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Third Party Beneficiary: A Comparative Analysis*

Published online by Cambridge University Press:  12 February 2016

Gabriela Shalev
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Chapter 4 of the new Israeli Contracts (General Part) Law, 1973, introduces the concept of a contract in favour of a third party, while granting express recognition to the right of a third party beneficiary. Even those, (including the author) who maintain, that the right of a third party beneficiary could and should be derived, even before the commencement of the new Law, from the general principles and premises of the old Israeli law of contract, cannot fail to see in the above-mentioned chapter an important innovation in the Israeli legal system.

This paper is a comparative analysis of the institution of third party beneficiary. The analysis will consist of a presentation and critical examination of the central concepts and doctrines involved in the institution under discussion, and it will be combined with a comparative survey of the arrangements adopted in various legal systems. The choice of this approach stems from the particular circumstances of the new legislation.

While in most countries, comparative legal research is a luxury, in Israel it is a necessity. The new legislation in private law is inspired to a great extent by Continental codifications. As far as the law of contract is concerned, Israel is now in the process of becoming a “mixed jurisdiction”: departing from the common law tradition and technique, and heading towards an independent body of law, derived from various sources, mainly Continental in both substance and form.

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Israel Law Review , Volume 11 , Issue 3 , July 1976 , pp. 315 - 338
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Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 1976

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References

1 (1972/73) 27 L.S.I. 117 at p. 128. (Text of the Law can also be found in (1974) 9 Is.L.R. 282.)

2 See infra text at nn. 117–118.

3 Shalev, and Herman, , “A Source Study of Israel's Contract Codification” (1975) 35 Louisiana L.R. 1091.Google Scholar

4 The Contracts (General Part) Law, 1973, is only part of this new legislation. See Barak, , “Towards Codification of the Civil Law” (1975) 1 Tel Aviv Univ. Studies in Law 9.Google Scholar

5 Yadin, , “Judicial Lawmaking in Israel” in Dainow, (ed.), The Role of Judicial Decisions and Doctrine in Civil Law and in Mixed Jurisdictions (Baton Rouge, 1974) 296.Google Scholar

6 Tedeschi and Zemach, “Codification and Case Law in Israel” in Dainow, ibid., at p. 272.

7 But not in Roman classical law. See infra text at nn. 19–20.

8 An “ultra-modern” use of the concept of third party beneficiary was lately suggested by an American court that applied this concept as a theory of recovery in pollution cases: Ratzlaff v. Franz Foods of Arkansas 468 S.W. 2d 239 (Ark., 1971). By enabling the plaintiff to recover as a third party beneficiary of the contract between the city and the defendant-polluter, the court made an extra weapon available to private litigants who fight environmental abuse.

9 See infra text at nn. 16–17.

10 A German treatise and a leading American essay, both dedicated to third party beneficiaries, open with the following statement: “In no department of the law has a more obstinate and persistent battle between practice and theory been waged than in regard to the answer to the question: whether a right of action accrues to a third person from a contract made by others for his benefit…”: Williston, , “Contracts for the Benefit of a Third Person” (1901) 15 Harv. L.R. 767CrossRefGoogle Scholar, translated from Busch, Doctrin und Praxis über die Gültigkeit von Verträgen zu Gunsten Dritter. See also Smith, T. A., Foundation of Legal Liability (New York, 1906) vol. II, p. 15Google Scholar, where this conflict is described as a battle between theory and legal evolution.

11 See Pound, , Introduction to the Philosophy of Law (Revised ed., New Haven, 1954) 105Google Scholar: “Common law of contract is based upon the postulate that men must be able to assume that those with whom they deal will act in good faith, and hence, that the latter will make good, reasonable expectation created by their promises or other conduct”. See also Pollock, , Principles of Contract (13th ed., London, 1950) 1.Google Scholar

12 For an analysis of the alternative attitudes see Tedeschi, , “Some Aspects of the Concept of Contract” (1966) 1 Is.L.R. 223.Google Scholar See also Ferson, M., The Rational Basis of Contracts (Brooklyn, 1949) 151–152.Google Scholar

13 Compare M. Ferson, ibidem at p. 147; “A promise as a form of juristic act, i.e. an act indicating consent to assume an obligation, should not require privity any more than the act of transferring property requires privity”.

14 See supra n. 10.

15 It is possible, however, to retain this doctrine, and define “privity” according to the intention of the parties, including thereby the third party beneficiary in the range of the contract as a “privy”. Under such an interpretation, the doctrine is compatible with both the principle of autonomy of will and the recognition of an independent right to the third party beneficiary.

16 Treitel, , The Law of Contract (3rd ed., London, 1970) 537.Google Scholar

17 Bafeild v. Collard Aleyn 1, 82 E.R. 882. The promisor's liability to two persons when he promised but one is described by Williston as “obviously unfair” and resulting in “hardship” upon him: Williston, , “Contracts for the Benefit of a Third Person” (1901) 15 Harv. L. R. 767, 793, 795.CrossRefGoogle Scholar

18 Shalev, , Exemption Clauses (Jerusalem, 1974, in Hebrew) 30 ff.Google Scholar

19 Institutes, III. 19.20; Digest, 45.1.38.22 & 23. As for attempts to explain the rationale of the prohibition in Roman law, see Dold, , Stipulations for a Third Party (London, 1948) 15–17.Google Scholar

20 Buckland, , Roman Law (Cambridge, 1921) 423–7Google Scholar; Shultz, , Classical Roman Law (Oxford, 1951) 487–490Google Scholar; Kaser, , Roman Private Law (tr.) (Butterworth, 1968) 145.Google Scholar

21 Buckland, & McNair, , Roman Law and Common Law (Cambridge, 1936) 164–167Google Scholar; Dold, op. cit., at pp. 17–28.

22 Grotius, De jure belli ac pacis, II.xi. s. 18 & 19. Adapted from the translation in Dold, op. cit., at pp. 33–34. Note that Grotius was still bound by the classical concept of contract, thus demanding “acceptance” on behalf of the third party beneficiary.

23 Dold, op. cit., at pp. 28–29.

24 Millner, , “lus Quaesitum Tertio: Comparison and Synthesis” (1967) 16 Int. & Comp. L.Q. 446, 449.CrossRefGoogle Scholar

25 Sixth Interim Report of the Law Revision Committee, Cmd. 5449, p. 25.

26 As well as the correlative rule declaring that no one but the parties to the contract can be bound by it.

27 See infra text at nn. 35–38.

28 Important statutory exceptions to the doctrine of privity are listed in Treitel, op. cit., at p. 565 ff.

29 Anson, , Law of Contract (23rd ed., Oxford, 1969) 89Google Scholar; Zeltner, , “Should the Consideration Doctrine be Abolished” (1961) 17 HaPraklit 39.Google Scholar

Indian law of contract, which is a codification of English common law, with a few modifications, illustrates clearly the proposition that the doctrine of consideration is not the real obstacle to legal recognition of the rights of a third party beneficiary. Although the requirement that consideration shall move from the promisee has been removed in India by a statute, the Indian law does not recognize a third party beneficiary's right. The rejection of the third party beneficiary's right in Indian law is based on the provisions identifying the offeror with the promisor and the offeree with the promisee, granting right of action to the latter only. This provision, embodying the English interpretation of the doctrine of privity, is seen as preventing recognition of the third party beneficiary's right.: Dold, op. cit., at p. 107.

It is interesting to realize that the doctrine of privity is also responsible for the slowness of English law to recognize the general duty of care and establish the tort of negligence. See the view of the minority in Donoghue v. Stevenson [1932] A.C. 562.

30 (1861) 1B. & S. 393; 121 E.R. 762.

31 Dutton v. Paole (1678) T. Raym 302. For an historical research of the principle of privity see Stoljar, A History of Contract at Common Law (Australia, 1975).

32 Per Crompton J. in Tweddle v. Atkinson, supra n. 30.

33 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] A.C. 847.

34 ibid., at p. 853.

35 Tomlinson v. Gill (1756), Amb. 330, embodies the first cited enunciation of the “trust of contractual rights” principle. This principle was later accorded the approval of the House of Lords in Les Affreteurs Réunis Société Anonyme v. Leopold Walford (London) Ltd. [1919] A.C. 801.

36 Here are some of the analytical problems that the application of trust theory to third party contracts presents: 1. What kind of a trust is involved (the possibilities being express, constructive or implied)? 2. What is the subject matter of the trust? The contractual promise or the res to which this promise refers? 3. Who of the parties is the trustee of the contractual promise? See Cheshire, & Fifoot, , The Law of Contract (2nd Australian Edition, by Starke, & Higgins, , Butterworth, 1969) 567–569.Google Scholar 4. How can the application of trust theory to third party beneficiaries be justified within the realm of equity in view of the maxim: “Equity will not assist a volunteer”, bearing in mind that “a volunteer” in this context is a person who has not furnished valuable consideration?

37 Described by Wright, Lord as “a cumbrous fiction”: (1939) 55 L.Q.R. 189, 208.Google Scholar

38 The “melancholy unpredictability of the recourse to the trust principle” is illustrated in one of the text-books on contracts by a tabulation of seven types of third party benefit contracts, considered on one occasion to import a trust, and on another occasion to negative a trust: Cheshire & Fifoot, op. cit., at pp. 566–567.

39 Corbin, , “Contracts for the Benefit of Third Persons” (1930) 46 L.Q.R. 12.Google Scholar

40 One scholar described this process as “desuetudo”: Furmston, , “Return to Dunlop v. Selfridge?” (1960) 23 M.L.R. 373.CrossRefGoogle Scholar

41 Street, op. cit. supra n. 10, at p. 15.

42 Such criticism was expressed by legal authors, e.g., Treitel, , The Law of Contract (2nd ed., London, 1966) 475–476Google Scholar, as well as by the courts, e.g., Lord Pearce in Beswick v. Beswick [1967] 2 All E.R. 1197, 1213, who described the rule in Tweddle v. Atkinson as a “mechanical defect” of the English law.

43 This pattern requires the English courts to rely heavily on the promisee to bring suit as the keeper of third party beneficiary's interests. See “Third Party Beneficiary Contracts in England” (1968) 35 Uni. Chi. L.R. 544, 552.

44 [1967] 2 All E.R. 1197.

45 Beswick v. Beswick [1966] 2 All E.R. 1.

46 This view was expressed by Lord Denning in previous cases. See Smith & Snipes Hall Farm Ltd. v. River Douglas Catchment Board [1949] 2 K.B. 500; Drive Yourself Hire Co. (London) Ltd. v. Strutt [1954] 1 Q.B. 250.

47 [1967] 2 All E.R. 1197, per Lord Hudson at p. 1204; per Lord Reid at pp. 1202, 1204; per Lord Upjohn at pp. 1221–1224.

48 See Kessler, & Gilmore, , Contracts (2nd ed., Boston and Toronto, 1970) 1126–1127Google Scholar: “In deciding to dispose of the case by holding that Mrs. Beswick could sue as executrix, the learned Lords had to hurdle the difficulty that it was far from apparent how the estate (as distinguished from Mrs. Beswick personally) had been damaged by the nephew's failure to pay the annuity. The difficulty was hurdled in a manner that can only command an awed Transatlantic respect. It must be, however, a matter for jurisprudential regret that the faithless nephew had not been named executor of Peter Beswick's estate instead of Mrs. Beswick”.

49 New Zealand Shipping Co. Ltd. v. A.U. Satterthwaite & Co. Ltd. [1974] 1 N.Z.L.R. 505, 508–509: “[A] contract between two parties cannot be sued on by a third person even though the contract was expressed to be for his benefit”.

50 Cf. per Lord Reid in Beswick v. Beswick [1967] 2 All E.R. 1197, 1201.

51 Para. 48 of the Sixth Interim Report of the Law Revision Committee, Cmd. 5449, reads as follows: “[W]here a contract by its express term purports to confer a benefit directly on a third party, the third party shall be entitled to enforce the provision in his own name…”

52 The Law Commission First Annual Report, 1965–1966, Law Cmd. no. 4, sec. 31.

53 For a general description and definition of Roman-Dutch law, see Lee, , Introduction to Roman-Dutch Law (5th ed., Oxford, 1953) 2.Google Scholar

54 Lee, op. cit., at p. 243.

55 See supra text at nn. 22–23.

56 Dold, op. cit., at pp. 110–118

57 Lee, op. cit., at p. 437.

58 See Lee, op. cit., at p. 439: “The stipulatio alteri is a triangle. It cannot by any manipulation be transformed into a straight line”.

59 See infra n. 91.

60 Gloag, & Henderson, , Introduction to the Law of Scotland (7th ed., Edinburgh, 1968) 94.Google Scholar

61 Smith, T. B., “Jus Quaesitum Tertio: Remedies of the “Tertius” in Scottish Law” (1956) 1 Juridical Review (N.S.) 3, 4.Google Scholar

62 Gloag & Henderson, op. cit., at p. 95.

63 See Dold, op. cit., at p. 118.

64 Smith, op. cit., at p. 5.

65 Institutions (1681) 1. 10. 5. See Smith, T. B., Studies Critical and Comparative (Edinburgh, 1962) 168, 183.Google Scholar

66 1920 S.C. (H.L.) 195.

67 Among them MacCormick, , “Jus Quaesitum Tertio: Stair v. Dunedin” (1970) 15 Juridical Review (N.S.) 228Google Scholar; Rodger, , “Molina, Stair and the Jus Quaesitum Tertio” (1969) 14 Juridical Review (N.S.), 34–44Google Scholar; 128–151, 144.

68 Secondary or remedial rights are limited: Gloag & Henderson) op. cit., at p. 97.

69 This state law, on the question of third party beneficiary, will also apply in litigations decided by Federal courts. See Corbin, , “Contracts for the Benefit of Third Persons in the Federal Courts” (1930) 39 Yale L.J. 601.CrossRefGoogle Scholar

70 See M. Ferson, op. cit. supra n. 12, at p. 145.

71 See Hughes, , “The Third Party Beneficiary Rule in Massachusetts” (1973) 8 Suffolk U.L.R. 130Google Scholar; Bernhard, , “Third Party Beneficiary Rights in Massachusetts” (1964) 49 Mass. L.Q. 159.Google Scholar

72 In some states this recognition is based on statute law, e.g., California Civil Code, S. 1559. Art. 1890 of the Louisiana Code is very similar to Art. 1121 of the French Civil Code, which we shall discuss infra, text at nn. 76–80.

73 (1859) 20 N.Y. 268.

74 Chapter 6, 133–147, Restatement (First) of Contract and Restatement (Second) of Contracts (Tentative Draft, No. 4, 1968).

75 See infra n. 99.

76 The French code has had a wide influence upon the legislation of the Latin countries of Europe and America. A few countries have directly copied the articles regulating the issue of “stipulation pour autrui”. Williston, , “Contracts for Benefit of a Third Person in the Civil Law” (1902) 16 Harv. L.R. 43, 48.CrossRefGoogle Scholar And see Millner, op. cit. supra n. 24.

77 Colin, et Capitant, , Cours elementaire de droit civil francais, t. II, sec. 209Google Scholar; Jesserand, , Cours droit civil positif francais, t. II, no. 303.Google Scholar

78 Amos, & Walton, , Introduction to French Law (Oxford, 1935), 173–174Google Scholar; Smith, , “Third Party Beneficiaries in Louisiana: the Stipulation pour autrui” (1937) 11 Tulane L.R. 18, 18–22.Google Scholar

79 Both terms, doctrine and jurisprudence, are used here in their civil law meaning, signifying respectively the body of opinions on legal matters expressed in books and articles and judicial decisions, interpreting and applying the code. For a general evaluation of the role of jurisprudence and doctrine in civil law and in mixed jurisdiction, the interested reader is referred to Dainow (ed.), op. cit. supra n. 5.

80 Amos & Walton, op. cit., at p. 172.

81 As well as Austrian law, which was inspired by it.

82 Ennenccerus-Kipp-Wolff, , Lehrbuch Des Burgerlichen Rechts (13th ed., 1950) vol. 2, p. 137Google Scholar; Brunner, , Zeitschrift fur dae ges Handelsrecht vol. 22, p. 96.Google Scholar

83 B.G.B., Art 328, para. II. and see Reichsgericht vol. 114, p. 222.

84 Arts. 329–332.

85 See Leyser, , “Third Party Contracts in English and Continental Law” (1954) 3 Uni. West Aust. L.R. 39, 49.Google Scholar

86 See supra text at n. 39.

87 Cf. supra n. 48.

88 For a contrary view, rejecting this general premise see Corbin, , On Contracts (One volume edition, West, 1952) 732, 733.Google Scholar

89 The dispositive nature of the rules in this area is made clear by the provisions of the German Civil Code. After establishing, in Art. 328, the right of the third party, the B.G.B. provides a set of presumptions, Arts. 329–332, to determine the parties' will in case of doubt.

90 The fact that in a positive legal system is this right established by a statute, does not determine its theoretical nature.

91 Many scholars do not agree to this proposition. Dold op. cit. supra n. 19, at p. 48 and Lee, op. cit. supra n. 53, at p. 438, define the right as “quasi contractual”. This view is unacceptable to me. Whenever the promisor breaks his promise the third party beneficiary's secondary (remedial) right accrues, and he is not limited to recovery. Besides, there is no contract, not even by fiction, between the third party beneficiary and the promisor. See also Millner, op. cit. supra n. 24, at p. 451.

92 See Dernburg, Pandekten, II, §18, 5th ed.; translated in Williston, op. cit. supra n. 76, at pp. 44–5: “Third party's right is rooted in the contract…”

93 In fact, the very existence of the promisor's correlative duty supports my approach. It is obvious that the promisee's right, to claim the performance of the promisor's obligation in favour of the third party beneficiary, is contractual. Correlative to this right is the promisor's duty to perform his obligation. This duty does not change its contractual nature when the claimant is the third party beneficiary himself.

94 Although, in some legal systems, not perfected. See infra text at nn. 101–102.

95 This feature gains obvious importance in cases of the promisee's bankruptcy.

96 See Restatement of Contracts (Second, Tentative Draft), §133 which draws a distinction between intended and incidental beneficiaries.

97 Ihering designates this person as the “Rechtsparasit” (a legal parasite). Ihering, , “Die Reflexwirkung oder die Ruckwirkung rechtlicher Tatsachen” in Jahrbuch fur die Dogmatik vol. X, pp. 245, 288.Google Scholar

98 Corbin, op. cit. supra n. 88, at pp. 736–7.

99 In the first Restatement of contracts third party beneficiaries had been classified into “donee beneficiaries” and “creditor beneficiaries”: §133. The Second Restatement departed from this obsolete classification, after it was realized that not all third party beneficiaries can be forced into rigid grouping. §133 of the Second Restatement now distinguishes only between intended and incidental beneficiaries.

100 Ihering, op. cit., uses this definition in order to explain the “Reflexwirkung”, namely the reflex operation that occurs whenever a third person acquires a right because of someone else without its being the result of any activity of the will. See Dold, op. cit. supra n. 19, at pp. 1–2.

101 A third possibility is suggested by Lustig, , “Contracts for the Benefit of Third Persons” (1940) 19 Canadian Bar Review 280, 287Google Scholar: “This adoption of the right by the third party certainly is the suitable moment for the acquisition of the irrevocable right by the third party. There is no reason why this right should be acquired at an earlier moment…”. We consider this proposition wrong. The right of third party beneficiary is constituted and completed upon the conclusion of the contract. Later happenings can only make it immune against revocation. The same lack of distinction between creation and perfection of the third party beneficiary's right is reflected in Lowensohn, , “jus Quaesitum Tertio: A Comparative and Critical Survey” (1940) 56 Scot. L.R. 104, 108Google Scholar where a “suspension” of the right until “acceptance” is described.

102 In French law (Art. 1121 (2) of the Code Civil): The declaration of the third party of his wish to avail himself of the benefit. Cf. §1890 of the Civil Code of Louisiana, and para. 48 of the recommendation of the Law Revision Committee in England (supra n. 25). In American law (§143 of the Restatement (second)): reliance by the third party beneficiary; in Israeli law (sec. 36(1) of the Contracts (General Part) Law): notice by one of the contracting parties informing the third party beneficiary of his right.

103 In this respect the right of a third party beneficiary differs from the right of another “third party”, namely the holder in due course of a negotiable instrument, who receives his right “free from equities” and is not affected by former defects. See Barak, , The Nature of the Negotiable Instrument (Jerusalem, 1972, in Hebrew) 23, 73 ff.Google Scholar

104 But not to defences of set-off, arising out of other matters.

105 Sec. 64 of the Contracts (General Part) Law, 1973. See supra text at nn. 3–6.

106 See supra text at n. 6.

107 See, e.g., State of Israel v. Hidna (1959) 14 P.D. 926.

108 Cf. Zeltner, The Law of Contracts (Tel Aviv, 1963, In Hebrew) vol. I, p. 180, n. 283.

109 Per Cohn J. in State of Israel v. Hidna (1959) 14 P.D. 926, 930.

110 Sussmann J. and Witkon J. dissenting, ibid. at pp. 936, 937.

111 See Zeltner, supra n. 29, at pp. 40–48.

112 See supra text at n. 46.

113 Shmueli v. Hochman (1949) 6 P.M. 333, 338.

114 See Hochman v. Shmueli (1950) 16 P.D. 420.

115 This exposition of English law appeared lately in New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd. (1974) 1 N.Z.L.R. 505, 508–509 (P.C.).

116 Per Cohn, J. in State of Israel v. Hidna (1959) 14 P.D. 926, 930Google Scholar; per Kister, J. in Sharafi v. Minha'l M'karkei Israel (1966) (VI) 20 P.D. 821Google Scholar; per Berinson, J. in Reisel v. Holander (1966) (I) 21 P.D. 189.Google Scholar And in the district courts Zeltner, J. in Futter v. Ezra (1948) 6 P.M. 232Google Scholar and in Shmueli v. Hochman (1949) 6 P.M. 333; Loewenberg, J. in Zehavi v. The Physician's Organization of Kupat Cholim (1972) 78 P.M. 185.Google Scholar

117 Eliash v. Director of Lands (1931) 1 P.L.R. 735; Tedeschi, , Studies in Israel Law (Jerusalem, 1960,) 212Google Scholar; Zeltner, , “Private Trust in Israel” (1959) 15 HaPraklit 214.Google Scholar But see now the draft Trust Law (1974) H.H. no. 1196, p. 22.

118 In a leading article, Prof. Tedeschi clarifies that whenever there is a gap in the Israeli legal system the judge must resort to English law: “Lacunae in the Law and Article 46 of the Palestine Order-in-Council, 1922”, in Studies in Israel Law, op. cit., at p. 226.

119 See Shaky, , “The Problem of Contracts in Favour of a Third Party in English Law and Israeli Law and its Solution in Jewish Law” in Selected Legal Topics (Jerusalem, 1958, in Hebrew) 470.Google Scholar

120 Cf. Kessler & Gilmore, op. cit. supra n. 48, at p. 1118.

121 Secs. 12 and 39 of the Contracts (General Part) Law, 1973, introduce the concept of good faith, both at the pre-contractual stage of negotiations and at the contractual stage of carrying out the obligations.