in writing and partly orally made.
15
See definition of ‘beneficiary’ in s 55(6).
4
in the United States, England and New Zealand, third parties of oral contracts and contracts
which are partly written to enforce the contract if the specified requirements are satisfied.
In relation to (ii), s 11(3) provides that a third party loses the right to enforce a contract if it
is cancelled or modified by the mutual consent of the contracting parties unless the contract
prohibits such cancellation or modification. Nonetheless, the contracting parties will lose
the right to cancel or modify the contract if the third party has ‘adopted’ the contract either
expressly or impliedly by conduct. The approach in the Qld Act is different, s 55(2)16 states
that the contracting parties can vary or discharge the promise without obtaining the
beneficiary’s consent. However, once the beneficiary accepts the promise, any variation or
revocation of the promise can only be made if the contracting parties and the beneficiary
consent to such a change.17 There are issues and limitations in both approaches.18
However, the concern as to when the third party’s right would crystallise and prevent the
constraint parties from altering or revoking the benefit is not just whether which type of
test is better19 but also whether one test is sufficient. In the US, England and New Zealand,
the law on third party rights allow three different approaches in dealing with this issue. For
instance, in England, the third party’s right crystallises when he has communicated his
assent to the promisor, where the latter is aware that he has relied on the term or the latter
can reasonably be expected to have foreseen that he would relied on the term and he had
in fact relied on it.20 The different approaches can ensure that the law is not too rigid that
could result in the exclusion of deserving third parties. It can be contended that by utilising
more than one approach, this would solve some of the interpretive difficulties that plagued
the Australian courts in some of the cases relating to the application of the ‘adoption’ and
‘acceptance’ approaches.
In relation to (iii), s 11(2)(a) provides that the promisor, in the course of an action brought
by a third party is entitled to rely on all the defences which would be available to him or her
if the third party is a party to the contract. The effect is similar in the Queensland statute
although differently worded. Section 55(4)21 provides that the promisor is entitled to rely
on defences and any matter which will render the promise to be void, voidable or
unenforceable if the promisee is the one bringing the legal action. For purposes of reform,
the wider English position can be considered which allows the contracting parties to
expressly include any defences and set-off against the promise arising from the contract
which is not connected to the benefit provided to the third party.22 It also allows the
contracting parties to exclude any defences, set-off and counterclaims which would be
available to the promisor.23
16
The equivalent provision in Northern Territory is s 56(2) Law of Property Act 2000 (NT).
Section 55(3)(d). The equivalent provision in Northern Territory is s 56(3)(d) LPA 2000 (NT).
18
It is not the aim or within the scope of this submission to discuss these issues but merely to highlight the
differences in the WA and Qld statutes and propose consideration of the position in other jurisdictions.
19
There has been academic opinion questioning the rationale behind requiring third party’s assent to
determine the contracting parties’ right to modify the contract as seen in Eisenberg, MA, “Third-Party
Beneficiaries” 92 Columbia Law Review (1992) 1358-1430, at 1419-1421 and Geis, GS “Broadcast Contracting”
Public Law and Economics Research Paper Series No. 2011-06 of University of Virginia School of Law obtained
from http://ssrn.com/abstract=1926747 at p 18.
20
Section 2 England Act.
21
The equivalent provision in Northern Territory is s 56(4) LPA 2000 (NT).
22
Section 3(3) England Act.
23
Section 3(5) England Act.
17
5
The joinder of proceedings is only mandated in Western Australia. Section 11(2)(b) requires
each party to the contract to be joined as a party to the legal action brought by the third
party against the promisor.24 The rationale behind this rule is to avoid double recovery by
the promisee and the third party as seen in Westralian Farmers where the buyer was
ordered to pay the agent despite having paid the purchase price directly to the seller. This
could have been avoided had if the joinder procedure was utilised so that each party could
be given their ‘just due’ in one proceeding.25
C. Conclusion
Based on the above, this submission concludes that due to limitations of the privity
doctrine, it is time to consider its abolition. While there is some measure of judicial
developments with the creation of the Trident exception, judicial reform is limited.
Statutory interventions in significant jurisdictions indicate that statutory recognition may be
the best way forward. This will also assist in the process to internationalise Australian
contract law (Infolet 6) and in relation to Australia’s position in the Asian Century where
four of its top ten trading nations (that is, China, Japan, Korea and Thailand) do have some
form of recognition for third party rights.26 As globalised trade is key for Australia’s
economy, this move to internationalise Australian contract law will make trading
relationships easier and smoother.
Submitted by:
May Fong Cheong
Professorial Visiting Fellow, Faculty of Law, University of New South Wales
LLB (Hons) (Malaya), LLM (NUS), Phd (Sydney), Diploma in Shariah Law & Practice (IIUM).
Pei Meng Tan
Assistant Professor, Faculty of Accountancy and Management, University Tunku Abdul
Rahman
LLB (Hons) LLM (Lond), Phd (Malaya).
20 July 2012
24
In Jones v Bartlett [1998] 146 FCA 151, Gaudron J held that one of the reasons behind the failure of the son
to rely on s 11(2) was that he did not join his parents to his legal action against the landlord. Similarly, in JWH
Pty Ltd v Kimpura Pty Ltd [2004] WASC 39, it was held that the third party could not rely on s 11(2) as not all
parties to the deed were joined as parties to the action.
25
Siopis, A, Note, (1983) 57 Australian Law Journal 640–642 at pp 641–642; see also Longo, J, “Privity and the
Property Law Act: Westralian Farmers Co-Operative Ltd. v Southern Meat Packers Ltd (1983) 15 University of
Western Australia Law Review 411, 416
26
See separate submission, May Fong Cheong, “Submission on Australian Contract Law in the Asian Century),
20 July 2012.
6