LAW OF CONTRACT - University of Sydney 2016-17/LPAB... · The Parol Evidence Rule • Where the contract is wholly in writing, or intended to be wholly in writing,

LAW OF CONTRACT

LPAB – Summer 2016/2017

Week 6

Alex Kuklik

Lecture 6Aims and Objectives

At the end of this lecture, students should understand the rules and principles by which terms of a contract, especially exclusion clauses, are construed or interpreted. Students will have an understanding of the parol evidence rule.

In addition, at the end of this lecture students should have an understanding of the operation of the doctrine of privity of contract. In relation to the doctrine of privity of contract the principle issues that arise include:

a) the meaning of the doctrine of privity of contract;

b) the relationship of the privity doctrine to the consideration rule that consideration must move from a promisee;

c) the remedies available at common law and equity to a promisee when enforcing a contractual promise by a promisor to benefit a person who is not a party to the contract; and

d) the ‘exceptions’ by which a person not a party to a contract can take enforcement action in relation to a contractual promise for his or her benefit.

Lecture 6The Meaning of Terms

• Radan & Gooley, Chapter 12

• Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33 (R&G(C) [12.2])

The Construction of Exclusion Clauses


• Darlington Futures v Delco Australia (1986) 161 CLR 500 (R&G(C) [13.2])

• *Alderslade v Hendon Laundry Ltd [1945] KB 189 (R&G(C) [13.3])

• *White v John Warwick & Co [1953] 2 All ER 1021 (R&G(C) [13.4])

• Sydney City Council v West (1965) 114 CLR 481 (R&G(C) [13.5])

• Competition and Consumer Act 2010 (Cth) Sch 2 ss 64 and 64A

Privity of Contract


• Coulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460

• Trident General Insurance Co v McNiece Bros (1988) 165 CLR 107

• New Zealand Shipping Co v A M Satterthwaite and Co (The Eurymedon) [1975] AC 154

The Meaning of Terms


• Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33 (R&G(C) [12.2])


• The meaning of terms is usually seen as one aspect of the construction of terms:

– Meaning of terms.

– Legal effect or significance of terms.

• In ascertaining the meaning of terms, the court is primarily concerned with determining the objective intention of the parties.

• ‘The intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the surrounding circumstances available to the parties would have understood them to be using the language in the contract to mean.’ : Byrnes v Kendall


• The Courts will seek to give the words of the contract their natural and ordinary meaning, although where technical words are used, there is a rebuttable presumption that they are used with that technical meaning in mind: *Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64, [167].

• The basic approach to intention is:

“To decide what a reasonable person would have understood the parties to have meant by using the language which they did.”

*Chartbrook v Persimon Homes Ltd [2009] 1 AC 1101, 1113.

• When construing a contract, a court will have regard to all of the words in the contract to ensure the congruent operation of its various components as a whole: *Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529.


• The courts will seek to adopt a construction that will preserve the validity of a contract over one that will not, and will strive to avoid holding agreements (particularly commercial ones) void for uncertainty.

– Meehan v Jones (1982) 149 CLR 571


Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33 (R&G(C) [12.2])

• Codelfa agreed to build a part of the Eastern Suburbs rail line. There was a fixed agreement that Codelfa would finish the work in 130 weeks for a fixed price and would bear the cost of any difficulties or delays. It anticipated work being done in a 3 shifts per day, 6 days per week, plus some Sunday work.

• The SRA had a statutory immunity from nuisance suits and Codelfa mistakenly believed that this covered it.

• The work schedule was blocked in the Supreme Court by a nuisance action brought by locals against Codelfa, and it could only work 2 shifts per day (not at night) and not on Sundays.

• Codelfa argued that there was there an implied term in the contract to protect Codelfa economically from the injunctions regarding work hours.


Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33 (R&G(C) [12.2])

• Arbitrator said ‘Yes’.

• Supreme Court also said ‘Yes’ but changed the term.

• Court of Appeal said ‘Yes’ but changed the term again.

• Codelfa went to the High Court of Australia because it was unhappy with the new form of the term and wanted to improve it. The SRA wanted to get rid of it.

• The argument was around the interpretation of implied terms (and frustration), but it applies equally to express terms.


Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33

• It is not enough that it is reasonable to imply a term. It must be necessary to give business efficacy to the contract.

Mason J

The true rule is that evidence of surrounding circumstances admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

[352][



Mason J

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions

and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.



Mason J

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision, we look not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

The Meaning of TermsCodelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 33

Mason J

• The construction of contracts centres upon the presumed, rather than the actual, intention of the parties.

• There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention:

– If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. [para 25]



• Is this approach broader than the UK position set out by Lord Hoffman in Investors Compensation Scheme v West Bromwich Building Society [1988] 1 All ER 98? Probably.

• If so, you should follow Codelfa: *Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604, 605.


Principles of construction:

– Presumption that unreasonable results are not intended

• The more unreasonable the result a particular construction of the terms would produce, the less likely that it reflects the parties’ intentions. If the parties intend an unreasonable result, the language must be abundantly clear.

– L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, 251

– Avoidance of inconsistencies

• Where internal inconsistencies arise, a court will attempt to construe the contract so as to avoid inconsistency.


– Presumption in favour of business common sense

• Where detailed semantic and syntactical analysis of a written contract leads to a conclusion that is inconsistent with business common sense, the contract must be made to yield to business common sense.

– Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181

– Use of dictionaries

• In Australia, the Macquarie Dictionary is the authorised dictionary.

• Dictionaries no substitute for judicial determination of the meaning of words.


Parol Evidence Rule

• (parol = verbal expressions or words)

• The purpose of the parol evidence rule is to exclude extrinsic evidence (evidence beyond the contents of the contractual materials themselves), such as evidence of pre and post contractual negotiations, when interpreting the terms of the contract.

1. Extrinsic evidence of prior negotiations is excluded for the interpretation of contractual terms.

2. Extrinsic evidence of post contractual conduct is excluded in interpretation of contractual terms. This has had a chequered history –12.65.

Express TermsThe Parol Evidence Rule

• Where the contract is wholly in writing, or intended to be wholly in writing, the express terms of that agreement are generally the only terms that are recorded in the written contract.

• Subject to an exception, a party cannot include anything previously said or written before the contract was signed. Two issues arise:

– What is meant by extrinsic evidence?

• All forms of extrinsic evidence

– Only applied to written agreements.

• Therefore not applicable partially oral/partially written agreements.

• Does the rule apply to threshold question of whether the contract is written or partly oral?


Parol evidence rule - Exceptions

Parol evidence is acceptable:

1. To identify the subject matter of the contract in circumstances where the description of the subject matter is ambiguous or uncertain.

• Thus, in *White v Australian and New Zealand Theatres Ltd (1943) 67 CLR266,Two theatrical artists were engaged to provide their “professional services”for a theatre company. There was no definition of “professional services” in thecontract. Extrinsic evidence was admitted to establish that it included producingthe performance, as well as acting in it.

2. To show the intention that both parties had in relation to the meaning of a particular ambiguous term – Codelfa



Parol evidence is acceptable:

3. To identify the correct parties to a contract.

• Verbal evidence is admissible where there is ambiguity concerning the identity of the parties to the agreement.

– E.g.: Edwards v Edwards

4. To establish whether conduct, if it contains admissions, shows that a contract was formed.

• Regard has been had to the subsequent conduct of the parties as providing evidence that they had not concluded a contract. For example, in *Barrier Wharfs Ltd v W Scott FeIl & Co Ltd (1908) 5 CLR647 at 668, Griffith CJ considered that subsequent correspondence could show that a concluded contract had not been formed.



5. To establish whether a document of clause in a document is a sham.

6. To establish whether a term was incorporated into a contract.

• When a contract is formed it is assumed that all the terms are included but, if there are terms missing and not included in the contract then, it may allow the parties to give verbal evidence in court, and this is the case where the contract is partly written partly oral.

7. To establish whether the remedy of rectification is available.

• In cases of mistake that would give rise to rectification (for example, a typo in the price or address on a contract), evidence may be given as to the true term. Extrinsic evidence may also be introduced, for example, to show that one party was acting as an agent for an undisclosed principal.


• R&G, Chapter 13

• Darlington Futures v Delco Australia (1986) 161 CLR 500 (R&G(C) [13.2])

• *Alderslade v Hendon Laundry Ltd [1945] KB 189 (R&G(C) [13.3])

• *White v John Warwick & Co [1953] 2 All ER 1021 (R&G(C) [13.4])

• Sydney City Council v West (1965) 114 CLR 481 (R&G(C) [13.5])

• Competition and Consumer Act 2010 (Cth) Sch 2 ss 64 and 64A

The Construction of Exclusion Clauses• Exclusion clauses are terms of a contract that seek to exclude or limit

liability of defendant from liability to a plaintiff in the event that the defendant causes loss to the plaintiff.

• They are not necessarily confined to breaches of the contract by the defendant, but can also cover breaches of torts and statute.

• Cases often analyse the operation of exclusion clauses in the following way:

1. Is the defendant liable to the plaintiff (for breach of contract, tort, or statute)?

2. Is the exclusion clause a term of the agreement between the plaintiff and defendant.

3. On a proper construction, does the exclusion clause cover the liability of the defendant?


• Traditionally courts were hostile to such clauses, but now they are taking a more even-handed approach, especially in the context of commercial transactions.


General principals

Darlington Futures v Delco Australia (1986) 161 CLR 500 (R&G(C) [13.2])

• Delco retained Darlington to enter into commodities futures transactions on its behalf

– Cl 6: excluded liability “for any lossQarising from trading by Darlington on behalf of Delco whether pursuant to this agreement or not.”

– Cl 7: Damages arising out of or in connection with the relationship established by the agreement, or any conduct under it, or any orders given, limited to $100.

• Darlington entered into unauthorised transactions. Delco lost $280,000


General principals


• Could Darlington limit its liability?

• High Court:

– Cl 6 only applied to authorised trading. Parties did not intend to exclude unauthorised trading.

– Cl 7 could limit damages to $100 because the transactions were in connection with the relationship arising out of the agreement. Even if unauthorised a transaction can have a connection with the relationship.


General principals


1. An exclusion clause should be construed according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature and object of the contract.

2. Contra proferentem rule will be applied so that in cases of ambiguity the clause will be construed against the person relying on the exclusion clause.

Is the term ambiguous??


General principals


• In relation to cl 6, read in context, it refers to trading activity undertaken by Darlington for Delco with Delco’s authority, whether pursuant to the agreement or not. It could not be supposed that the parties intended it to cover trading that was not authorised. [510].

• Because cl 7 included trading ‘in connection with’ the relationship established by the agreement, even an unauthorised transaction can be made in connection with the relationship of broker/client established by the agreement.


Exclusion clauses and negligence

*Alderslade v Hendon Laundry Ltd [1945] KB 189 (R&G(C) [13.3])

– Alderslade left 10 linen handkerchiefs with Hendon for cleaning. Accepted on condition that ‘the maximum allowed for lost of damaged articles was 20 times the charge for their cleaning.’

– Handkerchiefs lost. Apparently negligently. The defendant agreed to pay 11d for the loss (= 20 x cleaning cost). But the owner sued for the replacement value (£5). The claim was in negligence rather that for breach of a term of the agreement.

– Therefore, does the exclusion clause apply to a tortious action (negligence)?

The Construction of Exclusion ClausesExclusion clauses and negligence


1. If the only cause of action available on the facts was in tort then the exclusion does apply, because otherwise it would have no utility (the parties would not have intended that).

2. If however, there was another cause of action available (say contract), then the exclusion clause would not apply to the tortious action unless it expressly refers to exclusion for liability for negligence.

– Here, there was no other cause of action available in relation to the handkerchiefs, so the exclusion clause applies to negligence.

– If a contracting party wishes to limit her liability in respect of negligence, she must do so in clear terms, and in the absence of such clear terms the clause is to be construed as relating to a different kind of liability and not negligence.

The Construction of Exclusion ClausesExclusion clauses and negligence


• The comments in this case formed the basis of the three rules set out inCanada Steamship Lines v Ltd v The King [1952] AC 192, 208:

1. An express exclusion for liability in negligence will effectively exclude liability of the defendant.

2. If there is no express reference to negligence, the court needs to determine if the words used are wide enough to exclude negligence, with any doubts being construed contra preferentem.

3. If the words are wide enough to cover negligence and another ground of liability (say contract), then the exclusion clause will be read to apply to that other ground only, and will not exclude negligence.

• But the continuing status of these principles has been questioned in light of the decision in Darlington Futures v Delco Australia (1986) 161 CLR 500 (see R&G [13.14 – 13.29])


*White v John Warwick & Co [1953] 2 All ER 1021 (R&G(C) [13.4])

– White hired a bicycle for a delivery run. The contract provided for a replacement when the bicycle was being repaired and maintained. An exclusion clause said that ‘nothing shall render the owners liable for personal injuries to riders of the machines hired nor for any third-party claimsQ’

– Replacement was given to White, but the bike had a loose seat. White slipped and injured himself. White sued for breach of contract and negligence.

– Did exclusion prevent liability?


*White v John Warwick & Co [1953] 2 All ER 1021 (R&G(C) [13.4])

– There were 2 causes of action: negligence and breach of contract – on the basis of an implied term that the bike would be reasonably safe for the intended purpose.

– Therefore exclusion clause only applied to contractual claim and tort was not excluded.

– 2 distinct causes of action.


Four Corners Rule

Sydney City Council v West (1965) 114 CLR 481 (R&G(C) [13.5])

– West parked his car in parking station. The ticket had terms and conditions, including an exclusion saying that Council did not accept liability for loss or damage to vehicle or articles or injury, however such it arose or was caused.

– Also instructed customers to present ticket for stamping before pickup.

– A man said he lost his ticket and conned a replacement out of the attendant. West’s car disappeared and turned up damaged.

– West sued for detinue and breach of contract.

The Construction of Exclusion ClausesFour Corners Rule

Sydney City Council v West (1965) 114 CLR 481 (R&G(C) [13.5])

– Court held that even if the exclusion was a term of the contract, it was unenforceable. It did not intend to protect the council

– If the defendant’s act causing loss to the plaintiff is an act that is not authorised or contemplated by the agreement, then an exclusion clause will not protect against liability arising from that act.

– Such an act is outside the scope of the 4 corners of the contract (4 corners rule.)

• If the defendant’s act causing loss to the plaintiff an act that has not been authorised or contemplated by the contract, then an exclusion clause will generally not protect the defendant from liability for damages flowing from that act. Here that was clearly the case.

The Construction of Exclusion ClausesCompetition and Consumer Act 2010 (Cth) Sch 2 (Australian Consumer Law)

ss 64 and 64A

Section 64 - Guarantees not to be excluded etc. by contract

(1) A term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) is void to the extent that the term purports to exclude, restrict or modify, or has the effect of excluding, restricting or modifying:

(a) the application of all or any of the provisions of this Division; or

(b) the exercise of a right conferred by such a provision; or

(c) any liability of a person for a failure to comply with a guarantee that applies under this Division to a supply of goods or services.

(2) A term of a contract is not taken, for the purposes of this section, to exclude, restrict or modify the application of a provision of this Division unless the term does so expressly or is inconsistent with the provision.


ss 64 and 64A


• This provision relates to the consumer guarantees in ss 51 – 63 of the ACL:

– Guarantee as to title: s 51

– Guarantee of undisturbed possession: s 52

– Undisclosed securities over goods: s 53

– Goods are of acceptable quality: s 54

– Goods are fit for their disclosed purpose: s 55

– Supply of goods by description: s 56

– Supply of goods by sample or demonstration: s 57

– Repairs and spare parts: s 58

– Express warranties: s 59

– Services provided with dues skill and care: s 60

– Services fit for purpose: s 61

– Reasonable time for supply: s 62


ss 64 and 64A


• The guarantees only apply to supply of goods or services to a consumer, i.e.:

– Contract price is $40,000 or less.

– Goods or services are of a kind ordinarily provided for domestic, personal or household use.

– Vehicle or trailer used for the transport of goods on public roads.


ss 64 and 64A

64A - Limitation of liability for failures to comply with guarantees

(1) A term of a contract for the supply by a person of goods other than goods of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under section 64 merely because the term limits the person's liability for failure to comply with a guarantee (other than a guarantee under section 51, 52 or 53) to one or more of the following:

(a) the replacement of the goods or the supply of equivalent goods;

(b) the repair of the goods;

(c) the payment of the cost of replacing the goods or of acquiring equivalent goods;

(d) the payment of the cost of having the goods repaired.

The Construction of Exclusion ClausesCompetition and Consumer Act 2010 (Cth) Sch 2 (Australian Consumer

Law) ss 64 and 64A


(2) A term of a contract for the supply by a person of services other than services of a kind ordinarily acquired for personal, domestic or household use or consumption is not void under section 64 merely because the term limits the person's liability for failure to comply with a guarantee to:

(a) the supplying of the services again; or

(b) the payment of the cost of having the services supplied again.

(3) This section does not apply in relation to a term of a contract if the person to whom the goods or services were supplied establishes that it is not fair or reasonable for the person who supplied the goods or services to rely on that term of the contract.

The Construction of Exclusion Clauses(4) In determining for the purposes of subsection (3) whether or not reliance on a term of a contract is fair or reasonable, a court is to have regard to all the circumstances of the case, and in particular to the following matters:

(a) the strength of the bargaining positions of the person who supplied the goods or services and the person to whom the goods or services were supplied (the buyer ) relative to each other, taking into account, among other things, the availability of equivalent goods or services and suitable alternative sources of supply;

(b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity of acquiring the goods or services or equivalent goods or services from any source of supply under a contract that did not include that term;

(c) whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);

(d) in the case of the supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer.



• So if a contract is not for goods or services ordinarily acquired for personal, domestic or household purposes, then pursuant to s 64A, the exclusion clause will not be overridden if it merely limits the suppliers liability to do the things set out in (a) – (d).

• However, the supplier cannot rely upon s 64A(1) if the buyer establishes that it would be unfair to do so.


Contracts Review Act 1980 (NSW)

• Section 7 allows a court to declare a term void if it is unjust.

• An exclusion term was held to be unjust in the particular circumstances in John Dorahy’s Fitness Centre Pty Ltd v Buchanan (CA(NSW), 19 December 1996, unreported)

Privity of contract

• R&G, Chapter 39

• Coulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460 (R&G(C) [39.2])

• Trident General Insurance Co v McNiece Bros (1988) 165 CLR 107 (R&G(C) [39.3])

• New Zealand Shipping Co v A M Satterthwaite and Co (The Eurymedon) [1975] AC 154 (R&G(C) [39.4])

• Only parties to the contract can enforce it. People who benefit under the contract who are not parties cannot enforce it.

• This is still good law although it has been criticised often. Exceptions are applied liberally.

Privity of contractCoulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460 (R&G(C) [39.2])

• Mr Coulls entered into agreement with O’Neill allowing O’Neill to quarry stone from Coulls’s land. Royalties to go to Mr and Mrs Coulls as joint tenants.

• Mr Coulls died. Agreement was vague as to whether it was between Mr Coulls and O’Neill or both of the Coullses and O’Neill.

• Mrs Coulls wanted to enforce the agreement (and claim the right of survivorship). Estate of Mr Coulls said that she had not provided consideration.


• Majority said that agreement was between Mr Coulls and O’Neill only, and therefore Mrs Coulls could not enforce it.

“It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it. Our law knows nothing in a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam.”

• Is this different to saying that the third party did not provide consideration? Are they distinct arguments?

• If B promises to A that she will pay C $500 and A sues B for breach, what damages can A recover? And who do they go to? See R&G [39.11] –[39.26]


• Windeyer J (minority) suggests that A can require specific performance because damages here not sufficient.

• Is there a separate argument about consideration? Normally consideration must move from the promisee. Is the same as privity, or are there two separate rules? There has been much debate about this.

• In Coulls, This is discussed by Windeyer J, without coming to a conclusion.

Privity of contractTrident General Insurance Co v McNiece Bros (1988) 165 CLR 107

• Blue Circle, a construction company entered into an insurance contract with Trident. The insurance policy applied to subsidiaries, contractors, sub-contractors, suppliers. McNiece was the head contractor. A worker was injured and successfully sued McNiece. It sought indemnity from Trident. Trident argued that there was no privity.

• Could Trident be held liable? Did privity apply and if so, was there an exception?

Privity of contract

Trident General Insurance Co v McNiece Bros (1988) 165 CLR 107

Majority said Trident was liable, but for different reasons:

Mason CJ, Wilson Toohey JJ

• Privity does not apply to insurance contracts. Courts can require specific performance of such agreements. Mason and Wilson suggested privity should be abolished generally, but Toohey said that is for later cases. But all three effectively abolished the rule in relation to insurance contracts. This is because:

– The remedy of damages by the promisee against the promisor was not a sufficient sanction to secure the promise (for the benefit of the third party). The remedy may often only be nominal damages

Privity of contract


Majority said Trident was liable, but for different reasons:

Mason CJ, Wilson Toohey JJ

– Specific performance is not a sufficient sanction, because it is not always available and may not be practical.

– Exceptions to the rule may not be sufficient.

• Mason and Dawson took the view that the established principle should be overturned.

• Toohey said that the principle was not that old and was widely criticised, so it was ok to depart from it.

Privity of contract


Three judges affirmed the operation of the principle:

Brennan J

• Exceptions may exist for implied trusts, estoppel, but these were not pleaded. He confirmed the operation of the principle.

Deane J

• Whilst judicial development could occur, not when the doctrine was this entrenched. It could only be changed precisely defined and compelling reasons. There were none here. He confirmed the rule. But he also held that the policy and events created a trust in favour of McNiece of the benefit of Trident’s promise to indemnify it. So the result was in favour of McNiece.

Privity of contractTrident General Insurance Co v McNiece Bros (1988) 165 CLR 107

Three judges affirmed the operation of the principle:

Dawson J

• Affirmed the operation of the principle. Held that a partial abolition of the doctrine (in relation to insurance) cannot be sustained on the basis of any coherent body of principle.

Gaudron JJ

• Confirmed the doctrine of privity, but background discussion and analysis. But found in favour ofMc Niece on a totally different basis: A promisor who agrees to indemnify a third party is unjustly enriched at the expense of the third party if the promise is unfulfilled and the non-fulfilment does not attract proportional legal consequences. Therefore held on the basis of unjust enrichment.

Privity of contract


• Now insurance contracts are covered by s 48 of the Insurance Contracts Act 1984 (Cth)

– A third party can recover under the contract of insurance.

Privity of contractExceptions to privity

• Covenants on land:

– Restrictive covenants on land can be enforced (see also Conveyancing Act)

• Trusts:

– A third party beneficiary can initiate and action to force a promisor’s obligation to the trustee. If the trustee fails to enforce the contract, then the beneficiary can join the promisor and the trustee as defendants to a claim.

• Equitable estoppel:

– If a third party can establish the elements of estoppel, then she can sue the promisor.

Privity of contractExceptions to privity

• Statutory exceptions:

– Insurance Contracts

– Bills of exchange (cheques etc)

• Exclusion clauses

– Himalaya clauses that provide exclusion rights to third parties can be enforced by those parties.

• Agency:

– If a party contracts as agent for another, then either the agent of the principal can sue to enforce the contract.

Privity of contractHimalaya clauses

New Zealand Shipping Co v A M Satterthwaite and Co (The Eurymedon) [1975] AC 154

• In a bill of lading (a legally binding document providing the driver and the carrier all the details needed to process the freight shipment and invoice it correctly) there was a ‘Himalaya Clause’ providing – ‘no servant of the of the employer is liable’. NZ Shipping, the stevedore, unloaded the cargo and damaged it. The owners did not sue the carrier in time (1 year limit under international rules), so Satterthwaite sued NZ Shipping directly.

• Did NZ Shipping have the benefit of the Himalaya Clause in the agreement between the carrier and the owner of the goods?



• A third party will be able to rely on the clause if the conditions in Midland Silicones are met:

1. It must be clear from the wording that the third party is to be protected by the exclusion

2. The contracting party must also ‘contract as agent of the third party’

3. The primary party must have express or implied authority to contract for third party. Authority can be given retrospectively.

4. Third party must show that it provided consideration for the primary party’s promise.



• Here the conditions were met:

1. The clause was intended to protect the stevedore.

2. The contract was negotiated on behalf of the stevedore.

3. The shipper had the stevedore’s authority to do so.

4. Consideration was satisfied by the fact that the stevedore performed the task of loading the ship.

This was confirmed in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon Pty Ltd (1978) 139 CLR 231.



• This principle can also apply to other contracts of carriage, such as road freight.

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LAW OF CONTRACT - University of Sydney 2016-17/LPAB... · The Parol Evidence Rule • Where the contract is wholly in writing, or intended to be wholly in writing,