Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(8) (31 July 1996)

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1. Designation

8.1 It is inherent in the test of enforceability that we have recommended in Part VII above that the third party be expressly identified whether by name (for example, Joe Bloggs), class (for example, "stevedores", "subsequent owners", "subsequent tenants"), or description (for example, "person living at 36 Coronation Street" or "B's nominee"). So, in applying the first limb of our recommended test, one cannot expressly confer a right of enforcement on a third party other than by expressly identifying that third party by name, description or class. And the presumption in the second limb of our recommended test of enforceability is only triggered where there is express identification by name, description or class. It follows that, under our recommended reforms, third party rights cannot be conferred on someone who is impliedly in mind. We consider that the possibility of such an implication would give rise to unacceptable uncertainty.

8.2 At the other extreme, we are also of course rejecting a requirement that the third party be expressly identified by name. This was provisionally rejected in the Consultation Paper (1) and that rejection was supported by consultees. The objection to express designation by name is that it would prevent the conferral of a legally enforceable right upon a third party who was identified by class or description only (including those who do not exist at the time of contract). This would mean, for example, that it would be impossible for an employer and contractor to provide in a construction contract for the conferral of rights on future occupiers of the premises under construction.

8.3 We should clarify that, in our view, it is a sufficient identification by description (or class) if the third party is referred to in the contract as "B's nominee". In the New Zealand first instance decision of Coldicutt v Webb & Keeys (2) it was held that the nominee could sue because he had been designated by description and the only purpose of adding a reference to him was to give him the right to sue on the contract. The contract was one for the sale of land to "Webb or his nominee". Hillyer J said:-

8.4 While the approach in Coldicutt has been rejected by subsequent New Zealand cases, (3) we see no valid objection to it. (4) Indeed it is significant that the New Zealand Law Commission in its Contracts Statutes Review (5) preferred Coldicutt to the conflicting cases as being "supportable in principle and satisfactory in its result". The Commission concluded, however, that the interpretation of section 4 should be left to the courts to resolve and that the conflict in the cases did not merit an amendment of the Contracts (Privity) Act 1982.

2. Existence of Third Party

8.5 In the Consultation Paper, (6) the provisional view was expressed that it should be possible to create rights in a third party who was not in existence (or ascertained) (7) at the time that the contract was made, since otherwise a remedy would be denied to prospective beneficiaries such as an unborn child or a future spouse. However, whether a third party was ascertained at the time of the contract might be relevant in determining whether the contracting parties intended to confer on him a right to enforce the contract. This provisional view was overwhelmingly supported by consultees.

8.7 The view was also expressed in the Consultation Paper (8) that it should not be necessary for the third party to be in existence (or ascertained) at the time of acceptance of the benefit by another third party, as appears to be required by section 55(6)(b) of the Queensland Property Law Act 1974. (9) It was felt that this would have adverse consequences for some members of a class of beneficiaries. For example, it would appear to mean that, where an employer has agreed with union representatives to review employees' salaries at regular intervals, and has also expressly provided that the agreement should be legally enforceable by the employees, (10) the benefit of this agreement would be enjoyed only by those members of the work-force who accepted it at its inception and not those who subsequently joined the company. Although the opinions of consultees were not specifically sought on this question, no consultee disagreed with our provisional view.

3. Pre-Incorporation Contracts: A Special Case?

8.9 The common law rule is that a company which is not incorporated at the time that a contract is made on its behalf cannot enforce that contract, despite a purported later ratification of it. (11) Nor is the contract enforceable against the company. Section 36C of the Companies Act 1985 (12) provides that the purported agent for the unincorporated company is liable on the contract. A pre-incorporation contract is therefore generally enforceable as between the signatory parties and remains valid as between them.

8.10 It is clear that a reform which permits the conferral of rights on a third party not yet in existence may extend to a third party which is a company that has not yet been incorporated. Thus the interrelationship between our proposed reform and the rules governing liability on pre-incorporation contracts needs to be considered. Under our proposed reform, where a promoter/promisee contracts with a promisor to confer a benefit on a non-existent company, the company, once it comes into existence, could enforce the benefit if it could satisfy the test of enforceability. On the face of it, this would seem to derogate from the pre-incorporation contracts rule.

8.11 However, we agree with the New Zealand Law Commission (13) that a contract on behalf of a third party is not the same thing as a contract for the benefit of a third party. The former involves the third party becoming a party to the contract, and to all of its rights and obligations, after its incorporation. The latter is the situation that we are dealing with, where the third party is not, and will not become, a party to the contract, but will simply acquire a right to sue to enforce provisions of the contract. The third party company will not become subject to the obligations of the promoter under the contract, and so, for example, the obligation to pay for goods or services supplied to a company under a pre-incorporation contract would remain the promoter's. Thus, our proposed reform of the third party rule would not have the effect of rendering valid as against the third party company contracts that would otherwise be invalid.

8.12 We should also mention at this stage - although the point is discussed fully in Part X below (14) - that, while our reform does not enable obligations to be imposed on third parties, the third party's entitlement may be subject to conditions so that a failure to comply with the condition can give the promisor a defence or set-off. Our recognition that a company's right under a pre-incorporation contract may be conditional should not be misconstrued as permitting obligations under a pre-incorporation contract to be imposed on the company. (15)

8.13 Our general approach is supported by developments in New Zealand. The New Zealand Contracts (Privity) Act 1982 contained no specific provision to deal with pre- incorporation contracts. The law on pre-incorporation contracts in New Zealand was amended by the New Zealand Companies Amendment Act (No 2) 1983, introducing a new section 42A into the New Zealand Companies Act 1955, which permits the ratification of contracts made in the name of or on behalf of a non-existent company within a specified or reasonable time after the incorporation of the company. The Contracts (Privity) Act 1982 has been held since its enactment to apply to pre- incorporation contracts by the New Zealand courts, (16) a conclusion which has not been affected by the specific legislation dealing with the matter in company law. The New Zealand courts have maintained the distinction which we draw between a company becoming a full party to a contract made for it or on its behalf prior to its incorporation, and enforcing a contract as a third party whether made before its incorporation or not.

8.14 Consequently, we do not believe that we need to qualify recommendation 10 in order to preserve the rules governing pre-incorporation contracts. (17) We accept however that our proposals for reform may provide a route by which at least one of the effects of those rules may be avoided. Given that the rules governing pre-incorporation contracts have been described as "clearly unjust", (18) we believe that the accordance of a right of suit to the newly incorporated company in circumstances where this clearly matches the contracting parties' intentions goes some way towards doing greater justice to those involved than the present position.

8.15 In the Consultation Paper, we invited views on whether the issue of pre-incorporation contracts should be addressed in any reform of the third party rule, or whether it would be best left to specialist company legislation. (19) The preponderance of consultees' opinions was in favour of leaving general reform of pre-incorporation contract law to specialist legislation while accepting that there should be no restriction on a corporate third party's right to enforce an otherwise enforceable contract simply because it was entered into before the third party's incorporation.

4. Ascertainability of Third Party and Certainty

8.17 A few consultees pointed out that it must be possible to ascertain who is the third party at the time the right accrues. Thus, a third party who is to receive money or services under a contract would need to be capable of being ascertained with certainty at the time at which the promisor's duty to perform arose. Where the third party is to receive the benefit of an exclusion or limitation clause under the contract, the third party should be ascertainable with certainty by the date at which the liability falling within the exclusion or limitation clause was incurred. We agree, but it is hard to see that this represents anything more than the straightforward application of the normal principle that to be valid a contract, or contractual provision, must be sufficiently certain.

Footnotes to Part VIII

(3)In McElwee v Beer (Unreported, High Court, Auckland, 19 February 1987, A 445/85, Wylie J) it was held that (i) assuming a nomination results in a benefit to the nominee, it is the nomination, not the contract (or the promise under the contract) that confers it; (ii) a nomination does not in itself confer a benefit for mere nomination leaves all the benefits with the original party to the contract; and (iii) a person designated by description connotes a person identifiable at the time of the contract, not someone who by capricious choice of the contracting party may subsequently be brought within the description. In Field v Fitton [1988] 1 NZLR 482, the New Zealand Court of Appeal supported (iii) above, observing that whether or not a nominee is sufficiently designated will depend on whether words of qualification are added to allow a bare nominee to be sufficiently identified. In Karangahape Road International Village Ltd v Holloway [1989] 1 NZLR 83, Chilwell J held that a benefit conferred on a nominee is not one conferred by the promise, but by the independent act of the contracting party, and that, in any event, section 4 could not apply because the nominee was not specified or particularised.

(4)This is not to deny that, in the context of the particular contract, it may be that the nominee cannot otherwise satisfy the test of enforceability. This was the alternative ground of reasoning in Field v Fitton [1988] 1 NZLR 482. Bisson J said, at p 494, "The second difficulty is that the proviso to s 4 is fatal to the first respondents as there is on the proper construction of this contract no intention to create an obligation on the appellants enforceable at the suit of the first respondents alone. The mere addition of the words ?or nominee' without more, is not sufficient in this case... on the proper construction of the agreement to impute an intention to the parties to create, in respect of the benefit to a named purchaser an obligation on the part of the vendor enforceable at the suit of a bare nominee."

(9)Section 55(6)(b) reads: "?beneficiary' means a person other than the promisor or promisee, and includes a person who, at the time of acceptance is identified and in existence, although that person may not have been identified or in existence at the time when the promise was given."

(10)A collective agreement is not legally enforceable unless it is in writing and there is an express provision that it is legally enforceable: Trade Union and Labour Relations (Consolidation) Act 1992, s 179.

(11)11It is a contract made by an agent (the promoter) on behalf of a non-existent principal (the company) and leads to personal liability of the agent: Kelner v Baxter (1866) LR 2 CP 174.

(13)Contract Statutes Review (1993) para 5.18. It was stated that the special company law rules on pre-incorporation contracts and the provisions of the Contracts (Privity) Act 1982 could happily co-exist and that no amendments were warranted.

(15)It also follows from this that there is no question of our proposed legislation undermining s 36C of the Companies Act 1985 which was designed to implement Article 7 of the First Company Law Directive (Dir 68/151) which rests on the company not having assumed the obligations arising under the pre-incorporation contract.

(16)16Palmer v Bellaney (1983) ANZ ConvR 467, holding that the Contracts (Privity) Act 1982, s 4, applied in the case of a contract made by X "as agent for a company to be formed" and that the company could accordingly enforce the contract. Although criticised (Farrar and Russell, Company Law and Securities Regulation in New Zealand), this interpretation was supported in Speedy v Nylex New Zealand Ltd (unreported, H Ct, Auckland, 3 February 1989, CL 29/87) by Wylie J. Cf Cross v Aurora Group Ltd (1989) 4 NZCLC 64,909 where a contract had been entered into on behalf of "Cross Property Management Ltd, a company currently being formed". In the event, Cross Property Management Ltd was not in the process of formation at the time of contract, but instead the promoter's solicitors had bought a shelf company and subsequently changed its name to Cross Property Management Ltd. It was held that section 4 could not apply to allow Cross to take the benefit of the contract, as there was no sufficient identification of the shelf company as being Cross for these purposes. Wylie J (at p 64,913) held that "Designation is a strong word, a positive word and means something more than a mere contemplation or possibility".

(17)It is perhaps noteworthy that reform of this doctrine has itself been advocated: in 1962 the Jenkins Committee recommended that companies should be given statutory power to adopt contracts made in their names or on their behalf before incorporation (Report of the Company Law Committee (Cmnd 1749), para 54(b)); and reform has been effected in New Zealand: Companies Amendment Act (No 2) 1983, s 15, introducing a new s 42A into the Companies Act 1955.

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You are here: BAILII >> Databases >> The Law Commission >> Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(8) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(8).html Cite as: [1996] EWLC 242(8)

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1. Designation

2. Existence of Third Party

3. Pre-Incorporation Contracts: A Special Case?

4. Ascertainability of Third Party and Certainty

Footnotes to Part VIII