McCullogh v Fernwood Estate Ltd

• Jurisdiction: South Africa
• Judge: Innes CJ, CG Maasdorp JA and De Villiers AJA
• Judgment Date: 26 January 1920
• Citation: 1920 AD 204
• Hearing Date: 12 November 1919
• Court: Appellate Division

Innes, C.J.:

I agree with the judgment of my brother de Villiers upon both points raised in this appeal. Regarding the first I have nothing to add; but in view of the importance and interest of the second, I desire to state shortly my reasons for arriving at the same conclusion. In Tradesmens' Benefit Society v du Preez (5 S.C. 269) the principle was laid down that, given a justa causa, two persons might validly contract for the benefit of a third, and that the

Innes, C.J.

third, on accepting the stipulation, might enforce his rights by action upon the contract itself. By justa causa de Villiers, C.J. and the other members of the Court understood valuable consideration. That view is no longer tenable (Conradie v Rossouw); but its modification does not in any way affect the soundness of the conclusion (Louisa v van der Berg 1 M. 471). The principle is supported by a great weight of Roman-Dutch authority, it was adopted in the Transvaal (Hyams v Wolf & Simpson 1908 T. S. 78), and has been approved by this Court in Mutual Life Insurance Co. v Hotz (1911 AD 556). It may be regarded, therefore, as firmly established in our practice. Conradie v Rossouw, which decided that the doctrine of valuable consideration did not obtain in South Africa, rounded off the position, and resulted in establishing our law of contract on a satisfactory basis. No consideration in the English sense being necessary, it follows that the rule in Tweddle v Atkinson (30 L.J.Q.B. 265) has no application. So that any deliberate agreement neither immoral nor illegal and not invalidated by some special defect may be enforced, even if it is an agreement between two independent parties, for the benefit of a third.

An agreement for the benefit of a third person is often referred to in the books as a stipulation. This must not be taken, however, in the narrow meaning of the Civil law, for in that sense the stipulatio did not exist in Holland. It is merely a convenient expression to denote that the object of the agreement is to secure some advantage for the third person. It may happen that the benefit carries with it a corresponding obligation. And in such a case it follows that the two would go together. The third person could not take advantage of one term of the contract and reject the other. The acceptance of the benefit would involve the undertaking of the consequent obligation. The third person having once notified his acceptance and thus established a vinculum juris between himself and the promisor would be liable to be sued, as well as entitled to, sue. If, for instance, the stipulated benefit took the form of an option to purchase specified property at a certain price, the acceptance of the offer would involve a liability to pay the price which could be legally enforced. Otherwise the third person would be in the position of being able to sue upon a contract involving reciprocal obligations without being liable to an action if he refused to discharge his part of them.

With regard to the nature of contracts for the benefit of third

Innes, C.J.

persons Grotius has some illuminating remarks. In his Introduction (3.3.38) after discussing the rule of the Civil law that a stipulation in favour of another was invalid and enumerating the exceptions to that rule he proceeds: "But besides these exceptions, as equity is more regarded with us than legal subtleties, a third person may accept the promise and thus acquire a right, unless the promisor revokes the promise before such acceptance by such third person." In his subsequent work de Jure Belli et Pacis (Bk. 2. C. 11, par. 18), he deals more in detail with the circumstances under which a promise of this nature may be withdrawn. A distinction must be observed he says, between a promise made to me for the benefit of a third person, and a promise expressed directly in favour of such person (in ipsius nomen collatam cui res danda est). In the former case I having closed with the promise may hold the promisor to it, pending the decision of the third person. The promisor can not revoke his undertaking, but I can in the meantime release him. In the latter case he thinks a further differentiation is necessary. For either the contracting party has authority - special or general - to accept the benefit or be has not. If he has, the transaction is complete and there can be no withdrawal; if he accepts without authority, then he cannot grant remission pending the decision of the third person for whom he purported to act; nor apparently can the promisor withdraw without breaking faith. The significance of this passage, for present purposes, lies in this that Grotius divides all unauthorized agreements for the benefit of third persons into two classes, - those made with principals in favour of third persons, and those made with agents purporting to act on behalf of third persons. Both are valid, and both, if duly accepted or ratified, are enforceable by the third person concerned. The division seems satisfactory; for it is exhaustive and founded on principle. There may be difficulty, however, in ascertaining whether a particular transaction falls under one class or the other, especially where the third person was not in being at the date of the agreement, a position with which Grotius in the passage referred to does not deal. Yet the enquiry is of importance, because the rule that there can be no ratification by a principal not in existence at the date of the transaction is recognised by our law as well as by the law of England. Before endeavouring to assign the present contract to its appropriate class, it will be necessary to ascertain whether the matter is covered by the decision

Innes, C.J.

of the Privy Council in Natal Land Co. v Pauline Colliery (1904 A.C. 120). The English doctrine as laid down in Kelner v Baxter (L.R. 2 C.P. 174) and a series of later cases seems clear. A company cannot ratify a contract made for its benefit before it was formed; nor can it adopt such contract by resolution. A new agreement on identical lines is necessary. The result may sometimes be unfortunate, but follows logically from an application of the doctrine that a principal not in being at the date of an agreement, and therefore not in a position to be bound by it then, cannot ratify it thereafter. Now the rule of English law that there must be in every contract be consideration moving from the promisee, prohibits any agreement for the benefit of and enforceable by a third person, except one made by an agent on his behalf. And such an agreement cannot be entered into on behalf of a non-existent principal. But by our law, as already explained, it is possible to contract independently for the benefit of a third person; it is not necessary to do so as agent. Such a contract when duly accepted by the person for whose benefit it was made may be enforced by him. I know no reason in principle why this right of acceptance should be confined to cases where the third person was in being at the date of the contract. There is nothing in the authorities which points to such a conclusion. The sole test is whether the offer is open. And I cannot see why by our law a man should not himself stipulate in favour of his unborn child, or of the company which he is engaged in bringing into existence, leaving it to the beneficiary in due time to decide whether or not he will accept the benefit offered.

In view of this difference between our law and that of England, the importance of Natal Land Co. v Pauline Colliery becomes...