Privity of Contract and Third Party Beneficiaries 2007

III. Other Corollary Issues

[56] The enforceability of third party beneficiary agreements is the primary consideration behind any law reform project in this area. It is not, however, the only issue raised by the prospect of reform. If the ULCC were to proceed with such a project, a number of other corollary issues would also have to be considered, including:

(A) identification of third parties;

(B) variation and rescission;

(C) defences;

(D) overlapping claims.

[57] These issues have not been very developed in Canadian law. A comparison of existing Canadian law with the UK’s Contracts (Rights of Third Parties) Act 1999 will help to illustrate these issues.[61]

(A) Identification of Third Parties

[58] With any reform, the question arises with what degree of certainty must the third party be identified. That is, must they be identified in the contract, and if so with what degree of specificity. Further, must they be in existence at the time the contract is entered into? The Supreme Court of Canada’s “principled exception” does not require that third parties be expressly identified in the contract. (Although there is some uncertainty as to when they will imply that a contract was intended to benefit a third party). In contrast, the U.K. Act requires the third party be either expressly identified or satisfy a statutory test for identification, e.g. name, or as a member of a class or as answering a particular description. It does not require that the third party be in existence when the contract is entered into. [62]

(B) Variation and Rescission

[59] A question central to any reform would be under what circumstances, would parties who have agreed to confer a right on a third party be permitted to vary or rescind that right and when would crystallization of the third party right occur. The Supreme Court of Canada and the U.K. legislation deal with this issue in two very different ways. In Fraser River, the Court held that parties to the contract could unilaterally revoke those rights at any time prior to “crystallization” and without regard to the third party. Crystallization was said to occur when the “contract crystallized into an actual benefit in the form of a defence against an action in negligence.”[63] Its approach is consistent with freedom on contract. The Court was silent about consent to or reliance by the third party.

[60] In contrast, the U.K. Act offers a greater balancing of third party interests with those of the contracting parties. It provides that where a third party right arises under the terms of the contract, the parties to the contract may not vary or rescind it without the consent of the third party once: (i) the third party has communicated his assent to the term to the promisor; or (ii) the promisor is aware that the third party has relied on the term; or (iii) the promisor could reasonably foresee that the third party would rely on the term and the third party has relied on the term.[64]

[61] Resolution of this issue is likely to be controversial as even some preliminary consultees who favoured reform of the doctrine of privity indicated they would be uncomfortable with any limitations placed on the ability of parties to vary or rescind an agreement.

(C) Defences

[62] In a typical bilateral contract, each party is able to rely on certain defences in the event of non-performance. The question is whether the promisor’s defences, set-offs and counterclaims should be available to the promisor in an action by a third party. On the one hand, the third party should not be put in a better position than the contracting parties. On the other hand, not all the defences, set-offs and counter-claims may be appropriate in the context of a third-party claim. The Supreme Court did not address this issue in either London Drugs or Fraser River as these cases involved a third party relying on a provision in a contract in defence. The UK legislation expressly provides that third party claims should be subject to all defences and set-offs that would have been available to the promisor in an action by the promisee and which arise out of or in connection with the contact.[65]

(D) Overlapping Claims

[63] Allowing third parties to enforce contracts against promisors raises the possibility of overlapping claims. Should promisors be liable to both promisees and third parties? Should promisors be shielded from double liability, and if so, how? Neither London Drugs, nor Fraser River addresses this issue. Article 4 of the U.K. Act provides that the fact that a third party has been given rights does not affect the promisees right to enforce any term of the contract. Article 5 of the U.K. Act seeks to protect the promisor from double liability. It provides that where a promisee has recovered from the promisor a sum in respect of the third party’s loss then the court shall reduce any award to a third party to the extent it thinks appropriate to take account the sum recovered by the promisee.

[64] Other possible issues include: whether arbitration and exclusive jurisdiction clauses should be binding on third parties; the interrelationship between existing common law and statutory rules affecting third parties and any reform proposal; and, whether certain contracts should be excepted from any legislative reform of the privity rule.

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