Privity of Contract and Third Party Rights - Report 2008


FOOTNOTES

[1] Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries by M. Lavelle, (Charlottetown: Uniform Law Conference of Canada, Civil Section, 2007), online:

Uniform Law Conference of Canada

http://www.ulcc.ca/en/poam2/Privity_of_Contract_and_Third_Party_Beneficiaries_En.pdf.

[2] Uniform Law Conference of Canada, Civil Section Proceedings - Resolution 15. Privity of Contract, (Resolutions) (Charlottetown: Uniform Law Conference of Canada, 2007).

[3] Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] A.C. 847 (H.L.), at 853 (UK). A number of commentators have, however, suggested that consideration, in its own terms, says nothing about who may enforce an enforceable bargain, and it should not prevent a third party from enforcing a bargain made to his or her benefit. Such a view seems consistent with the doctrine of consideration insofar as “the consideration requirement is material only to the question of whether a promise is contractually enforceable; if the promise that the third party is permitted to enforce is part of a contract (supported by consideration), there is no weakening of the consideration requirement”: John N. Adams, Deryck Beyleveld & Roger Brownsword, “Privity of Contract - the Benefits and Burdens of Law Reform” (1997) 60:2 Mod. L. Rev. 238 at 248. See also S.M. Waddams, The Law of Contracts, 5th ed., (Toronto: Canada Law Book, 2005) at 193-206.

[4] Currie v. Misa, (1875), 10 L.R. Exch. 153 (Ex.) at 162 (UK): “A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”.

[5] Vandepitte v. Preferred Accident Insurance Corporation of New York, [1933] A.C. 70 (P.C.); Beswick v. Beswick, [1968] A.C. 58 (H.L.).

[6] Greenwood Shopping Plaza v. Beattie, [1980] 2 S.C.R. 228.

[7] Tweddle v. Atkinson, (1861) 121 E.R. 762 (Q.B.) (UK).

[8] John D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 298. In other words it could be said that the third party who has suffered a loss has no standing to enforce the promise, and the contracting party who has standing to enforce the contract has suffered no real loss. In many cases, then, the third-party beneficiary rule will leave the third party without any effective redress against the person who promised, for good consideration, to confer a benefit on the third party. See Coulls v. Bagot’s Executors and Trustees Co. Ltd. (1967), 119 C.L.R. 430 (H.C.) (AUS); Jackson v. Horizon Holidays Ltd., [1975] 1 W.L.R. 1468 (C.A.) (UK); Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd., [1980] 1 W.L.R. 277 (H.L.) (UK); Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd., [1994] 1 A.C. 85 (H.L.) (UK); Darlington Borough Council v. Wiltshier Northern Ltd., [1995] 1 W.L.R. 68 (C.A.) (UK). See also Robert E. Forbes, “Practical Approaches to Privity of Contract Problems” (2002) 37 Can. Bus. L. J. 357, at 376-377.

[9] It should be noted that such a result can also be obviated by adding a clear “anti-third-party clause” in the contract.

[10] J.D. McCamus, The Law of Contracts, supra, note 8, at 299. McCamus also points out that “the doctrine of privity of contract is not followed in American law and has been abrogated by statute in a number of Commonwealth jurisdictions, including one Canadian province, the traditional doctrine of privity remains generally applicable in other common law jurisdictions”: Ibid, note 8, at 217.

[11] It is not always clear whether an exception to the privity rule has been created. Nonetheless, in some of the cases cited hereafter, courts appear to have chosen to relax the privity doctrine or, at any rate, opened the door to further exceptions to the doctrine in their dicta.

[12] Michael Trebilcock, “The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada” (2007) 57 U.T.L.J. 269, at 272.

[13] For instance, should the privity rule be relaxed “if [the] recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties”: see American Law Institute, Restatement of the Law of Contracts 2d (St. Paul: American Law Institute, 1981), § 302(1)).

[14] For instance, a promise to pay an annuity or an amount of money to a third party made by a contracting party in exchange of a valid consideration cannot be enforced by the intended third party beneficiary: see Keoughan v. Holland, [1948] 1 D.L.R. 605 (P.E.I.S.C.); Beswick v. Beswick, supra, note 5; Vandewal v. Vandewal, [2002] O.J. No. 393 (S.C.J.), aff’d. [2003] O.J. No. 3269 (C.A.). A contract can also be unenforceable by a third party, even where the contracting parties have intended to confer to the third party a right to directly enforce the contract: see Tweddle v. Atkinson, supra, note 7. In a commercial context, privity can sometimes prevent the intended third party beneficiary of a contract of service, guarantee, right to redeem, escrow agreement, indemnity or provision of a note indenture from being able to enforce it: see RDA Film Distribution Inc. v. British Columbia Trade Development Corporation, [1999] B.C.J. No. 1516 (S.C.), aff’d [2000] B.C.J. No. 2550 (C.A.); Logozzo v. Toronto-Dominion Bank, [1999] O.J. No. 4088 (C.A.); Higgins Estate v. Security One Alarm Systems Ltd., [2001] O.J. No. 2447 (S.C.J.); Cheong v. Futama, [2002] B.C.J. No. 2214 (S.C.); MacNeil v. Fero Waste and Recycling Inc., [2002] N.S.J. No. 166 (S.C.), aff’d [2003] N.S.J. No. 95 (C.A.); Stelco Inc. (Re), [2006] O.J. No. 3219 (S.C.J.), aff’d [2007] O.J. No. 2533 (C.A.).

[15] Even before London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299 and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108., it seems that courts were already open to the idea of allowing a third party beneficiary to enforce a contract or term of a contract in insurance context (either to bring a claim against a contracting party or to defend itself against a action brought by a contracting party), notwithstanding the lack of privity between an insured and an insurer (and thus ignoring Vandepitte v. Preferred Accident Insurance Co. of New York, supra, note 5): Commonwealth Construction Co. v. Imperial Oil Ltd., [1978] 1 S.C.R. 317; Trans Canada Credit Corporation Ltd. v. Royal Insurance Co. of Canada, [1983] N.S.J. No. 440 (S.C.A.); Scott v. Wawanesa Mutual Insurance Co., [1989] 1 S.C. R. 1445, and the Australian case Trident General Insurance Co. Ltd. v. McNeice  Bros. Pty. Ltd. (1988), 165 C.L.R. 107 (H.C.) (AUS). See also Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries, supra, note 1, as well as J.D. McCamus, The Law of Contracts, supra, note 8, at 294-321; S.M. Waddams, The Law of Contracts, supra, note 3, at 176-216; G.H.L. Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Thomson Carswell, 2006) at 175-201; John Swan, Canadian Contracts Law, 1st ed., (Markham: LexisNexis Butterworths, 2006); and Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, Final Report, LRC88-2008 (Ireland: Law Reform Commission).

[16] Although not limited the insurance or pension and benefit contexts, the main statutory exceptions to the privity rule regarding intended third party beneficiaries are typical of this areas of law. See Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries, supra, note 1, as well as J.D. McCamus, The Law of Contracts, supra, note 8; S.M. Waddams, The Law of Contracts, supra, note 3; G.H.L. Fridman, The Law of Contract in Canada, supra, note 15; John Swan, Canadian Contracts Law supra, note 15; and Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15.

[17] Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15.

[18] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15.

[19] Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15, at para 32.

[20] Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15, emphasized the general nature or open texture of the principled exception. Thus, it is said that “[t]he purpose of the exception is to confer upon courts, in cases where the traditional exceptions of agency and trust do not apply, a discretion to “undertake the appropriate analysis, bounded by both common sense and commercial reality, in order to determine whether the doctrine of privity with respect to third party beneficiaries should be relaxed in the given circumstances” ”: J.D. McCamus, The Law of Contracts, supra, note 8, at 314.

[21] In the words of McCamus: “We should note in passing that the second branch of the test, as formulated in Fraser River, does not appear to apply neatly to all cases in which third-party beneficiaries seek to enforce, as plaintiffs, promises that are intended to benefit them. Although the “insured” plaintiffs in Vandepitte and Trident General may appear to be engaged in the “very activity” envisaged by the agreement, that is, they suffered the defined loss or injury, the agreement in Beswick does not envisage that the widow will engage in any particular activity, other than the receipt of money”: J.D. McCamus, The Law of Contracts, supra, note 8, at 316.

[22] Vandepitte v. Preferred Accident Insurance Co. of New York, supra, note 5.

[23] On that point, J.D. McCamus, The Law of Contracts, supra, note 8, at 312 wrote: “This was the problem in Vandepitte, which held that the doctrine of privity prevented third-party insureds from enforcing such provisions. Although, as noted above, the decision in Vandepitte was abrogated by legislation in the context of automobile insurance, the reasoning in Vandepitte created a potential hazard in other insurance contexts. Nonetheless, Canadian courts appear to have adopted the practice of ignoring Vandepitte”. See also Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15, at para. 40: “In this respect, it is time to put to rest the unreasonable application of the doctrine of privity of contracts of insurance established by the Privy Council in Vandepitte, supra, a decision characterized since its inception by both legislatures and the judiciary as out of touch with commercial reality” [emphasis added]. See Commonwealth Construction Co. v. Imperial oil Ltd., supra, note 15; Trans Canada Credit Corporation Ltd. v. Royal Insurance Co. of Canada, supra, note 15; Scott v. Wawanesa Mutual Insurance Co., supra, note 15; Trident General Insurance Co. Ltd. v. McNeice  Bros. Pty. Ltd., supra, note 15; Downtown Pontiac Buick (1983) Ltd. v. Marshall, [2007] O.J. No. 4352 (S.C.J.).

[24] J.D. McCamus, The Law of Contracts, supra, note 8, at 316.

[25] After more than ten years, the extent of the application of the principled exception still entails a great deal of uncertainty. In some cases, courts stated that the principled exception can only be used as a shield and not as a sword: see, for instance, RDA Film Distribution Inc. v. British Columbia Trade Development, supra, note 14, at paras. 358-360 (BCSC), as well as paras. 67, 68 and 76 (BCCA); Parwinn Developments Ltd. v. 375069 Alberta Ltd., [2000] A.J. No. 68 (Q.B.) at para. 33; 375069 Alberta Ltd. v. 400411 Alberta Ltd., [2000] A.J. No. 71 (Q.B.) at para. 43; Geiger v. 803577 Ontario Ltd. (c.o.b. Exerspa Zure Son Holdings Ltd., [2000] O.J. 111 (S.C.J.) at para. 23; 804977 Alberta Ltd. v. Lowrie, [2003] A.J. No. 343, at para. 29; Marble (Litigation Guardian of) v. Saskatchewan, [2003] S.J. No. 479 (Q.B.) at para. 54; Kitimat (District) v. Alcan Inc., [2005] B.C.J. No. 58 (S.C.) at paras. 62, 65, 70 and 71; Kitimat (District) v. Alcan Inc., [2006] B.C.J. No. 376 (C.A.) at paras. 69-70; Sunshine Valley Developments Ltd. v. Hendrichs, [2006] B.C.J. No. 624 (S.C.) at para. 66; Waterloo (City) v. Wolfraim, [2006] O.J. No. 3147 9 (S.C.J.) at paras. 74-76; Design Services Ltd. v. Canada, [2006] F.C.J. No. 1141 (C.A.) at para. 38. In other cases, courts allowed plaintiffs to rely on the principled exception in support of their claims or, at any rate, contemplated using the principled exception as a sword: see, for instance, Hawman v. Regina Exhibition Assn. Ltd., [1999] S.J. No. 700 (Q.B.) at para. 21; Higgins Estate v. Security One Alarm Systems Ltd., supra, note 14 at para. 33 (it is not clear whether this decision is based in tort, i.e., a breach of a duty of care arising from the initial contract or in contract, i.e., an application of the principled exception allowing the third party to sue for breach of contractual duties); Cheong v. Futama, supra, note 14, at para. 60; Deleeuw v. Deleeuw, [2003] B.C.J. No. 2284 (S.C.) at paras. 82-84; Vandewal v. Vandewal, supra, note 14 at paras. 17-18 (S.C.J.) (it is not clear whether this decision is based on the conclusion to the effect that there was simply a new contract between all the initial contracting parties, including the father who accepted the new agreement, or on the application of the principled exception allowing the father, the intended third party beneficiary of the new contract, to sue upon it) (ONCA dismissed the appeal because the argument for restitution was neither tried nor pleaded at trial, and there was no fault in the judge’s analysis and findings without motivating its decision); MacNeil v. Fero Waste and Recycling Inc., supra, note 14 at paras. 53-55 (S.C.) (NSCA concluded to an independent contract of indemnity between contracting party and third party); Fenrich v. Wawanesa Mutual Insurance Co., [2004] A.J. No. 458 (Q.B.) at para. 20-22, as well as Fenrich v. Wawanesa Mutual Insurance Co., [2005] A.J. No. 788 (C.A.) at para. 29 (both QB and CA concluded that even though the plaintiff was a third party beneficiary falling under the definition of “insured”, he had no right to sue in his own name because the contracting parties did not intend to extend the benefit of suing to third parties. The policy expressly limited the right to sue to individuals named in the declaration. Therefore, the principled exception to privity did not apply); Frontenac Institution Inmate Committee v. Canada (Correctional Services), [2004] F.C.J. No. 703 (C.A.) at para. 18 (in the its reasons for dismissing the application for summary judgment, the Court stated that there was a reasonable argument that inmates were either third-party beneficiary with a right to enforce the contract of cable television services or that the government was acting as an agent or trustee); Caputo v. Imperial Tobacco Ltd., [2004] O.J. No. 299 (S.C.J.) at paras. 21-23; Stelco Inc. (Re), supra, note 14, at para. 75 (ONCA affirmed the creation of an exception through a trust device only and concluded that it was unnecessary to decide on extension of the principled exception); King v. Shuniah Financial Services Ltd., [2006] F.C.J. No. 799, at para. 20 (CAFC).

[26] In Parlette v. Sokkia Inc., [2006] O.J. 4085 (S.C.J.) at paras. 26-27, G.F. Day J. concluded: “A genuine issue of law is one that is “arguable”, for instance, where there are conflicting authorities or no authorities directly on point. The court should not dispose of matters of laws that are not fully settled in the jurisprudence. See Colantino v. Kuhlmann, [2006] O.J. No. 903 at paragraphs 22 & 23 (Ont. S.C.). The law in this area is at a fairly well developed state of evolution in the United States. It is far from settled in Ontario, let alone the other provinces of Canada. The Supreme Court in London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299 (“London Drugs”) did an analysis of third party rights in the American experience. It also did an examination on the doctrine of privity and whether it should be relaxed in Canada. It cautioned that the exception to the doctrine of privity functions as a “shield” rather than a “sword”. My reading of London Drugs, indicates the reserve expressed by the Supreme Court in dealing with matters of privity of contract which is one perspective with which to view the issue under adjudication in this matter. I do not get a sense of certainty out of London Drugs to be determinative in this motion”.

[27] Civil Code of Quebec, S.Q. 1991, c. 64, s. 1444 and Law Reform Act 1993, S.N.B. 1993, c. L-1.2, s. 4(1). In the words of G.H.L. Fridman, The Law of Contract in Canada, supra, note 15, at 188-189: “Other systems of law have discovered that to adopt the idea that contracts are personal to the contracting parties is to frustrate the object of the contract, and to cause very practical difficulties, which the demands of logic, as it were, do not justify, having regard to legitimate commercial and other needs. Hence their acceptance of the notion of stipulation for third parties”. London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 427, also referred to the exception to the privity rule in Scottish law when a jus quaesitum tertio is created, that is, “a right vested in and secured to a third party in and by contract a contract between two other parties.” In the words of the Court, “[i]f an intention to confer a benefit on a third party can be gathered from the terms of the contract and the conduct of the parties, a jus quaesitum tertion will arise and the third party will have a right to enforce the contractual provision”. See Ivanhoe Inc. v. United Food and Commercial Workers, Local 50, [2001] 2 S.C.R. 565 and Martin Boodman, “Third-Party Beneficiaries in Quebec Civil Law” (2001) 35 C.B.L.J. 216. See also The Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 2.46-2.50.

[28] Section 1440 of the Civil Code of Quebec, supra, note 27, provides that “a contract has effect only between the contracting parties; it does not affect third persons, except where provided by law” is a close equivalent of the common law doctrine of privity of contract.  However, the civil law principle of privity of contract (principle of relativity) is supported by the autonomy of the will, that is, the principle that people are free to determine their own civil rights and obligations, whereas the common law doctrine of privity of contract is first and foremost underpinned by the lack of consideration passing from the third party to the promisor.

[29] See Identification of the Third Party, infra, section B.2.c.ii).

[30] It could be argued that a corporation’s contractual obligations can only be undertaken through employees, agents or servants or that it can only be guilty of negligence through its directors or employees: see, for instance, Greenwood Shopping Plaza Ltd. v. Beattie, supra, note 6; London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15; Madison Developments Limited v. Plan Electric Co., [1997] O.J. No. 4249 (C.A.); Laing Property Corporation v. All Seasons Display Inc., [1998] B.C.J. No. 255 (S.C.), varied Orange Julius Canada Ltd. v. Surrey (City), [2000] B.C.J. No. 1655 (C.A.); Tony and Jim’s Holdings Ltd. v. Silva, [1999] O.J. No. 705 (C.A.); Dryburgh v. Oak Bay Marina (1992) Ltd., [2000] F.C.J. No. 1314 (T.D.), [2001] F.C.J. No. 1002 (T.D.).

[31] There are many examples of “implicit agency” or “plurality of promisees” where a contracting party contracts on behalf of one or several third parties: see S.M. Waddams, The Law of Contracts, supra, note 3, at 197-198; G.H.L. Fridman, The Law of Contract in Canada, supra, note 15, at 179-180 & 187-188.

[32] See comments, supra, note 21.

[33] In Greenwood Shopping Plaza v. Beattie supra, note 6, for instance, the employees of a tenant who negligently caused a fire were not entitled to the benefit of a limitation clause in the lease to protect them against the landlord’s claim. The Court distinguished Greenwood from London Drugs because the negligent acts were unrelated to the performance of the “very activity” envisaged in the initial agreement. The Supreme Court of Canada subsequently declined to overrule Greenwood in London Drugs and neglected to mention it in Fraser River. However, in Tony and Jim’s Holdings Limited v. Sylva, supra, note 30, the Court of Appeal of Ontario applied the principled exception in a case similar to Greenwood. See also Orange Julius Canada Ltd. v. Surrey (City), supra, note 30, at paras. 117-118.

[34] J.D. McCamus, The Law of Contracts, supra, note 8, at 315.

[35] RDA Film Distribution Inc. v. British Columbia Trade Development, supra, note 14. See also MacNeil v. Fero Waste and Recycling Inc., supra, note 14.

[36] Ibid.

[37] This category includes a variety of contexts where it could be argued that practical necessity or community of interests creates an indirect privity of contract, such as group travelling, household purchase, collective agreement, tender process, corporate contract, shopping centre lease, condominium association: see, for instance, Coulls v. Bagot’s Executors and Trustees Co. Ltd., supra, note 8; Jackson v. Horizon Holidays Ltd., supra, note 8; International Airport Industrial Park Ltd. v. Tanenbaum, [1977] 2 S.C.R. 326; London Drugs Ltd. v. Truscan Realty Ltd., [1988] B.C.J. No. 28 (S.C.), [1988] B.C.J. No. 1366 (S.C.); C.T.R.E.F. Investments Ltd. v. H.G.O. Real Estate Ltd., [1993] O.J. No. 1194 (Gen.Div.); Salmon Arm Pharmacy Ltd. v. R.P. Johnson Construction Ltd., [1994] B.C.J. No. 1266 (C.A); Liquor Depot at Riverbend Square Ltd. v. Time for Wine Ltd., [1997] A.J. No. 660 (Q.B.); Mann-Tattersall (Litigation Guardian of) v. Hamilton (City), [2000] O.J. No. 5058 (S.C.J.); Hansen v. Overwaitea Foods Ltd., [2003] B.C.J. No. 3018 (Prov.Ct.); Marshall v. Artree Developments Inc., [2006] O.J. No. 1633 (S.C.J.); Resh v. Canadian Tire Corp., [2006] O.J. No. 1505 (S.C.J.). See also J.D. McCamus, The Law of Contracts, supra, note 8, at 317; and G.H.L. Fridman, The Law of Contract in Canada, supra, note 15, at 176, 187.

[38] See, for instance, Anchor Fence Inc. v. Polaris Realty Corp., [1994] A.J. No. 482 (Q.B.)) (exclusion of liability extended to the “selling” agent where the plaintiff had entered into an agreement with the “listing agent”); Seven Oaks School Division No. 10 v. GBR Architects Ltd., [2002] M.J. No. 512 (Q.B.) (limitation clause extended to an architect who was the principal and shareholder in a firm of architects); British Columbia (Workers’ Compensation Board) v. Neale Staniszkis Doll Adams Architects, [2004] B.C.J. No. 2636 (S.C.) (limitation of liability available to the primary provider of the services extended to a subconsultant engineering firm); Harlon Canada Inc. v. Lang Investment Corp., [2008] O.J. No. 1279 (S.C.J.) (waiver of subrogation extended to landlord’s trade (contractor)). On the other hand, see Centennial Realities Ltd v. Westburn Industrial Enterprises Ltd., [1978] N.S.J. No. 697 (S.C.T.D.) (owner suing the wholesaler of a furnace installed by contractor); BDC Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228 (recipient of a letter suing the courier for failure to deliver on time); Solway v. Davis Moving & Storage Inc., [2001] O.J. No. 5049 (S.C.J.), [2002] O.J. No. 4760 (C.A.) (company (corporate plaintiff) cannot enforce a contract for moving and storage of the content of individual plaintiffs’ home where they also operate their business); Blagdon v. Pender, [2004] N.J. No. 228 (Nfld. Prov. Ct.) (principal of a company cannot sue in own capacity on a contract made with company).

[39] In Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15, at para. 43, Iacobucci J. wrote: “As was noted in London Drugs, supra, privity of contract is an established doctrine of contract law, and should not be lightly discarded through the process of judicial decree. Wholesale abolition of the doctrine would result in complex repercussions that exceed the ability of the courts to anticipate and address. It is by now a well-established principle that courts will not undertake judicial reform of this magnitude, recognizing instead that the legislature is better placed to appreciate and accommodate the economic and policy issues involved in introducing sweeping legal reforms”. See also Sunshine Valley Developments Ltd. v. Hendrichs, supra, note 25, at para. 63.

[40] See Legal Devices Ousting the Privity of Contract Rule, infra, section A.3.

[41] Michael Trebilcock, “The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada”, supra, note 12, at 271, comments: “Even if parties are fully informed of the rule and its effects, structuring their contracts to circumvent the rule entails wasteful transaction costs that different rule could eliminate, thus increasing the total surplus from the exchange to be shared amongst the parties”. See also John N. Adams & Roger Brownsword, “Privity of Contract and the Idea of a Network Contract” (1990) 10 L.S. 12.

[42] In Manitoba (Hydro Electric Board) v. John Englis Co., [1999] M.J. No. 506 (C.A.) at para. 63, the Court of Appeal of Manitoba dismissed an appeal by a third party seeking to rely on a limitation period clause: “There is no express language suggesting that the contract and limitation of liability clause was meant to benefit anyone else.Likewise, it does not appear that it can be implied that the limitation of liability clause was meant to benefit English Electric.The circumstances here are not analogous to those of employees actually charged with doing the work contemplated by the parties to the contract, as in London Drugs, or a specifically named beneficiary in a complex commercial arrangement as in Fraser River Pile & Dredge Ltd.Rather, similar to Edgeworth Construction, English Electric was a separate large professional firm which had the ability to protect itself in a variety of ways, if it chose to do so. Doubtless, it chose not to do so because of the very limited nature of its contractual relationship with Hydro”. See also Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206 at 216; Thunder Mountain Drilling Ltd. v. Denmar Equipment Rentals Ltd., [1993] B.C.J. No. 2263 (S.C.); Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85 at para. 47; British Columbia v. R.B.O. Architecture Inc., [1995] B.C.J. No. 587 (S.C.) at paras. 111-112; Haldane Products Inc. v. United Parcel Service Canada Ltd., [1999] O.J. No. 2851 (S.C.J.); Martel Building Ltd. v. Canada, [2000] 2 S.C.R. 860 at para. 108; RDA Film Distribution Inc. v. British Columbia Trade Development Corporation, supra, note 14. See to the opposite effect Sylvan Industries Ltd. v. Fairview Sheet Metal Works Ltd., [1994] B.C.J. No. 468 (C.A.); Madison Developments Ltd. v. Plan Electric Co., supra, note 30; (builder’s risk policy’s commercial purpose can only be served if the subcontractor is taken by necessary implication to be an unnamed insured); British Columbia (Workers’ Compensation Board) v. Neale Staniszkis Doll Adams Architects, supra, note 38, at para. 33; Beaulieu v. Day & Ross Inc., [2005] N.B.J. No. 77 (C.A.) (a carrier was allowed to raise a limitation clause contained in the bill of lading as a defence against a suit in contract by a third party, the eBay purchaser).

[43] Exceptions have developed in contexts, such as intellectual property (Cadbury Schweppes Inc. v. FBI Foods Ltd., [1999] 1 S.C.R. 142), shipment and carriage (including Himalaya clause in the bill of lading) Dunlop v. Lambert (1839), 7 E.R. 824 (H.L.) (UK); Midland Silicones Ltd. v. Scruttons Ltd., [1962] A.C. 446 (H.L.) (UK); Albacruz v. Albazero, [1977] A.C. 774 (H.L.) (UK); ITO-International Terminal Operators v. Miida Electronics Inc., [1986] 1 S.C.R. 752; Valmet Paper Machinery Inc. v. Hapag-Lloyd AG Inc., [2002] B.C.J. No. 1271 (S.C.); construction (including Builders’ risk policy) Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd., [1994] 1 A.C. 85 (H.L.) (UK); St. Martin’s Property Corp. Ltd. v. Sir Robert McAlpine Ltd., [1994] 1 A.C. 85 (H.L.) (UK); Darlington Borough Council v. Wiltshier Northern Ltd., supra, note 8; Madison Developments Limited v. Plan Electric Co., supra, note 30; Daishowa-Marubeni International Ltd. v. Toshiba International Corp., [2000] A.J. No. 1453 (Q.B.), rev’d [2003] A.J. No. 1189 (C.A.); Alfred McAlpine Construction Ltd. v. Panatown Ltd., [2001] 1 A.C. 518 (H.L.) (UK); Secunda Marine Services Ltd. v. Fabco Industries Ltd., [2005] F.C.J. No. 1918 (C.A.). See also S.M. Waddams, The Law of Contracts, supra, note 3, at 199-201.

[44] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 453. See John N. Adams & Roger Brownsword, “Privity of Contract and the Idea of a Network Contract”, supra, note 41; Michael Trebilcock, “The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada”, supra, note 12.

[45] See, for instance, Civil Code of Quebec, supra, note 27, s. 1443 and General Motors Products of Canada Ltd. v. Kravitz, [1979] 1 S.C.R. 790.

[46] Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries, supra, note 1. See also J.D. McCamus, The Law of Contracts, supra, note 8; S.M. Waddams, The Law of Contracts, supra, note 3; G.H.L. Fridman, The Law of Contract in Canada, supra, note 15; John Swan, Canadian Contracts Law supra, note 15; as well as Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15. See Vandewal v. Vandewal, supra, note 14 (creation of a new contract between all the initial contracting parties); Canada Southern Petroleum Ltd. v. Amoco Canada Petroleum Co., [2001] A.J. No. 1222 (Q.B.) (arguments related to privity, assignment and novation); Marden Mechanical Ltd. v. West-Con Developments Inc., [2007] O.J. No. 1018 (S.C.J.) (consent to assignment to sister company). See also National Trust Co. v. Mead, [1990] 2 S.C.R. 410.

[47] See, for instance, Donoghue v Stevenson, [1932] A.C. 562 (UK); Anns v. Merton London Borough Council, [1978] A.C. 728 (UK); City of Kamloops v. Nielsen, [1984] 2 S.C.R. 2. As pointed out by J.D. McCamus, The Law of Contracts, supra, note 8, at p. 306; “Although [the] tort duties relating to the supply of defective goods and structures typically arise independently of the contractual duties imposed by the initial contract of supply, there are other cases in which the tort duty owed to the third party appears to arise directly from the breach of contract. […] Their claim in tort, which avoids the third-party beneficiary rule, appears to flow directly from the initial breach of contract”. See Ross v. Caunters, [1980] Ch. 297 (UK) (solicitor liable to prospective beneficiary for failure to execute a will properly); Junior Books Ltd. v. Veitchi Co. Ltd., [1983] 1 A.C. 520 (UK) (flooring subcontractor liable to factory owner for cost of repairing defective flooring); White v. Jones, [1995] 2 A.C. 207 (UK) (solicitor liable to prospective beneficiary for failure to draw up a will); Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., supra, note 42 (builder liable in tort to subsequent owner for the economic loss involved in repairing defect). See also Higgins Estate v. Security One Alarm Systems Ltd., supra, note 14 (claim in tort, i.e., a breach of a duty of care arising from the initial contract). See also Bruce. Feldthusen, Economic Negligence: The Recovery of Pure Economic Loss, 4th ed., (Toronto: Carswell, 2000).

[48] Darlington Borough Council v. Wiltshier North Ltd., [1995] 1 W.L.R. 68, at 77-78 as quoted in RDA Film Distribution Inc. v. British Columbia Trade Development, supra, note 14, at para. 62.

{49} J.D. McCamus, The Law of Contracts, supra, note 8, at 319. See also comments, supra, note 25.

[50] Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries, supra, note 1. See also Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15.

[51] Ibid.

[52] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 439. On this point, he added: “Without doubt, major reforms to the rule denying third parties the right to enforce contractual provisions made for their benefit must come from the legislature Although I have strong reservations about the rigid retention of a doctrine that has undergone systematic and substantial attack, privity of contract is an established principle in the law of contracts and should not be discarded lightly. Simply to abolish the doctrine of privity or to ignore it, without more, would represent a major change to the common law involving complex and uncertain ramifications. This Court has in the past indicated an unwillingness to sanction judge-made changes of this magnitude: see, for two recent examples, Watkins v. Olafson, [1989] 2 S.C.R. 750, at pp. 760-61, and R. v. Salituro, [1991] 3 S.C.R. 654, at pp. 665-70”: Ibid, at 436-437. Iacobucci J. later reiterated the same idea in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15, at para. 43.

[53] Ontario Law Reform Commission, Report on Amendment of the Law of Contract (Toronto: Ministry of the Attorney General, 1987) at 67-68. See also London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 437.

[54] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 438.

[55] Although it is true that privity can as well raise difficulties in cases where third parties are not express or implied beneficiaries, but situational or relational beneficiaries, such cases are often considered less problematic because less unfair.

[56] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15, at 423.

[57] J.D. McCamus, The Law of Contracts, supra, note 8, at 319.

[58] As underlined by Robert E. Forbes, “Practical Approaches to Privity of Contract Problems”, supra, note 8, at 375: “A drafter’s goal should never be to produce a document that needs to be litigated, even if the litigation is ultimately successful”.

[59] Uniform Law Conference of Canada, Privity of Contract and Third Party Beneficiaries, supra, note 1. See also Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15.

[60] Ibid. As J.D. McCamus, The Law of Contracts, supra, note 8, at 319, pointed out it might as well be “difficult to identify the optimal model of reform” and even more intricate to “fashion a rule that would indicate more precisely in what circumstances a third-party beneficiary should be allowed to enforce [a promise]”.

[61] Whether a presumption of enforcement should be extended to implied third party beneficiaries (see section A.2.b) Third Party as Contracting Party’s Instrument or Representative) or relational third party beneficiaries (see section A.2.c) Chain of contracts), and situational third party beneficiaries (see section A.2.d) Rights and obligations follow the “Subject Matter”) is debatable. See also Identification of the Third Party, infra, section B.2.c.ii). On that point, one of the differences between the proposed Irish legislation as found in Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15 at 101 and the English Contracts (Rights of Third Parties) Act 1999, U.K. 1999, c. 31 is that, under the Irish Bill, the presumption that the contracting parties intended to give the third party a right to enforce a contract only applies when the contract expressly benefits the third party, whereas, under the English Act, this presumption applies when the contract expressly or impliedly benefits the third party. Nonetheless, in the Canadian context, it seems widely accepted that contracting parties who expressly intend to benefit a third party or impliedly intend to benefit a third party acting as their instrument or representative also intend to confer to the third party beneficiary a right to enforce the contractual provision(s) bargained for its benefit, at any rate, as a defence to a suit: London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15. However, it is not clear at the present time in what circumstances such a presumption could be extended to other types of implied third party beneficiary, relational third party beneficiaries and situational third party beneficiaries.

[62] See for instance Fenrich v. Wawanesa Mutual Insurance Company, supra, note 25.

[63] London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15 and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15.

[64] Similarly, the Ontario Law Reform Commission, Report on Amendment to the Law of Contract, supra, note 53 at p. 71, recommended a general enabling provision to the effect that “contracts for the benefit of third parties should not be unenforceable for lack of consideration or want of privity”. However, a negative rule has to be carefully formulated. The terms “contracts for the benefit of third parties” should clearly be defined as contracts which confer rights on third parties, not obligations. A negative rule should not deprive third parties of a defence against contracting parties’ claims seeking to enforce a contractual provision directly or indirectly purporting to impose obligations upon third parties or limit their rights. For example, problems could rise if a subcontractor argued reliance on a limitation clause in a subcontract for the renovation of a building as a defence against an action in tort brought by the owner of a building because the limitation clause in question should not be unenforceable for lack of privity.

[65] Nonetheless, as previously stated, it appears that these types of case are often better dealt with by the courts or the legislators on a case-by-case basis, rather than included in a general reform of the doctrine of privity.

[66] See, for instance, Law Commission of England and Wales, Privity of Contract: Contracts for the Benefit of Third Parties, Report No. 242, Cmnd. 3329 (London: HMSO, 1996); Attorney-General’s Chambers, Law and Revision Division, The Contracts (Rights of Third Parties) Bill 2001 (Singapore: Attorney-General’s Chambers, 2001); UNIDROIT, Working Group for the Preparation of Principles of International Commercial Contracts, Third Party Rights, Study L - Doc. 83 (Rome: Unidroit, April 2003); Law Reform Commission of Hong Kong, Privity of Contract, Report (Wanchai: Law Reform Commission of Hong Kong, 2005); Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15.

[67] The Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 3.25-3.27.

[68] See Express Intention to Benefit a Third Party, supra, section A.2.a). Contracting parties could be required to expressly identify any third party beneficiaries by name or description; such a description should include being a member of a class or group of people even when the third parties are not in existence at the time of the formation of the contract. See Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 15.

[69] See Third Party as Contracting Party’s Instrument or Representative, supra, section A.2.b); Chain of contracts, supra, section A.2.c); and Rights and obligations follow the “Subject Matter”, supra, section A.2.d). It is now clear that intentions to extend the benefit of a limitation clause, waiver or release to third parties can be implied from the relationships between the contracting parties and third parties: London Drugs Ltd. v. Kuehne & Nagel International Ltd., supra, note 15. However, a statutory provision creating a presumption to the effect that third party beneficiaries have the right to enforce contracts expressly or impliedly made for their benefit would not only confirm this exception to the privity rule, but also broaden it to cover other implied third party beneficiaries. It would thus encompass cases where the recognition of a third party rights is appropriate to effectuate the contracting parties’ intentions. The intentions to confer a benefit upon third parties could be ascertained on a proper construction of the contract which could also include looking at the particular terms benefiting the third parties, the contract as a whole, the identity of interests with respect with the contractual obligations, the conduct of the contracting parties and other surrounding circumstances at the time of the formation of the contract: Manderville v. Goodfellow’s Trucking Ltd., [1999] N.B.J. No. 75 (C.A.); North King Lodge Ltd. v. Gowlland Towing Ltd., [2004] B.C.J. No. 677 (S.C.), aff’d [2005] B.C.J. No. 2485 (C.A.). Moreover, it could as well be added that that the absence of a particular intention to benefit a third party should not preclude a (relational or situational) beneficiary to enforce a contract when other factors can support that conclusion, such as the commercial customs, the legal incidents of a particular class of contract and the necessity to give business efficacy to contractual arrangements: Double N Earthmovers Ltd. v. Edmonton (City), [2007] 1 S.C.R. 116, at paras. 30-31. In any event, the question of whether the benefit of an agreement should be extended to a third party could be decides according to the ordinary rules of contractual interpretation in all cases involving implied, relational or situational beneficiaries. See also The Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 3.03-3.10, 3.20-3.24.

[70] The Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at para. 3.28. In Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., supra, note 12, at para. 37, Iacobbuci J. wrote: “I am mindful, however, that the principle of freedom of contract must not be dismissed lightly. Accordingly, nothing in these reasons concerning the ability of the initial parties to amend contractual provisions subsequently should be taken as applying other than to the limited situation of a third-party’s seeking to rely on a benefit conferred by the contract to defend against an action initiated by one of the parties, and only then in circumstances where the inchoate contractual right has crystallized prior to any purported amendment. Within this narrow exception, however, the doctrine of privity presents no obstacle to contractual rights conferred on third-party beneficiaries”.

[71] Ibid, at para. 3.29.

[72] Ibid, at paras. 3.30-3.34.

[73] Ibid, at para. 3.38.

[74] Ibid, at paras. 3.46-3.49.

[75] Ibid, at paras. 3.142-3.151. See also Nisshin Shipping Co. Ltd v. Cleaves & Co. Ltd., [2003] E.W.H.C. 2602 (Comm.) (UK).

[76] Ibid, at paras. 3.51-3.68.

[77] See, for instance, Oldfield v. Transamerica Life Insurance Co. of Canada, [2002] 1 S.C.R. 742; Goulet v. Transamerica Life Insurance Co. Of Canada, [2002] 1 S.C.R. 719, at para. 54; MacNeill v. Fero Waste and Recycling Inc., supra, note 14.

[78] Courts could have such discretion in particular contexts, such as consumer transactions, contracts of adhesion, insurance and pension beneficiaries, guarantor indemnities, etc.

[79] See RDA Film Distribution Inc. v. British Columbia Trade Development Corporation, supra, note 14; MacNeil v. Fero Waste and Recycling Inc., supra, note 14.

[80] See, for instance, RDA Film Distribution Inc. v. British Columbia Trade Development Corporation, supra, note 14, at para. 360, Owen-Flood J. pointed out: “Losses occasioned to RS II Productions are the direct result of RDA’s failure to provide the revenue guarantee advance that it promised to RS II Productions. In other words, RS II Productions’ losses, if any, were directly caused by RDA’s breach of contract. RDA had an obligation to provide an advance to RS II Productions. The particular means by which RDA sought to fulfil its obligations was to seek a letter of credit from Bank of Montreal. This in turn required a guarantee from B.C. Trade. However, RDA, failing to obtain funds sufficient to fulfil its contractual obligations to RS II Productions, was thereby obliged to find another source of funds or be in breach of contract with RS II Productions. A concern for double recovery will arise because, if the London Drugs exception were applied to these facts, RS II Productions would have a right of recovery against B.C. Trade under the B.C. Trade Contract, and a right of recovery against RDA under the RDA Distribution Agreement”.

[81] See the Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 3.69-3.79.

[82] Michael Trebilcock, “The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada”, supra, note 12, at 271.

[83] On this point, the Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at para. 3.152, commented: “The proposed legislation is designed to give effect to the intentions of contracting parties who wish to confer contractual rights on third parties. It is intended to be facilitative, rather than mandatory, in nature. Thus, contracting parties who do not wish the proposed legislation to apply should be able to exclude the proposed legislation, or “contract out” of it”. See also Chambers v. HSBC Securities (Canada) Ltd., [2003] O.J. No. 3470 (S.C.J.) at para. 22.

[84] See Parlette v. Sokkia Inc., supra, note 26, at para. 7. One could indeed wonder which provision should prevail. However, the problem could be more apparent than real if a general provision only creates a rebuttable presumption to the effect that an intended third party beneficiary also has the right to enforce the contract: see General Provision, supra, section B.2.b), at para. 61.

[85] The Law Reform Commission of Ireland had concluded that contracts of employment; contracts between company and its shareholders and between individual shareholders; contracts for the international carriage of goods by air, rail or road; contracts for the carriage of goods by sea; contracts on a bill of exchange, promissory note or other negotiable instrument; as well as documentary credits should be excluded: see the Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at para. 3.89.

[86] Ibid, at paras. 3.89-3.141.

[87] Current and further exceptions to the privity rule would still apply insofar as the new third party rule would simply be a “fall back rule” or “default rule”.

[88] For instance, in cases of contracts of adhesion (Scott v. Wawanesa Mutual Insurance Co., supra, note 15); contracts under seal (Friedmann Equity Developments Inc. v. Final Note Ltd., [2000] 1 S.C.R. 842; Deleeuw v. Deleeuw, supra, note 25, at para. 74), consumer contracts (Beaulieu v.Day & Ross Inc., supra, note 42). The Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 3.89-3.153 also suggested that a reform of the privity rule should not, for example, affect mandatory consumer protection (e.g. unfair contracts), confer any third party rights against consumers or give to employers’ clients a right to enforce contracts of employment against employees in cases of losses caused by strike or industrial dispute, etc.

[89] As mentioned above, the term “exceptions” does not include the other means of circumventing the privity rule which can be used by the contracting parties or the other courses of action available to the third parties. See Legal Devices Ousting the Privity of Contract Rule, supra, section A.3.

[90] Law Reform Commission (of Ireland), Privity of Contract and Third Party Rights, supra, note 15, at paras. 3.80- 3.88.

[91] Uniform Law Conference of Canada, Civil Section Proceedings - Resolution 15. Privity of Contract, supra, note 2.

[92] There were diverging views among the Working Group members on the interpretation of case law, especially those surrounding the application of the principled exception, and on the appropriateness of legislative intervention as a way to pin these down more quickly and clearly than common law will. However, the collective conclusion is that the analysis of the current law does not sufficiently support the case for privity reform at this time for the Working Group to firmly recommend allocating resources towards the implementation of stand alone legislation.

[93] The existing body of law does not give satisfactory indications on how the law should evolve from this point. It should be noted that most jurisdictions that have reformed, or proposed reform, preceded it by consultations of different stakeholders: see for instance, Law Commission for England And Wales, Privity of Contract: Contracts for the Benefits of Third Parties, Consultation Paper No. 121 (London: HMSO, 1991); Law Reform Commission of Hong Kong, Privity of Contract, supra, note 66; and Law Reform Commission (of Ireland), Privity of Contract: Third Party Rights, Consultation Paper, LRC CP 40-2006 (Dublin: Law Reform Commission, 2006).

[94] In any event, if there were privity issues requiring legislative intervention, there is no clear direction from courts, legislators or scholars at the moment as to where the law should go to settle each of them in a satisfying way.

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