Scruttons Ltd v Midland Silicones [1961] UKHL 4 (06 December 1961)

Stevedores negligently damaged cargo. They sought to rely on a liability limitation clause in the bill of lading between the cargo owner and carrier. The House of Lords held they could not, as they were not a party to the contract.

Facts

Midland Silicones Ltd (the respondents/cargo owners) were the consignees of a drum of chemicals shipped from New York to London. The contract of carriage was made with the United States Lines (the carriers) and was contained in a bill of lading. This bill of lading included a clause limiting the liability of the carrier to $500 per package. The carriers engaged Scruttons Ltd (the appellants/stevedores) to discharge the cargo in London. While handling the drum, Scruttons’ employees negligently dropped and damaged it, causing loss valued at £593. Scruttons admitted negligence but sought to rely on the $500 limitation clause in the bill of lading to limit their liability, even though they were not a party to that contract.

Issues

The central legal issue was whether the stevedores, who were not a party to the contract of carriage (the bill of lading) between the carrier and the cargo owner, could nevertheless take the benefit of a limitation of liability clause contained within that contract.

Judgment

The House of Lords, by a majority of 4-1, dismissed the stevedores’ appeal, holding that they could not rely on the limitation clause. The majority strongly affirmed the doctrine of privity of contract.

The Majority Opinion

Viscount Simonds, delivering the leading judgment, unequivocally upheld the established principle of privity. He stated:

I come to the first and fundamental question… Is it the law that a person who is not a party to a contract can none the less sue upon it or rely for his protection on its terms… appellants’ counsel… said that the principle of privity of contract was ‘an unjust and inconvenient anachronism’. For him it was a matter of ‘taste’. For me, a matter of legal principle. Learned counsel… was on surer ground when he claimed that the law was not so rigidly set… But, whatever the exceptions, the fundamental principle is, in my opinion, established and the appellants, to succeed, must bring the present case within one of them.

The court considered two main arguments by which the stevedores might be able to claim the benefit of the clause:

1. Agency: The stevedores argued that the carrier had contracted as their agent. This was rejected on the facts, as there was no evidence that the carrier had the authority to act for the stevedores, or that the stevedores had provided any consideration to the cargo owners.
2. Bailment: The argument that the stevedores, as sub-bailees, were entitled to the same protection as the primary bailee (the carrier) was also dismissed.

Lord Reid’s Obiter Dicta

Crucially, Lord Reid, while concurring with the majority, outlined in obiter (non-binding but influential remarks) the conditions under which a stevedore might be able to benefit from such a clause in the future. He suggested a clause could be effective if four prerequisites were met:

(1) that the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability, (2) that the bill of lading makes it clear that the carrier, in addition to contracting for these provisions on his own behalf, is also contracting as agent for the stevedore that these provisions should apply to the stevedore, (3) the carrier has authority from the stevedore to do that, or perhaps later ratification by the stevedore would suffice, and (4) that any difficulties about consideration moving from the stevedore were overcome.

These four points provided a clear roadmap for drafting future clauses, which became known as ‘Himalaya clauses’, to extend contractual protections to third parties like stevedores.

Lord Denning’s Dissent

Lord Denning delivered a powerful dissenting judgment, arguing that the doctrine of privity was an outdated concept that failed to reflect commercial reality. He argued:

It is a fundamental principle of our law that a person cannot sue on a contract to which he is not a party, even though it is made for his benefit. But this does not mean he cannot plead a defence afforded to him by that contract… When a man buys a ticket for a journey, he knows that the railway company will not itself perform the whole contract. It will engage porters, guards and engine drivers… and he is taken to agree that the servants and agents of the company shall have the same protection as the company itself.

He advocated for a rule where a person who is intended to be protected by a contractual clause and has a legitimate interest in relying on it should be able to do so.

Implications

The decision in Scruttons v Midland Silicones was a landmark affirmation of the strict doctrine of privity of contract in English law. It confirmed that, at common law, a contract cannot confer rights or impose obligations on any person except the parties to it. However, the case is equally significant for its practical consequences. Lord Reid’s four-point test laid the foundation for the widespread adoption of ‘Himalaya clauses’ in shipping and other contracts, which are specifically drafted to meet his criteria and extend protections to third-party agents and contractors. The case highlighted the commercial inconvenience of the privity rule, which was eventually addressed decades later by the Contracts (Rights of Third Parties) Act 1999, although this case remains the leading authority on the common law position.

Verdict: Appeal dismissed. The House of Lords held that the stevedores were not a party to the bill of lading and could not rely on the limitation of liability clause contained within it.

Source: Scruttons Ltd v Midland Silicones [1961] UKHL 4 (06 December 1961)