The seminal third party contract case Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44 was decided twenty five years ago. It continues to be relevant to legal practice and legal education. It has had a lasting and important impact on insurance contracts, as it decided that the doctrine of privity did not apply to those contract. Typically the doctrine of privity means that only the parties to a contract are bound by it, and a person who is not a party to a contract (a ‘third party’) cannot enforce it. For example, suppose that Alphonse makes a contract with Bertha to the effect that Bertha will give Clarence an annuity after Alphonse dies. If Alphonse dies, and Bertha refuses to pay the annuity to Clarence, Clarence can’t force Bertha to keep to the contract because he is not a party to it.

The case also remains a reminder that the High Court will, when presented with the right circumstances, rework the law to achieve a just and fair outcome. In this post I will explore how the decision on the doctrine of privity has become entrenched; and discuss the impact on the decision, in particular the judgment of Deane J on our understanding of the law of express trusts.

What happened in Trident?

Blue Circle Southern Cement, the operators of a limestone crushing facility, took out an insurance policy with Trident, an insurance company. “The Assured” were defined as including the company, all subsidiary and related companies, and all contractors, sub-contractor and suppliers. McNiece was a major sub-contractor carrying out construction works at the limestone crushing facility. A sub-contractor with McNiece was severely injured on site. The question for the court was whether McNiece could get an indemnity from Trident in relation to the injury, even though it wasn’t a party to the contract.

What did the court hold (in a nutshell)?

A majority of the High Court found that McNiece could get an indemnity. Mason CJ and Wilson J (in a joint judgment) and Toohey J (in a separate judgment) held that the doctrine of privity of contract should not apply to insurance contracts. Gaudron J held that Trident came under an obligation to McNiece because otherwise it was unjustly enriched. Deane J held that an express trust was formed in order to get around the doctrine of privity of contract.

What is the difficulty which arises from the privity doctrine in contracts?

There are some circumstances where it seems fair that a third party should be allowed to enforce a contract where the contract is expressly stated to be for the benefit of third parties, notwithstanding that the third party has not given consideration under the contract. Trident itself is such a case.

Another such case is the English case of Beswick v Beswick [1967] UKHL 2. There, Mr Beswick, an elderly man, entered into an agreement with his nephew in which he agreed to transfer his business to his nephew in return for the nephew promising to pay a weekly annuity to Mr Beswick’s widow when he died. The business was transferred to the nephew, but after Mr Beswick died the nephew refused to pay the annuity to the widow. The widow sued the nephew for specific performance of the agreement in her capacity as personal representative of Mr Beswick’s estate. The nephew argued that Mr Beswick’s estate had suffered no loss as a result of his breach, and was only entitled to nominal damages. The court allowed the estate to call for specific performance of the contract.

By contrast, the plaintiff was less lucky in the Australian case of Coulls v Bagot’s Executor and Trustee Company Limited [1967] HCA 3. There, Mr Coulls signed a contract with a company where he gave it the right to quarry from his land, in return for a royalty. He also ‘authorised’ the company to pay the royalty money to himself and his wife as joint tenants. Mr Coulls died and the company ceased paying Mrs Coulls, the plaintiff. The company argued that Mrs Coulls could not require it to pay royalties to her as she was not privy to the contract. The majority held that the company had no obligation towards Mrs Coulls because she was not a party to the contract, and any authority to pay royalties was revoked by Mr Coulls’ death. In dissent, Barwick CJ and Windeyer J held that the consideration had moved jointly from Mr and Mrs Coulls such that she could enforce it by specific performance.

Australia has Trident to provide an exception for insurance contracts specifically. The Trident exception has been applied cautiously to non-insurance contracts subsequently. However there are cases where it has been argued that it may be extended. For example, in Gate Gourmet Australia Pty Ltd (in liq) v Gate Gourment Holding Ag [2004] NSWSC 149, Einstein J would have allowed a subsidiary company to enforce a letter of guarantee issued by its holding company pursuant to Trident if he had not found the subsidiary company was a party to the contract in any case. Other ways of getting around the doctrine of privity are to argue that a trust was created where the promisor holds the benefit of the contract on trust for the third party (as Deane J held in Trident), or to use the doctrine of agency to argue the promisor was acting as agent for the third party. Estoppel may also be used to enforce promises on which a third party relies to her detriment.

Interestingly, the Federal Parliament passed the Insurance Contracts Act 1984 (Cth) in 1984. Among other things, this Act stipulates in s 48 that a third party can recover from under insurance contract notwithstanding that she is not a party to the insurance contract. However, the Act did not apply to the Trident case because the events which gave rise to the claim to an indemnity arose some years before the Act came into operation. England has enacted a Contracts (Rights of Third Parties) Act 1999 which allows a third party to enforce the contract if the contract stipulates that he may enforce it, or if the contract is expressed to be for his benefit and the contract was intended to be enforceable by the third party. Similarly New Zealand has enacted the Contracts (Privity) Act 1982. Australia has no equivalent legislation.

How could a contract between two parties be held to create an express trust by Deane J?

Deane J held that the terms of the insurance contract manifested an intention to create an express trust where Trident was the settlor, and Blue Circle held the benefit of the insurance contract on trust for McNiece and others. He held that an intention to create an express trust should be inferred if a promise has been made between two parties for the benefit of a third party. This will prima facie be satisfied if a clause benefiting a third party can be found in the contract.  The relevant intention is that of both parties to the contract, although Deane J added that sometimes the intention of the promisee alone would suffice (in this case, the promisee was Blue Circle). Consequently, the beneficiary of the trust (McNiece) could require the trustee (Blue Circle) to sue Trident on its behalf, or, if Blue Circle would not do so, McNiece could join Blue Circle as a defendant and sue both Trident and Blue Circle to enforce the trust.

Mason CJ and Wilson J agreed that sometimes a contract for the benefit of a third party could create an express trust in favour of that party. However, they said that certain difficulties flowed from the recognition of 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.

Ultimately, they rejected the express trust analysis on the facts of Trident, and said that a clear expression of an intention to create a trust is required and an intention cannot necessarily be inferred from general words. This was a case where no intention could be inferred from the general words of the policy.

How has the express trust fared since Trident as a mechanism for getting around privity?

Since Trident, litigants have attempted to use Deane J’s trust analysis on a few occasions to enforce contracts on behalf of third parties, but generally there has not been much success.

For example, in Winterton Constructions Pty Ltd v Hambros Australia Ltd [1991] FCA 171, a builder unsuccessfully attempted to enforce a loan made in favour of a property owner. Gummow J said that the fact that the contract allowed the parties freedom to vary its terms pointed to the conclusion that no trust was intended and that the promisee did not mean to create rights in favour of a third party.

Similarly in Marks v CCH Australia Ltd [1999] 3 VR 513, a law professor attempted to enforce a funding contract between Melbourne University and a publisher in order to retain his professorial chair. Mandie J held that there was no intention to create an express trust, and that the contractual option to terminate indicated that the contract was to benefit the university, not for the benefit of the professor.

In other words, contracts which show a self-interested flavour are intrinsically inconsistent with an intention to create a trust. By contrast, trusts, by their very nature, involve the trustee putting the interests of the putative beneficiary before her own interests. If there are any indication that the parties to contract do not intend to act in the best interests of another, but in their own interests, or that the parties can vary the contract, then an express trust is unlikely to be found. Moreover, subsequent cases seem to have followed the analysis of Mason CJ and Wilson J in requiring a clear expression of an intention to create a trust which could not just be inferred by general words.

Conclusion

In the event, the impact of Trident has been perhaps more modest than it might appear at first blush, and applications of the various judgments have been cautious in the cases following, but it provides an important basis for allowing for enforcement of contracts by third parties where it would be unfair for the court not to recognise the plaintiff’s interest.

Another prominent private law case from the same era as Trident…can you guess it?

I was musing to one of my students, Peter Botros, that it would be great to see if someone could draw a cartoon of a High Court case in four frames. Lo and behold, he came up with a cartoon of another prominent private law case from the same era as Trident. I’m just going to put one frame from it to see if you can guess the case… Then when people have had a guess, I’ll put up the full cartoon. Thanks heaps, Peter!

Update:

Thanks to those who correctly guessed Peter’s cartoon. Here’s the full thing. Note the changes in weather throughout, and the throwing up of hands in frame four!