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Contract Privity Principles Breach of Contract Liability Arising Only Between Contracting Parties
Question: What are the key principles of privity of contract?
Answer: Privity of contract generally dictates that only the parties involved in a contract have the right to enforce its terms, though exceptions exist allowing certain third parties to claim benefits or pursue legal action under specific circumstances, as outlined in various legal cases and statutes. Understanding these nuances can help manage contractual risks effectively.
What Does Privity of Contract Mean?
The Privity of Contract Principle, Generally, Restricts Only the Parties to the Contract to Rights to Enforce the Contract.
Understanding Privity of Contract Principles Involving Contract Liability Risks Exclusively Between Contract Parties
Privity of contract principles confine the rights and responsibilities as provided within a contract solely to the contracting parties. The principle states that only the parties to the contract can enforce the rights and responsibilities of the contract; and accordingly, third parties are unable to enforce the terms of the contract.
The Law
The privity of contract principle was explained within the cases of Greenwood Shopping Plaza Ltd. v. Beattie et al., [1980] 2 S.C.R. 228, as well as Brown v. Belleville (City), 2013 ONCA 148, wherein it was stated:
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
As the law evolves, the privity of contract principle is becoming weakened. Recently, the case of Seelster Farms et al. v. Her Majesty the Queen and OLG, 2020 ONSC 4013, made this point whereas it was stated:
[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
Parties to a contract may also negotiate terms that will bestow or enure a benefit that will favour a third party. In such circumstances, if the party or person with the power to deliver the benefit to the third party fails to do so, the third party, as the beneficiary to the benefit, may enforce the contract terms. This third party right to enforce a contract was stated within the case of, among others, Ferraro et al v. Neilas et al, 2022 ONSC 2737, wherein it was said:
[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
Statutory provisions imposing an assumption of contractual obligations such as laws addressing rights or duties that run with the land following a purchase. As an example, the Residential Tenancies Act, 2006, S.O. 2006, Chapter 17, mandates that the purchaser of a premises tenanted for residential purposes must assume the contractual obligations contained within the lease terms as existing between the selling landlord and the residing tenants. Specifically, the Residential Tenancies Act, 2006, 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.