Privity of Contract and Third Party Beneficiaries 2007

EXECUTIVE SUMMARY

[1] This paper reviews the issue of privity of contract and third party beneficiaries. It concludes that the law is in need of reform and that a uniform proposal for reform from the Uniform Law Conference of Canada (ULCC) would improve the prospects for implementation across Canada.

[2] The doctrine of privity of contract provides that, as a general rule, a contract cannot confer rights or impose obligations arising under it to any person who is not a party. The doctrine has long been criticized as artificial and contrary to the parties’ intention to benefit a third party. As a result, the courts have frequently resorted to devices such as agency or trust to allow a third party to enforce a benefit conferred upon it. Legislation has also made incremental inroads into the doctrine by providing for certain specific exceptions. Furthermore, the Supreme Court of Canada created a “principled exception” to the doctrine.[1] Subsequent lower courts decisions, however, have tended to limit the application of this “principled exception” holding that it cannot be used by third parties as a sword, but only as a shield. The result is a complex series of exceptions and judicial devices which, although mitigating the application of the privity doctrine, have not precluded the possibility of injustice occurring.

[3] The Alberta Law Reform Institute (ALRI) recently completed a preliminary assessment of this issue. It found the current state of the law in Alberta to be problematic, however, initial consultations with the Alberta legal community revealed polarized views as to the perceived need for reform. While some lawyers had encountered this issue in the course of their practice and felt it to be in need of reform, other practitioners were not aware of the issue or simply worked around it. Further, the Alberta government indicated that reforms in this area were not a priority. ALRI concluded that success in implementation would depend on raising awareness of this issue in the legal community in Alberta and would be further assisted by a proposal for uniform law reform from the ULCC.

[4] ALRI’s experience is not unique. Law reform bodies in Ontario, Manitoba, Saskatchewan and most recently Nova Scotia have recommended legislative reforms to the doctrine of privity of contract, but to date, none of these recommendations have been implemented. In Canada, Quebec and New Brunswick are the only provinces with legislation addressing this issue.

[5] In failing to reform the doctrine of privity of contract with respect to third-party beneficiaries, Canada is out of step with other common-law jurisdictions. In Australia (Western Australia and Queensland), the United Kingdom, New Zealand, the U.S., and Singapore the privity doctrine has been reformed through legislation. Further law reform commissions in Hong Kong and Ireland recently recommended legislative reforms to address this issue.

[6] A ULCC project on privity of contract and third party beneficiaries would have the advantage of proposing a uniform solution to an area of law in need of reform and would stand a greater chance of implementation than recommendations from individual provincial reform bodies. The ULCC project would benefit from the body of research that has already been completed by other law reform commissions on this issue.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018