Bill of Lading Third Parties Direct Approach

Inevitably the ultimate solution must be to meet the issue of privity head-on. This tactic was adopted by the Supreme Court of Canada in 1993 in the case of London Drugs Ltd v Kuehne & Nagel. The claimant in this case had delivered a transformer to a warehouseman for storage under a contract which specified that his liability was limited to $40 per package unless the owner declared the true value of the goods and paid an additional charge. The claimant elected not to exercise this option.

Subsequently, employees of the warehouseman damaged the transformer while, contrary to express instructions, attempting to lift it with a fork-lift truck. When sued for damages in negligence, the employees sought to invoke the limitation of liability clause in the contract between the claimant and their employer, even though they were clearly not parties to that contract.

In these circumstances, the Supreme Court of Canada was prepared to make an exception to the privity rule and allow the employees to limit their liability to $40. The majority of the court indicated that they had no intention of abolishing the privity rule but were merely creating a new exception to it, which represented only an ‘incremental change’. The justification for this new exception was outlined by Iacobucci J in presenting a judgment in which three of his five colleagues concurred. ‘When an employer and a customer enter into a contract for services and include a clause limiting the liability of the employer for damages arising from what will normally be conduct contemplated by the contracting parties to be performed by the employer’s employees, and in fact so performed, there is simply no valid reason for denying the benefit of the clause to employees who perform the contractual obligations.’

In the view of the majority of the court, it did not make commercial sense to allow a plaintiff to invoke the doctrine of privity in such circumstances in order to circumvent a contractual exclusion or limitation clause to which he had freely consented. Two requirements must be satisfied before such an exception will operate. First, the limitation of liability clause must either expressly or impliedly extend its benefit to the employees seeking to rely on it; and, secondly, such employees ‘must have been performing the very services provided for in the contract between their employer and the customer when the loss occurred’.

While this decision centered on the existence of an employer–employee relationship, the Canadian Supreme Court indicated in the subsequent case of Fraser River v Can-Dive Services that there was no intention to limit the exception to situations involving such a relationship. In this case the charterer of a barge, when sued in negligence for the loss of the vessel, sought to rely on a waiver of subrogation clause in the hull subscription policy taken out by the owner of the barge. While he was clearly not a party to the insurance contract, the Supreme Court, in finding in his favour, was satisfied that the two basic requirements for the operation of the exception had been met. On the one hand, the parties to the insurance policy had clearly expressed an intention to extend the benefit of the waiver of subrogation clause to any ‘charterer’ of the vessel, while the third-party beneficiary in this case was engaged in the very activities envisaged by the clause on which he sought to rely.

On this occasion the Supreme Court was also required to address the question as to whether the original contracting parties could unilaterally revoke the provision in favor of the third-party beneficiary. In its view, such a revision of the contract was no longer possible, without the third party’s consent, once the benefit had crystallized by the occurrence of the event envisaged by the contract.

To what extent are English courts likely to follow a similar path? Lord Goff in The Mahkutai recognised that ‘the time may well come when, in an appropriate case, it will fall to be considered whether the courts should take what may legitimately be perceived to be the final, and perhaps inevitable, step in this development and recognize in these cases a fully-fledged exception to the doctrine of privity of contract, thus escaping from all the technicalities with which courts are now faced in English law’. For a variety of reasons, however, he did not consider that the appeal in The Mahkutai was an appropriate occasion on which to follow the lead given by the Canadian court.