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Published online by Cambridge University Press: 02 January 2018
It is commonplace in the commercial world for contractual obligations to be performed by persons other than the original parties to the contract. Because of the doctrine of privity of contract persons who are not party to a contract generally cannot take advantage of terms contained in it. If, therefore, a person undertakhg the performance of obligations which someone else has originally assumed misperforms those tasks so as to incur legal liability towards the other original contracting party, it would seem that he cannot rely on a protecting clause in the contract even though that clause may purport to afford him cover. A variety of avenues of escape from this situation (which is often commerically inconvenient) have been at various times advocated: the doctrine of vicarious immunity and the trust idea have been explored and eventually rejected. Other methods of avoidance retain more vigour: we have probably not heard the last of arguments based on the doctrines of volenti non fit injuria and disclaimer, of the bailment on terms and of the idea of spelling out a separate contract (or offer) between the party now suing and the third party.
1. Tweddle v Atkinson (1861) 1 B and S 393; Dunlop Pneumatic Tyre Co Ltd v Selfridge Co Ltd [1915] AC 847.
2. Scruttons Ltd v Midland Silicones Ltd [1962] AC 446. Treitel, Law of Cuntract (5th edn) pp. 471–476; Palmer, Bailment pp. 986–1008; Yates, Exclusion Clauses in Contracts pp. 102–113.
3. See per Scrutton LJ in Elder Dempster and Co Ltd v Paterson Zochonis and Co Ltd [1923] 1 KB 420. The idea was disapproved of by the House of Lords in Midland Silicones, op. cit.
4. See now Beswick v Beswick [1968] AC 58.
5. See Wilson v Darling Island Stevedoring and Lighterge Co Ltd (1956) 95 CLR 43 and per Lord Denning in Midland Silicones, op. cit.
6. See Morris v C W Martin and Sons Ltd [1966] 1 QB 716 and Johnson Matthey and Co Ltd v Constantine Terminals Ltd [1976] 2 Lloyd's Rep 215.
7. See Midland Silicones, op. cit; The Eurgmedon [1975] AC 154; The New York Star [1980] 3 All ER 25. Davies and Palmer [1979] JBL 337.
8. (1946) 175 LT 334 at 335.
9. Op. cit., p. 473.
10. [1967] QB 31; (1967) 30 MLR 584.
11. Willmer and Salmon LJJ. Harman LJ expressed no view on this point.
12. There must be an agreement to this effect since the general position is far from that a servant or agent is to be indemnified as far as employees are concerned they are liable to satisfy the master in respect of his vicarious liability: see Lister v Romford Ice and Cold Storage Co (1957) AC 555 and Civil Liability (Contribution) Act 1978.
13. Of course, the battery of devices created by Parliament and the courts means that very few challenges with a scintilla of an argument are doomed to failure: the contra proferentem rule is particularly helpful to challenges. On this see Smith v South Wales Switchgear Ltd [1978] 1 WLR 165 (a case of an indemnity clause, though the same rules as apply to exclusion clauses were employed).
14. In this respect the cases on promissory estoppel are analogous: see Woodhouse AC Israel Cocoa, Ltd, SA v Nigerian Produce Marketing Co Ltd [1972] AC 741.
15. (1970) 86 LQR 69.
16. Liverpool City Council v Irwin [1977] AC 239.
17. Welby v Drake (1825) 1 C and P 557, and Hirachand Punanchard v Temple [1911] 2 KB 330 are cited by Odgers as cases where a promisee was treated as in breach of agreement to accept a lesser payment in full settlement of a debt when he sued the debtor even though he had never promised not to sue. These cases are, however, best seen as illustrating the special rule that the cancellation of a promissory note can release a liable person irrespective of any contractual undertaking.
18. Unrep. 11 December 1977.
19. Cf. the equivocal role of the placement of a duty to insure on the passing of property (and risk) in sale of goods contracts: Atiyah Sale of Goods (6th edn, 1980) p. 187.
20. [1973] 1 QB 87, (1973) 36 MLR 214.
21. They had obtained a declaration that the plaintiffs loan should be forfeited.
22. At 98.
23. [1978] 1 Lloyd's Rep 206.
24. Infra. See also the comments of Yeldham J in Broken Hill Proprietary Co Ltd v Hapag-Lloyd Aktiengesellschaft [1980] 2 NSWLR 572.
25. Could this have been challenged as being a penalty? See Treitel Law of Contract (5th edn, 1979) pp.736–741.
26. Supra, n.9.
27. It is probably not now possible to argue that the promisee can in any event recover for the third party's loss: Jackson v Horizon Holidays [1975] 3 All ER 92 was restrictively interpreted in Woodar Investment Development Ltd v Wimpey Contraction UK Ltd [1980] 1All ER 571.
28. In The Elbe Maru, op. cit., the obligation to indemnify was that of an agent of the applicant which was likely to be passed on to the applicant.
29. Thus, even if there were a contractual indemnity, there should be no stay if that clause would be ineffective (as a matter of construction or because of s.4 Unfair Contract Terms Act 1977). In the Broken Hill case, supra cit., Yeldham J took the view that no liability in damages was necessary. His view was that if an undertaking not to sue would influence rates of carriage etc. that could justify the grant of a stay.
30. It would seem less likely to be reasonable that a promisor grtuitously indemnify an independent contractor (like a firm of stevedors or hauliers) than an individual employee.
31. See The Elbe Maru for such an approach. It would seem sensible to make the promisor actually aware of the indemnity position. The range of circumstances when the third party has a right at law to an indemnity in the absence of express agreement would seem now to be rare: see Mowbray v Merryweather [1896p QB 640 as approved by the House of Lords in Lumbert v Lewis [1981] 1 All ER 1185.
32. [1968] AC 58.
33. See Smith v South Wales Switchgear Ltd, op. cit.
34. Section 4 applies only in favour of consumers: the promisee is unlikely to be such (though N.B. the burden of proof).
35. There are important exceptions especially contracts for carriage of goods by sea or hovercraft. For the exceptions see Schedule 1.
36. For s.2 there is no limitation to consumers or those dealing on written standard terms; for s.3 there is but the promisor will often come within one of these categories.
37. Is the term by which the promisor undertakes not to sue a notice under s.2?
38. Cf. s.10.
39. The likely future tendency to make a contract consist of a series of positive undertakings (and thereby try to circumvent the Act - though cf. s. 3(2)(b)) may make it more difficult to rely on this device. See Palmer and Yates [1981] CLJ 108.
40. Supra, note 7.
41. See Davies and Palmer, op. cit. and The New York Star, op. cit.
42. See the new Article IV bis Rule 2 of the Hague Rules incorporated in English Law by the Act. Note, however, the criticisms of the scope of the new rule made by the learned editors of Scrutton on Charterparties (18th edn, 1974) p. 465.
* The author would like to thank Professor Norman Palmer for his comments on an earlier draft of this article.