New Zealand Shipping Co vs A.M. Satterwaite: A Comment on the Doctrine of Privity

New Zealand Shipping Co vs A.M. Satterwaite (The Eurymedon) is a 1974 case. It’s a leading contractual law case focusing on the concept of the third party to a contract, specifically examining the conditions under which a third party may seek the benefits of an exclusion clause. In it, the Eurymedon is delivered to Liverpool. The consignor and maker of the drill, Ajax Machine Tool Co Limited, was employed by A.M. Satterwaite. New Zealand Shipping Co Ltd is employed by Ajax Co Limited as the consignee. NZ Shipping Co is a subsidiary fully owned by Ajax Machine Tool Co Limited who were the recipients of the Bill of Lading. While unloading the ship, negligence on the part of NZ Shipping Co results in damage to Satterwaite’s drilling machine[1].

The issue that arose was whether NZ Shipping Co could avail the benefits of the Bill of Lading as a third party to the contract. To answer this question, the Court had to answer whether there a contract between A.M. Satterwaite and New Zealand Shipping Co. Further, the Court had to answer whether there was a consideration. In assessing this case, the Privy Court looked at the principles of the law of contract as well as the provisions in the Bill of Lading. In brief, the provision under the assessment of the Bill of Lading in court implied that the parties to this contract would not be at fault as long as the complaint was filed after the occurrence of the damage[2].

Who Is the Third Party and What Is Privity?

Introduction to the Concept of Third Party and Doctrine of Privity of Contract

The concept of the third party developed in Ancient Rome after the crusades when commerce, navigation, insurance and other carriage and businesses issues developed. It was found that it became necessary to give effect to some stipulations to third parties in these dealings. Bresch says this is because the law is not an abstract science like mathematics as it depends on the application to facts of life for its development[3]. The general principle of Roman law said that it was unacceptable that contracting parties may extend the benefit of rights to claim the contract of work obligation to a third party. Similarly, Justinian Institution held that benefits to a third party may only extend when: i) Stipulation is valid if stipulator has monetary benefit to the performance of the third party ii) Adding a penalty clause renders the stipulatio alteri valid[4]. These rules are based on a fundamental principle of Roman law- contracts create personal bonds between parties, comparable to English law as it developed from the 19th century[5]. According to English legislation, the third-party beneficiary is defined as a person who is not a party to a contract but has legal rights to enforce the contract or to participate in the proceeds because the contract was made for the benefit of the third party[6].

The right of the third party to sue arises when they are the intended beneficiary to the purpose of the contract, not a random one. Depending on the circumstances under which the third party is involved in contractual relations, they are entitled to sue both the person with rights and the person who is to perform the contractual obligations. Such a contract may even have legal consequences for third parties who aren’t beneficiaries. In such a case, the third party earning the right in their favour doesn’t participate either when the contract is concluded nor when it is implemented later[7].

The Eurymedon, Privity and Criticism

The reasoning of The Eurymedon’s Judgement

The final judgement held that NZ Shipping Co, despite being a third party, may avail the exemption clause in the Bill of Lading[8].

Midland Silicons Ltd v Scruttons Ltd (1962) was the starting point for the judgement[9]. The case held that since the Stevedore s were not a party to the contract, they were a stranger to the contract. Therefore, the court used the fundamental principle that a stranger cannot rely on a contract they are not a party to hold that they could not take advantage[10], similar to the effect of the case of Wilson v. Darling Island Stevedoring and Lighterage Co. Ltd (1956)[11]. However, what Midland left open to debate was a case where one of the parties to contract was an agent to the third party, like in the Eurymedon. This dealt particularly with Lord Reid’s four prerequisites for the validity of such an agent contract[12].

These included i)Stevedore  is intended to be protected by provisions in it which limit liability ii) Bill of Lading makes it clear that the carrier, in addition to contracting for these provisions on his behalf, is also contracting as agent for the Stevedore  that these provisions should apply to the Stevedore , iii) carrier has authority from the Stevedore  to do that, or perhaps later ratification by the Stevedore  would suffice, iv) that any difficulties about consideration moving from the Stevedore  were overcome. And then to affect the consignee it would be necessary to show that the provisions of the Bills of Lading Act, 1855, apply[13].

The court decided that the first three conditions were met, and as a result, the question in front of Beattie J was whether Lord Reid’s fourth condition had been met. He held no consideration had been shown for the shipper’s promise as to provide an exemption to the third party. On this, the Court of Appeal differed by arguing that since the exchange was commercial (involved service on one and rate on payments on another, with qualifying stipulations for both sides) between the parties, it leads to the creation of a business transaction which would have inevitably led to profits. As a result, it is ‘paradoxical and prima facie implausible’ that the contract is nudum pactum[14]. Further, the Court of Appeal held that the third party is exempt since the exemption is designed to cover from the whole carriage from loading to the discharge by whomsoever it is performed[15].

The court argues that another way of analysing the necessary components in this business transaction is to say that the Bill of Lading brought into existence a contract which was unilateral but capable of becoming mutual, through the role of the carrier as an agent. Thereby, the performance of the services for the benefit of the shipper by the appellant (discharging of goods) became the consideration and therefore the appellant should have the benefits of the exemptions. This is a well established and acceptable conception of a unilateral contract through Great Northern Railway Co. v. Witham[16].

In the Lordships’ opinion there is a consideration in between the appellant and defendant in accordance to the precedent in Scotson v Pegg (1861), “an agreement to do an act which the promisor is under an existing obligation to do to a 3rd party” still amounts to valid consideration, as the promisor obtains benefits of an enforceable direct obligation[17]. With Brandt v Liverpool (1924), the Court determines that the “consignee is entitled to the benefit and is bound by the stipulations of the Bill od Lading by way of their acceptance of it and request for delivery of goods thereunder”[18].

When Satterwaite tried to cite Carlill vs Carbolic Smoke Balls Co (1892) in the Court of Appeal, Turner P. and Richmond J. rebutted them by holding that an offer must be expressly or impliedly made known to whom it’s addressed and some method of acceptance must be conveyed to make it binding for this type of contract to exist. They argued that due to the generality of the language of Clause I in the Bill of Lading it did not fit in the category of an offer to the world at large. Rather, it intended to confer to the Carrier’s employees/agents an absolute and unconditional exemption[19].

In conclusion, their Lordships determined that giving the appellant the benefits of Bill of Lading exemptions would be to give effect to clear intentions of a commercial document, this may be given under existing principles. The Lordships see no attraction in the consequence of denying validity to the clause would be to encourage actions against servants, agents and independent contractors to circumvent exemptions. Therefore, the Court humbly advised Her Majesty that the appeal should be allowed and the judgement of Beattie J restored. As a result, it was held that the third party may avail the benefits of the exemption clause.

Criticism of The Eurymedon’s Judgement

Both Viscount Dilhorne and Lord Simon of Glaisedale cite the judgement of Beattie J in agreement. In his judgement, Beattie J. affirmed that since there no consideration for any promise on part of the Consignor to release the Stevedore from liability nor was there any evidence of such a promise in the Bill of Lading, the Stevedore could not be allowed to benefit from the exemption clause. Further, he stated, “the consignee could compel the Stevedore  to carry out the contract which is made with the carrier if it decided not to do so because the agency relationship refers only to the exemption provision which purports to create a benefit only and no detriment or liability is imposed on the Stevedore “[20].

Viscount Dilhorne stated that there was no offer and therefore no contract could exist between the appellant and defendant. He said that there was no clause in the Bill of Lading to suggest an offer by the shippers, neither express nor implied, to the carriers to enter an agreement where the appellants would receive the benefit of the exemption clause if they performed services for the shippers. He said that there was an assumption of contract here and the only manner in which it would be applicable was if one was to rewrite the contract which he deemed as unfair and unjust, further saying that could not be the intention of the parties[21].

Criticism of the Eurymedon’s Precedent in Contracts

In 1996, a report was presented in the Parliament of the UK which postulates upon the Law of Privity. In it, the exceptions to it were criticised on several grounds. It’s said if the third party can sue, it prevents effect being given to the intentions of the contracting parties. It is questioned if the justification of a third party being allowed to remedy their injustice at the cost of the actual parties to the contract. The Beswick v Beswick case is cited to illustrate how the Doctrine of Privity may lead to a situation in which the aggrieved party to the contract cannot sue, whereas someone who has suffered no loss may be able to have that right. Moreover, in contracts made for the benefit of the 3rd party, even if there is substantial damage or specific performance, the promisee may not want to sue, or have the capacity to[22].

The report also alleges that not only has the third-party beneficiary rule lead to an overly complex law which may lead to the use of ‘elaborate and often artificial stratagems and structures to give third parties enforceable rights’[23], it also leads to difficulties in commercial relations. For example, for simple construction contracts, “subject to the decisions in Linden Gardens Trust v Lenesta Sludge Disposals Ltd 23 and Darlington BC v Wiltshire Northern Ltd, the client can often only recover nominal damages, since they would have suffered no direct financial loss as a result of the builder’s breach”[24]. The report also states that due to this rule, only the parties within contractual relations with one another may be allowed to sue each other. Lastly, insurance contracts have also been adversely affected- the 3rd party is prevented from enforcing the contract of insurance against the insurer, which has led to many statuary inroads[25].

Conclusion

The third-party beneficiary rule is not only relevant to commercial cases, but they may also be used to decide cases which govern personal relations. Due to this reason, its utility is expansive. An advantage that came from the case is that makes employers more liable to their employees. It increases accountability and expands the concept of justice in a way to make it more inclusive.

While the issue of consideration is controversial, the author is inclined to agree that the exemption clause should apply for the third party since the logic employed in it is more sensible. It is well-reasoned one, and reliant on both facts as well as concepts in a practical manner. The argument against consideration may be strong but it fails to convince due to the complex manner of application of laws which is unnecessary. On the other hand, the application of the rules in the final judgement was direct and simple, making it easier to comprehend.

The consideration was sufficient- NZ Shipping Co performed Stevedore duties while the defendant provided benefits in the form of the exemption clause. The time of the events ensured that neither of the parties could be accused of invoking past consideration for the intended purpose. Moreover, it is fair to argue that consideration flowed from the promisee, Satterwaite, in the form of the Bill of Lading. The Bill of Lading was one which extended to all their employees and since Ajax Machine hired NZ Shipping Co in their capacity as agent, it established an employer-employee relationship between Satterwaite and NZ Shipping Co. Therefore, the parameters of legal conditions of consideration were met.

The scholarly criticisms are either redundant or irrelevant. The first argument is some scholars say that there is no intention on the part of the parties to form a legal relationship with the third party. However, if the intention of the parties is really to ensure that no third party beneficiary could avail benefits, these parties would have preferred to avoid the cumbersome procedure of litigation by employing the easier solution of making use of the advantage of legal drafting to ensure so in the contract itself, thereby making the argument redundant. Essentially due to the importance given to the terms of the contract, it would have been simple for them to write their intentions into the contract itself- thereby making it harder on the third party to avail benefits. Moreover, if someone is to argue that they might have forgotten to do this, the burden is on the parties of the contract and if a third party takes advantage of their unfortunate fault, it would be fair to do so. Moreover, the arguments of the rule leading to a complex body of law and inconvenience for commercial law is against the very ethos of law- rather than being easy, the author believes its higher purpose is to be able to be socially just and equitable. Like Bentham’s Utiliatirian Principle, the author believes the purpose of law should be to help the maximum number of people to the furthest extent. If a little inconvenience and complexity is the price to pay for it, it is a price which is worth the cost.


[1] New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154

[2] Ibid

[3]M.H. Bresch, ‘Contracts for the Benefits of Third Party’ (1963), 12(1), CUP on behalf of BIICL <https://www.jstor.org/stable/756535> Last accessed on 16th May 2020

[4] Ibid

[5] Ibid

[6] Ibid

[7] Ibid 

[8] New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154

[9] N 12

[10] All Answers ltd, ‘Scruttons Ltd v Midland Silicones Ltd – 1962’ LawTeacher.net (2020) <https://www.lawteacher.net/cases/scruttons-ltd-v-midland-silicones.php?vref=1> Last accessed 16 May 2020

[11] N 12

[12] Ibid

[13] bid

[14]New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154

[15] Ibid

[16] Ibid

[17] Ibid

[18] Ibid

[19] bid

[20]New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154

[21]Ibid

[22]Lord, High Chancellor, by Command of Her Majesty, Privity of Contract: Contracts for the Benefit of Third Party, Law Commission Report (Cm 3329, 1996) part III

[23]Lord High Chancellor by Command of Her Majesty, Privity of Contract: Contracts for the Benefit of Third Party, Law Commission Report (Cm 3329, 1996) part III

[24]Ibid

[25]Ibid

Vallika Varshri from Jindal Global Law School (O.P. Jindal Global University).

You can find her here.

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