Privity of Contract and Third Party Beneficiaries 2007

IV. The Need for Reform

(A) Preliminary Consultations

[65] ALRI undertook preliminary consultations with lawyers in Edmonton and Calgary practicing in the oil, construction and insurance law areas, as well as, law professors from both the University of Alberta and Calgary and with Alberta Justice.

[66] While the law professors consulted were unanimous in their support for reform in this area, the same could not be said for lawyers in practice. The law professors generally identified the lack of clarity, particularly with respect to the enforceability of contracts by third parties intended for their benefit as area in need of reform. Further, issues such as variation and rescission and the potential for double liability were also identified.

[67] The majority of lawyers consulted were not aware of the issue of privity of contract and third party beneficiaries. Of those who were aware of the issue, the responses received fell into three categories:

  • i. Those who favour the status quo;
  • ii. Those who favour greater clarity with respect to the existing exceptions, in particular clarification as to when a court will imply that the parties intended to benefit a third party;[66] and,
  • iii. Those who favour reform to the doctrine of privity to ensure that third parties can enforce contracts intended for their benefit.

[68] The responses could not be grouped around the area of law or the type of projects undertaken. For example, two firms involved in large oil projects recognized the lack of certainty as to whether the “principled exception” would enable a third party to enforce a contract intended for their benefit as a significant issue. In contrast, counsel for two other large oil companies engaged in similar sorts of projects did not believe this to be a pressing issue. Their contracts are structured such that this issue does not arise.

[69] Finally, a contact with the Alberta Justice discussed this issue with lawyers in both the Legislative Reform and Civil Law sections. The consensus was that this was not an area in need of reform.

(B) Reforms in Other Jurisdictions

[70] Law reform bodies in Canada and in other Commonwealth jurisdictions have recommended legislative reform to address the problem of privity of contract and third party beneficiaries. In Canada, few of these recommendations have been implemented. In contrast, many other Commonwealth jurisdictions have implemented comprehensive legislative reforms.

  • (i) Canada

[71] New Brunswick is the only common law jurisdiction in Canada to have legislatively reformed the privity rule.[67] The effect of the legislation is that a third party can enforce a claim under a contract made for their benefit.[68] The New Brunswick legislation also provides that any defence may be raised that could have been raised by the parties.[69] Further, the contracting parties can amend or terminate the contract at any time, but if by doing so they cause loss to a third party beneficiary, they may be liable for the loss.[70] The legislation has been described as steering a middle course between the detailed legislative framework of the New Zealand reform and the general enabling provision favoured by the Ontario Law Reform Commission (see discussion below).[71] Recently, however, the New Brunswick Court of Appeal did not apply the legislation in a case where a third party sought to enforce a contract for carriage of goods.[72] Instead it relied on the law of negligence and the judicial device of agency. It found no lack of privity between the carrier and the consignee because the consignee was acting as the consignor’s agent.

[72] Quebec, like other civil law jurisdictions, has recognized the enforceability of contracts for the benefit of third parties for some time. The relevant provisions are found in articles 1444 to 1450 of the Quebec Civil Code.[73] Initially the Civil Code contained only a general provision dealing with contracts in favour of third parties. In its current version it includes more detailed provisions including revocation and defences.

[73] In other jurisdictions in Canada, calls for legislative reform have not been acted upon largely because this issue is not a legislative priority. The Nova Scotia Law Reform Commission is the most recent body to recommend that the doctrine of privity of contract be relaxed by statute, to allow third party beneficiaries to enforce their rights under contract.[74] To date, however, its recommendations remain unimplemented.

[74] In 1993, the Manitoba Law Reform Commission recommended the adoption of detailed legislation to govern third party beneficiary agreements.[75] Its approach was similar to that implemented in Western Australia, Queensland, and Quebec, New Zealand and recommended by the English Law Commission. Its recommendations have also not yet been implemented.

[75] Earlier, the Ontario Law Reform Commission (OLRC) dealt with the doctrine of privity as part of a set of larger report on amendment of the law of contract.[76] The OLRC was firmly of the view that the doctrine of privity should be abolished.[77] It rejected the idea of detailed legislative amendments to address this issue, as in its view defining the class of beneficiaries entitled to sue and the problem of modification or rescission by the original parties would be an exceptionally complex and difficult task.[78] The OLRC opted instead for a general enabling provision to the effect that Acontracts for the benefit of third parties should not be unenforceable for lack of consideration or want of privity.[79]

  • (ii) Other Common Law Jurisdictions Outside of Canada

[76] There has been widespread criticism of the doctrine of privity in other common law jurisdictions i.e., the United Kingdom, Hong Kong, Singapore, parts of Australia and New Zealand and detailed legislation has been introduced by way of reform. It is notable that none of these jurisdictions distinguish between a third party seeking to enforce a right under a contract and using it as a defence.

[77] Although there are variations in the approaches taken, where detailed legislation is in place, the provisions generally include those that identify the third party, set out the test for enforceability, address variation and rescission, provide for defences, set-offs and counterclaims, and deal with overlapping claims against the promisors.

U.K.

[78] The U.K. recently adopted detailed legislation, the Contracts (Rights of Third Parties) Act 1999, abrogating the rule of privity of contract for third party beneficiaries. The U.K.’s 1999 Act was modelled in part on the New Zealand Contracts (Privity) Act 1982. Calls for reform in the area, however, date back to at least 1937 with the recommendations of the English Law Revision Committee. This earlier call for reform was not implemented. In 1991, the Law Commission (for England and Wales) put forward for discussion in a consultation paper proposals for reforming the privity rule and subsequently recommended a detailed legislative scheme in its final report in 1996.[80] An important consideration behind its recommendation for detailed legislative reform was the fact that although the House of Lords had been highly critical of the third party rule in English law it had declined on a number of occasions to reconsider it.[81] The U.K.’s 1999 Act essentially replicates the recommendations in the Law Commission’s 1996 report.[82] The 1999 Act has been generally well-received; however, interestingly, the construction industry in Britain has reportedly excluded the operation of the 1999 Act from its standard form contracts.[83]

Ireland

[79] In 2006, the Law Reform Commission of Ireland released a consultation paper entitled, Privity of Contract: Third Party Rights.[84] The paper examines the historical origins and development of privity of contract and highlights the practical problems that have resulted in the areas of construction, shipping, insurance, consumer law and in exemption clauses. After reviewing the options for reform, the Commission recommended detailed legislative reforms.

New Zealand

[80] In 1981, the New Zealand Contracts and Commercial Law Reform Committee recommended detailed legislative reforms to govern third party agreements. The Contracts (Privity) Act 1982 implemented the Committee’s proposals. In 1993, the New Zealand Law Commission reviewed the operation of the Act and concluded that:

“No serious problems posed by the terms of the Act have yet come to light. Although the law is not entirely clear in certain respects, notably regarding a third party beneficiary’s entitlement to sue under s 4, the degree of uncertainty is not such as to warrant amendment of the Act.”[85]

Australia

[81] Two Australian states, Western Australia and Queensland,[86] have given statutory recognition to third party beneficiary rights. The Western Australian Property Law Act of 1969, built on the English Law Revision Committee’s 1937 recommendations, but is less detailed than the U.K.’s 1999 Act. The State of Queensland followed in 1974, with the Queensland Property Law Act of 1974. Its proposal was also based on the English Law Revision Committee’s 1937 recommendations, but was less restrictive than the approach of Western Australia.[87]

[82] The High Court of Australia in Trident General Insurance Co. Ltd. v. McNiece Bros Proprietary[88] has also relaxed the doctrine of privity in relation to insurance contracts.

Asia

[83] Following a report of the Law and Revision Division of the Attorney-General’s Chambers,[89] Singapore introduced legislation that is virtually identical to that of the U.K..

[84] On 25 October 2005, the Law Reform Commission of Hong Kong released a report on proposals to reform the doctrine of privity of contract. The report recommends that the doctrine should be reformed (but not completely abolished), by means of a detailed legislative scheme which would provide a comprehensive, systematic and coherent solution. It also recommends that all the major issues arising from their proposed statutory exception should be dealt with in the new legislation. In a nutshell, the proposed reform should be regarded as a general and wide-ranging statutory exception to the privity doctrine.[90]

United States

[85] Since the New York Court of Appeals decision in Lawrence v. Fox,[91] it has been generally accepted in the U.S. that a third party is able to enforce a contractual obligation made for his benefit.[92] The First Restatement of the Law of Contract in 1932 restricted third party rights to those who fell in one of two categories: donee beneficiaries and creditor beneficiaries. The courts, however, found these two categories overly restrictive and eventually adopted the “intention to benefit test”.[93] The Second Restatement of the Law of Contract in 1981 adopted the intention to benefit test. The Second Restatement addresses other issues, including variation and termination and defences. In contrast, some states, such as California, have enacted only a general enabling provision and little more.[94]

UNIDROIT

[86] The Working Group for the Preparation of Principles of International Commercial Contracts of UNIDROIT, the International Institute for the Unification of Private Laws, also developed draft articles to recognize third party beneficiaries.[95] The draft articles included provisions addressing the identification of third parties, exclusion and limitation clauses, defences, revocation and renunciation. The draft was incorporated into UNIDROIT’s Principles of International Commercial Contracts, published in 2004.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018