Civil Section Minutes 2007

Privity of Contract and Third Party Beneficiaries

Presenter: Sandra L. Petersson, Research Manager, Alberta Law Reform Institute, on behalf of Maria Lavelle, Alberta Law Reform Institute

The 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 ULCC would improve the prospects for implementation across Canada.

The paper focuses on the ‘first limb’ of the doctrine of privity of contract: a “contract cannot, generally, confer rights or impose obligations arising under it on any person except the parties to it”. An overview of the history of the doctrine, examples of the problems created by it and the arguments ‘for and against’ the doctrine were provided.

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 has created a “principled exception” to the doctrine in the 1992 London Drugs case and allowed a negligent third party beneficiary to rely on a provision in their employer’s contract limiting liability for damaged goods. However, subsequent lower courts decisions 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.

Arguments against reform of the doctrine of privity include:

  • a third party should not be able to sue in the absence of consideration;
  • a third party should not be able to obtain contractual rights in the absence of consent;
  • it is undesirable for a promisor to be subject to double recovery or a flood of litigation brought about by third party beneficiaries;
  • it is unjust that a third party beneficiary can sue on the contract but cannot be sued;
  • the potential for infringement of the contracting parties’ ability to rescind or vary the contract.
  • Arguments in favour of reform include:
  • the law concerning privity of contract is unduly complex, uncertain and artificial;
  • the doctrine frustrates the enforcement of sensible commercial and personal arrangements made on a daily basis;
  • the person who has suffered the loss cannot sue, while the person who has suffered no loss can sue;
  • an injustice results to a third party who has relied on the promise.

Law reform bodies in Alberta, Ontario, Manitoba, Saskatchewan and Nova Scotia have recommended legislative reforms to the doctrine of privity of contract but, to date, none of these recommendations have been implemented. Québec and New Brunswick are the only provinces with legislation addressing this issue. It was noted that, 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. Law reform commissions in Hong Kong and Ireland recently recommended legislative reforms to address this issue.

Ms. Petersson noted that the Supreme Court of Canada, in London Drugs, acknowledged the academic and judicial criticisms of the restrictions imposed by the doctrine of privity but held that major reforms to the rule would have to come from the legislature. In determining whether the ULCC is the appropriate body to look at this topic, some factors to consider include: legislative interest in Canada seems low; conversely, reform has succeeded in other countries; UNIDROIT has a working group working in this area that has recommended some recognition of 3rd party beneficiaries; what are the consequences of inaction (incremental or piecemeal developments that differ across Canada?).

While enforceability of third party beneficiary agreements is the primary consideration behind any law reform project in this area, there are a number of other areas that require study, such as identification of third parties; variation and rescission; defences; and overlapping claims. Ms. Petersson also noted there are many options for reform, as not all countries have taken the same approach. The Paper concludes with a recommendation that the ULCC complete a study on this issue, including recommendations for uniform legislative reform. The ULCC project would be able to take advantage of the body of research that has already been completed by other law reform commissions on this issue.

Discussion:

The discussion centred around whether there is a need for legislative reform in this area or whether the courts are moving in the right direction, and on the experience in New Brunswick and Québec. Generally, it was agreed the issue warrants further examination.

RESOLVED:

THAT a Working Group be established to prepare, in accordance with the discussions of the Conference, a study paper examining the options and issues set out in the Report and containing legislative recommendations for consideration at the 2008 meeting.

Next Annual Meeting

2017 Conference

Hotel Saskatchewan

Regina, SK

August 13 - 17, 2017
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