Privity Reform

REPORTS
Privity of Contract –
the Benefits and the Burdens of Law Reform
John N. Adams, Deryck Beyleveld and Roger Brownsword*
Five years after the publication of its provisional recommendations in favour of

reforming the privity rule in English contract law,1 the Law Commission2 has
confirmed its view – and, indeed, the view of a considerable body of judicial3 and
academic4 opinion, as well as that of the vast majority of the Commission’s
consultees5 – that the doctrine is ripe for reform. Thus, in its central
recommendation, the Commission proposes that third parties (subject to being
expressly identified) should have the right to enforce contractual provisions where
either (i) the contracting parties expressly so provide (the so-called ‘first limb’ of
the test of enforceability) or (ii) the contracting parties intend to confer a benefit on
the third party (the so-called ‘second limb’ of the test of enforceability) – provided
that the contracting parties do not also intend that the third party beneficiary should
not have the right to enforce the contract. So, to take a couple of familiar
illustrative examples, the first limb of the test of enforceability would apply to a
case such as Tweddle v Atkinson6 (where the contracting parties expressly provided
for the third party to have the right to enforce the contract); and the second limb
would apply to a case such as that of Mrs Beswick,7 who famously pleaded that her
nephew should not renege on his contractual promise made for her benefit. The
Report thus signals a decisive break from the orthodoxy of the privity doctrine
which, in the earlier part of the century, was identified by Viscount Haldane LC as
one of the fundamental principles of English contract law.8
*Faculty of Law, University of Sheffield.

We are particularly grateful to Professor Andrew Burrows (Law Commission) and Professor Hugh Collins
who supplied detailed comments on earlier drafts of this paper and to our colleague, Professor Graham
Battersby, who gave freely of his time in acting as a sounding board for many of the ideas in it. We are
grateful too to those who participated in seminar presentations of the paper given at the Institute for
Commercial Law Studies at the University of Sheffield and at the University of Staffordshire. Of course,
the standard caveats apply.
1 Privity of Contract: Contracts for the Benefit of Third Parties (Law Com Consultation Paper No
121, 1991).
2 Privity of Contract: Contracts for the Benefit of Third Parties (Law Com No 242 Cm 3329 July
1996) (hereafter, ‘the Report’).
3 The Report opens with Steyn LJ’s critical observations on the injustice of the privity principle in
Darlington Borough Council v Wiltshier Northern Ltd. [1995] 1 WLR 68, 76 — particularly to the
effect that ‘there is no doctrinal, logical, or policy reason why the law should deny effectiveness to a
contract for the benefit of a third party where that is the expressed intention of the parties.’ For
further examples of judicial calls for reform, see paras 2.64–2.69 of the Report.
4 In para 2.63 (at note 163) of the Report, the Commission cites some 16 examples, starting with
Corbin (1930) 46 LQR 12. The majority of the academic calls for reform to English law, however,
lie in the last ten years (including our own initial calls in (1990) 10 Legal Studies 12 and (1991) 54
MLR 48).
5 See para 1.6 of the Report.
6 (1861) 1 B & S 393.
7 See Beswick v Beswick [1968] AC 58.
8 Dunlop Pneumatic Tyre Co v Selfridge and Co Ltd. [1915] AC 847, 853.
ß The Modern Law Review Limited 1997 (MLR 60:2, March). Published by Blackwell Publishers,
238 108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.
March 1997] Privity of Contract
The task of reforming such a discredited doctrine as privity, however, is far from
straightforward. It is one thing to condemn the doctrine as unfair and inconvenient,
but how is reform best effected? Essentially, there are two models as to how to
proceed.9 According to the first model, in a climate that is no longer rigidly
formalistic,10 reliance may be placed on the judiciary to relax orthodox privity
restrictions where they give rise to concern (so that a simple enabling provision –
for example, of the kind proposed by the Ontario Law Reform Commission11 –
explicitly authorising the courts to exercise such a discretion is all that is required).
The Commission, however, prefers a second model, recommending (as in its
Consultation Paper) that a detailed legislative scheme is required. The practical
advantage of laying down a calculable legislative scheme for third party rights is
obvious; moreover, the Commission fears that it could be accused of ducking its
responsibilities if it left major questions of principle to be settled by the courts.12
However, even in an ideal world, free of the pressure to deliver a politically
‘sellable’ package, the challenge, as Professor Andrew Burrows has put it, is the
familiar one of striking the right balance between the interests of certainty
(calculability) and flexibility (fairness in the individual case).13 As might already
be apparent, the centrepiece of the proposed scheme, the test of enforceability, is
an heroic attempt to compromise the needs of contractors to be able to predict and
to plan with the need to reserve some degree of flexibility (conspicuously so in the
proviso to the second limb of the test).
Even if we agree that a detailed legislative scheme is the right way ahead, there
remain controversial questions about how far, and how fast, we should proceed.
For example, should the legislation make special provision for consumer
contractors along the lines currently being debated in the European Union?14 Or,
should the legislation tackle the vexed question of whether sub-contract exclusions
or restrictions should bind a third-party head-contractor?15 In both instances, the
Commission prefers to keep these questions at arm’s length and generally the
Commission favours a cautious approach, putting to one side ‘more radical
possibilities . . . for fear that the central reform would otherwise be endangered’16 –
advancing instead a package of what it perceives to be ‘relatively conservative and
moderate measure[s]’17 calculated to modify the privity doctrine in a way that will
9 A third model invites incremental relaxation of the rule in specific contexts — for example, as was
done with bills of lading (see the Bills of Lading Act 1855 and, subsequently, the Carriage of Goods
by Sea Act, 1992: and see the Report, paras 2.59 and 12.7–12.11). However, if the reform of privity
is to be of a general nature, the incremental model is not appropriate.
10 See, eg Johan Steyn, ‘Does Legal Formalism Hold Sway in England?’ (The 1996 Presidential
Lecture to the Bentham Club, University College, London); Robert Stevens, ‘Judges, Politics,
Politicians and the Confusing Role of the Judiciary’ (Hardwicke Building Lecture, London, 21 May
1996); and generally, see John Adams and Roger Brownsword, Understanding Law (London:
HarperCollins, 1992; Sweet and Maxwell, 1996) chs 4 and 5.
11 For discussion, see the Report paras 5.5–5.6.
12 See ibid para 5.6.
13 Professor Andrew Burrows, ‘Reforming Privity of Contract: Law Commission Report No. 242’
SPTL Annual Conference, Cambridge, 11 September 1996, especially 1 and 9.
14 See European Commission, Green Paper on Guarantees for Consumer Goods and After-Sales
Services, COM (93) 509 final, 1993; on which, see Stephen Weatherill, ‘Consumer Guarantees’ (1994)
110 LQR 545. Most recently, see the draft Directive on the Sale of Consumer Goods and Associated
Guarantees, COM (95) 520 final, 1996; on which, see Proposal for a European Parliament and
Council Directive on the Sale of Consumer Goods and Associated Guarantees: A Consultation
Document (Department of Trade and Industry, 18 September 1996). And, for discussion of whether
there should be a special test of enforceability for consumers, see the Report paras 7.54–7.56.
15 See eg Morris v C.W. Martin and Sons Ltd [1966] 1 QB 716; The Pioneer Container [1994] 2 All
ER 250 (noted by Phang (1995) 58 MLR 422); and see discussion in text below.
16 See the Report, para 1.9.
17 ibid para 5.10.
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The Modern Law Review [Vol. 60
enjoy widespread support.18 Accordingly, whilst some might think that the
Commission’s proposals are a bit unexciting, the progressive view is that they
should be seen as initiating, rather than as placing final limits upon, a programme
of modification to the privity doctrine.
The Underlying Principles: Three Background Reservations

In both the Consultation Paper and the Report, the Commission takes it as axiomatic
that the law should track the intentions of the contracting parties. As the Commission
puts it, its recommendations ‘rest on an underlying policy of effectuating the
contracting parties’ intentions.’19 Accordingly, if the contractors intend that their
contract should create an enforceable obligation in relation to a third party, then the
contract should have such a third party effect; if the contractors do not so intend, then
the contract should not have such a third party effect. However, if a third party is
granted the right to enforce a transaction, then the Commission accepts that the
interests (and intentions) of the original contractors are no longer the only
consideration – the policy of effectuating the contractors’ intentions is qualified by
the need to protect the third party’s ‘reasonable expectations of the promised
performance.’20 In general, the Commission sees this as unproblematic, ‘the
intentions of the contracting parties and the reasonable expectations of the third
party [normally being] consistent with each other’;21 but where the contractors wish
to vary or cancel their contract, then (exceptionally) the interests of the third party
might have to prevail over those of the contracting parties.22
The Commission’s thinking, therefore, comprises two guiding principles: respect
for the intentions of the contracting parties; and respect for the third party’s
reasonable expectations. Before we engage with the detail of the recommendations,
it is as well to flag three background reservations that we have about the
Commission’s philosophy. These reservations concern: (a) the relationship between
contractual intention and the constitutive purpose of a transaction; (b) the
relationship between contractual intention and prescribed transactional regimes;
and (c) the relationship between contractual intention and legitimate expectation.
Contractual intention and constitutive purpose

Our first reservation is prompted by the pervasive idea that contracting parties, if
they so wish, can simply veto (or contract out of) a third party having a right to
enforce, and that they can do this even where (in the language of the second limb of
the proposed test of enforceability) ‘the contract purports to confer a benefit’ on a
particular third party. Put shortly, our point is that if parties A and B intend to
contract for the benefit of C (that is, if the constitutive purpose of the transaction
between A and B is to confer a benefit on C), then the contractual intention of A
and B must be that an enforceable obligation is thereby created in favour of C, and
it is not consistent with such contractual intention for A and B to purport to exclude
C’s right to enforce – at least, it is not consistent if enforcement by C is the only
way that the contractual obligations are capable of being honoured.
18 See eg ibid para 1.9: ‘Our general approach has been to devise moderate reform proposals which can
be expected to gain wide support.’
19 ibid para 1.8.
20 See the Report para 9.19.
21 ibid para 3.2.
22 See below 256–257.
240 ß The Modern Law Review Limited 1997

This reservation proceeds from what we take to be the uncontroversial proposition

that, when transactors intend to contract (to assume contractual undertakings),
then (by definition) they intend to create enforceable obligations. In principle,
transactors might intend their obligations to be enforceable simply inter se; or they
might intend that their undertakings should be enforceable at the suit of a third
party. What they cannot intend, however, is that their contract should be
unenforceable. It follows that, where the constitutive purpose of a contract (the
raison d’être of the transaction) is to confer a benefit on a third party, the
contractors cannot intend that the contractual undertaking in favour of the third
party should be rendered unenforceable. In other words, such contractors must
intend that, if necessary, their contractual obligations in favour of the third party
should be enforceable at the suit of the third party.
We anticipate two questions. First, if those who contract in order to confer a
benefit on a third party cannot simply exclude the third party’s right to enforce, to
what extent can they regulate their relationship with the third party? Secondly,
where a contract is of potential benefit to a third party, is there no way that the
contractors can confine their contractual obligations inter se?
In response to the first question, we need only say that the contractors can
regulate their relationship with the third party in any way that is consistent with the
constitutive purpose of the contract. So, for instance, we see no difficulty about the
contractors reserving the right to vary or cancel their contract, or making it a
condition of enforcement by the third party that any avenues of direct contractual
recourse first should be exhausted; and it might even be arguable that the
contractors should be able to stipulate that the third party’s right to enforce is to be
subject to veto by the party who has contracted for the third party’s benefit. In
essence, the contractors are restricted in just one respect, that they cannot intend
that the third party should be denied the right to enforce where their standing
contractual undertakings in favour of the third party will not otherwise be
enforceable.
We can give a short answer to the second question, while recognising that it
raises complex matters of interpretation. The short answer is that the contracting
parties can veto a third party’s right to enforce where the constitutive purpose of
their transaction is other than to confer a benefit on the third party.23 In other
words, where a contract is merely of incidental (or potential) benefit to a third
party, there is no contradiction in the contractors declaring that the third party has
no right to enforce – there is, so to speak, no contradiction between the parties’
exclusionary intentions and their formation intentions. However, this glosses over
several nice points of interpretation. In particular, how do we decide whether the
constitutive purpose of a contract is to confer a benefit on a third party or merely to
contract in a way that might be of benefit to a third party?24 And, do we take
exclusionary declarations that actually identify a third party as ‘for the avoidance
of doubt’ provisions designed to emphasise that the constitutive purpose of the
contract is not to confer a benefit on such a third party or, to the contrary, as
evidence that the contract really is intended to confer a benefit on the named third
party? Suffice it to say that, as the jurisprudence of the second limb of the proposed
23 Although, strictly speaking, such a veto is unnecessary — because, given the Commission’s
proposals, such a third party (even if named) does not have a presumptive right to enforce under the
second limb.
24 cf Kit Barker, ‘Are We up to Expectations? Solicitors, Beneficiaries and the Tort/Contract Divide’
(1994) 14 OJLS 137. The Commission draws extensively on Barker’s article in explaining its
proposals in relation to third party claims arising from negligent will-drafting: see the Report, paras
7.19–7.27; and see below 250–251.

test of enforceability unfolds, we might expect to see some answers to these

questions.
What, then, is the import of our reservation? By way of illustration, consider the
situation in Beswick v Beswick.25 Admittedly in Beswick the transactional
relationship between the nephew and the (third party) aunt was slightly unusual,
in the sense that the nephew’s obligation to pay the aunt was contingent on the
death of the uncle and the survival of the aunt. Nevertheless, Beswick surely is the
paradigm of a transaction intended to confer a benefit on a third party. Now, let us
suppose that, in Beswick, the uncle and the nephew expressly declared that the
transaction was not to create any enforceable obligations in favour of the aunt.
What should we make of this? We might interpret the declaration as a signal that
the uncle and the nephew were simply not creating contractual obligations of any
kind. However, this seems an unlikely interpretation. More plausibly, therefore, we
might treat the uncle and the nephew as having created contractual obligations
inter se, while purporting to deny to the aunt a right to enforce the nephew’s
promise. Such a denial, however, might be read in two ways as follows:
(1) as a denial of any contractual undertaking in favour of the aunt (effectively
treating the nephew as having made a contractual promise to pay the uncle and
a contingent non-contractual promise to pay the aunt); or
(2) as a denial of any right on the part of the aunt to enforce the contractual
undertaking made in her favour.
In our submission, the first reading is almost as implausible as the view that the
uncle and the nephew were not creating contractual obligations of any
description,26 and the second reading cannot be supported because it involves a
contradiction of the very idea of a contractual undertaking in favour of the aunt.27
There is only one plausible interpretation. If the nephew gave a contractual
undertaking to pay the aunt, and if the constitutive purpose of the contract was to
confer a benefit on the aunt, then the contracting parties could not have intended
that the aunt should be denied the right to enforce in precisely the circumstances
where the nephew’s obligation was triggered and where, failing the aunt having a
right to enforce, the contract would be unenforceable.
Finally, we can return to the cue for our first background reservation. According to
the second limb of the proposed test of enforceability, where a contract purports to
confer a benefit on a third party, the third party’s presumptive right to enforce can be
rebutted by contrary contractual intention. Our reservation is that, if we are guided by
the Commission’s principle of respect for contractual intention, this overstates the
contractors’ exclusionary powers. The contractors, to be sure, might argue that the
constitutive purpose of their transaction was not to confer a benefit on a third party, as
they might rely on certain express reservations (for example, of the right to vary or
cancel). However, where the constitutive purpose of a contract is to confer a benefit
on a third party, respect for the contracting parties’ intentions entails not only that the
third party has a presumptive right to enforce but also that that right cannot be
excluded where the contract would be otherwise unenforceable.
25 [1968] AC 58.
26 Such a mere declaration of intent looks very much like a trap; and certainly the effect of such a
transaction would need to be presented very carefully to Mrs Beswick, otherwise it would be
arguable that the nephew should incur liability for defeating Mrs Beswick’s legitimate expectation.
27 On the facts of Beswick v Beswick, we can discount interpreting an exclusionary veto as a
reservation of a right to vary or cancel, or as any other kind of stipulation that would be consistent
with the constitutive purpose of the contract.

Contractual intention and prescribed transactional regimes

Whereas our first reservation offers no challenge to the Commission’s premise that
the effect of a transaction should be regulated by the intentions of the parties – it
simply spells out what is involved in treating the parties’ constitutive purposes as
governing – our second reservation makes no such concession. Rather, it assumes
that there is a place for transactions, the legal effect of which is fully or partly
prescribed by law; that is, the law specifies that particular types of contract (or
particular types of contractual provision) involve certain legal effects, and such
prescribed effects obtain irrespective of contrary declarations of intention by the
contracting parties.28 Contracts of this kind come, so to speak, as packages of
standard rights and obligations, with given third party effects, the particular
package being prescribed by law rather than by the bespoke stipulation of the
contracting parties. This is hardly a new idea, regulation of this kind being familiar
in many settings – for example in the context of consumer sales contracts, where the
dealer who elects to enter into such a contract thereby assumes various enforceable
obligations in favour of the consumer purchaser; it is familiar too in the context of
various statutory exceptions to the privity rule (particularly with regard to insurance
and carriage of goods by sea); and this is the kind of proposal that we have
previously made for the treatment of sub-contracts in contractual networks.29
Essentially, where contracts of this kind are in place, what matters is the parties’
intention to enter into a particular species of contract, not their (contradictory)
intentions once they have entered into the given species of transaction.30
The concern arising from this second reservation is not so much that the
Commission has not adopted our favoured idea of contractual networks. Rather it is
a concern that further consideration (particularly in the courts) of this kind of
development in the law should not be inhibited by the Commission’s caution. It
would be unfortunate if the price to be paid for enacting the Commission’s
recommendations was general acceptance of the principle that the sovereignty of
contractual intention should trump all other (more radical) arguments.
Contractual intention and legitimate expectation

Our third background reservation goes to the heart of the Commission’s underlying
philosophy, to the question of how we are to understand the basis of contractual
obligation. In our submission, contractual obligation ultimately rests on the
legitimate expectations generated by inter-agent transactions.31 From this, it
follows that the protection of legitimate expectation needs to be the organising
focus for any reform of contract law, including reform of the privity doctrine. Our
28 In the case of contracts that purport to confer a benefit on a third party, the difference between an
intention-based regime (as in our first reservation) and a prescribed transactional regime (as in our
second reservation) is subtle. In the former, we contend that the third party’s right to enforce is an
entailment of the parties’ intentions (governed only by the requirement of non-contradiction); in the
latter, even if our analysis of contractual intention is incorrect, the law might still prescribe a third
party right to enforce.
29 See, John Adams and Roger Brownsword, ‘Privity and the Concept of a Network Contract’ (1990)
10 Legal Studies 12; and Deryck Beyleveld and Roger Brownsword, ‘Privity, Transitivity and
Rationality’ (1991) 54 MLR 48.
30 cf the excellent discussion by Simon Whittaker, ‘Privity of Contract and the Tort of Negligence:
Future Directions’ (1996) 16 OJLS 191.
31 See John Adams and Roger Brownsword, Key Issues in Contract (London: Butterworths, 1995). For
the relevant deep theory, see Deryck Beyleveld, The Dialectical Necessity of Morality (Chicago:
Chicago University Press, 1991). And for an interesting critique of prevailing theories of contractual
obligation see Randy E. Barnett, ‘A Consent Theory of Contract’ (1986) 86 Col LR 269.

reservation here is not that the Commission does not recognise the importance of
protecting legitimate expectations – or, at any rate, reasonable expectation. Quite
clearly it does. However, the Commission apparently aligns the protection of
reasonable expectation with the protection of third party interests. This generates a
misconceived balancing exercise, with the principle of respect for the intentions of
the contractors on one side and the principle of protecting the reasonable
expectations of third parties on the other side. However, if legitimate expectation is
the cornerstone idea, it must lie behind (and shape) the principle of respect for the
intentions of the contractors, such that a correct appreciation of the balancing
exercise is to see it as involving respect for the legitimate expectations of both
contracting parties and third parties. In short, our concern is that the protection of
legitimate expectation should be seen as the governing principle for the regulation
of all phases and aspects of contracting, and not simply as relevant to situations
where there is a conflict between the interests of contractors who wish to vary or
cancel and the interests of third parties who wish to protect their anticipated
benefits.
Some Preliminary Issues

The Commission’s Report comprises four sections (A: Background; B: Preliminary
Issues; C: Central Reform Issues; and D: Summary), 15 Parts, four Appendices,
one of which (Appendix A) has the Commission’s Draft Contracts (Rights of Third
Parties) Bill, and a total of 53 recommendations. We can pass fairly swiftly over
the first two Sections of the Report in which the Commission essentially outlines
the existing law, the case for reform, and the form in which legislative reform
should be cast. However, three preliminary points of some importance need to be
isolated from these opening Sections of the Report. These points concern: (i) the
scope of the reform; (ii) extension of the reform; and (iii) the relationship between
privity and consideration.
The scope of the reform

It is trite law that the privity doctrine has two dimensions, one preventing someone
not party to a particular contract from taking its benefit, the other protecting
someone not party to a particular contract from burdens purportedly imposed upon
them by the agreement of the contractors. The general consensus is that the latter
dimension, while not altogether satisfactory, is less urgently in need of reform. In
line with this view, the Commission declares that its proposed reforms do not seek
to amend the burden side of the privity doctrine;32 and, in various sections of the
Report, the Commission stops short of proposing reform precisely because it sees
itself in danger of crossing the line between the benefit and the burden side of the
doctrine. Hence, for example, the Commission ‘reluctantly’ decides that arbitration
and jurisdiction clauses must lie beyond the scope of the reform because such
clauses ‘do not lend themselves to a splitting of the benefit and the burden’ (the
third party being ‘burdened’ by such clauses).33
32 See the Report para 2.1. For contracts for the international carriage of goods by road and rail, or
cargo by air, where the governing international conventions involve both third party benefits and
burdens, see ibid paras 12.12–12.15 and clauses 6(2)(b) and 6(3)(b) of the draft Bill.
33 ibid para 14.18 (and paras 14.14–14.19), drawing on Lord Goff’s reasoning in The Mahkutai [1996]
3 WLR 1. Similarly, see paras 8.12 (the Commission’s ‘recognition that a company’s right under a

How though should we view the distinction between benefits and burdens? As the
Commission noted in its Consultation Paper, privity questions (which, of course,
might arise in single-contract or multiple-contract (chains and network) settings)
typically arise in one or more of the following four forms:34
(1) Where A and B make a contract for the benefit of C, can C enforce the
contract? (We can call this kind of question, P1).
(2) Can C set up a defence based on the terms of a contract between A and B in
order to answer a claim (typically, in tort) brought by A? (P2).
(3) Can C set up a defence based on the terms of his own contract with B in order
to answer a claim (typically, in tort) brought by A? (P3).
(4) Where A and B contract for the benefit of A, can A hold C to the benefit
promised by B? (P4).
P1 is the paradigmatic form of the benefit question; and, since Scruttons Ltd v
Midland Silicones Ltd,35 we think of P2 as an extension of this same question. P4 is
perhaps the paradigmatic form of the burden question (certainly in a case such as
Lord Strathcona Steamship Co v Dominion Coal Co).36 But, where does this leave
P3? In the Commission’s Consultation Paper, it was not entirely clear how (or
whether) the dual intention test (the Commission’s earlier test of enforceability)
should be applied to P3 questions; and, in the Report, the Commission again is less
than explicit in dealing with this question.
At first impression, the logic of the Commission’s approach appears to be that
P3 questions should fall outside the proposals because they seem to raise burden
issues.37 However, in a later, extended discussion of the boundary between
benefits and burdens, the Commission distinguishes between ‘imposing a burden
on the third party’ and ‘conferring a conditional benefit’.38 Here, the thrust of the
discussion is that a contracting party can set up a (burdensome) condition as a
defence to a third party claim, but not as a cause of action in its own right. For
example, if a contract confers a right of way to a third party on condition that the
third party keeps it in repair, failure by the third party to meet the repairing
condition would be a good defence for a defendant contractor but it would not be
a ground for action against the third party.39 Significantly, the Commission
continues:40
A very important example of a condition being attached to the benefit enforceable by the
third party (C) is where in the contract between A and B benefiting C, there is a clause
excluding or limiting A’s liability to C. C’s right to enforce A’s promise under our proposed
Act must be subject to the exclusion or limitation clause.
These short remarks, however, receive no further elaboration. In principle, the
example could fit with a single-contract P1 situation (and such situations certainly
pre-incorporation contract may be conditional should not be misconstrued as permitting obligations

under a pre-incorporation contract to be imposed on the company’) and 10.10 (defences, set-offs,
and counterclaims).
34 See John Adams and Roger Brownsword, ‘Privity and the Concept of a Network Contract’ (1990) 10
Legal Studies 12. This typology was adopted by the Commission in its Consultation Paper (note 1
above).
35 [1962] AC 446.
36 [1926] AC 108.
37 See eg para 2.1 of the Report and footnote 6 thereto. And in correspondence Professor Burrows has
intimated that the proposals are concerned purely with P1 and P2 questions, not with P3 or P4.
38 ibid para 10.25.
39 ibid paras 10.26–27.
40 ibid para 10.30.

tend to bulk large in the Commission’s thinking); or, it could fit with a multiple-
contract P3 situation. Again, in principle, multiple-contract P3 situations might
arise where A brings a claim against C in tort, or (if privity is relaxed) where A
brings a claim against C for breach of the contract between B and C. Given that the
Commission intends to avoid disturbing third party burden questions, we must
assume that the proposals do not cover P3 situations where A brings a claim
against C in tort. However, this leaves P3 situations where A’s claim is based in
contract and, here, the Commission’s remarks imply that, say, a sub-contractor
could set up a sub-contract exclusion or limitation as a condition of a third party
head-contractor taking the benefit by suing on the sub-contract, and that a third
party consumer might only be able to enforce a manufacturer’s supply contract
subject to the manufacturer’s exclusions or limitations. Perhaps, then, the proposals
should be understood as converting P3 situations of this kind to P1 situations, with
the relevant exclusions or limitations being treated as conditions to which the
benefit is subject. Whether such exclusions or limitations should then be subject to
regulation under the Unfair Contract Terms Act 1977 is an important question to
which we return in due course.
Extension of the reform

Clause 6(1) of the draft Bill provides that the new test of enforceability ‘is without
prejudice to any right or remedy of a third party which exists or is available apart
from this Act.’ This preserves the many existing statutory and common law
exceptions to the privity doctrine and, crucially, it opens the way to judicial
development of third party rights.
Thus, in an interesting reversal of reforming roles, instead of the courts declining
to reform the law on the ground that the matter should be left to the Law
Commission, we find the Commission returning the compliment:41
We should emphasise that we do not wish our proposed legislation . . . to hamper the judicial
development of third party rights. Should the House of Lords decide that in a particular
sphere our reform does not go far enough and that, for example, a measure of imposed
consumer protection is required or that employees (even though not mentioned in the
contract) should be able to rely on exclusion clauses that protect their employers under a
doctrine of vicarious immunity, we would not wish our proposed legislation to be construed
as hampering that development.
The case of employers and employees is an important one, and it is worth
underlining. Under the Commission’s proposed test of enforceability, the
defendant third party employees in the well-known London Drugs42 case would
not be able to set up the main contract limitation of liability – at any rate, they
would not be able to do so unless the contract reference to ‘warehouseman’ was
interpreted loosely to cover the employees.43 Some might think this an appropriate
case to cover with a bespoke exception (namely, that employees are presumed to
be covered by their employer’s protective terms even if not expressly designated as
beneficiaries). Others, however, might think this too radical. The Commission’s
response is to allow the courts to settle the matter if and when the question arises.
41 ibid para 5.10.

42 London Drugs Ltd v Kuehne and Nagel International Ltd (1992) 97 DLR (4th) 261; on which, see
Adams and Brownsword (1993) 56 MLR 722.
43 According to the Commission, the approach advocated by the majority in London Drugs is ‘a radical
one and would appear to go beyond our proposed reform by allowing an employee, even if not
expressly identified in the exclusion clause, to rely on it’: see the Report para 2.67, footnote 178.

The Commission’s reliance on the courts is evident, too, in several other parts of
the Report. For example, the extent of the contracting party’s remedies on behalf of
the third party is left to ‘the evolving common law’ in this area;44 the potential
absurdity inherent in clause 8 of the draft Bill, according to which a joint promisee
who has not provided consideration is not to be regarded as a third party for the
purposes of the reform, is one that the Commission confidently expects the courts
to avoid;45 the Commission also looks to the courts to mitigate any unfairness
resulting from its controversial proposal (which we discuss below)46 not to extend
the application of the Unfair Contract Terms Act 1977 to defences raised against
third party claimants;47 and presumably the courts can be trusted to develop ‘more
radical consumer protection measures’48 should the need arise.
The relationship between privity and consideration

In the Consultation Paper, the Commission took the view that the relationship
between privity and consideration is largely unproblematic – the consideration
requirement relates to whether there is an enforceable bargain (a contract); the
privity doctrine determines who is permitted to enforce the contract.49 However, in
the Report the matter is reviewed at some length, Part VI being dedicated to this
question.
At one level, the discussion is relatively straightforward. If the new test of
enforceability is to make any practical difference, it must be understood that the
consideration requirement does not disqualify the third party’s action. Accordingly,
if the consideration requirement is expressed as the requirement that ‘consideration
must move from the promisee’ this must not be read as ‘consideration must move
from the (third party) plaintiff’ – otherwise the test of enforceability would be
nullified. In other words, provided that locutions such as ‘consideration must move
from the promisee’ are understood to relate only to the question of whether there is
an enforceable bargain, and not to the question of who may enforce an enforceable
bargain, the avenues of the reform should be kept clear.
At another level, however, the discussion is rather puzzling. For having satisfied
itself that the consideration requirement is distinguishable from the privity
requirement, the Commission then suggests that the proposed relaxation of the
privity doctrine raises a deeper policy question by implying a relaxation, too, of the
consideration requirement.50 At first blush, the ensuing discussion of the deeper
question is strange in two respects: first because it seems to neglect the distinction
between consideration and privity already drawn; and secondly because it makes
no mention of the relaxation of consideration already effected in the recent case-
law.51 Such recent case-law might well justify the Commission’s conclusion that it
is perhaps time to undertake a separate review of the doctrine of consideration;52
but it is not clear that the privity proposals necessitate such a review.
44 See the Report para 5.15. For the evolving common law see The Albazero [1977] AC 774; Linden
Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; and Darlington Borough Council
v Wiltshier Northern Ltd [1995] 1 WLR 68.
46 See 258–263.
47 See the Report para 13.10(iv).
48 ibid para 7.55.
49 Note 1 above paras 2.5–2.10.
51 Most strikingly, of course, in Williams v Roffey Bros and Nicholls (Contractors) Ltd [1990] 1 All ER
512 (noted by Adams and Brownsword (1990) 53 MLR 536).

The Commission’s reasoning on the deeper policy question runs along the
following lines: (i) the proposed right to enforce puts a third party beneficiary in a
better position than a gratuitous promisee; (ii) neither the third party beneficiary
nor the gratuitous promisee provides consideration; therefore (iii) the proposal
must involve a relaxation of the consideration requirement. However, provided that
we stick to the Commission’s view in the Consultation Paper, this reasoning is
flawed. Quite simply, the consideration requirement is material only to the
question of whether a promise is contractually enforceable; if the promise that the
third party is permitted to enforce is part of a contract (supported by consideration),
there is no weakening of the consideration requirement. The Commission’s
proposals broaden the range of eligible plaintiffs who may enforce a contract; they
do not redefine what counts as a contract.
Yet, is this an overly simplistic view? Despite the conventional wisdom that a
distinction can be drawn, at a formal level, between the requirement of
consideration and the privity doctrine, the Commission apparently senses that this
may be somewhat superficial – and, no doubt, this explains the tension underlying
the discussion in this part of the Report. To illustrate the deeper problem, the
Commission suggests the hypothetical case of a contract for the sale of a car from
B to A, with A intending to give the car to C. Now, consider these two variations
on the basic situation:
(i) A, having made the contract with B, gratuitously promises to give the car to C;
and
(ii) A sets up the contract with B in such a way that C will have a right to enforce
under the proposed test of enforceability.
In (i), C has no right to hold A to his promise; but in (ii) C has the right to enforce
the promise (which would be a contractual promise made by B) to deliver the car.
The Commission observes that, as a matter of justice, the cases seem
indistinguishable. If, for the sake of argument, we allow that the cases are
indistinguishable, nevertheless we could be characterising the situation in two very
different ways. We could be saying: (a) that the core of the situation is the existence
of an enforceable bargain between A and B; (b) that A’s gratuitous promise to C in
situation (i) is an incident of the bargain between A and B; (c) that, in situation (i),
C is really trying to enforce an incident of the contract between A and B; from
which it follows (d) that the only question is a privity question, namely why C
should be able to enforce the contract (between A and B) in situation (ii) but not in
situation (i). Alternatively, we could be saying: (aa) that, in the context of situation
(i), C is trying to enforce A’s gratuitous promise; (bb) that, in situation (i), A’s
promise to C is independent of the contract between A and B; but (cc) that there is
no obvious reason why the law should not hold A to his promise (albeit gratuitous);
in which case (dd) the question raised by situation (i) is a consideration issue.
There is much more that could be said about this hypothetical example and the
issues it raises. However, here it must suffice to say that the Commission’s
thinking on privity has brought it to a point at which it senses that, in some
contexts,53 there is no good reason for refusing to treat a gratuitous promise as
contractually enforceable. Although we are not entirely clear about the
Commission’s reasoning in arriving at this view, we have no doubt that the end
53 ibid para 6.17, where the Commission cites documentary letters of credit, compositions with
creditors, and situations covered by promissory estoppel as examples of contexts in which the law
already treats gratuitous promises as contractually binding.

point of the reasoning is correct. Accordingly, we welcome the Commission’s

suggestion that a review of the dotrine of consideration might be timely.
Central Reform Issues

Section C of the Report deals with the central doctrinal issues to be addressed by
the reform. We can concentrate on three major issues: (i) the test of enforceability;
(ii) the contractors’ right to vary or cancel their contract (and the proposed
crystallisation test); and (iii) the availability of defences (including defences which
might be open to challenge under the Unfair Contract Terms Act 1977).
The test of enforceability

The centrepiece of the proposed reform is the test of enforceability. In clause 1(1)
of the draft Bill, a third party is given the right to enforce a contract if
(a) the contract contains an express term to that effect; or
(b) [subject to clause 1(2)] the contract purports to confer a benefit on the third party.
According to clause 1(2), the second limb of the test (ie the test stated in clause
1(1)(b))
does not apply if on a proper construction of the contract it appears that the parties did not
intend the contract to be enforceable by the third party.54
To take advantage of these provisions, the third party (as clause 1(3) stipulates)
must be expressly identified in the contract by name, as a member of a class or as answering
a particular description but need not be in existence when the contract is entered into.55
Where the test of enforceability is satisfied, the third party has the full range of
remedies available to a plaintiff contracting party, with the normal rules relating to
remoteness and mitigation, and the like, applying by analogy.56 Finally, clause 1(5)
makes it clear that references to a third party enforcing a contract include the third
party ‘availing himself’ of exclusions or limitations of liability.
At first glance, the import of these provisions looks pretty straigthforward. As
we remarked at the outset, in a case such as Tweddle v Atkinson,57 where the
contractors expressly provide for a named third party to have the right to enforce
the contract, the first limb of the test (clause 1(1)(a)) applies – and this is so even if,
unlike in Tweddle v Atkinson, the contract does not purport to confer a benefit on
the third party.58 If the contractors do not expressly provide for the third party
having the right to enforce the contract, but clearly intend to confer a benefit on the
third party (as, say, in Beswick v Beswick),59 then under the second limb of the test
(clause 1(1)(b)) the third party will have the right to enforce the contract – at any
rate, the third party will have this right subject to the proviso in clause 1(2).
Similarly, in more complex contractual situations of the kind encountered in such
54 cf section 4 of the Contracts (Privity) Act 1982 (New Zealand), which is the sole test of
enforceability in the New Zealand statute and which closely resembles the second limb of (and
proviso to) the Commission’s proposed test.
55 For discussion of the issues underlying the designation, existence, and ascertainability of the third
party, see Part VIII of the Report.
56 See clause 1(4) of the draft Bill.
57 (1861) 1 B & S 393.
58 For discussion, see the Report paras 7.12–7.16.
59 [1968] AC 58.

leading cases as Scruttons Ltd v Midland Silicones Ltd 60 and The Eurymedon,61
the defendant stevedore third parties will be able to rely on exclusions or
limitations in the carriage contract if the right to enforce62 is expressly granted
(under the first limb) or if the relevant provisions of the carriage contract are
designed to confer a benefit on the stevedores and, on its proper construction, the
carriage contract does not negative the third party having a right to enforce the
terms (under the second limb and the proviso).
We might also think that clause 1 gives, via the second limb of the test, a White v
Jones63 right to a disappointed third party legatee (ie a right to sue a negligent
solicitor for breach of contract). This, however, is not the Commission’s intention.
In an extended discussion of this matter, the Commission explains that it regards it
as something of a distortion to characterise a contract between a testator and a
solicitor as one intended to confer a benefit on a third party – and, of course, given
the House of Lords’ opening of a tortious line of relief in White v Jones the
Commission sees no pressing practical urgency to encourage such distortion.64
Thus:
It is our view, therefore, that the negligent will-drafting situation ought to lie . . . just outside
our proposed reform. It is an example of the rare case where the third party, albeit expressly
designated ‘as a beneficiary’ in the contract, has no presumed right of enforcement. Indeed it
is arguable that, by merely adjusting the wording of the second limb to include promises that
are ‘of benefit to’ expressly designated third parties, rather than those that ‘confer benefits
on’ third parties, we would have brought the negligent will-drafting situation within our
reform. But we believe that these words draw a crucial distinction between the situation
where it is natural to presume that the contracting parties intended to confer legal rights on
the third party and the situation where that presumption is forced and artificial.65
Now this is particularly instructive. To block the third party’s right in the negligent
will-drafting situation, the Commission might have been expected to have relied on
the proviso written into clause 1(2) – on the basis that, normally, the presumption is
that a testator and his solicitor do not intend the contract for professional legal
services to be enforceable at the suit of a beneficiary (a presumption that the
contracting parties might seek to re-inforce by explicit declaration). Instead,
however, the Commission prefers to deal with this by signalling that the phrase
‘purports to confer a benefit’ in clause 1(1)(b) has been carefully chosen
specifically to exclude White v Jones plaintiffs. In this way, the Commission not
only avoids any doubt; it avoids provoking our reservation that, where contracts
are made for the benefit of third parties, the principle of respecting contractual
intention should not operate as an unqualified licence to exclude the third party’s
right to enforce.
As the coded exclusion of White v Jones plaintiffs reveals, the application of the
test of enforceabililty is not entirely straightforward. For one thing, as we
foreshadowed in our background reservations, there are bound to be problems with
the application of a distinction between contracts that purport to confer a benefit on
60 [1962] AC 446.
61 New Zealand Shipping Co Ltd v A.M. Satterthwaite and Co Ltd [1975] AC 154.
62 The idea of ‘enforcing’ an exemption or limitation clause might seem a strained use of the language.
However, as the explanatory notes to the draft Bill state, the purpose of clause 1(5) is to make ‘it
clear that the Bill is to apply so as to entitle a third party to take advantage of an exclusion or
limitation clause, as well as to enforce ‘‘positive’’ rights.’
63 [1995] 2 AC 207.
64 See the Report paras 7.19–7.27.
65 ibid para 7.25.

a third party and those contracts that simply are of potential benefit to a third party.
To some extent, the problem is eased by the requirement that the third party must
be expressly identified; and the Commission has already classified contracts for
professional services (at least, in the context of negligent will-drafting) as merely
of potential benefit to a third party. Nevertheless, difficult cases surely will arise
for decision;66 and it will be interesting to see not simply how such difficulties are
resolved in particular cases but also how far the courts are able to maintain a clear
line between the question of whether the contract purports to confer a benefit on a
third party and the question of whether the contractors intended to create legally
enforceable rights in favour of a third party – the point being that draftsmen might
attempt to signal that a contract is not intended to confer a benefit on a third party
by providing that it is not intended that third parties should have a right to enforce
the contract.
This fairly obvious difficulty apart, there are, in our view, three major aspects of
the test of enforceability that invite clarification. First, in relation to clause 1(2),
how significant is it that the contracting parties do not draft the contract in a way
that gives the third party beneficiary a direct right to enforce under the first limb of
the test? Secondly, what precisely is the default position under clause 1(2) in
relation to the rebuttal of the presumption of enforceability (and, concomitantly,
which features of the contractual matrix might be material for the purposes of
rebutting the presumption)? And, thirdly, where reliance is placed on standard head
contract exclusions and limitations of liability for the benefit of sub-contractors,
are we to treat this as an argument under the first or the second limb of the test of
enforceability?
With regard to the first of these questions, consider again Beswick v Beswick.
There, although the contract between old Peter Beswick and his nephew did not
give Mrs Beswick (the third party) a direct right to enforce, the intention was quite
clearly to confer a benefit (in the form of an annuity) on Mrs Beswick. The
Commission presents this as a case where the second limb would apply to give the
third party ‘a presumed right of enforceability’.67 But, what of the proviso in clause
1(2)? According to the Commission:68
This presumption [of enforceability] could only be rebutted if the nephew could demonstrate
that, on the proper construction of the contract, he and old Mr Beswick had no intention at
the time of contracting that Mrs Beswick should have the right to enforce the provision. In
our view, the nephew would not be able to satisfy that onus of proof so that Mrs Beswick
would have the right of enforcement.
Given our background reservations, the Commission’s interpretation of the
particular facts of Beswick v Beswick surely is compelling. However, if (notwith-
standing our reservations) a third party’s presumptive right to enforce can be
rebutted, it is important to know what weight (if any) a court might give to the
contractors’ failure to provide for a direct right to enforce in favour of the third
party (ie a failure to invoke the first limb of the test of enforceability). According
to the Commission, the rebuttal of the presumption in favour of a third party (under
the second limb of the test of enforceability) involves an objective construction of
the contract, particularly looking at the terms of the contract or some other feature
66 See the Report para 7.41 for the distinction between (in text) a contract of sale in which goods are to
be delivered to a third party (arguably a contract to confer a benefit on a third party) and (in footnote
31 thereto) such a contract without delivery to a third party (arguably merely a contract of potential
benefit to a third party).
67 ibid para 7.46.
68 ibid.

of the contractual matrix.69 In principle, a contract might (a) declare that a

particular third party is intended not to have the right to enforce, or (b) declare that
a particular third party is intended to have the right to enforce, or (c) leave it
unclear whether a particular third party is intended to have the right to enforce. If
(again, notwithstanding our reservations) we follow the Commission’s approach
whereby ‘[a] promisor who wishes to put the position beyond doubt can exclude
any liability to the third party that he might otherwise have had’,70 case (a) is
straightforward. Case (b) is also plain – this is the way to draft the contract under
the first limb of the test of enforceability. Case (c), however, is the problem; and
the difficulty is compounded where the law leaves it unclear whether the
contractors’ failure explicitly to declare that the third party is intended to have the
right to enforce is never to count against the third party or may sometimes count
(and, if so, in what circumstances). It seems unlikely that the Commission intends
to exclude altogether the relevance of such a failure. After all, if the contractors
draft their agreement with legal advice and if some third party beneficiaries but not
others are given a direct right to enforce, this invites the view that the contractors
did not intend the latter beneficiaries to have the right to enforce (even though such
a negative intention was not explicitly declared). If, however, the Commission’s
intention is that the contractors’ failure explicitly to declare that the third party is
intended to have the right to enforce is never to count against the third party (ie is
never to assist the defendant in rebutting the presumption under the second limb),
then the legislation should make this clear.
The second point of clarification concerns the default position under clause 1(2)
(in relation to the rebuttal of the presumption of enforceability). The draft Bill
gives no guidance here. However, the tenor of the Report is that, in general, once a
third party has shown that the contract purports to confer a benefit (as per clause
1(1)(b)), then a presumptive right to enforce arises and the onus shifts to the
defendant (under clause 1(2)) to rebut the presumption.71 Moreover, Professor
Burrows has suggested that, although the Report (let alone the draft Bill) does not
spell this out, the presumption in favour of the third party ‘is a strong one’, not
normally to be rebutted
unless there is a term in the contract expressly negating the third party’s legal rights, or an
express term that is otherwise inconsistent with the third party having legal rights, or unless
the parties have entered into a chain of contracts which gives the third party a contractual
right against another party for breach of the promisor’s obligations under the alleged ‘third
party’ contract (as for example is presently the position in the construction industry).72
The latter point is important, for one of the Commission’s primary concerns is to
allay the fears of the construction industry that the proposed reform of privity will
re-open sub-contractors’ liability after the fashion of Junior Books.73 Thus, in a
telling section of the Report, the Commission states:74
[E]ven if there is no express contracting out of our proposed reform, we do not see our
second limb as cutting across the chain of sub-contracts that have traditionally been a feature
of [the construction] industry. For example, we do not think that in normal circumstances an
owner would be able to sue a sub-contractor for breach of the latter’s contract with the head-
contractor. This is because, even if the sub-contractor has promised to confer a benefit on the
69 See ibid paras 7.18(iii) and 7.28 where this minimal guidance on the proviso is offered.
70 See ibid para 7.18(iii).
71 See eg ibid para 7.17.
72 n 13 above.
73 Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520.
74 Report para 7.18(iii).

expressly designated owner, the parties have deliberately set up a chain of contracts which
are well understood in the construction industry as ensuring that a party’s remedies lie
against the other contracting party only . . . On the assumption that that deliberately created
chain of liability continues to thrive subsequent to our reform, our reform would not cut
across it because on a proper construction of the contract – construed in the light of the
surrounding circumstances (that is, the existence of the connected head-contract and the
background practice and understanding of the construction industry) – the contracting parties
. . . did not intend the third party to have the right of enforceability.
The Commission goes on to say that, for similar reasons, the second limb of the test
would not normally cut across chains of sales contracts to give a purchaser of
goods from a retailer a right to enforce a manufacturer’s quality promises.75 On the
other hand, the Commission implies that the position might be different where B
purchases goods from retailer A, making it clear that the goods are being purchased
as a gift for C (and with delivery to be direct to C).76 Here, the Commission
suggests that C might have a contractual claim against A for breach of the quality
undertakings (although it qualifies this by saying that such a claim would be
subject to rebuttal by A under the proviso).77 What are we to make of this?
One view is that we need not try to make anything of it at all. What the
Commission collectively thinks, or what individual Commissioners might think,
matters little once the legislation is put into circulation. From that point on,
assuming that the Bill is enacted in its present form, the courts (with or without
assistance from Pepper v Hart78) will gloss the statutory framework as they see fit.
Another view is that, although the Bill leaves the operation of clause 1(2) unclear,
the Commission’s fall-back position is that the parties can always cover themselves
by express provision (and, perhaps, should be encouraged to do so). Thus, if the
contractors do not intend the third party to have the right to enforce, they can simply
say so and the presumption will be rebutted. Alternatively, if the contractors do
intend the third party to have the right to enforce, they can say so and thereby invoke
the first limb of the test of enforceability. Neither of these views, however, will
satisfy those who want to know where they stand at the time of enactment rather
than after some later litigious engagement – nor, of course, does it assuage our
concern that we should be careful with the idea that parties are free to contract out of
the reforms whenever it suits them. The Commission, it seems, has tried to give
some ‘unofficial’ guidance on this matter in the Report, but it looks rather ad hoc.
On the one hand, we are given to understand that, in a case like Beswick v Beswick,
the presumption in favour of the third party is strong, and the contractor promisor
will not easily be able to rebut it (and certainly not by simply pointing to the absence
of a term explicitly giving the third party the right to enforce). On the other hand, in
a case like Junior Books v Veitchi, the presumption in favour of the third party is
weak (and, presumably, in this context, the fact that the contractors have not
explicitly given the third party a right to enforce will count against the third party).
Quite apart from our background reservations, does this not look like one rule for
vulnerable third party beneficiaries and another rule for the construction industry?
If the operation of clause 1(2) is to be transparent, it will not do to have
undisclosed default rules that vary from one context to another. Now, as Professor
75 ibid.
76 cf ibid note 31 on page 89: if delivery is not to be direct to C, there might be some difficulty in
showing that the contract of sale was intended to confer a benefit on C. (See note 66 above).
77 See the Report para 7.41 (illustrative example 14); cf, too, note 14 above. And quaere: if the second
limb does not normally cut across chains of sales contracts, would the proposals enable the third
party in Donoghue v Stevenson [1932] AC 562 to enforce the sales contract against the retailer?
78 [1993] AC 598 (noted by Miers (1993) 56 MLR 695).

Burrows has intimated, one significant consideration is whether the third party has
a standard avenue of contractual recourse without leaping across contracts. This
certainly suggests one ground for distinguishing between claims made by
contractors in the construction industry and claims made by third parties such as
Mrs Beswick, for, other things being equal, whereas contractors in networks and
chains have such contractual recourse, free-standing third parties do not.
Transparency, therefore, might be promoted if the Bill were to provide that the
existence of an alternative contractual recourse will normally count against any
presumption in favour of the third party (although, on our view, the right to enforce
must remain, at the very least as a last resort).
Turning to the third point of clarification, the question is whether standard head
contract exclusions and limitations of liability for the benefit of third parties are to
be read as conferring a right to enforce under the first limb of the test or as
conferring a benefit under the second limb of the test. In its relatively brief
elaboration of the first limb of the test, the Commission seems to treat such
provisions as conferring a direct right to enforce. Thus, we read:79
In our view, [the first limb] would . . . cover an exclusion (or limitation) clause designating
third parties (eg ‘C shall be excluded from all liability to A for damage caused in unloading
the goods’) because an exclusion clause, as a legal concept, has no meaning unless it is
intended to affect legal rights and, where the third party is expressly designated as a person
whose liability is excluded, the plain meaning of the exclusion clause is that the third party is
to have the benefit of it without having to rely on enforcement by the promisee . . . Of
course, even express words sometimes give rise to questions of interpretation . . . but the
great merit of this limb of the test is that it should give rise to very few disputes.
This, we suggest, is persuasive, for it seems implausible that, in a commercial
context, an exclusion or limitation clause drafted in favour of a third party could be
of any practical significance without being enforceable by the third party.
Nevertheless, it will be observed that, in the passage quoted above, the
Commission drifts into language that fits better with the second limb (the third
party having the benefit of the exclusion without having to rely on enforcement by
the promisee) and the possibility of questions of interpretation arising is conceded.
When the Commission proceeds to its extended discussion of the second limb of
the test of enforceability, any lingering doubts about the characterisation of
exclusions and limitations are not removed. In fact, although much of the modern
litigation about privity has arisen in the context of contractual networks and
protective clauses, the Report follows the pattern of the Consultation Paper in
focusing on the position of the third party beneficiary in the setting of a single
contract. It is true that the Report declares that the proposed reform ‘would permit
contractors and clients straightforwardly and uncontroversially to extend the
benefit of exclusion clauses in their contracts to employees, sub-contractors and
others.’80 Yet, only two of the Commission’s 17 illustrative examples approach the
point at issue;81 and only the Trident82 case in the Commission’s sample of ‘the
most celebrated cases where the third party rule has caused difficulty’83 gets
anywhere near to this kind of network dispute. In the first illustrative example
(hypothetical case 16 in the Report), B’s standard form of building contract
contains a clause that purports ‘to exclude the liability to its clients of all agents,

80 ibid para 3.20.
81 ibid paras 7.28–7.44.
82 Trident General Insurance Co Ltd v McNiece Bros Proprietary Ltd (1988) 165 CLR 107.

servants, employees and subcontractors engaged by B & Co. in the performance of

the contract works for any loss and damage occasioned other than through wilful
misconduct.’84 On the hypothesised facts (which need not concern us), the question
arises whether Mr C, a surveyor employed by B in pursuit of a contract with A, will
be permitted to rely on B’s standard form exclusion in an action for professional
negligence brought against him by A. The Commission’s response is thus:85
Mr C would succeed under the first limb of our test or, on the basis that the exclusion clause
is a promise to confer a benefit (the exclusion of liability) on Mr C, who is expressly
identified by class, under the second limb.
Clearly, Mr C would want the first limb to apply. Equally clearly, however, A
would want the issue to be treated as a second limb question because (on the
Commission’s own reasoning) A would then have the opportunity to rebut the
presumption in favour of Mr C.86
In a second illustrative example (hypothetical case 17 in the Report), B, a carrier,
contracts with a client A on the basis that the value of packages is ‘deemed to be
not over £100 unless otherwise declared.’87 B sub-contracts to C, who negligently
loses A’s package (worth £1,000). The question is whether C is permitted to rely
on the deemed value exclusion in response to A’s claim in negligence. Here, the
Commission offers a compelling reason (relative to its proposed test of
enforceability)88 why C would not be permitted so to rely:89
C has no rights to enforce the ‘deemed value’ clause under our proposals because C has not
been expressly identified as a beneficiary of that clause. Nor has C been expressly given the
right to enforce the clause under the first limb of the test of enforceability.
Suppose, though, that the deemed value clause had been expressed to be equally
applicable if B employed sub-contractors, thereby cancelling out the Commission’s
essential reason for denying C. Would the Commission still argue that C had been
given no right to enforce the clause under the first limb? Again, it would be in C’s
interests to present the case as falling under the first limb and it would be in A’s
interest to present it as a second limb question.
Granted that the characterisation of standard form exclusions and limitations is
not entirely clear, it might be argued that further clarification would be unhelpful.
The Report generally encourages a presumption that exclusions and limitations are
to be dealt with under the first limb; and, if draftsmen wish to be absolutely safe,
they can always adopt an explicit form of words – for example, by using words to
the effect that the third parties mentioned in particular exclusions and limitations
are to be treated as having the right to enforce such terms within the meaning of
clause 1(1)(a) (ie the first limb of the test of enforceability). However, if the
legislation neither signals the problem, nor offers guidance, we may find that a nod
and a wink from the Commission leads to old problems concerning the
characterisation of protective provisions – with shades of rules of law versus
principles of construction – being given a fresh twist.90
84 ibid para 7.43.

85 ibid.
86 A point that the Report omits to mention in this particular illustrative example.
87 Report para 7.44.
88 Relative to other criteria, this reasoning might look like less compelling. After all, A and B have
apportioned the insurance risks; and, if C cannot rely on the ‘deemed value’ clause, A’s insurer turns
out to be the third party beneficiary.
89 Report para 7.44.
90 cf Brian Coote, Exception Clauses (London: Sweet and Maxwell, 1964).

The contractors’ right to vary or cancel their contract (and the

crystallisation test)
The question of whether contractors, having conferred a right to enforce upon a
third party, should then be able to vary or cancel their agreement (to the detriment
of the third party) was one to which the consultation exercise produced no agreed
answer. At one extreme, the Commission rejects the view that contracting parties
should be allowed to vary or cancel at any time:91
At the core of this issue is a conflict between preserving the freedom of the contracting
parties to implement their intentions as they see fit at any particular time, and allowing the
creation of effective third party rights so that a third party can arrange its affairs with some
certainty. We consider that the former policy is outweighed by the latter.
At the other extreme, the Commission rejects as too restrictive the view that the
contracting parties should be denied any right to vary or cancel – after all, the third
party may not even be aware of the original contract.92 In the event, the
compromise between the contractors’ freedom to change their minds and the third
party’s interests is struck in clause 2 of the draft Bill. According to clause 2(1),
where a contract is enforceable by a third party, the contractors may not without
the third party’s consent vary or cancel in the following three situations:
(a) [if] the third party has communicated his assent [‘assent’ being defined in clause 2(2) as
covering both words and conduct] to the contract to the promisor;
(b) [if] the promisor is aware that the third party has relied on the contract; or
(c) [if] the promisor can reasonably be expected to have foreseen that the third party would
rely on the contract and the third party has in fact relied on it.
The strength of initial contractual intent, however, is preserved by clause 2(3) of
the draft Bill, which reserves to the contractors the right expressly to provide:
(a) that [the contract] shall be capable of cancellation or variation without the consent of the
third party; or
(b) that his consent is to be required in circumstances specified in the contract instead of
those specified [by the default provisions of clause 2(1)].
Seemingly, the Commission’s intention is that the exercise of an express right to
vary or cancel without the consent of the third party (under clause 2(3)(a)) should
be effective even though the third party was unaware of the reservation (or, quaere,
the exercise of the right).93 On the other hand, in the absence of express
reservation, if the contracting parties cannot reasonably ascertain whether or not
the third party has in fact relied on the contract, clause 2(5) authorises the court to
dispense with the third party’s consent – and similar authorisation is given by
clause 2(4), where the third party’s consent is required but where it cannot be
obtained either because his whereabouts cannot reasonably be ascertained or he is
mentally incapable of giving consent. Where a court dispenses with consent, clause
2(6) provides that ‘it may impose such conditions as it thinks fit, including a
condition requiring compensation to the third party.’
Put simply, the ‘crystallisation test’ proposed by the Commission is third party
acceptance or reliance,94 but this is qualified by express reservation. Although
91 Report para 9.8.
92 ibid para 9.10.
93 ibid para 9.39.
94 Drawing on the analogy of promissory estoppel (where the party seeking the protection of the
estoppel has the burden of proving reliance), the Commission argues that the burden of proving
reliance should lie with the third party (see the Report para 9.34). However, the Commission also
remarks that it would be unfair to expect the contracting parties to prove that the third party has not

some will favour different features of this compromise, it is unclear quite how it
fits with the Commission’s aspiration to reconcile the third party’s reasonable
expectations with the contractors’ intentions. The Report goes out of its way to
emphasise that the third party’s reliance need not be detrimental.95 For example,
the third party may have ‘relied’ by making investments in anticipation of
contractual performance in its favour, which investments prove so profitable that
the third party is better off even if the contractual performance does not
materialise. As the Commission rightly states, if the requirement is detrimental
reliance, then this ‘tends to shift the focus away from protecting the plaintiff’s
expectation interest to protecting the plaintiff’s reliance interest.’96 However, if the
intention is to protect the third party plaintiff’s expectation interest, it is unclear
why actual reliance of any description should be required.97 Indeed, insofar as the
Commission’s proposed crystallisation test turns on acceptance (the third party
communicating assent), there need be no reliance, so why insist upon actual
reliance (albeit not detrimental reliance) where there has not been acceptance?
As we have already declared, our view is that the protection of legitimate
expectation is the cornerstone principle on which the law of contract, including the
doctrine of privity, should be based. If A and B are in no sense indebted to C, there
is no reason why A and B should contract for the benefit of C. To this extent, it is in
line with the protection of legitimate expectation to treat the intentions of A and B
as decisive. However, once A and B have freely chosen to contract for the benefit of
C, the position is materially different. As we have said already, if the constitutive
purpose of a contract is to confer a benefit on a third party, this cannot be nullified
by simple denial (non-performance) or by contrary (contradictory) declarations of
intent. Equally, whether A and B are now free to change their minds and cancel or
vary the contract depends on the expectations that C legitimately has in the altered
situation. Where A and B have not expressly reserved the right to vary or cancel the
contract, and where C is aware of the contract (with the authorisation of A and B),
then it is plausible to reason that C has a right to hold A and B to the contract (ie to
bar cancellation or variation of the contract).
Gathering together these threads, we suggest that a crystallisation test based on
awareness is the most direct way of protecting the legitimate expectations of the
third party; that, if (taking the Commission’s line) mere awareness is to be rejected
as the test,98 then mere acceptance or communicated acceptance (as per the
Commission) is perhaps the next best test; and that, once the crystallisation test
turns on actual reliance (albeit not necessarily detrimental reliance), then the link
with the protection of the third party’s legitimate expectation, if not broken, is
certainly attenuated.99
relied (ibid) — although the difficulty of proving a negative does not seem to have troubled the
Commission so much in formulating its proposals in relation to the test of enforceability.
95 See eg paras 9.14 and 9.19.
96 ibid para 9.19.
97 Although, no doubt, actual reliance could be pleaded as evidence of expectation.
98 See the Report para 9.12, for the Commission’s rejection of a ‘mere awareness’ test. The
Commission first cites the case of a third party who ‘while aware of the terms of the contract, has no
wish to take advantage of them or who does not believe that the promise will be performed or that he
or she has an entitlement to performance.’ But this is a case of waiver or non-expectation. The acid
test is a third party with a legitimate expectation. The Commission then suggests that mere
awareness will not do because there might be a dispute where the third party encourages or
acquiesces in a variation or cancellation of the contract and then decides that it wants performance
after all. Again, though, in a legal regime organised around the idea of protecting the legitimate
expectations of all participants in a situation (including the contractors), this is less than convincing.
99 In defence of the Commission’s proposals, it may be argued that the combination of tests based on
acceptance and reliance satisfies evidential concerns about the reality of the third party’s expectation

The availability of defences (including defences which might be

open to challenge under the Unfair Contract Terms Act 1977)
Giving effect to one of the Commission’s most contentious recommendations,
clause 6(4) of the Bill provides that section 2(2) of the Unfair Contract Terms Act
1977 (UCTA) is not to apply where a plaintiff, making a third party contractual
claim (that is, under the proposed test of enforceability), seeks to challenge a
contractual provision excluding or restricting the defendant contractor’s liability
for negligently causing loss or damage (other than death or personal injury). The
disapplication of section 2(2) of UCTA must be set alongside three other doctrinal
elements: first, that (exceptionally) section 2(1) of UCTA will be available to a
plaintiff making a third party contractual claim;100 secondly, that the
Commission’s general approach is to leave UCTA unamended and, as presently
understood, unavailable to third party contractual claimants (section 2(1) apart);
and, thirdly, that section 2 of UCTA will remain available to plaintiffs who plead
their action in the tort of negligence.
The Commission confesses to agonising about the application (and
disapplication) of UCTA to third party claimants101 – and, understandably so,
for the proposal produces some strange outcomes. For instance, consider the
Commission’s hypothetical illustrative case 14, where B buys an expensive three
piece suite from A, a ‘well known Central London department store with a
reputation for quality.’102 B makes it clear to A that the goods are being purchased
as a wedding gift for Mr and Mrs C and B instructs A to deliver the goods to Mr
and Mrs C directly. After two weeks’ use, the furniture proves defective.
According to the Commission, this is a case where, subject to rebuttal, Mr and Mrs
C will have a right to sue A (under the second limb of the test of enforceability) for
breach of an implied term as to quality. Now, if the contract purports to exclude
liability for breach of the statutory implied term as to quality, the effect of the
Commission’s proposals is that such an exclusion will be void against B (under
section 6(2) of UCTA) but immune against any UCTA-challenge pleaded by Mr
and Mrs C. (For the moment, we pass over another difficulty here, namely whether
A’s exclusion of liability might serve to rebut Mr and Mrs C’s presumptive right to
enforce the contract). On the other hand, if Mr and Mrs C can frame their action
against A in the tort of negligence (where, for example, A negligently damages
goods belonging to Mr and Mrs C when delivering the furniture, or negligently
injures Mr C), then section 2 of UCTA applies in the ordinary way.103 And, of
course, even if Mr and Mrs C cannot frame their action in negligence, their
interests might be protected if B (as a contracting party) takes up the claim on their
behalf104 – for, as clause 4 of the draft Bill makes clear, the opening up of third
party claims in no way prejudices the independent claims of the contracting party
promisee. Nevertheless, the immediate impression is that the proposals produce
(cf note 97 above), and ensures that third parties who actually rely (on the basis of their expectation
of benefit) are not prejudiced by not knowing that a communicated acceptance will protect their
expectation; cf para 9.24 of the Report, where the Commission argues along these lines in rejecting a
single test based on acceptance (but, notice the way in which the possibility of detrimental reliance is
used to give persuasive force to this argument).
100 See the Report para 13.12. Sed quaere: why would such a claim be pleaded in contract rather than in
negligence?
101 See ibid para 13.7 and then paras 13.9–13.13.
102 ibid para 7.41.
103 ibid para 13.12.
104 One of the points pleaded in mitigation by the Commission: see ibid para 13.10(vi).

some unevenness in the law,105 and the obvious question is whether this is
defensible.
The key to the Commission’s thinking, here as elsewhere, is that the contracting
parties’ intentions must govern whether or not the third party has a right to enforce
the agreement. If the parties do not intend to create third party rights, they must
always be free so to stipulate.106 At all costs, therefore, there must be no doubt that
the parties remain free to exclude the creation of rights in favour of a third party. A
corollary of this guiding principle is that, if the parties do intend to create rights in
favour of a third party, they must also remain free to set conditions upon or limits to
the liability that goes with such rights (as we saw in our earlier discussion of
conditional benefits). From this perspective, to allow the third party to run arguments
based on UCTA might be seen as giving a hostage to fortune, encouraging litigation
on the distinction between ‘exclusions (and limitations) that are mere UCTA-type
defences’ and ‘exclusions (and limitations) that serve to preclude, rebut, or qualify a
third party’s presumptive right to enforce’, potentially inviting further extension of
the scope of UCTA,107 and duly diminishing the fundamental power of the
contractors to regulate their relationships with third parties.
Are we to conclude, therefore, that an element of doctrinal unevenness is the
price that we must pay for respecting the contractors’ intention? We think not.
Certainly, before we can endorse the Commission’s position, two other considera-
tions need to be brought into the picture. First, we need to review the Commis-
sion’s general approach to the availability of defences that can be set up against
third party claimants. And, secondly, we need to reflect on whether the proposed
side-lining of UCTA really is required if we are to keep faith with the principles of
respect for contractual intention and protection of legitimate expectation.
The Commission’s approach to defences

As elsewhere in its Report, the Commission’s approach to defences108 centres on
establishing a default position that the contractors are free to modify by express
provision. The default position is provided for by clause 3(2) of the draft Bill,
according to which the defendant promisor (contractor) is to have available by way
of defence or set-off (against a third party who satisfies the test of enforceability)
any matter that:
(a) arises from or in connection with the contract [or, insofar as a particular contractual
provision is being enforced by the third party, any matter that arises out of or in connection
with the contract and is relevant to that contractual provision]109; and
(b) would have been available to him by way of defence or set-off in proceedings for the
enforcement of the contract if those proceedings had been brought by the promisee.
This default position takes a middle path between two outlying positions – either
allowing only such defences as affect the existence or validity of the contract or the
particular contractual provision purporting to benefit the third party (which the
105 ibid para 13.9.
106 Seminally, see ibid para 1.8.
107 See Elizabeth Macdonald, ‘Exclusion Clauses: the Ambit of s 13(1) of the Unfair Contract Terms
Act 1977’ (1992) 12 Legal Studies 277, and ‘Mapping the Unfair Contract Terms Act 1977 and the
Directive on Unfair Terms in Consumer Contracts’ [1994] JBL 441; and John Adams and Roger
Brownsword, Key Issues in Contract (London: Butterworths, 1995) 269 et seq.
108 By ‘defences’, the Commission intends to cover ‘matters which render the contract void (for
example, fundamental mistake) or voidable (for example, the promisee’s misrepresentation, duress
or undue influence) or that have led to the contract being discharged (for example, frustration or
serious breach by the promisee)’ (see the Report para 10.2).
109 See para 10.12 of the Report and clause 7(2)(b) of the draft Bill.

Commission rejects as too narrow), or allowing all defences, set-offs, and

counterclaims that would have been available against the contractual promisee
(which the Commission rejects as too wide).110 However, clause 3(3) of the draft Bill
reserves to the contractors the right to narrow or widen the defences or set-offs
otherwise available under clause 3(2). Similarly, clause 3(4) specifies the default
position with regard to defences, set-offs, and counterclaims that are specific to the
third party (rather than arising from the contract) – the default position being that such
defences are available – but clause 3(5) reserves to the contractors the power expressly
to provide for a less inclusive range of defences, set-offs, and counterclaims.
If the Commission’s general approach is that the defendant contractor should
have available against the third party such defences as would have been available
against the other contracting party (plus any defences specifically available against
the third party), then it is tempting to reason that the defendant contractor should
not have available against the third party such (non-specific) defences as would not
have been good against the other contracting party. Following this line of thinking,
if a contractual exclusion clause would not be a good defence against a fellow
contracting party (because, say, it would be void or it would be judged
unreasonable under UCTA), why should it be a good defence against a third
party? This line of reasoning, as we have said, is tempting.111 However, logically,
the premise that the defendant contractor should have available against the third
party such defences as would be available against the other contracting party, does
not entail that such defences should be the only ones available to the defendant
contractor. And indeed, the Commission already allows the defendant to have
recourse to defences that are specific to the third party (such as fraud by the third
party). Nevertheless, both these categories of defences are in themselves ‘good’
defences and it seemingly defeats the principle of protection of legitimate
expectation that the Commission should allow the defendant to set up against the
third party what would otherwise be ‘bad’ defences – thereby putting the third
party in a worse position than that of the (non-defendant) contracting party.112 The
question that we need to ask, therefore, is whether it makes sense – given the
Commission’s general policy of respecting contractual intention, and its specific
concern that contractors should not be prevented from ‘contracting out of
conferring legal rights on third parties’113 – to side-line UCTA and, thus, to allow
in otherwise ‘bad’ defences.114
Respect for contractual intention

For two principal reasons, it is our contention that the exclusion of UCTA betrays a
misplaced respect for the intentions of the contracting parties. First, the principle of
110 See paras 10.8–10.12 of the Report.

111 Another tempting thought is that much of the present difficulty stems from setting up the third
party’s claim as an independent cause of action. Quaere, why not treat the claim as analogous to a
subrogated right of action?
112 Moreover, the sense of this is even more questionable if the contractual provision that we are
terming a ‘defence’ would not serve to rebut the third party’s presumptive right to enforce. In such a
case, to disallow the defence would not be to interfere with the contracting parties’ right to veto a
contractual relationship with the third party. However, to allow the defence, would be to allow the
contractors to avoid UCTA in their contractual dealings with the third party.
113 See the Report para 13.10(viii).
114 It should be noted that, in the reverse situation, where the third party is seeking to rely on a main
contract exclusion or limitation, the Commission’s recommendation is that the plaintiff contractor is
to be allowed to challenge the provision (as a bad defence) under UCTA: see ibid paras 10.22–10.23
and 13.11. To this extent (but only to this extent), the third party is to be treated as if he were a party
to the contract: see clauses 3(6) and 6)6) of the draft Bill.

respect for contractual intention implies respect only for the joint intentions of the
contractors. By disapplying (not extending) UCTA, the Commission exposes third
parties to the risk of being denied a remedy by a contractor who unilaterally relies
on otherwise bad defences – and all for the sake of respecting supposedly joint
contractual intention. Secondly, even if a particular contractual exclusion does
represent the joint intentions of the parties, the Commission’s proposal exposes
third parties to the risk of a contractor being allowed to defend against a third party
claim in a way that violates the integrity of the constitutive purpose of the contract
(thereby violating the principle of respect for contractual intention).
To take up the first of these reasons, the Commission’s thinking in relation to
UCTA presupposes a setting in which the contractors jointly intend the specified
third party effects of their contract. However, such a presupposition makes little
sense in relation to much of the standardised dealing regulated by UCTA. For
instance, in cases such as the Commission’s hypothetical illustration (14) of B
buying an expensive three piece suite from A, how plausible is it that A’s standard
form exclusions will have been jointly agreed by the contractors – let alone jointly
intended to regulate in a legitimate and specific way their relationship with a third
party beneficiary? In the ordinary course of consumer dealing, it surely is a
nonsense to suppose that A and B will have jointly agreed that C should have the
right to enforce but subject to A’s standard exclusions or restrictions on liability
(which might or might not be valid under UCTA). Admittedly, A’s Sales
Agreement will rehearse the standard terms, but to equate this with the parties’
intentions is absurd – certainly, if B were to succeed in challenging an exclusion in
A’s standard form, it would be odd to find B complaining about a lack of respect
for contractual intention (although, no doubt, this would be precisely what A would
say). It is important, therefore, to distinguish between those cases where the
contractors genuinely agree that the third party’s right to enforce shall be excluded
and those cases where the contract purports to contain an exemption clause but it
cannot be equated with the genuine agreement (or intention) of the parties.
It is important, too, to appreciate that, although much of the regulatory rhetoric
of UCTA is about terms being reasonable or unreasonable (which suggests that
ideas of substantive fairness are being introduced to limit freedom of contract), in
fact, UCTA operates largely by reference to the reality of the parties’
agreement.115 In other words, where UCTA strikes down a contractual provision
as unreasonable, this usually signifies that the provision has not been freely agreed
– in which case it would be a distortion to treat such a provision as representing the
contractors’ intentions. Conversely, where a contractual provision survives an
UCTA challenge, this normally signifies that the bargaining process was clean and
that the provision genuinely represented the parties’ intentions at the time of
contracting. As for those contractual provisions that UCTA declares to be void, the
Commission is correct to observe that, here, UCTA appears to operate ‘irrespective
of the true construction of a contract’.116 However, we might equally well say that
such provisions in UCTA build on assumptions about what contractors normally
intend, electing to effectuate such intentions through a general rule rather than a
case-by-case inquiry (discretion). Seen in this light, UCTA can be understood not
only as running with the grain of the Commission’s policy,117 but as one of the best
115 cf Adams and Brownsword, Key Issues in Contract (London: Butterworths, 1995) ch 8.
116 See the Report para 13.10(i).
117 Such an analysis also responds to the Commission’s difficulties concerning whether, if UCTA
applied, ‘reasonableness should be judged as between the promisor and the promisee or as between
the promisor and the third party’, ibid para 13.10(vii). Clearly, if UCTA is designed to filter standard

resources that we have for checking whether defences advanced in the name of
contractual intention actually reflect the contractors’ joint intentions.
In mitigation, the Commission pleads that ‘the common law rules as to the
incorporation and construction of exclusion clauses can go much of the way to
stopping, for example, promisors relying on exclusion clauses hidden away in
small print.’118 Yet, if the common law goes much of the way, why not go all the
way by applying UCTA? Why make any concession to exclusions that simply do
not look like the products of joint contractual intention?
This brings us to our second reason. Suppose that the relevant exclusion does
look like an explicit, and jointly agreed, attempt to preclude enforcement by third
parties (or by a particular third party). Is it now a mistake to apply UCTA to the
contractors’ exclusion? Here, we can identify three ways in which a defendant
contractor might seek to rely on such an exclusionary provision. Namely, the
defendant might argue:
(a) that there was no intention to confer a benefit on a third party; or,
(b) that, although there was an intention to confer a benefit on a third party, it was
not intended that the third party should have a right to enforce; or,
(c) that, although there was an intention to confer a benefit on a third party, it was
not intended that the defendant should be liable for breach.
If we accept the Commission’s policy of respecting contractual intention, and if we
accept the logic of the relationship between constitutive purpose and exclusionary
intention (as outlined in our background reservations), the defendant contractor’s
arguments in both (b) and (c) must be rejected. There is, therefore, no good reason
for disapplying UCTA where the defendant so argues; and if UCTA serves to
defeat such arguments, so much the better. However, the defendant contractor’s
argument in (a) cannot be dismissed so lightly.
In principle, the contractors (on both the Commission’s approach and on our
own view) must be free to form a contract, the constitutive purpose of which is not
to confer a benefit on any third party. Whether or not the contractors so intend
depends upon our best interpretation of all the material evidence; and, in this
respect, an explicit exclusion of any third party claim might well be a relevant
consideration. It must be conceded, therefore, that it would be unfortunate if the
application of UCTA were to lead to the indiscriminate striking out of exclusions
that were designed to underline that particular contracts were not intended to
confer a benefit on third parties and if, in consequence, contractors were exposed to
unintended third party liabilities. Such a concession, however, should not be
thought to entail the full disapplication of UCTA. For, whilst there might be an
argument for disapplying UCTA in relation to the question of whether the
contractors intended to confer a benefit on the plaintiff third party, there seems no
good reason for denying the third party the protection of UCTA (at least, in relation
to clauses that purport to exclude liability)119 once it is established that the
contractors intended to confer a benefit on the third party.
form legalese with a view to ascertaining what the parties really intended, the Commission’s general
approach entails that the reasonableness question must lie between the contracting parties.
118 See the Report para 13.10(iv).
119 The argument is more complex in relation to limitations of liability. It is arguable that UCTA should
be disapplied not only where the issue is whether the parties intended to confer a benefit but also
where the question is whether they intended to limit their liability to a third party. On this view,
where the parties intended to confer a benefit, UCTA would apply to exclusions but (arguably) not to
limitations. This would look odd and the temptation then would be to extend the application of
UCTA to limitations. Sed quaere, why should this be a problem? The contractors would remain
sovereign in deciding whether they wished to confer a benefit on a third party.

In sum, the Commission’s proposal to disapply (not extend) UCTA is designed

to ensure that the contractors remain free to declare that they are not contracting for
the benefit of a third party. Assuming that they genuinely do not intend to contract
for the benefit of third parties, the contractors should be allowed to plead
exclusionary declarations in their defence.120 However, the price that the
Commission proposes that we should pay for preserving this aspect of contractual
freedom is that defendant contractors are to be given a clear run (free of UCTA
regulation) to plead various ‘bad’ defences against third party plaintiffs, in
particular defences that are not the product of joint agreement and defences that
overreach the contractors’ exclusionary powers (consistent with respect for the
integrity of their constitutive purposes). This, we suggest, is a burden that third
parties cannot reasonably be asked to bear.
Conclusion
In some respects, the Commission’s work on privity can be regarded as carrying
forward the project initiated by the Law Revision Committee’s pre-war
recommendation that the doctrine of privity should be relaxed to enable third
parties to enforce contracts expressly purporting to confer a benefit upon them.121
Yet, the Law Revision Committee’s proposals failed to materialise in legislation –
and, in this sense, the Commission is having a second bite at the cherry.122 To
avoid any doubt, therefore, we should emphasise that, whatever criticisms we
might have of the Commission’s proposals, the instinct that the privity rule is in
need of reform is surely correct and it is important that the draft Bill survives the
Parliamentary process to put a legislative seal of approval on this overdue reform.
What then is our overall assessment of the Commission’s proposals? Basically,
the Commission is guided (quite rightly) by two principles: one principle is that we
should respect the intentions of contracting parties; the other principle is that we
should protect the (legitimate) expectations of parties who are potential
beneficiaries of transactions. However, in our submission, the former principle
needs to be understood in the light of the constitutive purpose of any particular
transaction – a matter of considerable importance where we are considering the
possible rebuttal of, or restriction upon, a third party’s presumptive right to enforce
– and, in the final analysis, it has to be squared with the principle of protection of
legitimate expectation (this principle applying both to third parties and to the
contractors themselves). It is true that in many cases the outcome is not affected by
the priority set between these two principles, because they each point to the same
result. Nevertheless, as we have argued previously, it sometimes does matter
whether legitimate expectation or contractual intention is taken as the criterion –
and certainly in contractual networks, where main contracts and sub-contracts
jointly serve a unifying purpose, it is as much a matter of logic as expectation to
120 There is no reason, of course, for respecting sham declarations of intention, designed to convert what
is essentially a contract for the benefit of a named third party into a contract intended to confer no
benefit on any third party.
121 See Law Revision Committee, Sixth Interim Report, Statute of Frauds and the Doctrine of
Consideration (1937) Cmd 5449. The Commission also broadly follows the Law Revision
Committee in allowing a contractor to raise defences that would have been available against a fellow
contractor and in allowing the contractors some right to vary or cancel their agreement. For
discussion, see the Report paras 4.2–4.4
122 See J. Beatson, ‘Reforming the Law of Contracts for the Benefit of Third Parties: A Second Bite at
the Cherry’ (1992) 45 CLP 1.

treat the transacting parties as contractually joined.123 The failure to give

expectation its due weight is apparent too in the Commission’s treatment of the
contracting parties’ right to vary or cancel (where the link between the proposed
crystallisation test and protection of the third party’s legitimate expectation is at
least attenuated); and, in displacing (not extending) the applicability of the Unfair
Contract Terms Act, the Commission not only fails to give legitimate expectation
its proper weight, it distorts the principle of respect for contractual intention. On
the other hand, the Commission’s readiness to review the enforceability of
gratuitous promises is a welcome indication of a renewed concern with protecting
legitimate expectation.
Having resolved to base its proposals on respect for the contracting parties’
intentions, the Commission’s principal difficulty was to strike the right balance
between calculability and flexibility. This balancing exercise is at its most sensitive
in the second limb of the test of enforceability. Although the design of this limb of
the test (including the proviso) is not without precedent – in fact, it is very closely
modelled on the test laid down by section 4 of the Contracts (Privity) Act 1982 in
New Zealand – the adoption of a two-limbed test of enforceability gives rise to
uncertainties that make no positive contribution to the desired element of
flexibility. In a sense, the Commission has substituted a dual-track approach for its
earlier dual intention test without altogether eliminating unproductive uncertainty.
As we have suggested, the conjunction of the two limbs invites litigation about the
precise relationship between the first and the second limb (particularly, where the
defendant contractor seeks to rebut the presumption under the proviso); and, where
a third party seeks to rely on exclusions or other protective terms, there is scope for
argument in relation to whether such terms fall under the first or the second limb.
Moreover, although the proviso is intended to allow for flexibility, the draft Bill
could offer more assistance (through indicative guidelines) in relation to the way in
which the discretion that accompanies this flexibility is structured. Is there any
reason, for example, why guidelines should not indicate that the availability of a
direct contractual recourse is normally to be taken as counting against the third
party having a right to enforce, and indicating that exclusions drawn by an
employer in favour of his third party employees should be treated normally as
enforceable by the employees? Or, even better, for the avoidance of doubt, why not
treat such exclusions as giving employees a right to enforce under the first limb?
Or, even better, for the avoidance of disputes such as that in London Drugs, why
not provide that exclusions drawn by employers are to be construed as giving
employees a right to enforce even if the employees are not expressly designated?
We should finish, however, by once again accentuating the positive. The
Commission’s determination to bring forward proposals for the reform of the
privity doctrine is to be applauded. The benefit of these proposals is that they
promise to break the stranglehold of the privity orthodoxy – not simply in the ad
hoc way achieved by the existing statutory exceptions to the doctrine,124 but across
the board through the general application of the test of enforceability. However, the
burden of implementing these proposals, of ironing out any difficulties that
emerge, and of developing more radical regimes of third party rights, has been
handed back to the courts.
123 See the argument in D. Beyleveld and R. Brownsword, ‘Privity, Transitivity, and Rationality’ (1991)
54 MLR 48; and J.N. Adams and R. Brownsword, Key Issues in Contract (London: Butterworths,
1995) ch 5.
124 Clause 6(1) of the draft Bill, it will be recalled, preserves the existing statutory exceptions to the
third party rule.

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REPORTS

Five years after the publication of its provisional recommendations in favour of

*Faculty of Law, University of Sheffield.

ß The Modern Law Review Limited 1997 239

The Underlying Principles: Three Background Reservations

Contractual intention and constitutive purpose

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This reservation proceeds from what we take to be the uncontroversial proposition

ß The Modern Law Review Limited 1997 241

test of enforceability unfolds, we might expect to see some answers to these

242 ß The Modern Law Review Limited 1997

Contractual intention and prescribed transactional regimes

Contractual intention and legitimate expectation

ß The Modern Law Review Limited 1997 243

Some Preliminary Issues

The scope of the reform

244 ß The Modern Law Review Limited 1997

pre-incorporation contract may be conditional should not be misconstrued as permitting obligations

ß The Modern Law Review Limited 1997 245

Extension of the reform

41 ibid para 5.10.

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The relationship between privity and consideration

ß The Modern Law Review Limited 1997 247

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point of the reasoning is correct. Accordingly, we welcome the Commission’s

Central Reform Issues

The test of enforceability

ß The Modern Law Review Limited 1997 249

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ß The Modern Law Review Limited 1997 251

of the contractual matrix.69 In principle, a contract might (a) declare that a

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ß The Modern Law Review Limited 1997 253

79 See the Report para 7.10.

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servants, employees and subcontractors engaged by B & Co. in the performance of

84 ibid para 7.43.

ß The Modern Law Review Limited 1997 255

The contractors’ right to vary or cancel their contract (and the

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ß The Modern Law Review Limited 1997 257

The availability of defences (including defences which might be

258 ß The Modern Law Review Limited 1997

The Commission’s approach to defences

ß The Modern Law Review Limited 1997 259

Commission rejects as too narrow), or allowing all defences, set-offs, and

Respect for contractual intention

110 See paras 10.8–10.12 of the Report.

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ß The Modern Law Review Limited 1997 261

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In sum, the Commission’s proposal to disapply (not extend) UCTA is designed

ß The Modern Law Review Limited 1997 263

treat the transacting parties as contractually joined.123 The failure to give

264 ß The Modern Law Review Limited 1997

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