Trident General Insurance Co Ltd v McNiece Bros Pty Ltd

[1988] HCA 44

HIGH COURT OF AUSTRALIA

Mason C.J., Wilson, Brennan, Deane, Dawson, Toohey and Gaudron JJ.

TRIDENT GENERAL INSURANCE CO. LTD. v. McNIECE BROS. PTY. LTD.

(1988) 165 CLR 107

8 September 1988

Insurance

Insurance—Public liability—Indemnity to insured and its contractors—Contractor engaged at date of claim but not when policy issued—Entitlement to indemnity.

Decisions

MASON C.J. AND WILSON J.: This is an appeal from a unanimous decision of the New South Wales Court of Appeal (Hope, Priestley and McHugh JJ.A.) in which that court held that a third party, who was not a party to the insurance policy in question, but fell within the class of persons expressed to be insured by the policy, was indemnified in respect of an award of damages for negligence made against the third party: Trident General Ins. v. McNiece Bros (1987) 8 NSWLR 270. In so finding, the Court of Appeal created an exception to the doctrine of privity of contract and to the requirement that consideration should move from the promisee.

2. McNiece Bros Pty Ltd ("McNiece") was the principal contractor for construction work being carried out at the limestone crushing plant of Blue Circle Southern Cement Ltd ("Blue Circle") at Marulan. Blue Circle had entered into a contract of insurance with the appellant insurer ("Trident"). The policy issued on 13 June 1977. The policy insured contract works, liability to the public, and maintenance/defects liability. "The Assured" were defined as "Blue Circle Southern Cement Limited, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers." The policy schedule specified the three contracts and the work sites covered, the relevant one being "(c) Alterations and extensions to Limestone Crushing Plant at Marulan, N.S.W." There was an attachment to the policy which provided that no liability should attach in respect of location (c) until the underwriters were advised of "the attachment date for which a suitable endorsement" was to be issued. In relation to Marulan, the period of insurance was to run for "15 months at date to be advised".

3. Under the heading "Public Liability" in Section 2 the policy provided:

"The Insurance ... indemnifies the Assured against all sums which the Assured shall become legally liable to pay in respect of

1. Death of or bodily injury to or illness of
any person not being a person who at the time
of the occurrence is engaged in and upon the service of the Assured under a Contract of service or apprenticeship ..."
An exception to Section 2 was stated to be "Any claim arising under any Workmen's Compensation Law".

4. On 4 July 1979 Gary Hammond was seriously injured while driving a crane at the construction site. Hammond was working under the direction of the McNiece site engineer, although he was actually employed by Faro Constructions, a firm which organized workers for contractors such as McNiece. Hammond subsequently brought an action against McNiece and recovered judgment in his favour in the sum of $541,768.16 less worker's compensation payments already received. McNiece sought indemnity from Trident for the amount of the judgment awarded to Hammond. Trident denied liability.

5. McNiece then commenced an action against Trident for indemnity. While an appeal was pending by McNiece against the award in favour of Hammond, the action came on for hearing before Yeldham J. who found that there was no contract of service between Hammond and McNiece but that McNiece would be liable for any injuries to Hammond due to its negligence. The effect of this finding was to eliminate the possibility that McNiece could seek indemnity from its worker's compensation insurer. It also meant that McNiece could seek indemnity under the Trident policy as a person legally liable to pay damages for bodily injury to any person "not being a person who at the time of the occurrence is engaged in and upon the service of the Assured under a Contract of service ..."

6. Yeldham J. also found that McNiece was in contemplation as one of "The Assured" at "the attachment date for which a suitable endorsement" was issued in respect of the Marulan contract. No endorsement was actually issued but the action proceeded on the basis that an endorsement had been made, that the period of insurance commenced on the date when work at Marulan began, and that the accident involving Hammond occurred within that period. The learned judge found that consideration was given by McNiece to Trident, because Blue Circle took into account as between itself and McNiece, "in a financial way", that it had contracted with Trident to insure McNiece, and in that sense the latter, through Blue Circle, provided consideration for part of the premium paid to the insurer. Yeldham J. held that it was not established that Blue Circle had actual authority to enter into the insurance policy on behalf of McNiece, but that the service of the statement of claim in the action before him constituted ratification of the policy by McNiece. Thus, his Honour held that there was a contract between McNiece and Trident and that McNiece was entitled to an indemnity from Trident for the amount of Hammond's award less the worker's compensation payments made.

7. Trident appealed to the Court of Appeal. The appeal was dismissed, Hope and Priestley JJ.A. agreeing with the judgment of McHugh J.A. McNiece sought leave to plead an alternative case based on the existence of a trust. Leave was refused.

8. The first question before the Court of Appeal was whether McNiece was one of "The Assured". Trident argued that the expression "The Assured" consisted of a class fixed at the date of issue of the policy and McNiece was not in contemplation as a party at that date. However, McHugh J.A. found that as a matter of business efficacy the policy was intended to cover any contractor, sub-contractor or supplier who was engaged at any time during the contract period. He also found that Blue Circle alone was liable for payment of the premium. These findings dictated the conclusions that McNiece was not a party to the contract of insurance and that it did not provide consideration to Trident. The conclusion that McNiece was not a party to the contract followed from the fact that it was not ascertainable as a principal when the policy issued. To make a contract on behalf of a principal an agent must contract on behalf of a principal who is then ascertainable.

9. McHugh J.A. also rejected the finding that McNiece had ratified the policy. Although his Honour concluded that a general policy of insurance can be ratified after loss and that commencement of an action on the policy against the insurer may constitute ratification, the policy was not ratified because ratification did not take place within a reasonable time.

10. McHugh J.A. went on to accept the far-reaching submission that at common law a beneficiary under a policy of insurance can sue on the policy even though it is not a party to the policy and provides no consideration. His Honour so decided because he concluded that the two common law rules that only a party to a contract can sue on it and consideration must move from the promisee work injustice in many situations. He considered that the law should allow an intended beneficiary to sue on a policy when commercial convenience and practice demand it. Moreover, he thought that the development of the common law should proceed in parallel fashion with statutory reforms enabling non-party beneficiaries to sue on policies of insurance. His Honour instanced the Motor Vehicles (Third Party Insurance) Act 1942 (N.S.W.) s.10 and the Insurance Contracts Act 1984 (Cth) s.48. See also Life Insurance Act 1945 (Cth) s.94.

11. Trident's case in this Court is that the rules that only a party to a contract can sue on it and that consideration must move from the promisee are fundamental principles of the common law of contract. These principles evolved in the course of the nineteenth century in the development in England of the law of contract and they have been consistently applied, not only in England but also in Australia, to contracts for the benefit of third parties, including insurance contracts. The argument is that the principles are so well accepted and so embedded in our law of contract that they should not be overturned by judicial decision, even if their application to contracts for the benefit of third parties is not altogether satisfactory, a matter which Trident by no means concedes. According to Trident, the recognition in appropriate circumstances by the courts of the trust of a contractual promise provides an adequate mechanism for protecting the rights of the third party under a third party contract. The concept of the trust of a contractual promise, it is said, overcomes any serious problem which might otherwise arise if the common law principles alone were to govern third party contracts.

12. Although the principle that only a party to a contract can sue on it is described as fundamental, the early common law permitted third parties to enforce contracts made for their benefit: see Flannigan, "Privity - The End of an Era (Error)" (1987) 103 Law Quarterly Review 564, at pp.564-565, esp. fn.6. The decision in Bourne v. Mason (1669) 1 Vent. 6 (86 ER 5) marked the beginning of a shift in the attitude of the common law. In that case the third party, who failed in his action on the contract, was described as "a mere stranger to the consideration": at p.7 (p.6 of ER). Thereafter, until Tweddle v. Atkinson (1861) 1 B.&. 393 (121 ER 762), the question whether the third party could bring an action on the contract was the subject of conflicting decisions. Compare, for example, Pigott v. Thompson (1802) 3 Bos. &Pul. 147 (127 ER 80) and Carnegie v. Waugh (1823) 1 LJ.(KB) 89 (where the court upheld the right of the third party to enforce the contract) with Price v. Easton (1833) 4 B. &Ad. 433 (110 ER 518) (where the court denied the third party's entitlement to sue on the contract). With reference to the common law before 1861, Windeyer J. observed in Coulls v. Bagot's Executor and Trustee Co. Ltd (1967) 119 CLR 460, at p 498:

"The law was not in fact 'settled' either way during the two hundred years before 1861. But it was, on the whole, moving towards the doctrine that was to be then and thereafter taken as settled."

13. The received doctrine is that Tweddle v. Atkinson decided that a third party cannot sue on a contract for his benefit, though Denning LJ. considered that it was wrongly decided: Smith and Snipes Hall Farm Ld v. River Douglas Catchment Board (1949) 2 KB 500, at p 514; White v. John Warwick &Co. Ld (1953) 1 W.LR 1285; (1953) 2 All ER 1021. There is much to be said for the view that the ratio of Tweddle v. Atkinson was that the plaintiff third party failed because no consideration moved from him. However, this view was not accepted in the years that followed: see, for example, Gandy v. Gandy (1885) 30 ChD 57, at p 69. The decision in Dunlop Pneumatic Tyre Co. Ltd v. Selfridge &Co. Ltd (1915) AC 847 firmly entrenched the two principles in the common law of England. So much emerges from the speech of Lord Haldane: at p.853. The Privy Council in Vandepitte v. Preferred Accident Insurance Corporation of New York (1933) AC 70, at p 79 subsequently applied the law as stated in Dunlop by Lord Haldane to a policy of insurance covering a motor vehicle by which the insurer agreed to indemnify the insured and anyone operating the car with the permission of the insured against third party risks. In the result the insurer was not liable under the policy in respect of a judgment obtained against the insured's daughter for damages for personal injury caused by her negligent driving of the motor vehicle. The Privy Council recognized (at p.79) that the common law rules are qualified by the equitable principle that a party to a contract can constitute himself a trustee for a third party of a right under a contract so that the third party can enforce the promise, making the promisee-trustee a defendant in an action against the promisor. However, Lord Wright went on to say (at pp.79-80) that "the intention to constitute the trust must be affirmatively proved: the intention cannot necessarily be inferred from the mere general words of the policy".

14. This Court has hitherto accepted that a third party cannot sue upon a contract and that a stranger to the consideration cannot maintain an action at law upon it: see, for example, Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd (1956) 95 CLR 43, per Williams J. at p 56, Fullagar J. (with whom Dixon C.J. agreed) at p 67, Kitto J. at p.80, Taylor J. at p.91; Coulls, per Barwick C.J. at p.478, McTiernan J. at pp.482-483, Taylor and Owen JJ. at pp.486-487, Windeyer J. at p.494.

15. So far we have proceeded on the footing that there are two distinct common law rules. This accords with the law as Lord Haldane stated it in Dunlop: at p.853. See also Vanderpitte, at p 79; Kepong Prospecting Ltd v. Schmidt (1968) AC 810. However, as Windeyer J. noted in Coulls (at p 494), there is an opposing view that the two rules are but one. In other words, to say that A is not a party to the contract is to say only that he is not a person who gave a promise in exchange for another: see Coote, "Consideration and the Joint Promisee" (1978) Cambridge Law Journal 301, at pp 309-310; Furmston, "Return to Dunlop v. Selfridge?" (1960) 23 Modern Law Review 373, at pp 383-385. As a matter of history this view has much to support it. The consideration requirement was the nub of the earlier cases. The privity requirement seems to have gained acceptance either as an alternative way of asserting the consideration requirement or as a by-product of it. Nevertheless the weight of authority points to the existence of two distinct, albeit interrelated, principles. Thus, if A, B and C are parties to a contract and A promises B and C that he will pay C $1,000 if B will erect a gate for him, C cannot compel A to carry out his promise, because, though a party to the contract, C is a stranger to the consideration: see Law Revision Committee (Eng.) Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) par.37, 1937 Cmd. 5449. Contrast par.41 of that Report and its discussion of the privity rule. For the purposes of the present case and contracts for the benefit of third parties, however, it is of little consequence whether the rules are in fact separate.

16. These "fundamental" traditional rules, where they survive, have been under siege throughout the common law world. In the United Kingdom the Law Revision Committee, which included many distinguished lawyers under the chairmanship of Lord Wright, recommended the abolition of the consideration rule and the privity rule in its Sixth Interim Report. The Committee described the consideration rule in its application to the example given in the last paragraph as lacking any reason in logic or public policy: par.37. The Committee stated that the English common law (an expression which, in the context of the Report in 1937, may be taken to include the Australian common law) was alone among modern systems of law in its insistence on the privity rule and observed that the United States had taken steps to mitigate the rigour of the rule. Even in England, the Committee noted, Parliament had found it necessary to create legislative exceptions: par.41. The Committee went on to make the point that the trust concept as applied to the promise for the benefit of the third party had not proved to be a satisfactory solution because there was uncertainty surrounding the approach of the courts to the recognition of a trust: par.44. Another criticism of the trust concept was that, once created, the trust was not revocable by the promisor or the promisee: par.47. A third comment was that insistence on the privity rule casts doubts on the enforceability of bankers' commercial credits by sellers of goods as against the banker setting up the credit: par.45. The final point made by the Committee was that the position of the third party is more analogous to that of an assignee of a contractual right than to that of a cestui que trust: par.46.

17. The Committee recommended that the statutory recognition of third party rights should be carefully limited. The proposed limitations were: (1) no third party right should be acquired unless given by the express terms of the contract; (2) the promisor should be able to raise against the third party any defence available against the promisee; and (3) the right of the promisor and of the promisee to cancel the contract at any time should be preserved unless the third party has received notice of the agreement and has adopted it. It might be noted that this regime is much like that which has developed in the United States. There, the problems arising from the traditional rules have been avoided by not requiring that consideration move from the promisee to the promisor: see Farnsworth, Contracts (1982), ss.2.3, fn.9, 10.2. As it stands now in most American states, third parties can sue directly upon contracts made for their benefit by others: see generally Restatement, Second, Contracts (1979) Ch.14.

18. Despite the criticisms and the proposals for reform, the traditional rules survive in the United Kingdom: see, for example, Midland Silicones Ltd v. Scruttons Ltd (1962) AC 446; Beswick v. Beswick (1968) AC 58; Woodar Investment Ltd v. Wimpey Ltd (1980) 1 WLR 277; (1980) 1 All ER 571. Legislative procrastination prompted Lord Reid in 1968 to suggest that, if there were to be a further long delay, then the House of Lords might be compelled to deal with the question: Beswick, at p.72. Similarly, Lord Scarman, supported by Lord Keith of Kinkel, expressed the view in 1980 that the House of Lords might "reconsider Tweddle v. Atkinson and the other cases which stand guard over this unjust rule": Woodar, at p 300; p 591 of All ER In Swain v. The Law Society (1983) 1 AC 598, at p 611, Lord Diplock described the doctrine of privity as "an anachronistic shortcoming that has for many years been regarded as a reproach to English private law". And in this country, Windeyer J. reflected similar sentiments to those of Lord Scarman when he referred in Olsson v. Dyson (1969) 120 CLR 365, at p 393 to the possibility "that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear" to reform the traditional rules.

19. In Western Australia dissatisfaction with those rules has resulted in the enactment of s.11 of the Property Law Act 1969 (W.A.), which confers in certain circumstances a right on a third party to sue on a contract for his benefit. In 1973 the Queensland Law Reform Commission recommended that the law be amended so as to allow that a contract conferring a benefit on a third party should be enforceable by him in his own name: see Report No. 16, cl.55 of the draft bill and the commentary on that provision. The recommendation was adopted and is expressed in s.55 of the Property Law Act 1974 (Q.). And in New Zealand the Contracts (Privity) Act 1982 (N.Z.), like the Queensland Act, allows the third party to enforce a contract made for his benefit by imposing an obligation on the promisor in favour of the third party where the parties intend that the third party should be able to enforce the provision for his benefit: compare Property Law Act 1974 (Q.) s.55(6)(c)(ii) with Contracts (Privity) Act 1982 (N.Z.) ss.4, 8.

20. The Australian Law Reform Commission in its Report No. 20 on Insurance Contracts noted (at par.122) that Vandepitte had been legislatively displaced in all Australian jurisdictions in respect of compulsory third party insurance. Otherwise the Commission acknowledged that Vandepitte was alive and well, well enough to cause injustice to third parties. Indeed, as the Commission observed, Vandepitte was invoked by an insurer as a defence to an action on a policy by a person, not a party to the contract, who fell within the class of persons expressed to be insured: Jovanovic v. Broers (1979) 25 ACTR 39. The Commission, concluding that the problems could not be solved by the application of the principles of trust and agency, recommended that persons falling within the class of persons expressed by a policy to be entitled to indemnity should be able to sue on the policy. The Commission stated (at par.124) that this alteration in the law should be uncontroversial because most insurers already act as though they were under such a liability to such persons. Section 48 of the Insurance Contracts Act 1984 (Cth) gives effect to this recommendation.

21. There is much substance in the criticisms directed at the traditional common law rules as questions debated in the cases reveal. First, there is the vexed question whether the promisee can recover substantial damages for breach by the promisor of his promise to confer a benefit on the third party. The orthodox view is that ordinarily the promisee is entitled to nominal damages only because non-performance by the promisor, though resulting in a loss of the third party benefit, causes no damage to the promisee: see West v. Houghton (1879) 4 CPD 197; Viles v. Viles (1939) SASR 164; but cf. Drimmie v. Davies (1899) 1 IR 176. On the other hand, Lush LJ. in Lloyd's v. Harper (1880) 16 ChD 290, at p 321 said:

"... I consider it to be an established rule of law that where a contract is made with A. for the benefit of B., A. can sue on the contract for the benefit of B., and recover all that B. could have recovered if the contract had been made with B. himself."

Windeyer J. in Coulls (at p.501) thought, correctly in our opinion, that Lush L.J. was referring to a contract where A was trustee of the promised benefit for B, a view in which Lord Upjohn acquiesced in Beswick (at p.101). Windeyer J. went on to say that the promisee could recover more than nominal damages in a situation in which he had sustained actual loss or damage by reason of the promisor's breach of his promise to confer a benefit on the third party. Plainly his Honour correctly stated the law in this respect. His Honour then (at p.502) expressed his disagreement with suggestions by Lord Esher M.R. and Fry LJ. in Cleaver v. Mutual Reserve Fund Life Association (1892) 1 QB 147, at pp 153, 157, 158 that the promisee could recover not unliquidated damages but any sum which the promisor had agreed to pay to the third party.

22. It is clear enough that the availability of an action for damages at the suit of the promisee for breach of the promise to benefit the third party is not a sufficient sanction to secure performance of the promise. What is more, the uncertain status of the decision in Jackson v. Horizon Holidays Ltd (1975) 1 WLR 1468; (1975) 3 All ER 92 is a telling indictment against the law as it presently stands. There, the plaintiff recovered substantial damages for the travel company's breach of contract to provide a satisfactory family holiday, but the basis on which the decision can be supported is by no means clear, even after the comments by the House of Lords in Woodar: at pp.283-284, 291, 293, 297; pp.576-577, 577, 584, 588 of All E.R. Rules which generate uncertainty in their application to ordinary contracts commonly entered into by the citizen call for reconsideration.

23. Next, there is the question whether the contract to confer a benefit on the third party is capable of specific performance. In Coulls Barwick C.J. considered (at p.478) that where a promisor promises to make a payment to a third party the promisee may obtain specific performance of the promise, at least where the nature of the consideration would have allowed the remedy. Windeyer J. went even further, asserting (at p.503) that contracts to pay money or transfer property to a third party are always or very often contracts for breach of which damages are an inadequate remedy and that on this ground such contracts are susceptible of specific performance. We agree with his Honour's comment and with his additional observations (at p.503) which point the way to a more general recognition of the availability of specific performance as a remedy. As Lord Upjohn noted in Beswick (at p.102), "Equity will grant specific performance when damages are inadequate to meet the justice of the case" (our emphasis). See also the dissenting judgment of Sir Garfield Barwick in Loan Investment Corporation of Australasia v. Bonner (1970) NZLR 724, at p 742. There is no reason to doubt that the courts will grant specific performance of a contract of indemnity or insurance, even if it involves payment of a lump sum, at least where the payment is to be made to a third party, damages being an inadequate remedy. But, even if we assume the availability of specific performance at the suit of the promisee in a wide variety of situations, there are nonetheless situations, such as that in Jackson v. Horizon Holidays Ltd, where specific performance is not a suitable remedy and damages are inadequate. In these situations the incapacity of the third party to sue means that the law gives less protection to the promisee and the third party than the promisor: see Collins, The Law of Contract (1986), p.107. And, assuming the availability of specific performance, the third party is nonetheless dependent on the willingness of the promisee to exercise his rights, in the absence of a trust, an agency relationship or an enforceable agreement between the promisee and the third party.

24. Then there is the trust of the contractual promise on which the appellant places particular reliance as a palliative of the difficulties generated by the common law principles. Despite the insistence in Vandepitte (at pp 79-80) and In re Schebsman (1944) Ch 83, at p 104, on the need for a clear expression of intention to create a trust and the warning that such an intention cannot necessarily be inferred from general words, there are a number of authorities which justify the difficulty expressed by Fullagar J. in understanding the reluctance of the courts sometimes to infer trusts (Wilson, at p.67). In Robertson v. Wait (1853) 8 Ex 299 (155 ER 1360), Lloyd's v. Harper, Les Affreteurs Reunis Societe Anonyme v. Leopold Walford (London), Ltd (1919) AC 801 and Williams v. Baltic Insurance Association of London, Ld (1924) 2 KB 282 the courts readily inferred the existence of a trust from the circumstance that the contract was made for the benefit of a third party. The contrast between Vandepitte and Williams is striking. Both cases concerned motor vehicle insurance policies expressed to cover persons driving the vehicle apart from the insured. Fullagar J.'s comment followed a reference to the two decisions. See also "Notes" (1933) 49 Law Quarterly Review 474. As we have seen, critics of the common law rules have pointed to the uncertainty surrounding the circumstances in which the courts will recognize a trust in contracts for the benefit of third parties as a reason for rejecting the trust concept as a sufficient answer to the difficulties caused by those rules: Corbin, "Contracts for the Benefit of Third Persons" (1930) 46 Law Quarterly Review 12, esp. at p.17.

25. This apparent uncertainty should be resolved by stating that the courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention. See Eslea Holdings Ltd v. Butts (1986) 6 NSWLR 175, at p 189.

26. But, even if adherence to this approach produces greater consistency of outcome, there are still the cases where the third party has no remedy because there is no sufficient intention to create a trust. And there are other consequences which flow from recognizing the existence of a trust. It may circumscribe the freedom of action of the parties to the contract, especially the promisee, to a greater extent than the existence of a right to sue on the part of the third party. How can the promisee terminate the trust once it is created? Lest it be overlooked, we should mention that the creation of a third party trust rests on ascertaining the intention of the promisee, rather than on the intention of the contracting parties. And in the ultimate analysis it seems incongruous that we should be compelled to import the mechanism of a trust to ensure that a third party can enforce the contract if the intention of the contracting parties is that he should benefit from performance of the contract. A fortiori is that so if the intention common to the parties is that the third party should be able to sue the promisor.

27. In order to justify the privity and consideration rules in the face of these problems, three practical policy considerations are sometimes invoked. First, they preclude the risk of double recovery from the promisor by the third party as well as the promisee. If the third party is permitted to sue the risk of double recovery arises from the possibility that the one party may seek specific performance after another has recovered damages. The risk is insignificant; joinder of all parties in the first action will make the resulting decision binding on all.

28. The second point is that the privity requirement imposes an effective barrier to liability on the part of a contracting party to a vast range of potential plaintiffs. This may be significant in the case of government contracts intended to benefit a class of persons: see, for example, Martinez v. Socoma Companies, Inc. (1974) 521 P 2d 841. But it is difficult to justify the existence of a rule by reference to one of its indirect results, if in other respects its operation is unsatisfactory.

29. The third matter is more important. The recognition of an unqualified entitlement in a third party to sue on the contract would severely circumscribe the freedom of action of the parties, particularly the promisee. He may rescind or modify the contract with the assent of the promisor, arrive at a compromise or assign his contractual rights. He may even modify the contract so that he diverts to himself the benefit initially intended for the third party. Professor Corbin suggested that any entitlement in the third party to enforce the provision in his favour would necessarily exist at the expense of the rights, privileges and liberties that the contracting parties enjoy under the common law rules: "Third Party Beneficiary Contracts in England" (1968) 35 University of Chicago Law Review 544, at p.549. But this does not entirely follow. The entitlement of the third party to enforce the provision in his favour can be subordinated to the right of the contracting parties to rescind or modify the contract, in which event the third party would lose his rights except in so far as he relied on the promise to his detriment (cf. Restatement, s.311(3)). To subordinate the third party's entitlement in this way would accord with legal principle and with the protection of the interests of the parties to the contract. There is to our minds no compelling reason why the interests of the third party should be preferred, though we acknowledge that in Queensland the parties lose their right to rescind and modify the contract without the third party's consent on the third party's acceptance of it (Property Law Act 1974 (Q.) ss.55(2), 55(3)(d)) and in Western Australia on the third party's adoption of the contract (Property Law Act 1969 (W.A) s.11(3); see Westralian Farmers v. Southern Meat Packers (1981) WAR 241, at pp 246, 251). The Queensland and Western Australian qualifications trace back to the recommendations of the English Law Revision Committee in 1937.

30. Should it be a sufficient foundation for the existence of a third party entitlement to sue on the contract that there is a contractual intention to benefit a third party? Or, should an intention that the third party should be able to sue on the contract be required? Under s.48 of the Insurance Contracts Act 1984 (Cth) and in the United States an intention to benefit a third party alone is necessary and that seems to be the position in Western Australia. But in Queensland (Property Law Act 1974 (Q.) ss.55(1), 55(6)(c)(ii)) and in New Zealand (Contracts (Privity) Act 1982 (N.Z.) ss.4, 8) an intention that the third party should be able to sue is required. This requirement again seems to have its origin in the recommendations of the English Law Revision Committee. As the contracting parties are unlikely to turn their attention to the enforcement by the third party, the ascertainment of this intention may well be fraught with similar problems to those that have surrounded the trust concept.

31. The variety of these responses to the problems arising from contracts to benefit a third party indicate the range of the policy choices to be made and that there is room for debate about them. A simple departure from the traditional rules would lead to third party enforceability of such a contract, subject to the preservation of a contracting party's right to rescind or vary, in the absence of reliance by the third party to his detriment, and to the availability in an action by the third party of defences against a contracting party. The adoption of this course would represent less of a departure from the traditional exposition of the law than other legislative choices which have been made. Moreover, as we have seen, the traditional rules, which were adopted here as a consequence of their development in the United Kingdom, have been the subject of much criticism and of legislative erosion in the field of insurance contracts. Regardless of the layers of sediment which may have accumulated, we consider that it is the responsibility of this Court to reconsider in appropriate cases common law rules which operate unsatisfactorily and unjustly. The fact that there have been recent legislative developments in the relevant field is not a reason for continuing to insist on the application of an unjust rule as it stood before its alteration by the Insurance Contracts Act 1984 (Cth).

32. In the ultimate analysis the limited question we have to decide is whether the old rules apply to a policy of insurance. The injustice which would flow from such a result arises not only from its failure to give effect to the expressed intention of the person who takes out the insurance but also from the common intention of the parties and the circumstance that others, aware of the existence of the policy, will order their affairs accordingly. We doubt that the doctrine of estoppel provides an adequate protection of the legitimate expectations of such persons and, even if it does, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such an intricate doctrine. In the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind.

33. This argument has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its sub-contractors. It stands to reason that many sub-contractors will assume that such an insurance is an effective indemnity in their favour and that they will refrain from making their own arrangements for insurance on that footing. That, it seems, is what happened in the present case. But why should the respondent's rights depend entirely on its ability to make out a case of estoppel?

34. In the circumstances, notwithstanding the caution with which the Court ordinarily will review earlier authorities and the operation of long-established principle, we conclude that the principled development of the law requires that it be recognized that McNiece was entitled to succeed in the action.

35. For the foregoing reasons, we would dismiss the appeal.

BRENNAN J.: Trident General Insurance Co. Limited ("Trident") issued a policy to Blue Circle Southern Cement Limited ("Blue Circle") agreeing to indemnify "the Assured against all sums which the Assured shal1 become legally liable to pay in respect of ... bodily injury to ... any person". The "Assured" is defined by the policy to be "Blue Circle Southern Cement Limited, all its subsidiary associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers". McNiece Bros. Pty Limited ("McNiece") became a contractor, though it was not a contractor when the policy was issued in June 1977. McNiece became liable to pay damages to a workman employed by a sub-contractor in respect of that workman's bodily injury suffered in July 1979. McNiece seeks to be indemnified by Trident, though it paid none of the premium.

2. In the Supreme Court of New South Wales, Yeldham J. declared that Trident was liable to indemnify McNiece, holding that Blue Circle had entered into the contract of insurance with Trident on its own behalf and on behalf of those who were embraced in the definition of "Assured" and that McNiece, falling within that definition, had ratified the contract made on its behalf. Trident appealed to the Court of Appeal: (1987) 8 N.S.W.L.R.270. The appeal failed although the Court rejected the finding that McNiece had become a party to the contract through the agency of Blue Circle. McHugh J.A., with whom Hope and Priestley JJ.A. agreed, did not think that "Blue Circle was or intended to act as an agent for principals". That conclusion was clearly right. However, the judgment in favour of McNiece was sustained on another ground. Their Honours held that McNiece, though it was neither a party to the contract of insurance nor an "Assured" when the contract was made and though it had given no consideration for the indemnity it claimed, was entitled to sue directly on the policy. McHugh J.A. said (at pp.287-288) that -

"this Court should now declare that at common law a non-party assured is, and has been for some time at common law, able to sue on a written policy of liability insurance. In truth the position in respect of liability insurance policies is, and has been for some time, the same as that in respect of bankers' letters of commercial credit: see Jacobs, "Judicial Reform of Privity and Consideration" The Journal of Business Law (November 1986) at 466. That is to say, although once not enforceable because of the privity of contract doctrine, commercial necessity, practice and widespread use have combined to create an exception which the common law will now enforce."

The judgment in favour of McNiece was sustained solely on the basis that McNiece was entitled to sue on the policy in its own name and on its own behalf, the case being an exception to the doctrine of privity by which the common law limits to a promisee the right to sue to enforce a contractual promise. It was not suggested that agency, trust or estoppel availed McNiece. The facts excluded agency. In the course of the appeal before the Court of Appeal, McNiece sought to raise a case that Blue Circle was the trustee for it of the benefit of the promise to indemnify "the Assured" contained in the policy, but leave was refused because "there was a possibility that further evidence would be available to negative a trust". It was not suggested that McNiece might be entitled to raise an estoppel against Trident founded on an assumption or expectation by McNiece that Trident held it covered against legal liability in respect of bodily injury to any person.

3. The declaration by the Court of Appeal that policies of liability insurance are a common law exception to the doctrine of privity of contract and that the exception has existed for some time may come as a surprise to those who have seen no reference to such an exception in the books. McHugh J.A. thought that policies of liability insurance are similar to bankers' letters of commercial credit and his Honour regarded bankers' commercial credits as exceptions to the doctrine of privity of contract. Bankers' commercial credits were not regarded as such exceptions by Jenkins L.J. in Hamzeh Malas &Sons v. British Imex Industries Ltd. (1958) 2 QB 127, at p 129, who described them as "a bargain between the banker and the vendor of the goods". And in United City Merchants (Investments) Ltd. v. Royal Bank of Canada (1983) 1 AC 168, Lord Diplock said it was trite law that, in an international sale of goods to be financed by means of a confirmed irrevocable documentary credit, there are "four autonomous though interconnected contractual relationships involved" (pp.182-183), the fourth of which his Lordship described as "the contract between the confirming bank and the seller". In point of principle, bankers' commercial credits are not recognized as true exceptions to the doctrine of privity.

4. If policies of liability insurance are to be recognized as an exception to the doctrine, what are the features which might make them so? Excluding the principles of agency, trust and estoppel from consideration, what makes a "non party assured" who has furnished no consideration for a policy of loss insurance different from any other third party mentioned in a contract between promisor and promisee as a party who is to have the benefit of a promise? The difference suggested by McHugh J.A. was that commercial necessity, practice and widespread use, strengthened by analogy with modern statutes, established policies of loss insurance as exceptions to the doctrine of privity of contract. The fact that policies of loss insurance are frequently expressed to cover losses sustained by persons who are not parties to the contract and the fact that insurers ordinarily honour those contracts do not establish the kind of commercial practice that evokes the creation of a new principle of the common law. It may be that, where the voluntary acceptance of liability by an insurer does not account for the commercial practice and use of which his Honour spoke, those factors are to be accounted for by operation of the law of agency, trusts and estoppel. His Honour's proposition that it is commercially necessary to admit an exception to the doctrine of privity would be more supportable if it were found that those principles when applied in conjunction with the doctrine leave the law powerless to prevent or remedy injustice. But it was impossible to demonstrate such a defect in this case where agency was negatived on the facts and no occasion arose to consider the application of the principles of trust and estoppel.

5. Nor is the argument for a judicially created exception advanced by considering modern statutory provisions. As Dawson J. points out, s.48 of the Insurance Contracts Act 1984 (Cth) weakens rather than strengthens the proposition that a common law exception exists. That section creates in a person who is not a party to a contract of general insurance a statutory right to recover the amount of his loss directly from the insurer if he was specified or referred to in the contract as a person to whom the insurance cover was provided. But the Parliament did not make that provision retrospective, and it cannot be inferred that the Parliament contemplated that cases arising before the Act came into force (this case being one of them) would be governed by provisions of the common law identical with those in the Act. I would add that I respectfully agree with what Dawson J. has written about the limited use to which statute can be put in developing the common law.

6. To hold that policies of liability insurance are an exception to the doctrine of privity, some criterion must be found to distinguish the exception from the general rule. I can find none. Indeed, if the doctrine of privity should be overthrown in its application to policies of liability insurance, no reason either of policy or logic is advanced for retaining the doctrine for application to other contracts. It was acknowledged in the Court of Appeal that the doctrine of privity of contract is a fundamental rule of our common law, but that acknowledgment was followed immediately by an assertion (at p.284) that:

"the injustice of the rule in some situations is so obvious that it has been the subject of prolonged and intensive criticism. Few could be found today who would agree with the opinion of Myers AJ, expressed in 1954 (27 ALJ 175), that no change should be made to the rule: although cf Barwick CJ in Coulls ((1967) 119 C.L.R.460) at 478".

7. I am numbered amongst those who agree with Myers A.J., being fortified in that view by the observations of Barwick C.J. (at p.478) in the case referred to:

" It must be accepted that, according to our

law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another."

8. Barwick C.J. treated privity of contract as distinct from the related question of consideration and the distinction is well founded. However, in the same case Windeyer J. observed (at p.494) that:

"Doubtless the two requisites merge in the strict view of a contract as a bargain, a promise for which the promisee has paid the price."

In this case, as McNiece was not a party to the contract and did not give consideration for Trident's promise, it is not necessary to pursue the enquiry whether the two requisites merge. It is sufficient to focus on the doctrine of privity.

9. Privity is a doctrine which is both settled and fundamental, though it was not settled in England until the 19th century. In Coulls v. Bagot's Executor and Trustee Co.Ltd. (1967) 119 CLR 460, Windeyer J. referred to the uncertainty prior to 1861 about the right of third parties to bring assumpsit. He concluded (at p.498):

" The fact is that the early cases are conflicting, because during the sixteenth, seventeenth and eighteenth centuries the doctrine of consideration in the common law was still in process of formation. Whether, and in what circumstances, third parties should be allowed to bring assumpsit was still debatable. The law was not in fact 'settled' either way during the two hundred years before 1861. But it was, on the whole, moving towards the doctrine that was to be then and thereafter taken as settled."

In 1861, Tweddle v. Atkinson (1861) 1 B.&S.393 (121 ER 762) was decided. The law was then settled that "no stranger to the consideration can take advantage of a contract, although made for his benefit": per Wightman J. at p.398; p.764. The rule emerged in consequence of the development of the action of assumpsit, as the judgments of Crompton and Blackburn JJ. show. It may be that, at least in the understanding of the profession if not in the reports of cases, the rule was settled before Tweddle v. Atkinson was argued. In that case, the general proposition advanced by counsel for the defendant, supporting the demurrer, was that "a stranger to the agreement and to the consideration ... cannot sue upon the contract", and that proposition was conceded by counsel for the plaintiff who sought unsuccessfully to bring the case within an exception to the general rule. The rule was affirmed by the House of Lords in Dunlop Pneumatic Tyre Company, Limited v. Selfridge and Company, Limited (1915) AC 847. Viscount Haldane LC. said (at p 853):

" My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of 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. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor's request. These two principles are not recognized in the same fashion by the jurisprudence of certain Continental countries or of Scotland, but here they are well established. A third proposition is that a principal not named in the contract may sue upon it if the promisee really contracted as his agent. But again, in order to entitle him so to sue, he must have given consideration either personally or through the promisee, acting as his agent in giving it."

So well established were those principles that the argument of counsel for the appellants in Dunlop Pneumatic Tyre Co. was directed merely to showing that the appellants were undisclosed principals who had given consideration. In Midland Silicones Ltd. v. Scruttons Ltd. (1962) AC 446, Lord Reid said (at p 473):

"Although I may regret it, I find it impossible to deny the existence of the general rule that a stranger to a contract cannot in a question with either of the contracting parties take advantage of provisions of the contract, even where it is clear from the contract that some provision in it was intended to benefit him. That rule appears to have been crystallised a century ago in Tweddle v. Atkinson and finally established in this House in Dunlop Pneumatic Tyre Co.Ltd. v.

Selfridge &Co.Ltd. There are, it is true,

certain well-established exceptions to that rule - though I am not sure that they are really exceptions and do not arise from other principles."

10. The doctrine of privity has been treated as settled not only by the House of Lords (Beswick v. Beswick (1968) AC 58) but also by the Supreme Court of Canada (Greenwood Shopping Plaza Ltd. v. Beattie (1980) 111 DLR (3d) 257) and by this Court. In Wilson v. Darling Island Stevedoring and Lighterage Co.Ltd. (1956) 95 CLR 43 Kitto J. spoke (at p 80) of "the elementary general rule that the only persons entitled to the benefits or bound by the obligations of a contract are the parties to it". See also Birmingham v. Renfrew (1937) 57 CLR 666, at p 675; Coulls, at pp 478,494 and per Windeyer J. in Olsson v. Dyson (1969) 120 CLR 365, at pp 392-393. The doctrine of privity has long been settled and it was settled as a doctrine of general application.

11. Can an intermediate court of appeal properly refrain from applying such a settled and fundamental doctrine of the common law? If an intermediate appellate court were free to disregard a fundamental doctrine settled by the final appellate court, an endemic uncertainty would infect the administration of justice: cf. Broome v. Cassell &Co. (1972) AC 1027, at p 1054. Courts are bound to apply the principles laid down by courts higher in the appellate hierarchy and observance of that rule avoids the futility of delivering judgments which will be reversed on appeal. Of course, the rule would lose much of its cogency if the final court of appeal were to regard a principle embodied in its own decisions as settled only to the extent that a majority of its members approve the principle for application in each case falling within its scope. Unless the members of the final appellate court regard themselves as generally bound by the court's precedents, a precedent would tend to be viewed (to use the simile of Roberts J. in Smith v. Allwright (1944) 321 US 649, at p 669) like "a restricted railroad ticket, good for this day and train only". Intermediate courts would be encouraged to speculate on whether a majority of the final court would apply the principle in the instant case and the judges in the final court would be encouraged to determine the case according to their individual opinions as to what the law should be rather than by applying, so far as the traditional modes of judicial reasoning permit its ascertainment, what the law is. Judicial freedom in the application of precedent is a potent stimulus to rapid development of new fashions of legal thought and, in times of social change, the authority of some precedents will be readily questioned. On the other hand, to free the judges of an appellate court from the constraint of precedent entirely would lead to such diversity of reasoning that the ratio of a decision would be (at best) obscured and the capacity of the appellate court to settle the law would be put at risk. In this Court, the practice has been adopted of requiring leave, granted by the Court itself, to argue that an earlier decision of the Court should be departed from: Evda Nominees Pty.Ltd. v. Victoria (1984) 154 CLR 311. Inherent in and underlying that practice is the proposition that the earlier decision will not be departed from unless the Court so determines. And in Baker v. Campbell (1983) 153 CLR 52, at pp 102-103, I stated my understanding that individual justices of this Court are not generally free to depart from principles laid down in earlier decisions of the Court unless the Court as a whole gives leave to reopen an earlier decision for reconsideration. That constraint may not apply to matters of practice and procedure, especially when the exercise of a discretion is called for, and special considerations apply to questions arising under the Constitution. But, in my opinion, the observance of such a constraint, coupled with the Court's ability to re-examine its own decisions, provides the appropriate balance between a legal system on which the dead hand of the past rests too heavily and one in which the law is in continual ferment. If the constraint is observed in relation to questions of general substantive law, there can be no uncertainty as to the duty of intermediate courts faithfully to apply the decisions of this Court. Until leave to reopen a decision of this Court is given by this Court, the authority of the decision remains and its ratio should be applied. I do not suggest, of course, that the decision should not be critically examined in order to see whether the ratio is of broad or narrow application or whether the case in hand is distinguishable: these are familiar and proper judicial enquiries. But once the ratio is distilled and it is found to be applicable to the case in hand, the decision must be accepted in other courts - and, in my opinion, ought to be accepted in this Court unless leave is given by this Court to reopen it. Leave to reopen will be given from time to time not only to correct an error which has become manifest in an earlier decision but also to permit a review of doctrines which were the product of and suited to an earlier age but which work injustice or inconvenience in contemporary conditions. It is a jurisdiction to be exercised sparingly, for contemporary conditions may themselves be moulded by existing doctrines. Judicial preference for a more elegant or logically satisfying jurisprudence is insufficient to warrant a change in settled doctrine which works satisfactorily in conjunction with other legal principles. And if a change in settled doctrine is contemplated, a substitutionary doctrine sufficiently precise to admit of practical application must be at hand.

12. In this case, unless the Court determines that the doctrine of privity be reopened and a new doctrine substituted, the appeal must be allowed. The Court of Appeal ought to have allowed the appeal to it. However, the doctrine of privity was directly challenged, at least to the extent of allowing an exception in the case of liability insurance where the third party is named in the policy. In my view, for reasons which will appear, to admit such an exception involves the overthrow of the doctrine. The true question for decision is, therefore, whether this Court should now decide to overrule the settled and fundamental doctrine of privity.

13. It is submitted that the doctrine of privity sometimes produces unjust results and that this Court should re-examine it in the light of the criticisms the doctrine has attracted. The criticisms, many of which have come from judges of great eminence and some of which may be traceable to the influence of Scots law, are rehearsed in the judgment of McHugh J.A. Those criticisms tend to erode the acceptability of the doctrine and to facilitate the postulation of an exception. If it be asserted that the doctrine works injustice, an exception can be seen as a first step on a path leading to the heights of justice and therefore a step to be taken with judicial alacrity. If this case is to be decided not by reference to the law as it is but by reference to the law as it ought to be, it is useful to consider the alternative paths by which the heights of justice might be scaled: the path followed by our law for over a century or a new path of doctrine.

14. According to the settled law, when A (a promisor) contractually promises B (a promisee) to confer a benefit on C, a third party who is not a party to the contract and who has given A no consideration for the promise, C acquires no right to sue A on the promise. Nor did the classical Roman Law admit such a right in the third party: alteri stipulari nemo potest was Ulpian's statement of the law (Dig.45.1.38.17). The law of contract admits the capacity of persons who are sui juris to create by offer and acceptance rights and obligations binding as between each other. A proposal that a contractual promise in favour of a third party should give rise to a common law right in C to sue A to enforce the promise goes further. The proposal postulates the capacity of the contracting parties to create rights as between the third party and the promisor. Moreover, it precludes application of the principles of trust to any case to which the proposed exception applies. If C's right were held to grow out of a contractual promise by A to B, it is hard to see how B might be the trustee of the promise for C: C could hardly have a legal right to the performance of A's promise while B retained the same legal right as trustee for C. The principles of trust would be irrelevant in such a case. Indeed, the proposal may postulate that B, though the promisee, loses the contractual right to performance of the promise by A, that right being conferred solely upon, or being transferred to, C. And, if the proposal postulates a cause of action in C while leaving B's cause of action intact, it would expose A to double liability. To postulate the creation of a legal right in C to enforce a third party promise against A is to postulate the creation of legal relationships between the three parties which the doctrines of our legal system are not presently able to define.

15. If a third party promise is to confer on C a common law right enforceable against A, do A and B retain a capacity to defeat C's right by varying or abrogating their contract or is C's right indefeasible on the making of the contract? If C's right becomes indefeasible, what makes it so? Does C become subject to any obligation under the contract? Does C's right or obligation depend on C's acceptance of it? Or does C's acquisition of the right against A automatically impose any associated obligation? Does B retain a right to enforce the promise against A? Can C and A vary the right without B's consent? Does B have any right to contribution from C in respect of the consideration for the promise? If want of consideration moving from C to A is no bar to C's cause of action, is consideration moving from B to A essential? Does C lose his right to enforce the promise if he does not comply with the contractual conditions binding on B? Is B under a common law duty to C to perform the contract? Can A raise against C any defence which would be effective against B, for example, a set off? Legal systems which recognize the effectiveness of a third party promise to create a right in a third party to sue (a jus quaesitum tertio) give different answers to these questions.

16. A comparison of the solutions adopted by a number of legal systems to some of the problems in this field is furnished in an article "Ius Quaesitum Tertio : Comparison and Synthesis" (1967) 16 International and Comparative Law Quarterly 446 by M.A. Millner. The learned author states that the Scottish institutional writer, Lord Stair, considered that C acquires a right to sue if the parties to the contract intend C immediately to have an indefeasible right, though Scottish case law requires - at least in some cases - a delivery or other act to evidence that intention. However, it seems that C may renounce the right: "Jus Quaesitum Tertio: Remedies of the 'Tertius' in Scottish Law" (1956) The Juridical Review 3, by T.B. Smith at p.15. German law gives C an indefeasible right on the making of the contract though the German Civil Code permits C to renounce the right. In French law, however, a stipulation in favour of C is revocable until "the third party has declared his wish to take advantage of it" (Art.1121) and the Roman-Dutch law of South Africa requires notification of acceptance by C to A before C's right is perfected though in the meantime B may by interdict hold A to his bargain. The American Restatement, Second, Contracts Ch.14 sets out a number of propositions which may be summarized (though accuracy is sacrificed) by saying that a contract by which the promisor and promisee intend to benefit an "intended beneficiary" creates a duty by the promisor to the beneficiary which the beneficiary may enforce directly against the promisor. The first Restatement, Ch.6 133, drew a distinction between the indefeasibility of rights acquired on the making of the contract by two different classes of beneficiaries - donee beneficiaries and creditor beneficiaries. The tide of authority has turned against maintaining the distinction (see Restatement, Second, Contracts Ch.14 311 Reporter's Note) but, if the doctrine of privity were to be modified or abandoned, there is much to be said for maintaining the distinction: see Professor Stoljar, "Contracts for Third Parties; In Search of the Problems" (1988) 13 New Zealand Universities Law Review, 68.

28. No doubt, a decision upholding the Court of Appeal will itself give rise to a number of questions. Are there other situations in which a third party may sue on a contract when consideration has not moved from the third party to the promisor? What defences are available to the promisor in such cases? These are questions which do not now require an answer. Other situations must await another day; the terms on which special leave to appeal was granted preclude a decision in wider terms than have been expressed in these reasons. The defences available to an insurer against whom action may lie at the suit of a third party do not have to be explored for none was advanced on behalf of the appellant before this Court.

29. The appeal should be dismissed.

GAUDRON J. Subject to one matter pertinent to my consideration of this appeal the facts are fully set out in the judgment of Mason C.J. and Wilson J. The matter to which I would additionally advert is that by its statement of defence the appellant admitted that it had agreed for reward to indemnify Blue Circle Southern Cement Limited, its subsidiary, associated, and related companies, and all contractors, subcontractors and/or suppliers as alleged in the statement of claim filed by the plaintiff, the respondent in the present appeal. The "reward" so admitted was the payment of a premium calculated provisionally at $233,450.00 and expressed in the policy to be "payable 50% at inception and 50% 12 months thereafter." No issue has been raised to suggest that the premium was not paid in accordance with the terms of the policy.

2. It is necessary to refer to the question of payment of premium because although I agree generally with the reasons for judgment of Mason C.J. and Wilson J., I differ from their Honours in two significant respects. It is as well to state them at the outset. In my view a promisor who has accepted an agreed consideration for a promise to benefit a third party comes under an obligation to the third party to fulfil that promise and the third party acquires a right to bring an action to secure the benefit of that promise. The right of the third party is not a right to sue on the contract: rather, it is a right independent of, but ordinarily corresponding in content and duration with, the obligation owed under the contract by the promisor to the promisee.

3. The doctrine of privity of contract and the related requirement that consideration should be provided by the person seeking to enforce a contractual obligation do not deny the binding nature of a contractual promise the performance of which will benefit a third party. Breach of the contractual obligation may sound in damages at the suit of the promisee. However, it is not clear on existing authority whether the promisee is restricted to recovering damages for his loss only or whether damages can also be recovered by the promisee for the third party's loss: Coulls v. Bagot's Executor and Trustee Co. Ltd. (1967) 119 CLR 460, at pp 501-502; Olsson v. Dyson (1969) 120 CLR 365, at p 392; Beswick v. Beswick (1968) AC 58, at pp 73, 81, 88 and 102. If damages are an inadequate remedy, the promisee may obtain a decree of specific performance of the contract: Coulls, at pp.478, 499 and 502-503; Beswick, at pp.78, 82, 88-89 and 101-102; Olsson, at p.392. The third party, however, cannot institute an action for breach of contract or for specific performance unless he can bring himself within one of the recognized exceptions to or qualifications of the rules. Commonly the position of the third party is expressed in terms of inability to sue on the contract. See, for example, Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd. (1956) 95 CLR 43, at p 67; Coulls, at pp 478 and 494.

4. Although the position of the third party is commonly expressed - and in my view accurately expressed - in terms of inability to sue on the contract, common understanding is that the consequence of the rules is that no obligation is owed by the promisor to the third party and no right is created in the third party to secure the benefit of the contract. For the sake of simplicity I leave out of account conduct by the promisor which may create some other recognizable obligation to the third party, or which may lead to an assumed state of affairs by reference to which their mutual rights and obligations will be determined.

5. The source of the obligation to perform a contractual promise is the contract itself, but there is no reason in logic or in law why the existence of a contract should preclude the existence of another obligation ordinarily corresponding in content and duration with the contractual obligation, but having its source in law rather than in the contract. Thus an obligation to pay a debt to which a contract has given rise is separate and independent from the contractual obligation, although corresponding in content with it. An action to recover the debt is an action on the debt and not an action on the contract. In Young v. Queensland Trustees Ltd. (1956) 99 CLR 560, the position was put as follows (at p 567):

"The common law does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract: it is rather the detention of a sum of money ...".

See also Turner v. Bladin (1951) 82 CLR 463, at p 474; Pavey &Matthews Pty. Ltd. v. Paul (1987) 162 CLR 221, per Brennan J. at pp 233-234 and Dawson J. at pp 265-267.

6. So too, if consideration has been wholly executed under an unenforceable contract, the law imposes an obligation or imputes a promise to make compensation for the benefit accepted: Pavey &Matthews, at pp.227-228, 255-256 and 269. The obligation may be limited by the terms of the contract to correspond in content with the unenforceable contractual obligation, but it is an obligation which has its source in law and not in the contract.

7. In Pavey &Matthews it was stated by Deane J. (at p.256) (and accepted by Mason and Wilson JJ. (at p.227)) that the basis of the obligation imposed by law to pay compensation for a benefit accepted under an unenforceable contract was preferably to be seen as lying in restitution. Deane J. added (at pp.256-257):

"That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognize such an obligation in a new or developing category of case".

8. The obligation to make restitution and the concept of unjust enrichment are not limited to situations in which the parties stand in a contractual relationship, or would so stand but for some matter rendering the contract invalid or bringing the relationship to an end. So much seems to have been accepted by Lord Wright M.R. (in Brook's Wharf and Bull Wharf, Ltd. v. Goodman Brothers (1937) 1 KB 534) who described the obligation to make restitution as "a debt or obligation constituted by the act of the law, apart from any consent or intention of the parties or any privity of contract" (at p.545). The concept of unjust enrichment suggests actual enrichment, which might be thought not to occur until there is actual impoverishment. However, as Windeyer J. pointed out in Mason v. New South Wales (1959) 102 CLR 108, at p 146, the concept of impoverishment as a correlative of enrichment, whilst it may be relevant to some fields of continental law, is foreign to our law. Thus obligations having their source in notions of unjust enrichment may arise prior to, and indeed independent of, any actual impoverishment of the party to whom the obligation is owed and the concept of unjust enrichment is apt to include a consideration that there is a possibility of unjust enrichment occurring as a result of a benefit having been received under a contract - an idea which underlies the imposition of a constructive trust in cases of mutual wills. Thus in Birmingham v. Renfrew (1937) 57 CLR 666, Dixon J. stated at p 690:

"The objection that the intended beneficiaries could not enforce a contract is met by the fact that a constructive trust arises from the contract and the fact that testamentary dispositions made upon the faith of it have taken effect. It is the constructive trust and not the contract that they are entitled to enforce."

9. Where the consideration is wholly executed in favour of a promisor under a contract made for the benefit of a third party a rule that the third party may not bring action to secure the benefit of the contract permits of the possibility that the promisor may be unjustly enriched to the extent that the promise is not fulfilled. Certainly that is so if the promisee is unable or unwilling to bring an action on the contract. It will also be the case if action by the promisee will result only in the award of nominal damages. True it is that the possibility of unjust enrichment does not exist in all cases, but, as Mason C.J. and Wilson J. demonstrate in their reasons for judgment, the right of action available to the promisee and the limited rights available to the third party by operation of trust or estoppel, fail to provide a universal guarantee that the contractual obligation will be fulfilled, or if not fulfilled, will attract legal consequences proportional to its non-fulfilment.

10. In my view it should now be recognized that a promisor who has accepted agreed consideration for a promise to benefit a third party is unjustly enriched at the expense of the third party to the extent that the promise is unfulfilled and the non-fulfilment does not attract proportional legal consequences. Although exceptions to and qualifications of the rules of privity and consideration and the doctrines of trust and estoppel operate in certain circumstances to preclude any unjust enrichment, the exceptions, qualifications and doctrines should not be seen as reasons to impede the development of legal principle which will obviate all possibility of unjust enrichment. Rather, their existence should be seen as demonstrating the necessity for the recognition of such an obligation.

11. The possibility of unjust enrichment is obviated by recognition that a promisor who has accepted agreed consideration for a promise to benefit a third party owes an obligation to the third party to fulfil that promise and that the third party has a corresponding right to bring action to secure the benefit of the promise. It may be that the perceived pre-eminence in the field of contract law of the writ of assumpsit, with its associated requirements of privity and consideration, has delayed the recognition of an enforceable obligation and corresponding right as between promisor and third party. Whether or not this be so, there is no legal principle to preclude the recognition of an obligation and corresponding right as between promisor and third party separate from the contractual obligation existing between promisor and promisee. Rather the fact that the law, as it is presently understood, permits of the possibility of unjust enrichment provides a compelling reason for the recognition of such an obligation of the same nature of the obligation imposed by law to compensate for a benefit received under an unenforceable contract.

12. To recognize an obligation on the part of a promisor who has accepted agreed consideration for a promise to benefit a third party, is not to abrogate the doctrine of privity of contract. It is merely to confine it to the only area in which it can properly operate, viz. the area of rights and obligations having their source in contract. The matter can be put another way. A right to enforce an obligation imposed by law by reason of the acceptance of agreed consideration for a promise to benefit a third party is no more a right to sue on the contract than an action to recover a debt on an executed consideration is an action upon a contract.

13. The circumstances which warrant the imposition of an obligation, viz. the acceptance of agreed consideration for a promise to benefit a third party, also necessarily require that the content and duration of that obligation should ordinarily correspond with the content and duration of the contractual obligation owed to the promisee. Thus should the obligation as between promisor and promisee be varied, modified or extinguished, then correspondingly the obligation of the promisor to the third party will be varied, modified or extinguished. It may be that in a particular case there will be some intervening circumstance which will create an obligation not to vary, modify or extinguish the promise or which will create an assumed state of affairs such that the mutual rights and obligations of the promisor and third party are to be ascertained by reference to that state of affairs rather than by reference to the contract between the promisor and promisee. But these considerations aside, the content and duration of the obligation by the promisor to the third party will correspond with the contractual obligation of the promisor to the promisee.

14. On the basis that the appellant received the agreed consideration specified in the policy of insurance - a matter that has not been disputed - it came under an obligation to the respondent to fulfil its promise to indemnify it as provided in the policy. The respondent is entitled to maintain an action to enforce that obligation. Accordingly the appeal should be dismissed.

Orders

Appeal dismissed with costs.