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ENFORCEMENT OF THIRD PARTY CONTRACTUAL RIGHTS IN GHANA [1971] VOL.
VIII NO. 2 UGLJ 76—97

DATE-BAH S. K.



*

I. THE CASE FOR THE ENFORCEABILITY OF THIRD PARTY CONTRACTUAL RIGHTS

1. The Received Law

Before 1960, when the Contracts Act1 of Ghana was passed, the
enforcement of third party contractual rights in Ghana was governed by
the common law rules received from England. The main effect of these
rules was aptly and pithily summed up by Lord Haldane in Dunlop
Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.2 thus:

"My lords, in the law of England certain principles are fundamental.
One is that only a person who is a party to a contract can sue on it.
Our law knows nothing of a jus quaesitum tertio arising by way of
contract. Such a right may be conferred by way of property, as, for
example, under a trust, but it cannot be conferred on a stranger to a
contract as a right to enforce the contract in personam."

The law on third party contractual rights has, however, not always
been as explained by Lord Haldane above. Indeed, the law became
settled along these lines only after the decision in Tweddle v.
Atkinson3 in 1861. Before then, there were certain decisions such as
Dutton v. Poole4 which were compatible with the view that third party
contractual rights were enforceable by the third parties. In recent
times Lord Denning has made valiant efforts5 re-instate such pre-
Tweddle v. Atkinson authority in favour of third party contractual
rights, but his efforts have not convinced his brother judges on the
English bench and the law remains as stated above by Lord Haldane.6
The rigour of the common law position has been somewhat tempered by
the trust device which has sometimes been resorted to in order to help
third parties enforce benefits conferred on them by contracts to which
they are strangers.7 However, this equitable device has become an
inadequate remedy, since strict proof of an intention to create a
trust has come to be insisted upon.8

2. A Critique of the Received Law

Basically, the reason for the negation of third party contractual
rights in the received law is founded on doctrine or dogma. It is
based on the need to keep the doctrine of privity of contract intact.
But there is no reason why the concept of privity of contract should
be completely sacrosanct. It is believed that legal doctrine should
be used as a tool for achieving socially or commercially desirable
results. The advantages and disadvantages of doctrines, such as that
of privity of contract, have to be continuously under evaluation and
where any disadvantages of a doctrine can be averted by appropriate
modification of the doctrine such a modification should be adopted.
Indeed in the area of the assignment of contractual rights, English
law has already recognised the need for such modification of the
doctrine of privity of contract, in the interest of commercial
convenience.

The issue posed by the problem of the enforceability of third party
contractual rights is whether if B promises A to confer a benefit on
C, C's interest in A and B's contract should be given legal
protection. Now to this question of some considerable commercial and
social importance, it is no meaningful answer to reply that such
protection should not be accorded because there is no privity of
contract between C and the contracting parties. A more meaningful
exercise is to examine the reasons why it is socially desirable or
undesirable for such protection to be given to C's interest. In other
words, it is believed to be more helpful to find an answer to the
problem of third party rights in terms of social utility rather than
in terms of doctrine or dogma. From a social utilitarian standpoint,
the issue posed by the problem of third party rights is whether there
is a social or commercial need for protection to be given to third
party contractual rights and whether any significant undesirable
consequences are likely to flow from the granting of such protection.
9 This issue cannot be answered in the abstract and doctrinally;
rather various concrete kinds of transactions have to be examined and
an assessment made as to whether, from one's knowledge of Ghanaian
society, parties to such transactions are likely to feel a need for a
legal power to confer enforceable benefits on third parties and
whether the general community is likely to view as unjust a legal rule
that denies third party beneficiaries the right to enforce contracts
to which they are not parties.

There are at least two ways in which one could make an evaluation of
the response of Ghanaian society to the problem of third party rights
as stated above. First, from one's own observation of, and life
among, the Ghanaian people one can make the assessment. Secondly, one
could borrow from the methodology of the social sciences by
conducting a field survey with questionnaires among a controlled
sample of the Ghanaian people. The first form of evaluation is the
modus operandi that the present author will adopt for this article.
However, his examination of the concrete types of third party
beneficiary contracts will be rather limited. It is not his intention
to do a detailed study of the various recurrent types of third party
beneficiary contracts such as life insurance policies, confirmed
credit arrangements in connection with international trade and so on.
Rather it is intended merely to discuss three broad classes of third
party beneficiary contracts and the legitimacy of the claims of
beneficiaries under such contracts for the enforceability of the
benefits conferred on them. The three broad classes of contracts will
be identified by reference to the types of beneficiaries claiming a
benefit under them. The following section will therefore deal with the
three different types of third party beneficiaries.

3. Types of Third Party Beneficiaries

(a) Donee Beneficiaries

According to terminology in use in the United States of America, a
person is a donee beneficiary "if the promisee who buys the promise
expresses an intention and purpose to confer a benefit upon him as a
gift in the shape of the promised performance."10 In other words,
where in a contract between A and B, A exacts a promise from B to
confer a benefit on C and A's intention in so doing is to confer a
gift on C, C is a donee beneficiary. It is important to note that C
is a donee only in relation to A. C is not a donee of B since B's
performance is supported by consideration from A. The issue of the
enforceability of B's promise cannot therefore be foreclosed by it
being asserted that enforcing B's promise is tantamount to enforcing a
gratuitous promise. Enforcing B's promise, far from implying the
enforcement of a gratuitous promise, rather means enforcing a bargain
supported by consideration, according to its tenor.11 The objection
that traditional English doctrine has raised to the enforcement of B's
promise has been that the consideration for it does not move from the
beneficiary of the promise. This is the doctrinal ground on which the
beneficiary's claim to the enforcement of B's seriously intended
promise has been negated.

The question that has to be investigated is whether in donee
beneficiary transactions, there is a social or commercial need for the
enforcement of the third party's rights. The important thing to
realise about donee beneficiary situations is that failure to allow
the donee beneficiary to sue means that the beneficiary is entirely
remediless. He cannot sue his donor, that is A, for there is no pre-
existing obligation between A and C, the beneficiary. It is usually
also impossible for A to sue B for failing to perform his promise,
since A has not been injured by B's non-performance.12 As Pound J.
said in the New York case of Seaver v. Ransom13 in which the plaintiff
was the donee beneficiary of an agreement entered into between a
dying wife and her husband: "The contract was made for the
plaintiff's benefit. She alone is substantially damaged by its
breach. The representatives of the wife's estate have no interest in
enforcing it specifically."

As is suggested by the last sentence in the above quotation, very
often the promisee, that is A, or his personal representative after
his death, does not have the requisite interest or enthusiasm for
taking the promisor B to court for his breach of promise. This is
because, during his lifetime, A, the promisee, may not have sufficient
motivation to undertake the expenses and trouble of a lawsuit in order
to enforce the gift he has conferred on C, even if A is thus entitled
to enforce the promise. It is one thing to secure a promise on C's
behalf and it is quite another thing for A to have to go through the
processes of a lawsuit in order to confer a gift on C. Since A suffers
no material damage from B's breach of contract, he is fairly likely to
allow the transaction to fall through without stirring up trouble.
For instance, if A pays B N¢1,000 to deliver a car to C and B fails to
do this, A can recover the N¢1,000 from B in quasi-contract as money
had and received. This is because of the total failure of the
consideration in exchange for which the money was paid. If B pays
back the N¢1,000 to A, A will not have much incentive to go to court
to sue B for the benefit of C, even if this were possible. There is
even less likelihood of a lawsuit to enforce B's promise, if A himself
has died and his personal representative has stepped into his shoes.
Such a personal representative will usually not share the emotional or
other reason that drove A to make a gift to C. Usually a personal
representative is concerned to gather as much property into the
deceased's estate as possible in order to satisfy the claims of
creditors, legatees, etc. The duty felt by a personal representative
to a donee beneficiary is likely to be minimal, if not non-existent,
and he will probably decide to resist such donee beneficiary's claims.

Probably the chief reason why the donee beneficiary deserves
protection is the element of bad faith that surrounds the promisor's
action. He has accepted consideration in order to confer a benefit on
the donee, but has broken his promise thus to confer the benefit. Such
conduct undoubtedly runs counter to current ethical notions in Ghana
and it is probably on such notions of equity and fair dealing that the
ultimate basis for the enforceability of a donee beneficiary's rights
has to be laid. Take, for instance, a life insurance company which
collects premiums from an insured for the whole of his adult life, in
return for a promise to pay the insured's wife a specified sum upon
his death. If upon his death, the company should refuse to pay the
widow the sum specified and the courts were to hold that the widow had
no remedy against the company, there would hardly be any person in
Ghana who would not roundly condemn the law for such an unjust
result. So far as the third party rights of donee beneficiaries are
concerned, therefore, it would seem that there is a social need, based
on notions of fairness and justice, for the enforceability of such
rights.

Having established a social need for the enforceability of the rights
of donee beneficiaries, an inquiry has to be made also into the
question whether there are any substantial disadvantages to granting
such donee beneficiaries the right to enforce benefits conferred on
them. In this connection, it has to be discussed whether the concept
of the enforceability of the benefit by the donee inexorably leads in
logic to the result that the donor cannot change his mind and revoke
the benefit that has been promised the beneficiary. For instance, the
donor who has asked a promisor to pay N¢5,000 to the donee beneficiary
may become insolvent in between the time of contract and the time when
payment is due to the donee beneficiary. Is the donor in such
circumstances entitled to withdraw his imperfect gift or is he bound
to carry his gift through in spite of his current impecuniosity? If
because of the enforceability of the donee's gift the poor donor is
bound to make his rich gift, in spite of his poverty, it might be said
that there are some socially undesirable results flowing from the rule
that donee beneficiaries may enforce their benefits. It is clearly
socially undesirable to force poor men to be generous.

The answer to the point discussed above is that it is not logically
an inevitable result of the enforceability of third party donee rights
that such rights should be irrevocable. The law can provide for the
enforceability of such rights whilst making it possible for the donor
to revoke his gift at any time before it is perfected. The fact that
the law may enable the release of the promisor from his obligation by
the promisee is not logically incompatible with the concept of the
enforceability of third party rights. However, in spite of the
logical compatibility of the two ideas, it has usually been felt
necessary to impose some limitation on the freedom of the donor to
arrange with the promisor for a variation or rescission of the benefit
conferred on the third party.14 The interest sought to be protected
by such limitation is the reasonable expectations induced in the third
party beneficiary. The difficult issue is the determination of the
point at which the donor loses his right of revocation. The Ghanaian
solution to this problem will be discussed later, but here the point
sought to be established is that even though a donor's power of
revoking his gift may be qualified in the interest of the reasonable
expectations of the beneficiary, this possible disadvantage to donors
does not outweigh the social gains derived from making third party
donee rights generally enforceable.

To sum up then, the chief justification for enabling the enforcement
by third parties of benefits conferred by contract on them by way of
gift is that if such third parties are not given a power of
enforcement, it will often be the case that nobody can or that nobody
will be interested in securing the enforcement of the promisor's
promise. Consequently, a loophole is created that enables such
promisors to break their promises with impunity, thus making a
reprehensible and unjustifiable inroad into that basic principle of
contract law that pacta sunt servanda.

(b) Creditor Beneficiaries

According to section 133 of the American Restatement of the Law of
Contracts, a third party beneficiary is a creditor beneficiary, "if no
purpose to make a gift appears from the terms of the promise in view
of the accompanying circumstances and performance of the promise will
satisfy an actual or supposed or asserted duty of the promisee to the
beneficiary ......"

The claim by creditor beneficiaries that benefits conferred upon them
by contracts to which they are strangers should be enforceable rests
on a rationale different from that which we have discussed above in
connection with donee beneficiaries. This rationale is the
desirability of eliminating the needless circularity and multiplicity
of suits that is the result of holding that a creditor beneficiary may
not sue the promisor on a third party beneficiary contract.

Where A owes C and agrees with B that a debt or other contractual
performance due him from B should be paid or rendered to C, if B fails
to pay the money or render the contractual performance due to C, C is
not in as remediless a situation as a donee beneficiary. This is
because C can always fall back on a suit against A and A, in turn, can
sue B for the recovery of the debt or for the contractual performance
due. Thus, because the effect of a creditor beneficiary contract
transaction is that the creditor beneficiary acquires a claim against
two creditors instead of one, if the claim against one of the
creditors (namely B) is not given legal protection, the beneficiary
merely reverts to the status quo ante and can sue his original debtor,
namely A. Since A also can sue B for substantial damages in respect of
his breach of contract, this means that in the end every party pays
his debt or is subjected to remedial action in respect of his non-
performance of his contractual obligation. But this result is
achieved only after needless multiplicity in litigation. Allowing a
direct suit by the third party creditor beneficiary against the
promisor eliminates the need for C to sue A and for A to sue B.

The wisdom and convenience of allowing such direct suit was given
early recognition in American law. In the 1859 New York case of
Lawrence v. Fox,15a creditor beneficiary was allowed to sue on a
contract to which he was not a party. The facts were as follows: One
Holly, at the request of the defendant Fox, loaned him 300 dollars,
informing the defendant that he owed the money to the plaintiff and
had agreed to pay him the next day. The defendant, in consideration of
the loan he received, promised to pay it back to the plaintiff the
next day. When he failed to do this, the plaintiff sued him directly,
although the plaintiff was not a party to the agreement between Holly
and the defendant. The defendant raised two doctrinal objections to
the plaintiff's action, but they were both overruled.

First, the defendant contended that the agreement sued on was void for
want of consideration and, secondly, that there was no privity of
contract between the plaintiff and the defendant. The agreement was
clearly not void for want of consideration since Holly had supplied
consideration to the defendant. The consideration did not move from
the plaintiff, but this did not mean that the agreement was void for
lack of consideration. As regards privity, the Court of Appeals of
New York was prepared in the interest of justice to relax the strict
rigour of the doctrine.

It is intuitively believed that if any Ghanaian businessman were asked
whether in a fact situation such as that in Lawrence v. Fox the third
party should be allowed to sue the promisor, his answer would most
likely be in the affirmative. Direct enforceability by a creditor
beneficiary is commercially convenient, since it saves the promisee
the trouble of a lawsuit and has no significant social or commercial
disadvantage. The received law on third party contractual rights does
tend to impose an unnecessary doctrinal restriction on the freedom of
action of businessmen. It might be thought that suits between third
party beneficiaries and promisors under contracts to which they are
strangers are not such a frequent feature of the business scene as to
make the enforceability of third party contractual rights a necessary
part of a legal framework that is adequate to meet the requirements of
businessmen. But, in trying to devise and maintain a commercial legal
framework whose total effect is to sustain the confidence of
businessmen and which enables them to achieve their business
objectives, no effort should be spared in making all the specific
doctrines and detailed rules of the law responsive to the needs of the
business community. However, the received law on third party
contractual rights does have a tendency to thwart the reasonable
expectations of businessmen who have deliberately agreed that a
creditor beneficiary should enjoy certain rights under their contract.
It is an important function of the law of contract to build up
confidence in businessmen that they can depend on the courts to
enforce promises made for their benefit. To refuse to enforce such
promises on behalf of third party beneficiaries is thus to undermine
this important function of contract law.

(c) Incidental Beneficiaries

It is hoped that the discussion above has established the need for
allowing third party beneficiaries of the kind described above to sue
on contracts that purport to confer benefits on them.16 The doctrine
of privity of contract buttresses the concept of freedom of contract
by ensuring that a contractual party is liable on contract only to
persons whom he himself has chosen to deal with. Also, contractual
liability would be too onerous, if the privity doctrine did not
exist. Unforeseen plaintiffs might emerge to sue the promisor on some
benefit or other that they would have received, had the promisor
performed his promise. The privity doctrine is thus not without a
social function. Consequently in the endeavour to make third party
rights enforceable, care has to be taken that the doctrine is not
wholly swept away.

In the U.S.A., a way of limiting the inroad made into the doctrine of
privity of contract by the enforcement of third party rights has been
to recognise a category of "incidental beneficiaries" who may not
enforce contracts to which they are not parties. As Corbin has written,
17 the term incidental beneficiary is used as:

"a sort of omnium gatherum and is not very clearly descriptive; but it
is used in default of better. It can be defined only by a statement
that negatives the existence of gift and debt: Incidental
beneficiaries are all those who are not donees or creditors of the
promisee."

In other words, if the promisee has no intent either to confer a gift
on the beneficiary or to discharge a legal duty owed to him, then such
beneficiary is an incidental beneficiary.

An American case illustrative of who is an incidental beneficiary is
Moch Co. v. Rensselaer Water Co.18 In this case, a waterworks company
entered into a contract with the city of Rensselaer for the supply of
water during a term of years. The company agreed to supply the city
with water for, inter alia, fire hydrants, sewer flushing and street
sprinkling. The plaintiff owner of a warehouse claimed that it had
been destroyed by a fire that could have been put out, had the
defendant company adequately supplied the city's fire hydrants with
water. He therefore claimed that he had been injured by the defendant
company's breach of its contract with the city and he sued on this
contract as a third party beneficiary.

The Court of Appeals of New York, in an opinion delivered by the
famous Cardozo C.J., admitted that "In a broad sense it is true that
every city contract, not improvident or wasteful, is for the benefit
of the public." But he insisted that,

"More than this, however, must be shown to give a right of action to a
member of the public not formally a party. The benefit, as it is
sometimes said, must be one that is not merely incidental and
secondary... It must be primary and immediate in such a sense and to
such a degree as to bespeak the assumption of a duty to make
reparation directly to the individual members of the public if the
benefit is lost."

He gave some examples to illustrate the principle that he enunciated.
He said:

"A promisor undertakes to supply fuel for heating a public building.
He is not liable for breach of contract to a visitor who finds the
building without fuel, and thus contracts a cold . . . The carrier of
the mail under contract with the government is not answerable to the
merchant who has lost the benefit of the bargain through negligent
delay . . ."

The reason why incidental beneficiaries are not allowed to sue is
clear enough. Incidental beneficiaries are often unforeseen plaintiffs
who come forward to sue from the wide category of people who would be
benefitted in one way or another by the promisor's performance of his
promise. For instance, persons who have purchased tickets for a play
might claim to have a right of action against an actress in the play
for a breach of her contract of service with the theatre company.
Since her promised performance under such a contract would confer the
benefit of entertainment on the ticket-holders, the latter would be
beneficiaries of her contract of service. But such beneficiaries
should obviously not be able to recover against the actress. That
would mean imposing too onerous a liability on her. The social policy
interest in encouraging private economic enterprise requires that an
overburdensome and indefinite risk of liability is not imposed on
promisors. One of the policy underpinnings of English contract
doctrine has been to encourage private economic enterprise by limiting
the risks of financial loss that flow from the non-performance of a
promise. This policy is discernible for instance in Hadley v.
Baxendale.19 This case applies in the area of damages the same policy
as requires the non-recognition of the claims of incidental
beneficiaries. The law should not make the cost of breach of contract
so heavy as to make businessmen unhappy about entering into contracts.

II. THE GHANAIAN STATUTORY PROVISIONS ON THIRD PARTY CONTRACTUAL
RIGHTS

In 1960, the Ghanaian legislature decided to change the received law
on third party contractual rights. This decision was implemented
through the following sections of the Contracts Act, 1960 (Act 25)20:

"5. (1) Any provision in a contract made after the commencement of
this Act which purports to confer a benefit on a person who is not a
party to the contract, whether as a designated person or as a member
of a class of persons, may, subject to the provisions of this Part, be
enforced or relied upon by that person as though he were a party to
the contract.

(2) Subsection (1) does not apply to—

(a) a provision in a contract designed for the purpose of resale price
maintenance, that is to say, a provision whereby a party agrees to pay
money or otherwise render some valuable consideration to a person who
is not a party to the contract in the event of the first-mentioned
party selling or otherwise disposing of any goods, the subject-matter
of the contract, at prices lower than those determined by or under the
contract; or

(b) a provision in a contract purporting to exclude or restrict any
liability of a person who is not a party thereto."

"6. Where under the provisions of section 5 of this Act a person who
is not a party to a contract is entitled to enforce or rely on a
provision in the contract—

(a) no variation or rescission of the contract shall prejudice that
person's right to enforce or rely on the provision if he has acted to
his prejudice in reliance thereon, unless he consents to the variation
or rescission; and

(b) subject to paragraph (a), any party against whom the provision is
sought to be enforced or relied on shall be entitled to rely on or to
plead by way of defence, set-off, counterclaim or otherwise any matter
relating to the contract which he could have so relied on or pleaded
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defined limit. They both make the third party's rights "subject to
the equities," as it were. They both contemplate contracts which have
purported to confer a benefit on a third party, but while the English
proposal demands that the contract must have by its express terms
purported to confer the benefit, the Ghanaian provision contains no
such reference to "express terms." Does this mean then that under the
Ghanaian provision, if a contract does not contain an express clause
conferring a benefit on a third party, but an intention to confer such
a benefit can be implied, such benefit may be enforceable?

An example will illustrate the situation envisaged. An ice-cream
vendor goes into a home. A boy who desires some of the ice-cream
implores his father to buy him some. This the father does. In the sale
transaction between the father and the ice-cream vendor, however, no
express mention is made of the boy, although both parties realise that
the ice-cream is meant for his consumption. Now, if it should so
happen that the ice-cream is unfit for human consumption because of
the use of a poisonous substance to flavour it, an issue would be
raised as to whether the boy could sue on the contract of sale between
his father and the vendor. Would the boy be entitled to enforce the
condition of quality implied into the contract of sale by the Sale of
Goods Act, 1962?22

By the contract of purchase, the father clearly intended, to the
knowledge of the vendor, to confer a benefit on the boy. From the
circumstances surrounding the contract, an intention to confer a gift
on the boy can probably be implied. Can such a benefit be enforced in
Ghana by the boy, even though he was not expressly referred to in the
contract ?

The answer to this question is to be found in what interpretation the
courts will put on the phrase "any provision" in section 5 (1) of the
Contracts Act. Does "any provision" include an implied provision? Is
it meaningful to speak of an implied provision? It seems to the
present writer that the phrase "any provision" is used synonymously in
the Act with the phrase "any term." Since it is trite knowledge that
terms in a contract may be express or implied, it is submitted that
the phrase "any provision" should be construed to include both express
and implied provisions purporting to confer a benefit on third
parties.

The fact that in Ghana third party beneficiary rights may be conferred
by implication may lead to some difficult problems in drawing the line
between an implied donee beneficiary and an incidental beneficiary.
The contract would contain no express reference to a beneficiary in
either category. But the fact that the donee is not expressly
mentioned will not be fatal to his claim. But how does one
distinguish such an unmentioned donee from an incidental beneficiary
who would in fact be benefitted by the performance of the contract but
on whom the contracting parties have not purported to confer a
benefit? The answer is by examining the circumstances surrounding the
contract. In the case of the donee beneficiary circumstantial evidence
must be found of an intent to confer a gift on him. The difficulty in
the line drawing will lie in interpreting these surrounding
circumstances.

In the immediately preceding discussion, it will be noticed that there
has been a resort to the American classification of third party
beneficiaries. This is because the present writer believes that
classification to be relevant to the Ghanaian legal position.
Although section 5 (1) of the Contracts Act, in making third party
contractual rights enforceable in Ghana, does not speak in terms of
donee beneficiaries, creditor beneficiaries and incidental
beneficiaries, it is submitted nonetheless that only donee
beneficiaries and creditor beneficiaries may enforce contracts to
which they are not parties.

A moment's reflection will lead to a confirmation of this view.
Section 5 (1) requires that the contract must have purported to confer
a benefit on the third party. This, in effect, means that the promisee
must have an intention to confer a benefit on the third party, since
third party beneficiary contracts usually seek to implement primarily
the promisee's intention with regard to the beneficiary. It is
submitted that an intent to confer a benefit on a third party must
mean either an intent to confer a gift on him or an intent to
discharge an obligation owed to him. Where neither of these two
intents exist, there probably is no intent to confer a benefit.

Thus, although section 5 (1) of the Contracts Act does not expressly
refer to the American categories of third party beneficiaries, it is
believed that in Ghana, as in most American states, only donee and
creditor beneficiaries can sue on contracts. Incidental beneficiaries
of contracts cannot sue on them in Ghana. This is evident from the
discussion above and is also borne out by the memorandum to the
Contracts Bill, 1960 which states that section 5 (1) of the Act "does
not apply merely because a contract in fact confers a benefit on a
third person." This is clear guidance that incidental beneficiaries
cannot sue on contracts in Ghana. Also, the effect of the recent case
of Yeboah & Anor. v. Krah23 seems to be that the victim of a road
accident is usually an incidental beneficiary merely of the contract
of insurance between a negligent motorist and his insurers and
consequently cannot sue on that contract.

In Yeboah & Anor. v. Krah the plaintiff-respondent sought to enforce
against the alleged insurers of the first defendant, whose vehicle had
negligently caused damage to the plaintiff's vehicle, a judgment
obtained against the first defendant. One of the arguments put
forward by the plaintiff was that the motor insurance policy conferred
an enforceable benefit on persons injured by the assured. It was
contended on his behalf that a third person whose claim against an
assured is to be met by insurers was a person for whose benefit the
contract of insurance was made. Consequently, the argument continued,
he was entitled to enforce the contract against the insurers under
section 5 (1) of the Contracts Act.

This argument was rejected in the following terms by Amissah J.A.
delivering the opinion of the Court of Appeal:

". . . a contract of insurance of the kind under consideration is not
a contract for the benefit of a third person. It is a contract to
indemnify the assured. Whether or not the insurers pay up on the
policy, the third party is entitled to his damages as against the
assured if the third party had suffered injury as a result of the
negligence of the assured. The injured party's right to be
compensated for his injury is against the negligent person and is
wholly independent of the existence of a contract of insurance between
that person and the insurer. Of course legislation in the nature of
the Third Party Act may give the injured party a more or less direct
recourse against the insurer . . ."

What Amissah J.A. probably means when he asserts that the contract of
insurance is not one for the benefit of a third person is that there
is no intention on the part of the contracting parties to confer a
benefit on the victims of the assured's negligence. The contracting
parties' intention is to confer the benefit of indemnity on the
assured. The learned judge does not probably mean to say that an
injured third party would not in fact be benefited by the insurers'
due performance of their obligation of indemnifying their assured. But
such benefit in fact makes the third party a mere incidental
beneficiary who cannot sue because there is no intent to confer a
benefit on him.

This interpretation of the intention of the parties to the contract of
insurance is undoubtedly correct with regard to the standard
provisions governing liability to third parties that are to be found
in most motor insurance policies currently in use in Ghana. For
instance, the relevant clause in the author's own motor policy reads
as follows:

"Subject to the Limits of Liability the Company will indemnify the
Insured in the event of accident caused by or arising out of the use
of the Motor against all sums including the claimant's costs and
expenses which the Insured shall become legally liable to pay in
respect of

(a) death of or bodily injury to any person except where such death or
injury arises out of and in the course of the employment of such
person by the Insured . . .

(b) damage to property other than property belonging to the
Insured . . ."

Such a provision obviously does not purport to confer a benefit on the
victim of the assured's negligence, although the insurer's performance
of his obligation to his assured is likely to benefit such a victim. A
victim cannot therefore sue on such a contract as a third party
beneficiary. However, it is clearly possible for the parties to the
insurance contract so to frame their contract as to give a direct
contractual right against the insurer to victims of the insured's
negligence. Thus, it may be that the passage quoted from Amissah
J.A.'s judgment is a little misleading in that it tends to suggest
that such a third party right can only be conferred by statute.

The parties to the contract of insurance may agree that the victims
of the assured's negligence should have the right to receive
compensation directly from the insurance company for their injury.
Such a contract would make such victims creditor beneficiaries of the
contract of insurance and they would therefore be able to sue on the
contract pursuant to section 5 (1) of the Contracts Act. Of course,
such a right of action would be subject to any defences that the
insurers may have against their insured. This we will see in our
discussion of section 6 (b) below.

The only other Ghanaian case known to the author in which there has
been any consideration of the effect of section 5 of the Contracts Act
1960 is Koah v. Royal Exchange Assurance.24 This was a case involving
the so-called "named driver clause" in a third party motor insurance
policy. By this clause is meant that the contract provides insurance
cover for only a named driver. Any other person who drives the car is
outside the risk assumed by the insurers. Such other drivers are
third parties to the contract between the named driver and his
insurers. Section 5 (1) cannot help such third parties to sue on a
named driver policy because, as Archer J., as he then was, explains in
this case, the contract does not purport to confer a benefit on anyone
apart from the named driver.

The change made by section 5 (1) in the Ghanaian law on third party
contractual rights logically demands an amendment of that aspect of
the traditional consideration doctrine which has affected the
enforceability of third party rights. This consequential amendment is
made by section 10 of the Contracts Act which is set out above. Under
traditional English contract doctrine, a promisee cannot sue on a
promise for which he has supplied no consideration. This rule is often
expressed as follows: consideration must move from the promisee.
Section 10 abolishes this rule. The purport of this section seems to
be that even though a third party has not himself supplied
consideration for a promisor's promise, he can nonetheless sue on it
provided that someone else has supplied consideration for the promise.

It should be noted that section 10 does not abolish the requirement
of consideration altogether. Under section 6 (b), a promisor will be
entitled to refuse to perform a contract which is meant to confer a
benefit on a third party, if he receives no consideration from the
other contracting party. Thus in a contract between A and B for the
benefit of C, C cannot sue on the contract unless A has supplied
consideration to B in exchange for B's promise to confer a benefit on
C. Where, however, A has supplied such consideration, it is no bar to
C's action against B for the latter to say that C has supplied no
consideration. In this connection, it would seem that the word
"promisee" in the context of section 10 means the person for whose
benefit a promise is made, and not the person to whom the promise is
made.

From the discussion above, it is clear that in Ghana the law
recognises a ius quaesitum tertio arising by way of contract, where
there is an intention to confer a benefit on a third party. However,
section 5 (2) lays down two important exceptions to this rule. It is
interesting to note that even Lord Denning, that outspoken champion of
the enforceability of third party contractual rights, thinks that
third party rights of the kind mentioned in section 5 (2) should not
be enforceable. In the latest in the line of cases in which Lord
Denning has tried to establish that third party contractual rights are
enforceable in English law, he had the following to say a propos the
subject-matter of section 5 (2)25:

"Where a contract is made for the benefit of a third person who has a
legitimate interest to enforce it, it can be enforced by the third
person in the name of the contracting party . . . It is different when
a third person has no legitimate interest, as when he is seeking to
enforce the maintenance of prices to the public disadvantage, as in
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. or when he is
seeking to rely, not on any right given to him by the contract, but on
an exemption clause seeking to exempt himself from his just
liability. He cannot set up an exemption clause in a contract to
which he was not a party: see Midland Silicones Ltd. v. Scruttons
Ltd."

Third Party Rights in Resale Price Maintenance Agreements

It has been the policy of the common law to encourage freedom of
competition in trade. It has thus frowned on contracts whose purpose
has been to restrict such freedom of competition. Thus, as far back
as 1758, Lord Mansfield had declared of an agreement by which two
proprietors of salt-works had undertaken not to sell salt below a
stipulated fixed price that ". . .at what rate soever the price was
fixed, high or low, made no difference, for all such agreements were
of bad consequence and ought to be discountenanced"26 Similarly an
American court had declared27: "But agreements or combinations between
dealers, having for their sole purpose the destruction of competition
and the fixing of prices are injurious to the public interest and
void."

It is this concern to control the freedom of contract of businessmen
with respect to such agreements that are injurious to consumers'
interests which is reflected in section 5 (2) (a) of the Contracts
Act. The reason why section 5 (2) (a) is necessary is that although
price maintenance agreements may be void at common law if they are in
excessive and unreasonable restraint of trade, they are regarded by
the courts as enforceable where the contracting parties are able to
show that their particular agreement is not in excessive restraint of
trade and that the restriction on freedom of competition involved in
their agreement is reasonable and compatible with the interests of the
public.28 Thus, there are price maintenance agreements which are
enforceable. The effect of section 5 (2) (a) is that such agreements
can be enforced by only the parties to them. Third parties may not
sue to enforce such agreements in restraint of trade. The intention
of the legislature here is clearly to limit the lawful scope of
enforceable price maintenance agreements.

The facts of the well-known case of Dunlop v. Selfridge29 provide an
illustration of what is meant by a resale price maintenance agreement
that purports to confer a benefit on a third party. In this case, the
plaintiff manufacturer of tyres entered into a contract with a dealer
in tyres under which the dealer undertook, among other things, not to
sell tyres to certain kinds of customers at prices below the current
list prices of the manufacturer. The dealer could, however, sell at a
discount to certain classes of customers, which included the defendant
in the case, provided that the dealer obtained from such customers an
undertaking not to sell the plaintiff's products to private customers
at prices below the plaintiff's list prices. The present action was
brought on the contract between the dealer and his customer, the
plaintiff maintaining that the defendant customer had broken his
undertaking not to sell the plaintiff's products below his list
prices. The contract between the dealer and the defendant customer
provided that, in such situations, the defendant was to pay to the
plaintiff £5 for each product of the plaintiff's sold below the list
price.

Recovery was denied the plaintiff on the general ground set out at the
beginning of this article, namely that there was no ius quaesitum
tertio arising by way of contract in English law. Because recovery
was denied on this doctrinal ground, no need was felt to discuss the
more specific issue of policy raised by the resale price maintenance
agreement involved in the case. In Ghana although the wider rule in
Dunlop v. Selfridge has been abolished, the legislature has been
convinced, presumably by reasons of economic policy, of the need to
retain the rule denying third parties the right to enforce retail
price maintenance agreements.

No Conferment of Immunity by Contract on a Third Party Permitted

In Mersey Shipping and Transport Co. Ltd. v. Rea Ltd.30 is to be found
an obiter dictum of Scrutton L.J. that: "Where there is a contract
which contains an exemption clause, the servants or agents who act
under that contract have the benefit of the exemption clause. They
cannot be sued in tort as independent people, but they can claim the
benefit of the contract made with their employers on whose behalf they
were acting." This dictum purported to lay down what has subsequently
come to be known as the principle of vicarious immunity.

It is the intention of section 5 (2) (b) to negative the existence of
any such principle in the Ghanaian law. In England itself, Adler v.
Dickson31 and Scruttons v. Midland Silicones32 seem to have re-
established the authority of Dunlop v. Selfridge in this matter of the
availability of exemption clauses to third party beneficiaries.
Indeed, the wonder is that the unmeritorious claims of alleged third
party beneficiaries should ever have been accorded any recognition in
this area. Speaking of the alleged principle of vicarious immunity,
Fullagar J. of the High Court of Australia has said"33:

"This appears to me to be a 'development' of the common law which is
altogether out of character, and which is exactly the opposite of what
one would have expected and felt to be justified. It is all the more
remarkable in view of the fact that the modern tendency has been to
expand the field of liability in tort."

It is bad enough when a contractual party is able to evade his
liability in tort by relying on an exemption clause which may have
been imposed on the other party, but to allow third parties to avail
themselves of the exemption clause is quite undesirable. The policy
behind the exception contained in section 5 (2) (b) is thus sound.

Qualifications on the Enforceability by Third Parties of Contractual
Benefits Purported to be Conferred on them

The general rule embodied in section 5 (1) of the Contracts Act is
further qualified by section 6 of the Act. Section 6 (a) in effect
makes the enforceability of third party contractual rights subject to
the contracting parties' power to amend or rescind the contract,
although this power is in turn made subject to an important
limitation. Section 6 (b) re-affirms the derivative nature of third
party contractual rights.

(a) Power to Amend or Withdraw the Third Party's Rights

It has been mentioned above that section 5 (1) does not distinguish
between donee beneficiaries and creditor beneficiaries. In conformity
with this unified approach to beneficiaries on whom there is an intent
to confer a benefit, section 6 (a) accords the same amount of
protection to creditor beneficiaries as to donee beneficiaries. The
differentiation, made in the American Restatement of the Law of
Contracts between donee beneficiaries and creditor beneficiaries with
regard to the contracting parties' power to change the third party's
rights, is not adopted.

Under section 142 of the American Restatement, the rights of a donee
beneficiary become vested immediately upon the conclusion of the
contract and the contracting parties are powerless to affect them
without the donee's consent. It is believed that this provision over—
protects the donee beneficiary at the cost of an unjust restriction on
the freedom of contract of the contracting parties. Thus, if A takes a
life insurance policy with the B company, naming C as the beneficiary,
A has no power to change the beneficiary under the contract, even
though the beneficiary may have no knowledge of the benefit conferred
on him. Now, probably the chief function of the law of contract is the
protection of reasonable expectations induced by the making of a
promise.34 But here, since C has no knowledge of the promise made for
his benefit, no expectations are induced in him and it seems quite
unjust to deny the insured the power to amend a contract for which he
is furnishing the consideration. The unified Ghanaian approach to both
donee and creditor beneficiaries discussed below is to be preferred to
the Restatement's position.

The unified Ghanaian rule is that where the beneficiary has acted to
his detriment in reliance on the right conferred on him, the
contracting parties may not rescind or vary such right without his
consent. This means that the contracting parties retain their freedom
of contracting to vary their previous contract until the beneficiary
not only knows of the benefit purported to be conferred on him, but
actually acts in reliance on this promised benefit to his detriment.
Thus contracting parties in Ghana have a greater freedom to jeopardise
the enforceability of a third party's contractual right than was
proposed by the English Law Revision Committee in its report which has
been mentioned above. In that report, the contracting parties' power
of cancelling the contract was to be preserved until the express or
implied adoption by the third party of the benefit conferred on him.
Such adoption presumably implies the manifestation by the third party
of his assent. But under the Ghanaian provision, the power of
cancellation is not lost until there has been not only a manifestation
of assent but also an act in reliance on the benefit.

In the American Restatement, this principle of acting in reliance on
the benefit conferred is what is adopted for limiting the power of
rescission of the contractual rights of creditor beneficiaries. A
comparison between the Ghanaian provision and section 143 of the
Restatement reveals certain pertinent issues. The Ghanaian formulation
of the reliance limitation seems not to go far enough for the
protection of beneficiaries in some situations where they may deserve
protection. For instance, if a third party beneficiary, who knows of
the benefit conferred on him and acts in reliance on the benefit
promised him, is ignorant of a prior purported rescission of that
benefit by the contracting parties, will he be entitled to ignore this
purported rescission? Under the American Restatement (section 143),
the beneficiary will be so entitled to ignore the purported rescission
because section 143 provides that the parties may revoke a creditor
beneficiary's right only if he does not bring suit upon the promise or
otherwise materially change his position in reliance thereon before he
knows of the discharge or rescission.

Upon a plain reading of section 6 (a), however, it would not seem that
a similar result can be reached in Ghana. Also, although the
Restatement speaks only in terms of the third party's material change
in position in reliance on the contract, the Ghanaian provision
introduces the further element of prejudice. There has to be
prejudicial reliance by the beneficiary. It is not clear exactly what
is meant by prejudicial reliance. But it may be that the concept may
turn out not to be much different from a material change in position.
In the law of consideration, "detriment" is often used not to refer to
factual detriment but to describe an act, forbearance or promise the
performance of which was not already legally due from the promisee.35
Similarly, it may be that prejudicial reliance can be conceived of as
any act, promise or forbearance done or made in reliance on the
contract which was not already legally due from the beneficiary.

Thus, if there were to be a contract between an uncle and a father by
which the uncle promised the father that he would pay his son N¢1,000,
if the son refrained from drinking and smoking till he was 21 and the
son, learning of this promise, so refrained, there would be
prejudicial reliance within the meaning described above, although the
son's action may in fact have been beneficial, rather than
detrimental, to his health.36 If prejudice is thus understood as
meaning doing, promising or forbearing from doing something in respect
of which there is no obligation to do, promise or forbear from doing,
then prejudicial reliance has virtually the same meaning as a material
change in position.

It is submitted that this is the meaning that should be put on the
concept as used in section 6 (a). This is because such an
interpretation would best promote the function of contract law in the
protection of reasonable expectations flowing from promises. Actual
harm or detriment should not be insisted upon. Where a third party is
induced by a contract to which he is not a party into doing, promising
or forbearing to do what he would not otherwise have done, promised or
forborn from doing, such act, promise or forbearance should be
regarded as sufficient prejudicial reliance for the purposes of
section 6 (a).

On the whole the unified approach of the Contracts Act to the
variation of the rights of both donee beneficiaries and creditor
beneficiaries is to be welcomed. The American differentiated approach
seems to be anomalous. What is the social policy behind making it
permissible for a creditor beneficiary who has not relied on his
rights to be deprived of them, whereas a donee beneficiary in a
similar situation cannot be so deprived? Is the recipient of a gift
entitled to more protection than a creditor receiving payment? The
Ghanaian rule seems to make more sense.

(b) The Derivative Nature of Third Party Rights

Section 6 (b) emphasizes the derivative nature of the rights of third
party beneficiaries. The legal position of such third parties cannot
be better than that of the promisee under the contract. This is
because such third parties derive their legal rights from the promise
made to the promisee. Consequently, all defences, set-offs and
counterclaims that are available against the promisee may be set up by
the promisor in a suit against him by the third party beneficiary of
his promise. Included in the wide range of such defences that may be
available to the promisor is the non-performance of a constructive,
express or implied condition precedent or concurrent to the promisor's
own promise. Thus sometimes third party beneficiaries under executory
bilateral contracts cannot recover damages against promisors under
such contracts because such promisors have not received their
promisees' performance in exchange for the promise sued on by the
third parties. Such promisors are permitted to plead the promisees'
non-fulfilment of the condition precedent or concurrent to the
promisor's performance as a defence.37

CONCLUSION

It is hoped that the discussion in this article has thrown some light
on what contractual benefits are enforceable by third parties in
Ghana. Sections 5 and 6 of the Contracts Act, 1960 contain fairly
sophisticated provisions on the enforceability of third party rights.
However, there is little evidence of what impact these sections have
had on business activity in Ghana. Thus far, no litigation has given
evidence of whether the business community knows of these sections and
has taken advantage of the greater flexibility in the planning and
implementation of business transactions that they have made possible.
The two case38 in which there has been a consideration of section 5 of
the Act have not involved contracts that have been drafted to take
advantage of the Act. All that can be said is that sections 5 and 6
provide Ghanaian businessmen with the opportunity for concluding
complex contractual arrangements that can confer enforceable benefits
on persons who are not parties to such arrangements, and have thereby
enhanced the suitability of the Ghanaian contract law for the
implementation of the commercial and business plans of members of the
Ghanaian business community.

FOOTNOTE

*LL.B (Ghana), LL.M. (Yale), Ph.D.(London); Barrister-at-Law of the
Supreme Court of Ghana and Lecturer in Law at the University of Ghana.

1. Act 25.

2. [1915] A.C. 847 at p. 853.

3. (1861) 1 B. & S. 393; 121 E.R. 762.

4. (1677) 2 Lev. 210; 83 E.R. 523.

5. See, e.g. Smith and Snipes Hall Farm v. River Douglas Catchment
Board [1949] 2 K.B. 500, and Beswick v. Beswick [1966] Ch. 538.

6. In the recent case of Chuba Ikpeazu v. African Continental Bank
Ltd., 1965 N.M.L.R. 374, the Nigerian Supreme Court re-affirmed the
principle asserted by Lord Haldane.

7. See, e.g. Lloyd's v. Harper (1880) 16 Ch.D. 290. Under the trust
device, the promisee is allowed to sue on behalf of the third party as
a trustee.

8. See, e.g. Vandepitte v. Preferred Accident Insurance Corporation of
New York [1933] A.C. 70.

9. Cf. Fuller and Braucher, Basic Contract Law (1964), p. 449.

10. See Corbin on Contracts (1952), s. 774.

11. Contra Treitel, Law of Contract (2nd ed., 1966), p. 476 where the
author says: "If a gratuitous promisee has no right of action, it
would be odd to give one to a gratuitous beneficiary who is not even
the promisee." However, the fallacy of this argument lies in the fact
that a gratuitous promisee sues on a gratuitous promise unsupported by
consideration, whereas a donee beneficiary sues on promise that is
supported by consideration, the only problem being that the
consideration is supplied by somebody else. The fact that the
consideration is supplied by somebody else does not change the fact
that the promise sued on constitutes part of a bargain.

12. However, see Beswick v. Beswick [1968] A.C. 58, and Treitel's
commentary on this case in (1967) 30 M.L.R. at pp. 690-693 where the
suggestion is made that A, that is, the promisee of the contract, can
secure a decree of specific performance in appropriate cases, even
though the benefit of the performance is going to C, the third party.
In the House of Lords, all but Lord Pearce, however, did agree that
the promisee could not recover substantial damages in such third
party contracts, since he sustains no damage himself. However, the
availability of the remedy of specific performance may enable the
promisee to come to the aid of the beneficiary in appropriate cases.

13. (1918) 224 N.Y. 233; 2 A.L.R. 1187.

14. See Part II below.

15. 20 N.Y. 268.

16. Cf. Treitel, op. cit., p. 476—he there agrees that creditor
beneficiaries should have enforceable rights but does not agree that
donee beneficiaries should have such a right.

17. See Corbin, op. cit., s. 779c.

18. (1928) 247 N.Y. 160; 62 A.L.R. 1199.

19. (1854) 9 Ex. 341; 156 E.R. 145.

20. This Act is reported to be the product of P.S. Atiyah, that
renowned contract lawyer.

21. See the Sixth Interim Report of the Law Revision Committee (Cmd.
5449), para. 48. This proposal has been adopted in Ireland, but only
in relation to family contracts. See Dowrick, 21 M.L.R. 98. S. 8 of
the Irish Married Women's Status Act, 1957 reads as follows:

"When a contract (other than a contract to which section 7 applies) is
expressed to be for the benefit of or by its express terms purports to
confer a benefit upon, a third person being a wife, husband or child
of one of the contracting parties, it shall be enforceable by the
third person in his or her own name as if he or she were a party to
it.

(2) The right conferred on a third person by this section shall be
subject to any defence that would have been valid between the parties
to the contract.

(3) Unless the contract otherwise provides, it may be rescinded by
agreement of the contracting parties at any time before the third
person has adopted it either expressly or by conduct."

22. Act 137, s. 13.

23. (1969) C.C. 42. Civil Appeal No. 27/64. Judgment delivered on 23rd
December 1968 by Amissah J.A. on behalf of the Court of Appeal.

24. (1968) C.C. 79; Suit No. 49/1967. Judgment of Archer J., as he
then was, at the High Court, Cape Coast, delivered on 26th April
1968.

25. See Beswick v. Beswick [1966] Ch. 538 at p. 557.

26. See The King v. Norris (1758) 2 Keny. 300; 96 E.R. 1189.

27. See per Hughes J. in Dr. Miles Medical Co. v. John D. Park &
Sons Co. (1911) 220 U.S. 373 (Supreme Court of the U.S.A.)

28. See, e.g. Palmolive Co. (of England) Ltd. v. Freedman [1928] Ch.
264 and English Hop Growers v. Dering [1928] 2 K.B. 174.

29. See note 2, supra.

30. (1925) 21 LI. L.R. 375 at p. 378. See also Elder Dempster & Co.
v. Paterson, Zochonis & Co. [1924] A.C. 522.

31. [1955] 1 Q.B. 158.

32. [1962] A.C. 446.

33. See Wilson v. Darling Island Stevedoring & Lighterage Co., Ltd.
(1956) 95 C.L.R 43 at p. 70.

34. As Corbin has said: "The right of a third party beneficiary
rests chiefly upon the fact that the contract will create reasonable
expectations on his part and will induce him to change his position in
reliance." Corbin, op. cit., s. 775.

35. See Treitel, The Law of Contract (2nd ed., 1966), pp. 46-47.

36. Cf. Hamer v. Sidway (1891) 27 N.E. 256. (Court of Appeals of New
York.)

37. See, e.g. National Bank v. Grand Lodge (1878) 98 U.S. 123 (U.S.
Supreme Court). The Masonic Hall Association had issued certain
bonds. The plaintiff was one of the bond holders. The defendant Lodge
passed a resolution to assume the payment of the bonds issued by the
Association, if the Association would issue stock to the defendant to
the amount of the bonds assumed by the defendants. The plaintiff
bondholder brought this action on the promise contained in this
resolution. But the U.S. Supreme Court refused the plaintiff recovery
on the ground, inter alia, that even if the resolution had been
accepted by the Masonic Association the contract was still executory
and to allow the plaintiff to sue on this executory contract before
defendants had received the stocks they had bargained for would amount
to enforcing the defendants' promise without ensuring that the
condition concurrent of the defendants' performance had been
fulfilled.

38. See Yeboah & Anor.,v. Krah and Koah v. Royal Exchange Assurance
discussed supra.