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Contract Privity Principles Breach of Contract Liability Arising Only Between Contracting Parties
Question: What is the principle of privity of contract?
Answer: Privity of contract is a fundamental legal doctrine that confines the enforceability of contract terms to those directly involved in the contract. While generally only parties to a contract can sue for enforcement, exceptions exist, such as third-party beneficiaries or statutory obligations. Navigating these complexities can safeguard your interests and minimize potential liabilities. For comprehensive legal insight tailored to your needs, consider consulting a qualified professional.
What Is Meant By the Privity of Contract Rule?
The Privity of Contract Rule, Generally, Requires That Only the Parties to a Contract May Sue to Enforce the Terms of the Contract; However, There Are Some Exceptions That Do Allow Other Persons As Strangers to the Contract to Enforce the Contract Terms.
Understanding Privity of Contract Principles Involving Contract Liability Risks Exclusively Between Contract Parties
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
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
Some contract rights, such as the right to collect a debt, may be assigned to a third party. Generally, an assignment must adhere to 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 be provided to the contract parties who may be affected by the assignment of the rights or debts prescribed within the contract; however, in some circumstances, equitable assignment principles may allow for the assignment of rights or debts without complying with the Conveyancing and Law of Property Act mandates. Such was explained within the case of Nadeau v. Caparelli, 2016 ONCA 730, where it was said:
[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
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.
