Lloyd's Maritime and Commercial Law Quarterly
PRIVITY OF CONTRACT IN AUSTRALIA: THE BEGINNING OF THE END?
Trident General Insurance Co. Ltd. v. McNiece Bros. Pty. Ltd.
One of the cornerstones of modern contract law in England and Australia is the principle that third parties cannot sue on contracts for their benefit.1 The rationale used by the courts to justify this principle is that such third parties are not privy to the contracts and have not provided any consideration to the promisors. In recent times the principle that third parties cannot sue on contracts for their benefit has been trenchantly criticized.2 Some courts and legislatures have created exceptions to it,3 while other courts have at times circumvented it by tort reasoning.4 Towards the end of 1988 the High Court of Australia handed down a major decision. Trident General Insurance Co. Ltd. v. McNiece Bros. Pty. Ltd.,5 which deals with this area.
In June 1977, Trident General Insurance Co. Ltd. (“Trident”) issued a policy to Blue Circle Southern Cement Ltd. (“Blue Circle”) which purported to indemnify “the Assured” inter alia against public liability in respect of work carried on at certain construction sites. In the policy schedules, the “Assured” was defined to be “Blue Circle Southern Cement Limited, all its subsidiary associated and related Companies, all contractors and sub-contractors and/or suppliers”. One of Blue Circle’s contractors was McNiece Bros. Pty. Ltd. (“McNiece”). On 4 July 1979, a labourer working under the direction of McNiece was injured at one of the construction sites listed in the policy. McNiece was held liable to pay him damages in respect of his injuries. After paying these damages, McNiece sought to be indemnified by Trident under the policy.
At first instance, Yeldham, J., of the Supreme Court of New South Wales, held that Trident were liable to indemnify McNiece because McNiece had become a party to the insurance contract by ratification. However, the New South Wales Court of Appeal declined to follow this reasoning; nevertheless, they held that, in the case of insurance contracts there was an exception to the principle that third parties cannot sue on contracts for their benefit. McHugh, J.A. (who delivered the leading judgment) said:
if we can now assert that a trust will be invariably imputed in the case of a liability insurance policy, as I think we can, then a refusal to allow the beneficiary to sue directly at common law is one of form and procedure.6
Trident appealed to the High Court. However, a majority of the court (comprising Mason, C.J., Wilson, Toohey, and Gaudron J.J.) dismissed the appeal. Two of the majority judges, Mason, C.J. and Wilson, J., delivered a joint judgment. They
1. See, e.g. Tweddle v. Atkinson (1861) 1 B. & S. 393.
2. For example, in Home Insurance Co. v. Ipec Holdings Ltd. (1983), an unreported judgment of the Supreme Court of New South Wales. Rogers, J., described it as a “blot on the administration of justice”.
3. See D. W. Greig and J. L. R. Davis, The Law of Contracts (1987), 999–1048.
4. E.g., Watts v. Public Trustee (1980) W.A.R. 97. See also the comments of Murphy, J., in Seale v. Perry (1982) V.L.R. 193, 209.
5. (1988) 80 A.L.R. 574.
6. (1987) 8 N.S.W.L.R. 270, 287. See A.T.S., F.M.B.R. [1987] 3 LMCLQ 258.
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