Chapter 13: Privity of Contract

Question 1

describe doctrine of privity

Answer 1

only a person who is party to a contract can:

(1) enforce the obligations under the contract/be entitled to it, or

(2) have obligations imposed on them/be bound by it. Means that a person who is not a party to a contract cannot legally enforce rights or liabilities accruing to them under the contract.

Question 2

reasons we have privity of contract

Answer 2

1. Those who are involved in contract should decide whether to sue
2. Those who are involved know what the contract means, and have the evidence to prove it
3. Reciprocity (consideration)
4. Judicial economy (want each contract matter decided once, argued by the people who know contract the best)

Question 3

Beswick v Beswick

Answer 3

General Privity rule: only the parties to a contract (those giving or receiving consideration) can sue upon it. Third party beneficiaries cannot sue for the receipt of a benefit under a contract.

But representative of estate of a party to contract can sue

Husband sells business to nephew on condition for payment to him, then to his wife when he dies

nephew makes one payment to wife after husband’s death, then doesn’t make any more payments

wife is adminstratrix of husband’s estate, which allows her to sue despite privity rule

Question 4

Greenwood Shopping Plaza v Beattie

Trust exception to privity of contract

Answer 4

subrogation insurance company acquires insured’s right to sue for damages (results in cheaper insurance)

Instances of agency and trust are exceptions to the general privity rule

If settlor/trustee (employer) puts certain rights they hold in trust as property to their employees, exception to general rule applies

Trust Exception Test: Test to determine trust exception: can contract terms be altered without reference to the beneficiary of trust?
* If yes, then no trust
* If no, then trust

Question 5

Dyck v MB Snowmobile Association

Answer 5

Test for agency exception:

1. Is there a clear indication in the document that the third party beneficiary at issue is to be protected by the limitation of liability clauses in the document?
2. Does the wording in the document indicate that in addition to contracting on its own behalf, a party is also contracting as agent for the third party beneficiary at issue, so that these provisions should also apply to the 3rd party?
3. Does the contracting party have the authority to act on behalf of the third party beneficiary?
4. Is there consideration moving from the third party beneficiary to the Plaintiff in exchange for limited liability of the third party beneficiary?

if 4 elements can be proven, agency exception creates a direct contractual relationship between third party beneficiary and the other party, avoiding application of privity rule

Question 6

London Drugs v Kuehne & Nagel

Principled Aapproach, employee protection limitation of liability clause

Answer 6

Principled Approach Application Test:

1. Intention to benefit employees (threshold): was there an intention for the limitation of liability clause to extend benefits to employees expressly or impliedly [looking at the language]? This will establish an identity of interest; and
2. Activity: when the loss occurred: (a) the employees are acting in the course of their employment duties and (b) were carrying out the exact work contemplated by the contract (within the scope of their duties/performing the services pursuant to the contract indicates consideration)

different from Greenwood:
* contract for services rather than lease
* general limitaiton clause rather than subrogaation clause

Question 7

Fraser River Pile & Dredge v Can-Dive

Principled exception application to commercial transactions

Answer 7

stronger version of London Drugs

A 3rd Party beneficiary can be “privy” to a contractual benefit in a contract when the 3rd Party was:

1. intended by the parties to the initial contract to benefit from the contractual term (expressly or impliedly); and
2. where the third party beneficiary’s reliance on the provision arose out of the very activities contemplated as coming within the scope of the provisions/contract