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Contract Privity Principles: Breach of Contract Liability Arising Only Between Contracting Parties
Question: Can a third party hold contract rights despite not being directly involved?
Answer: In general, the principle of privity of contract restricts contract rights and obligations to the parties involved in the agreement. However, exceptions exist. Courts have allowed certain third parties to rely on contract terms, as seen in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108, where a third party was granted defence rights under contract provisions. Consider these exceptions alongside potential statutory obligations like those in the Residential Tenancies Act, 2006, S.O. 2006, Chapter 17. For tailored solutions to your contract needs, Marketing.Legal assists clients in navigating these complex legal landscapes.
Can a Person Without Party Status Have Contract Rights?
The principle of privity of contract limits the rights and obligations of a contract to the parties involved within the contract. Accordingly, other persons or entities are unable to enforce the terms of the contract and the parties to the contract are, generally, the only persons who can benefit from or be held liable for the contract terms.
The Law
The privity of contract principle was explained in Greenwood Shopping Plaza Ltd. v. Beattie et al., [1980] 2 S.C.R. 228, and Brown v. Belleville (City), 2013 ONCA 148,, whereas it was said:
The rule relating to privity of contract has been stated in many authorities in sometimes varying form, but a convenient expression may be found in Anson’s Law of Contract, 25th ed., 1979, p. 411, in these terms:
We come now to deal with the effects of a valid contract when formed, and to ask, To whom does the obligation extend? What are the limits of a contractual agreement? This question must be considered under two separate headings: (1) the imposition of liabilities upon a third party, and (2) the acquisition of rights by a third party. We shall see that the general rule of the common law is that no one but the parties to a contract can be bound by it, or entitled under it. This principle is known as that of privity of contract.
[73] The common law doctrine of privity of contract, an established principle of contract law, stands for the proposition that "no one but the parties to a contract can be bound by it or entitled under it": Greenwood Shopping Plaza Ltd. v. Neil J. Buchanan Ltd., 1980 CanLII 202 (SCC), [1980] 2 S.C.R. 228, [1980] S.C.J. No. 59, at para. 9. See, also, London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC), [1992] 3 S.C.R. 299, [1992] S.C.J. No. 84, at p. 416 S.C.R.; Dunlop Pneumatic Tyre Co. v. Selfridge & Co., [1915] A.C. 847 (H.L.), at p. 853 A.C. ...
Exceptions
In recent years, the privity of contract principle has become less strict than it was in the past. This point was made within, among other cases, Seelster Farms et al. v. Her Majesty the Queen and OLG, 2020 ONSC 4013, wherein it was said:
[184] The historical reticence of the court to find a contract where the third-party claimant is not party to a contract, or to recognize a claim of a third-party beneficiary in a contract between others, has been relaxed to a measured extent in recent years. In London Drugs Ltd. v. Kuehne & Nagel International Ltd., 1992 CanLII 41 (SCC), [1992] 3 S.C.R 299, the Supreme Court of Canada held that third parties, such as employees of an insured, are able to rely on a limitation of liability clause in a contract even though they are not parties to it. Similarly, in Fraser River Pile & Dredge Ltd. v. Can-Drive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 S.C.R. 108, the Supreme Court allowed an incremental exception to the privity rule to find that a third party was able to rely on a contractual provision to defend an action brought by one of the parties to a contract.
Assignment
Contracts often involve rights or debts that may legally be assigned to a third party, even a third party uncontemplated when the contract was originally negotiated such as a debt collection agency, among others. Generally, when an assignment of a right or debt occurs, the process of assignment must comply with the Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34, which requires, among other things, that written notice of the assignment is provided to those parties to the contract that may be affected by the assignment; however, absolute compliance may be unnecessary whereas, in some circumstances, equitable assignment principles allow for an assignment full compliance to the Conveyancing and Law of Property Act mandates. The case of Nadeau v. Caparelli, 2016 ONCA 730, explained such whereas it was stated:
[19] Equity does not require a particular form to effect a valid assignment, but whatever form is used must clearly show an intention that the assignee is to have the benefit of the debt or chose in action assigned: Halsbury’s Laws of Canada, “Personal Property and Secured Transactions” (Markham: LexisNexis Canada, 2013), at HPS-110 and HPS-111; G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Thomson Reuters Canada, 2011), at pp. 648-49. As summarized by Michael Furmston in Cheshire, Fifoot & Furmston’s Law of Contract, 16th ed. (Oxford: Oxford University Press, 2012), at p. 636:
The transaction upon which the assignee relies need not even purport to be an assignment nor use the language of an assignment. If the intention of the assignor clearly is that the contractual right shall become the property of the assignee, then equity requires him to do all that is necessary to implement his intention. The only essential and the only difficulty is to ascertain that such is the intention. [Citations omitted.]
Beneficiaries
A contract may contain terms that provide for benefits in the favour of a third party. With such contracts, if the party or person authorized or empowered to provide the benefits to the third party fails to do so or refuses to do so, the third party, despite a lack of privity of contract but as a beneficiary to a benefit provided by the contract, may bring legal proceedings seeking to enforce the contract. This exception to the privity of contract rule that allows for a third party to enforce a contract was explained in Ferraro et al v. Neilas et al, 2022 ONSC 2737, whereas it was stated:
[89] When a trustee fails or refuses to take action to enforce contractual terms, the beneficiaries can, a traditional exception to the doctrine of privity of contract. See: Greenwood Shopping Plaza Ltd. v. Neil, J. Buchanan Ltd., 1980 CanLII 202 (SCC), [1980] 2 SCR 228 (SCC), at para. 239.
Statutes
Certain statutes may prescribe the assumption of contract responsibilities upon a person who was a stranger to a contract. An example involves the Residential Tenancies Act, 2006, S.O. 2006, Chapter 17, which prescribes upon a purchaser of premises which are occupied by a residential tenant that the purchaser must assume the lease terms that exist between the seller of the premises and the residential tenants whereas the Residential Tenancies Act, 2006, explicitly states:
18 Covenants concerning things related to a rental unit or the residential complex in which it is located run with the land, whether or not the things are in existence at the time the covenants are made.
Conclusion
Generally, privity of contract principles restrict the right to enforce contract terms solely to the parties to the contract; however, there are exceptions.