Two (or even
three) legal topics, each of considerable interest in its own right, mingle in
a recent case to produce an even more interesting result. Let us set the scene
for a discussion of this case by reviewing these diverse areas of tort,
contract and agency.
First, the
law of tort. Readers may recall the fuss caused a couple of years ago by the
decision of the House of Lords in Junior Books Ltd v Veitchi Co Ltd
[1983] 1 AC 520. It was there held that a client for whom a factory was being
built was entitled, if the work of a nominated subcontractor proved defective,
to sue that subcontractor in the tort of negligence rather than adopt the more
normal course of pursuing the main contractor for breach of contract. Most of
the argument in that case (and the resultant publicity) centered upon the
acceptance by the court of the principle that an action in negligence could be
brought in respect of pure financial loss; in this respect the case was
regarded as something of a breakthrough. However, reference was also made, at
least in passing, to the problems which might have arisen had either the main
contract or the subcontract contained exemption or limitation clauses — could,
would or should these have had any bearing upon the subcontractor’s liability in
tort?
Our second
area of interest is the law of contract and, in particular, the doctrine of
privity. This is the rule, and it is an almost inviolable one, that only a
person who is a party to a contract can sue upon it. Indeed, the doctrine goes
further: as Lord Reid put it in Scruttons Ltd v Midland Silicones Ltd
[1962] AC 446: ‘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 the
provisions of the contract, even where it is clear from the contract that some
provision in it was intended to benefit him.’
As a result, it was there held that a person could not shelter behind an
exemption clause contained in a contract to which he was not a party. If,
therefore, a shipping company contracted on the basis of non-liability for
itself, its servants and agents, the advice to an injured passenger was simple:
sue the individual crew member responsible for causing the accident.
In the
commercial world, at least, this particular branch of the privity rule has for
a long time been unpopular. If a cargo owner contracts with a shipowner on the
express basis that neither the shipowner nor any firm of stevedores handling
the cargo shall be responsible for damage to it, it is felt that the reasonable
expectations of the businessmen involved should have legal force. To some
extent, this was achieved in New Zealand Shipping Co Ltd v AM
Satterthwaite & Co Ltd [1975] AC 154, where it was held that a
carefully drafted clause could confer immunity upon the shipowners’
servants and agents; precisely how this was done, we shall see later.
Another leap
sideways, and we are in the realms of agency law. In issue are the conditions
under which a principal may ‘ratify’ or adopt an act done by his agent without
authority. Every student knows that an undisclosed principal (ie one
whose very existence is unknown to the third party) is precluded from ratifying
(Keighley, Maxsted & Co v Durant [1901] AC 240). Less well
known, however, is the contention, based on obiter dicta of Willes J in Watson
v Swann (1862) 11 CBNS 756, that the same applies to an unidentified
principal. Thus, it is suggested, ratification is possible only by one who is
from the outset identified to the third party (or at least described in such a
way as to make identification possible). However, it must be said that
authority on this point is extremely scanty and that American law (often taken
as a guide in agency matters) regards disclosure of the principal’s existence
as sufficient.
We may now
turn to consider the (as yet) unreported case of Southern Water Authority
v Francis de Vic Carey (March 20 1984), a decision of David Smout QC,
sitting as a deputy judge of the Queen’s Bench Division. This case concerned
the failure of a sewage scheme which was constructed in the early 1970s for the
Brighton Sewers Board. The plaintiffs, who had succeeded under statute to the
position of the board (and who were treated in law as having exactly the same
rights and obligations as their predecessors) took legal action against the
main contractors, three different subcontractors and the consulting engineers.
At an early stage in the proceedings two of the subcontractors raised the point
that they could not be liable for negligence, because of an exemption clause
contained in the main contract, and this matter was ordered to be tried as a
preliminary question of law.
The clause
in question provided that, once any part of the contract works was ‘taken over’
by the clients (which would occur upon the issue by the engineers of a
‘takingover certificate’), the main contractors should be liable only in
certain circumstances which were specified in the contract. It was further
provided that, apart from these circumstances, ‘neither the Contractor nor his
Sub-Contractors, servants or agent shall be liable . . . in respect of defects
. . . . For the purposes of this sub-clause the Contractor contracts on his own
behalf and on behalf of and as trustee for his Sub-Contractors, servants and
agents’. The wording of this clause, and in particular the statement that the
main contractor was making the contract as agent for his own subcontractors,
was designed specifically to meet the requirements laid down in the New
Zealand Shipping Co case, and thus to make these sub-contractors parties to
the main contract and within the protection of the exemption clause. However,
the present plaintiffs argued that the main contractors had not actually been authorised
to act as their subcontractors’ agent in this respect and, further, that there
could be no question of ratification as they had not been identified
when the contract was made.
Having found
that there was indeed no evidence of prior authorisation by the subcontractors,
the judge considered the question of ratification and came down on the side of
the plaintiffs: ‘The fact that the [subcontractors] were in the contemplation
of the [main contractors] at the material time, as the documents show, does not
in my view suffice.’ As a result, the New
Zealand method of circumventing the privity of contract rules failed, and
the subcontractors were not entitled to take the benefit of the exemption
clause.
However,
this was far from the end of the matter. To make the subcontractors liable in
tort in the first place, it had to be shown that they owed the plaintiffs a
duty of care, and the judge approached this question in the usual way, namely,
by inquiring whether there was a sufficient relationship of ‘proximity’ between
the parties. His answer to this question is of great interest:
No one would
doubt that in an ordinary building case as between the subcontractors and the
building owner who has suffered damage there is a sufficient relationship of
proximity that in the reasonable contemplation of the subcontractor
carelessness on his part may be likely to cause damage to the building owner.
Thus a prima facie duty of care lies upon the subcontractor. So also in
this case. But one has to go on to consider whether there are any
considerations which ought to negative or to reduce or limit the scope of that
duty. And merely to ask the question in the context of this case seems to me to
foretell the answer. Did not the plaintiffs’ predecessors as building owners;
as it were, themselves stipulate that the subcontractors should have a measure
of protection following upon the issue of the appropriate taking-over
certificate? We must look to see the
nature of such limitation clause to consider whether or not it is relevant in
defining the scope of the duty in tort. The contractual setting may not
necessarily be overriding, but it is relevant in the consideration of the scope
of the duty in tort for it indicates the extent of the liability which the
plaintiffs’ predecessors wished to impose. . . . As the plaintiffs’
predecessors did choose to limit the scope of the subcontractors’ liability, I
see no reason why such limitation should not be honoured.
At the end
of the day, therefore, the subcontractors were protected against liability for
negligence by an exemption clause, the benefit of which they were not entitled
to take! This seems extremely odd, but
it undoubtedly follows from the rules of contract, tort and agency discussed
above. The real oddity is a system of civil liability which makes a
subcontractor directly liable to the client for what in truth amounts to a
breach of the subcontract, while continuing to pay lip-service to the rule that
only a party to a contract can have any rights under it. The House of Lords has
called more than once for the abolition of the privity doctrine. And the sooner
the better!.
landlords
It is
perhaps in the nature of the game of litigation that ‘fashions’ develop. The
legal grapevine soon passes on the good news that a certain new line of
argument has proved successful and others rush to mount the bandwagon. This
will roll only for a short (in the legal sense) time, after which either the
novel ruling will become settled law (in which case litigation will tend to
cease) or it will have been overturned, leaving the lawyers free to start the
wagon lurching in another direction.
There is
little doubt that one of the ‘in’ areas for litigation at the moment concerns
sureties of leasehold obligations and the latest contribution from the court is
likely to cause considerable consternation in the ranks of landlords and their
advisers. The case containing this happy yuletide greeting is Pinemain Ltd
v Welbeck International Ltd [1984] 2 EGLR 91):
Here the
plaintiffs, assignees of the original landlords, were suing the defendants, who
were the sureties of the original tenant, following the insolvency of the
current tenants. The defendants were ordered to pay some £8,500 arrears of rent
and insurance premiums following an Order 14 summons and the present hearing
was an appeal from that order, asking for it to be set aside and for the
defendant to be given leave to defend.
The
defendants’ argument was the quite simple one that the plaintiffs, as assignees
of the reversion, were not entitled to the benefit of the surety agreement in
the absence of an express assignment; in other words, that the benefit of the
surety covenant had not automatically passed to the plaintiff along with the
lease in which it was contained. The first ground for this contention was that
the surety agreement was stated to be made with the ‘lessor’ and that this term
was defined in the lease as meaning only those deriving title ‘under’ the
lessor, which does not include a successor in title to the reversion. Mr E G
Nugee QC, sitting as a deputy judge, refused to accept this narrow definition
of ‘lessor’ and held that it must include the person entitled for the time
being to the immediate reversion.
Counsel for
the defendant was on stronger ground when arguing his second ground. This was
that a surety covenant is a purely personal covenant, securing an advantage to
the landlord which is purely collateral to the lease, and for this reason none
of the statutory provisions in the Law of Property Act 1925 which automatically
transmit the benefit of certain covenants could apply, since these carry the
basic requirement that the covenant should ‘touch and concern’ the land.
It was
agreed that section 141 of the Law of Property Act 1925 was of no assistance,
since that applies only to pass the benefit of covenants made by the lessee.
The judge also rejected section 78, on the basis that it could not add anything
in the light of his finding that the covenant was expressly made with
the lessor and his successors in title. The main thrust of the argument
therefore centred on section 62(1) and section 56(1).
Section 62
passes with the land conveyed ‘all easements, rights and advantages . . .
appertaining . . . to the land . . . or, at the time of conveyance . . .
enjoyed with . . . the land . . .’. As the judge agreed, some of these words,
taken in isolation, were clearly wide enough to include the benefit of the
surety covenant, but, in his view, the application of the section is confined
to rights which touch and concern land: it cannot apply to purely personal
rights. With this there can be no quarrel.
The issue,
of course, was whether the surety’s covenant could be said to comply with this
requirement. It was held that where, as in this case, the covenantor (ie the
surety) does not himself own an interest in the land, the observance of the
covenant must have a direct effect on the demised land. A covenant by a third
party that the lessee will pay the rent does not do this: even where the surety
becomes obliged to pay, he is not paying rent in the sense of a payment issuing
out of the land.
The argument
based on section 56(1) was rapidly disposed of on the basis that this section
can only render a person a covenantee where that person is identifiable at the
time of the covenant. This a future assignee is not.
It is highly
likely that this decision will be challenged, if only because it has been
widely assumed that the benefit of a surety covenant does run. However, there
seems little reason to doubt that a surety covenant is a personal
benefit which is collateral to the lease. For this reason it may well be that
current practice has to change. If this is so, then those advising landlords by
assignment will have to act swiftly to ensure that they protect their clients
by procuring an express assignment of the benefit of any surety covenants. Given
that, by definition, these are being regarded as a separate, personal benefit,
there seems no reason to doubt that an assignment subsequent to the transfer of
the reversion will be effective.
