PART III

THE OPERATION OF CONTRACT

275. The problems stated. We come now to deal with the effects of a valid contract when formed, and to ask, To whom does the obligation extend? Who have rights and liabilities under a contract?

And then this further question arises, Can these rights and liabilities be assigned or pass to others than the original parties to the contract?

In answer to these questions we may lay down two general rules.

(1) No one but the parties to a contract can be bound by it or entitled under it.1

(2) Under certain circumstances the rights and liabilities created by a contract may pass to a person or persons other than the original parties to it, either (a) by act of the parties, or (b) by rules of law operating in certain events.

These two rules seem at first to look like one rule subject to certain exceptions, but they are in fact distinct. The parties cannot, by their agreement, confer rights or impose liabilities, in respect of the agreement, upon any but themselves. But they may by certain methods and under certain circumstances drop out of the obligation so created, and be replaced by others who assume their rights or liabilities under the contract.

Thus (1) If John Doe contracts with Richard Roe, their contract cannot impose liabilities or confer rights 2 upon John Styles.

(2) But there are circumstances under which John Doe or Richard Roe may substitute John Styles for himself as a party to the contract, and there are circumstances under which the law would operate to effect this substitution.

1, 2 In the United States generally John Doe and Richard Roe may by their contract confer rights upon John Styles. See post, sec. 284.

CHAPTER I

The Limits of the Contractual Obligation

276. General rules. The general rule that a person who is not a party to a contract cannot be included in the rights and liabilities which the contract creates cannot sue or be sued upon it is an integral part of our conception of contract. A contract is an agreement between two or more persons, by which an obligation is created, and those persons are bound together thereby. If the obligation takes the form of a promise by A to X to confer a benefit upon M, the legal relations of M are unaffected by that obligation.' He was not a party to the agreement; he was not bound by the vinculum juris which it created; the breach of that legal bond cannot affect the rights of a party who was never included in it.

Nor, again, can liability be imposed on such a third party. It is an essential feature of contract as opposed to other forms of obligation, that the restraint which it imposes on individual freedom is voluntarily created by those who are subject to it — that it is the creature of agreement.

277. Exceptions: agency and trust. The relation of principal and agent may from one point of view be held to form an exception to these rules. It needs at any rate a separate chapter.'

A trust has this in common with contract, that it originates in agreement, and that among other objects it aims at creating obligations. If we could place a trust upon the precise footing of contract we might say that it formed a very real and substantial exception to the general rule which we have laid down. Doubtless the creator of a trust and the trustee do, by agreement, bring rights into existence which a third party, the cestui que trust, may enforce. But we will set aside trusts from

1 American students must note from the outset of this chapter that the law in most of the states is contrary to the law of England upon this point. See post, sec. 284 et seq.

2 Certainly the case of an undisclosed principal who may sue and be sued upon a contract between his agent and a third person is a clear exception to both rules. See Huffcut on Agency, §§ 118-122.

A trust is the obligation of one holding the legal title to property to account in equity to him who has the beneficial interest. Beers v. Lyon,

the discussion, and with reason. For contract differs from other forms of agreement in having for its sole and direct object the creation of an obligation. The contractual obligation differs from other forms of obligation mainly in springing from the voluntary act of the parties obliged. A trust and the obligations resulting from a trust correspond to neither of these characteristics. The agreement which creates a trust has many other objects besides the creation of obligations, and these objects may include conveyance, and the subsequent devolution of property. The obligation which exists between trustee and cestui que trust does not come into existence by the act of the parties to it. It is better, therefore, having noted the similarities between the contractual and the fiduciary obligation, to dismiss the latter altogether from our inquiries.

§ 1. A man cannot incur liabilities from a contract to which he was not a party

278. Consent necessary to create an obligation. This proposition is a part of a wider rule to the effect that liability ex contractu or quasi ex contractu cannot be imposed upon a man otherwise than by his act or consent. A cannot by paying X's debts unasked, make X his debtor; "a man cannot, of his own will, pay another man's debt without his consent and thereby convert himself into a creditor." a 1

a Durnford v. Messiter, 5 M. & S. 446.

21 Conn. 604, 613. Where the creator of the trust makes himself the sole beneficiary the transaction may be regarded either as a trust or a contract Gilman v. McArdle, 99 N. Y. 451. Where a third person is made the beneficiary it is sometimes difficult to determine whether the transaction is to be treated as a trust or a contract. Compare Rogers Locomotive Works v. Kelley, 88 N. Y. 234 and Comley v. Dazian, 114 N. Y. 161. A debt may be transformed into a trust. Hamer v. Sidway, 124 N. Y. 538, H. & W. 143. And the trust obligation may as to specific amounts due under it be transformed into a debt. Husted v. Thomson, 7 N. Y. App. Div. 66, aff'd, 158 N. Y. 328. It is often a matter of construction whether a promise for the benefit of a third person given upon the receipt of property from the promisee constitutes a trust or only a contract. Compare Steele v. Clark, 77 Ill. 471, and Moore v. Triplett, 96 Va. 603. See also Ahrens v. Jones, 169 N. Y. 555.

There are two aspects of this problem: (1) If X's creditor sues him on the debt may he plead as a defense the payment by A? (2) If A sues X to recover such payment made in his behalf is X liable?

(1) American doctrine is generally that X may in an action by his creditor plead the payment by A as a defense. Crumlish's Adm'r v. Central Improvement Co., 38 W. Va. 390, H. & W. 412, and cases there cited; White v.

And in like manner A and M cannot, by any contract into which they may enter, thereby impose liabilities upon X. The Messrs. Thomlinson employed X, a firm of brokers, to transport goods from London to Amsterdam. X agreed with Schmaling to put the whole conduct of the transport into his hands; Schmaling did the work and sued the Messrs. Thomlinson for his expenses and commission. It was held that they were not liable, inasmuch as there was no privity between them and Schmaling; that is to say, that there was nothing either by writing, words, or conduct to connect them with him in the transaction. X had been employed by them to do the whole work, and there was no "pretense that the defendants ever authorized them to employ any other to do the whole under them: the defendants looked to X only for the performance of the work, and X had a right to look to the defendants for payment, and no one else had that right." a 1

279. Duty not to interfere with contract rights. A contract cannot impose the burdens of an obligation upon one who was not a party to it; yet a duty rests upon persons, though extraneous to the obligation, not to interfere, without sufficient justification, with its due performance. I speak of duty as that necessity which rests upon all alike to respect the rights which the law sanctions; and reserve the term obligation for the special tie which binds together definite, assignable members of the community.

a Schmaling v. Thomlinson, 6 Taunt. 147.

Cannon, 125 Ill. 412; Binford v. Adams, 104 Ind. 41; Danziger v. Hoyt, 120 N. Y. 190 (but see Muller v. Eno, 14 N. Y. 597, 605-6); Bennett v. Hill, 14 R. I. 322; Snyder v. Pharo, 25 Fed. Rep. 398.

(2) If X accepts or ratifies the payment made by A in his behalf, he becomes liable to A; and pleading" the payment as an estoppel against an action by the creditor is a ratification. Neely v. Jones, 16 W. Va. 625; Danziger v. Hoyt, supra (semble); Denby v. Mellgrew, 58 Ala. 147. But in the absence of any previous request, subsequent promise, or ratification, X is not liable to A. Collins v. Stove Co., 63 Conn. 356; Harrison v. Moran, 163 Mass. 495; Boyer v. Richardson, 52 Neb. 156; First N. B. v. Supervisors, 106 N. Y. 488; Albany v. McNamara, 117 N. Y. 168. See 22 Am. & Eng. Encyc. of Law (2d ed.) 535-538; 23 L. R. A. 120 n.

An agent cannot render his principal liable to a sub-agent, or the subagent to the principal, unless the principal has authorized the appointment of a sub-agent. Fairchild v. King, 102 Calif. 320. It is often a nice question as to whether there is such authority to create a contract for the principal with the sub-agent. Exchange Nat. Bk. v. Third Nat. Bk., 112 U. S. 276; Guelich v. National State Bank, 56 Iowa, 434; Dun v. City Nat. Bk., 58 red. Rep. 174; Huffcut on Agency, §§ 92-95.

Lumley v. Gye. Lumley, being the manager of an opera house, engaged a singer to perform in his theatre and nowhere else. Gye induced her to break her contract. Action was brought, and it was argued that a party to a contract might sue any one who induced the other party to the contract to break it: if that were not so, it was argued that an action would still lie for inducing a servant to quit the service of his master.

The relation of master and servant has always given the master a right of action against one who enticed away his servant, and so the court was called upon to answer two questions: Does an action lie for procuring a breach of any contract? If not, then does the special rule applicable to the contract of master and servant apply to the manager of a theatre and the actors whom he engages?

The majority of the court answered both these questions in the affirmative."

Later cases. No similar case arose until 1881, when Bowen v. Hall came before the Court of Appeal, offering precisely the same points for decision as Lumley v. Gye. The majority of the court, setting aside the question whether the relation of master and servant affected the rights of the parties, held that a man who induces one of two parties to a contract to break it, intending thereby to injure the other, or to obtain a benefit for himself, does that other an actionable wrong. In both these cases it will be observed that the element of motive was introduced, and that the judges appeared to consider the malicious intention to injure as necessary to make the inducement of a breach of contract actionable. This view was negatived in Quinn v. Leathem, where Lord Macnaghten thus laid down the law.

"The decision [in Lumley v. Gye] was right, not on the ground of malicious intention that was not I think the gist of the action - but on the ground that a violation of legal right committed knowingly is a cause of action, and that it is a violation of legal right to interfere with contractual relations recognized by law, if there be no sufficient justification for the interference."

In Quinn v. Leaihem a conspiracy to injure was alleged as an additional cause of action, but in the case of the South

a Lumley v. Gye, 2 E. & B. 216. In the elaborate dissenting judgment of Coleridge, J., the exception which the law of master and servant seems to have engrafted upon the common law is traced by the learned judge, in a detailed historical argument, to the Statutes of Laborers, and is held to be inapplicable to the case of a theatrical performer.

b6 Q. B. D. 333.

[1901] A. C. 495.