11.2.1.2 Notes - Lawrence v. Fox | Kessler, Gilmore & Kronman | September 13, 2012

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11.2.1.2 Notes - Lawrence v. Fox

by Kessler, Gilmore & Kronman
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1. In Mellen v. Whipple, 67 Mass. (1 Gray) 317 (1854), discussed in both the majority and dissenting opinions in Lawrence v. Fox, Metcalf, J., suggested that most of the cases in which third parties had been allowed to sue on contracts to which they were not parties fell into two classes:

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 1. . . . [C]ases . . . in which A has put money or property into B's hands as a fund from which A's creditors are to be paid, and B has promised, either expressly, or by implication from his acceptance of the money or property without objection to the terms on which it was delivered to him, to pay such creditors. In such cases, the creditors have maintained actions against the holder of the fund. . . .

2. Cases where promises have been made to a father or uncle, for the benefit of a child or nephew, form a second class, in which the person for whose benefit the promise was made has maintained an action for the breach of it. The nearness of the relation between the promisee and him for whose benefit the promise was made, has been sometimes assigned as a reason for these decisions. And though different opinions, both as to the correctness of the decisions, and as to this reason for them, have often been expressed by English judges, yet the decisions themselves have never been overruled, but are still regarded as settled law. Dutton v. Pool[e], 1 Vent. 318, is a familiarly known case of this kind, in which the defendant promised a father, who was about to fell timber for the purpose of raising a portion for his daughter, that if he would forbear to fell it, the defendant would pay the daughter £1,000. The daughter maintained an action on this promise. Several like decisions had been previously made. Rookwood's case, Cro. Eliz. 164. Oldham v. Bateman, 1 Rol. Ab. 31. Provender v. Wood, Hetl. 30. Thomas's case, Style, 461. Bell v. Chaplain, Hardr. 321. These cases support the decision of this court in Felton v. Dickinson, JO Mass. 287.

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67 Mass. (l Gray) at 322-323.

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Judge Metcalf also referred without disapproval to Brewer v. Dyer, 61 Mass. (7 Cush.) 337 (1851), in which a lessor had been allowed to sue a sublessee who had promised the original lessee to pay the rent and taxes. The cases in which third party suits had been allowed were, he said, exceptions to the general rule and the classes of third parties who should be allowed to bring them should not be expanded. Held, in Mellen v. Whipple, that a mortgagee could not sue the purchaser of the mortgagor's equity of redemption who had promised the mortgagor to pay the mortgage debt. (On "equities of redemption," see Note 1 following the next principal case, Vrooman v. Turner.)

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The Supreme Judicial Court of Massachusetts finally rejected the rule of Mellen v. Whipple in Choate, Hall & Stewart v. SCA Services, Inc. 378 Mass. 535, 392 N.E.2d 1045 (1979). Choate, Hall & Stewart, a law firm, had done extensive legal work for its client, a former director of the defendant corporation. The law firm sued to recover legal fees which it claimed the defendant, in a contract with its former director, had agreed to pay. The trial court granted summary judgment for the defendant on the grounds that Massachusetts law did not give standing to third party beneficiaries. In reversing the trial court, Kaplan, ]., noted that "this court has in fact frequently recognized the right of suit of creditor beneficiaries . . . but it has been in the form of 'exceptions' to . . . the supposed general prohibitory rule of the Mellen case." Judge Kaplan characterized the court's endorsement of the doctrine of third party beneficiaries in the Choate, Hall case as "a long anticipated but relatively minor change in the law of the Commonwealth."

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The Massachusetts court's long resistance to third party beneficiaries may be some indication of its instinctive feeling for logical consistency, expressed elsewhere in the same court's rejection of the anticipatory breach idea (compare Daniels v. Newton, supra p. 1270).

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2. Judge Metcalf might have confined the classes of third party beneficiaries even more narrowly than he did in Mellen v. Whipple if he had been as well up on English case law as Comstock, J., dissenting in Lawrence v. Fox. For the overruling in later cases of Dutton v. Poole, on which Metcalf relied, see Comstock's opinion. Price v. Easton, 4 B. & Ad. 433, 110 Eng. Rep. 518 (K.B. 1833), is sometimes taken as the definitive rejection in English law of third party beneficiary doctrine. The rule that beneficiaries cannot sue on contracts to which they are not parties has come to be referred to in England as the rule of Tweddle v. Atkinson, 1 B. & S. 393, 121 Eng. Rep. 762, 30 L.J.Q.B. 265, 4 L.T. 468, [1861-1873] All KR. 369 (Q.B. 1861). (According to the Chicago Note cited at the end of this Note, the case is reported with "considerable variation" in the several collections of reports.) It has, however, long been a commonplace (at least in American legal writing) to point out that English courts, while rejecting the beneficiary doctrine, have achieved results quite like those reached in this country by a somewhat tortured manipulation of trust theory. See 4 Corbin, ch. 46, which first appeared as an article in 46 L.Q. Rev. 12 (1930). It has been said that, after Professor Corbin's article appeared, the English courts were, at least for a while, somewhat more reluctant than they had been to protect contract beneficiaries by calling them trust beneficiaries.

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The current state of English law on third party beneficiaries was inconclusively reexamined in Beswick v. Beswick, [1968] A.C. 58. The facts were that Peter Beswick had entered into an agreement with his nephew under which Peter turned his small trucking business over to the nephew who promised, among other things, that in the event of Peter's death he would pay Peter's widow an annuity. Peter having died, the nephew, after making one payment on the annuity, refused to make any more payments. Mrs. Beswick brought an action to compel payment of the annuity, claiming that she was entitled to a decree of specific performance either on the ground that she was the beneficiary of the contract between her late husband and the defendant or on the ground that, as executrix under her late husband's will, she could bring the action for the estate. The ultimate disposition of the case in the House of Lords was that she could bring the action in her capacity as executrix, so that it was unnecessary to decide whether, apart from that happy circumstance, she could have brought it in her individual capacity as a beneficiary. However, in the Court of Appeal, [1966] Ch. 538, [1966J 3 All KR. 1, Lord Denning, M.R., had chosen to make the case a vehicle for reexamination of English third party beneficiary doctrine. Lord Denning, who had long been known as an advocate of the doctrine, wrote an elaborate opinion in which he argued that Dutton v. Poole had never in fact been overruled and that, both at common law and in equity, suits by beneficiaries were recognized in England. Even if that were not so, he went on, a provision in the Law of Property Act, 1925, had, perhaps by inadvertence, authorized suits by contract beneficiaries. On appeal to the House of Lords counsel for Mrs. Beswick abandoned the argument that English law recognized actions by beneficiaries, which seems rather hard on Lord Denning, and were duly congratulated for that wise decision in several of the opinions delivered in the House. Counsel did argue the point based on the Law of Property Act, 1925; all the opinions in the House of Lords were devoted, in large part, to demonstrating that the 1925 Act had had no such effect, intended or unintended. There was, thus, little discussion of the arguments advanced by Lord Denning, beyond rather casual statements that his historical reconstruction of English law had not so much as a leg to stand on. That is not to say that the members of the House of Lords considered the third party beneficiary idea noxious or evil. Lord Reid, for example, noted that in 1937 a "strong" Law Revision Committee had recommended the enactment of a statute providing that: "Where a contract by its express terms purports to confer a benefit directly on a third party it shall be enforceable by the third party in his own name. . . . " Nothing was ever done in Parliament about the Law Revision Committee's recommendation. In his Beswick opinion, Lord Reid commented: "If one had to contemplate a further long period of Parliamentary procrastination, this House might find it necessary to deal with this matter; but if legislation is probable at an early-date, I would not deal with it in a case where that is not essential." His reference to the probability of an early legislative solution was to the work of the Law Commission which is currently engaged in the ambitious task of preparing a codification of the English law of obligations and had announced that the third party beneficiary problem was among the items which it proposed to consider (see the Editorial Note to the report of the Beswick case in the Court of Appeal, [1966] 3 All KR. 1, 2).

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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.

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The history of the matter is traced and the Beswick case analyzed in an excellent Note, Third Party Beneficiary Contracts in England, 35 U. Chi. L. Rev. 544 (1968).

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Continuing dissatisfaction with the English law on third party beneficiaries was again voiced in Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd., [1980] 1 All KR. 571. Lord Scarman, recalling Lord Reid's reference to "Parliamentary procrastination," commented: "the Committee reported in 1937; Beswick v. Beswick was decided in 1967. It is now 1979; but nothing has been done. If the opportunity arises, I hope the House will reconsider Tweddle v. Atkinson and the other cases which stand guard over this unjust rule."

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3. In National Bank v. Grand Lodge, 98 U.S. 123 (1878), it appeared that the Masonic Hall Association had issued bonds. The Grand Lodge adopted a resolution that the Lodge would assume the payment of the bonds issued by the Association on condition that the Association issue its stock to the Lodge in the amount of the bonds whose payment was assumed. The Bank, a bondholder, brought action against the Lodge to compel the payment of bond coupons. It did not appear that the Association had accepted the offer made by the Lodge or that stock of the Association had ever been issued to the Lodge. At trial the jury. was directed to enter a verdict in favor of the Lodge. This disposition of the case was affirmed in the Supreme Court. Justice Strong commented on the third party beneficiary doctrine in the following passage:

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We do not propose to enter at large upon a consideration of the inquiry how far privity of contract between a plaintiff and defendant is necessary to the maintenance of an action of assumpsit. The subject has been much debated, and the decisions are not all reconcilable. No doubt the general rule is that such a privity must exist. But there are confessedly many exceptions to it. One of them, and by far the most frequent one, is the case where, under a contract between two persons, assets have come to the promisor's hands or under his control which in equity belong to a third person. In such a case it is held that the third person may sue in his own name. But then the suit is founded rather on the implied undertaking the law raises from the possession of the assets, than on the express promise. Another exception is where the plaintiff is the beneficiary solely interested in the promise, as where one person contracts with another to pay money or deliver some valuable thing to a third. But where a debt already exists from one person to another, a promise by a third person to pay such debt being primarily for the benefit of the original debtor, and to relieve him from liability to pay it (there being no novation), he has a right of action against the promisor for his own indemnity; and if the original creditor can also sue, the promisor would be liable to two separate actions, and therefore the rule is that the original creditor cannot sue. His case is not an exception from the general rule that privity of contract is required. There are some other exceptions recognized, but they are unimportant now. The plaintiff's case is within none of them.

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Id. at 124-125.

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4. In a brilliant article on the evolution of third party beneficiary doctrine, Professor Waters throws some additional light on the curious facts in Lawrence v. Fox (footnotes have been omitted):

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The mystery of Lawrence v. Fox is why Lawrence chose the tortuous route of suing Fox, with whom he had not dealt, rather than sue Holly, who was, it appears, his debtor. . . . From the records of the case, we learn that "Holly" was in fact one Hawley, referred to in the complaint as Samuel Hawley. The Buffalo census of 1855 lists no Samuel Hawley, but of the eighteen Hawleys who are listed, only one appears to have had sufficient means to have been involved in a three hundred dollar cash transaction. He was Merwin Spencer Hawley, a prominent merchant. In 1856, Hawley was President of the Buffalo Board of Trade, an organization with which Fox, at some point, was also connected. It is admittedly possible that the Hawley who dealt with Fox, and who was allegedly indebted to Lawrence, was another Hawley from out of town, or out of state. That would explain his absence from the census and from the courtroom. But there are indications of other reasons why Lawrence may have avoided suing Hawley, even If he was affluent and available. Those reasons — which I shall deal with shortly — taken together with the fact that Merwin Hawley was a wealthy Buffalonian who moved in the same social circles as Arthur Fox make it more likely that he is the Hawley of Lawrence v. Fox. The assumption that Hawley was affluent and available in Buffalo when Lawrence sued Fox does nothing, however, to solve the mystery of why Lawrence chose not to sue him. The solution to that mystery lies in the nature of Lawrence's transaction with Hawley, of which Hawley's dealings with Fox on the next day are highly suggestive.

 In 1854, when the transaction took place, three hundred dollars was a very large amount of money. Even among successful entrepreneurs, a loan the size of Hawley’s to Fox, to be repaid a day later, must have been out of the ordinary. At trial in the Superior Court in Buffalo, Fox's attorney, Jared Torrance, shed some light On the nature of that transaction. The only witness in the case was William Riley, by whom Lawrence's attorney, Edward Chapin, had proved that Hawley paid three hundred dollars to Fox; that Hawley told Fox that he, Hawley, owed that amount to Lawrence; and that Fox promised Hawley that he would repay that amount to Lawrence. On cross-examination, Torrance elicited four facts: that Lawrence was not present when Hawley made the loan to Fox; that the deal took place at Mr. Purdy Merritt's on Washington Street; that there were "two or three persons present . . . doing nothing but standing near them"; and that Hawley counted out the money as he handed it to Fox.

The first fact, that Lawrence was not present, formed the basis of Fox's privity defense. This defense makes sense only in an action based on contract, a point to which we shall return. For now, it is the other three facts — the location, the bystanders, and the cash being counted out — that are noteworthy, for they suggest the milieu in which the transaction took place, and help to explain its character.

William Riley, the witness, was a horse dealer. He did his business near the canal, the life line of Buffalo's then-thriving commerce. Not many steps away was Mr. Purdy Merritt's establishment, where the transaction took place; Merritt was also a horse dealer. Torrance's cross-examination presented a more complete picture: two well-to-do merchants in a horse dealer's establishment down by the canal; a large amount of cash changing hands;. and several other people present, loitering. Of these facts, not the least significant was the location:

 Canal Street was more than a street. It was the name of a district, a small and sinful neighborhood. . . . As late as the 1800's, there were ninety-three saloons there, among which were sprinkled fifteen other dives known as concert halls plus sundry establishments designed to separate the Slicker from his money as swiftly as possible, painlessly by preference, but painfully if necessary. . . . It must have been an eternal mystery to the clergy and the good people of the town why the Lord never wiped out this nineteenth century example of Sodom and Gamorrah with a storm or a great wave from Lake Erie.

 In his cross-examination of Riley, Attorney Torrance had gone as far as he could go to set the scene for what he then sought to prove directly, also by William Riley: that Hawley lent the money to Fox for Fox to gamble with it, and that this unlawful purpose was known to Hawley.

Trial Judge Joseph Masten did not, however, permit Riley to testify to the alleged link with gambling. Attorney Chapin, for Lawrence, successfully objected on two grounds, neither of which bears upon the probable truth or untruth of the evidence that Riley was prepared to give. As to that question, the facts that Torrance had already elicited do suggest a setting in which gambling could have been taking place. But there is one more fact, this one uncontroverted, that is entirely consistent with the allegation of a connection with gambling and is difficult to explain otherwise. The fact — the central mystery of this case — is that Lawrence chose to sue not his debtor, Hawley, but his debtor's debtor, Fox. If, as seems to be the fact, Hawley was a person of considerable wealth in Buffalo, and if, as alleged, he owed three hundred dollars to Lawrence, then Lawrence must have had compelling reason to neglect the obvious action — suing Hawley — in favor of the much more difficult task of seeking recovery from Fox. A gambling debt would have presented just such a reason. If Hawley's debt to Lawrence from the day before, in the round sumn of three hundred dollars, was itself the outcome of gambling and thus unenforceable at law, Lawrence was well advised to look for someone other than Hawley to sue. Furthermore, if we look to the law of gamblers rather than the law of commerce, it is clear that Fox, and not Hawley, was both the villain and the obvious person to pursue.

Commercial transactions were not then and are not now structured in such a way as to leave a creditor with no better means of recovery than to sue his debtor's debtor. The series of events described in Lawrence v. Fox makes no commercial sense. Had Hawley's dealings with Fox conformed to the norms of commercial behavior, Hawley would have requested a negotiable instrument either made out to Lawrence, or to be endorsed in his favor, in return for his loan to Fox. And had Lawrence's dealings with Hawley been of a kind condoned and upheld by the law of the land, then Lawrence would surely have sued Hawley, and not Fox. It is not surprising, therefore, that there was no theory of recovery in the law of contract by which Lawrence could collect from Fox.

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 Waters, The Property In the Promise: A Study of the Third Party Beneficiary Rule, 98 Harv. L. Rev. 1109, 1123-1127 (1985).

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June 02, 2014

11.2.1.2 Notes - Lawrence v. Fox

11.2.1.2 Notes - Lawrence v. Fox

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