Third Party Beneficiaries – Privity of Contract
Privity of Contract rule = only the parties to a K can enforce the K. Only party paying consideration can get benefit. Its unfair for a stranger to benefit (Tweedle v. Atkinson)
Tweedle v. Atkinson (1861) – Leading case
- FACTS: Two fathers promise to pay the son (and wife) sums of money. These payments were never made. Son sues the wife’s father for his portion.
- COURT: Held for D. Husband was not a party to the contract between the two parties.
Dunlop Pnuematic Type (1915)
- FACTS: Dunlop made a contact with wholesaler, wholesaler required to make contracts with retailers to keep a minimum price on their tires. One retailer sold some tires below that minimum price. Dunlop sues the retailer
- COURT: Held for D. Dunlop was not a party to that agreement and they cannot sue on that contract to enforce it. It was called a fundamental principle of law
- NOTE: this was the case that stressed the detriment to the promisee as being the operative branch of the consideration. Privity doctrine is really tied up with consideration.
Scruttons v.
- FACTS: drum of oil being shipped by carriers. Damaged in unloading at the other end. Stevedores at the other end wanted protection of limited liability of the bill of lading between the shipper and the carrier.
- COURT: stevedores do not get protection of limited liability clause because they are third parties to the contract.
- NOTE:
Beswick v. Beswick (1964, HL)
- FACTS: Mr. Beswick is a coal merchant, draws up a K saying that his nephew will get the business if he makes a payment to Beswick’s widow each week upon Beswick’s death. Nephew makes one payment and reneges. P (Mrs. Beswick) sues for breach of contract.
- COURT: in Court of Appeal, Denning holds for P. This goes to House of Lords. They also find for P, but say that Mrs. Beswisk is a party to the K as an administrator of the estate. Thus, HL upholds privity of contract rule. HL orders specific performance of K
EXCEPTIONS TO PRIVITY OF CONTRACT RULE
(1) is third party an employee? If yes, use London Drugs and Laing
(2) if 3rd party is a stranger, use concepts of assignment, trust or agency. If arguing agency, use
(3) is 3rd party an independent contractor?
a. If true independent contractor – use
b. If really an employee – use London Drugs
EXCEPTION 1: Agency
o Three parties: Principle. Agent. Third party. Principle appoints agent. Agent has power to bind principle and third party in contract. If you can find that there is an agent, can avoid third party beneficiary problem.
- same facts as Scruttons v. Midland Shipping. Stevedores attempt to utilize exception to third party beneficiary rules.
- COURT: There was a unilateral K between the carrier and the stevedores. The carrier was acting as the agent of the shippers. Stevedores accept the exemption from liability by performance (unloading cargo). The act of unloading is the stevedores’ consideration for exemption from liability.
· No issue of pre-existing duty, because the duty was owed to the shipper not the carrier. Can have the same duty to another person.
· Relies on INTENT to create an agency relationship.
- Set out doctrinal test for agency:
o (1) intention to benefit third party
o (2) principle must in fact be contracting on behalf of the beneficiary
o (3) principle must have the authority to act as the agent
o (4) Must be consideration from third party to promisor.
EXCEPTION 2: Trust
- A (settler) wants to give property to C (beneficiary). A transfers property to B (trustee) who holds the property in trust for C. B can deal with property, enter into K with banks, etc. If bank breaches K, both B and C can sue. .
- It only works if you can find a true intention to create a trust.
Van Peddick (1933, Privy Council) p.352
- FACTS: insurance policy taken out by father. Provided indemnity coverage for anyone driving his car with his permission. Daughter drives the car and injured an innocent. Daughter was sued. Daughter seeks indemnification under the insurance policy. Even though daughter is named in the insurance, she cannot sue to enforce that. Tried to show that this was a trust.
- DECISION: facts don’t support a trust. No privity of contract
o This made the public angry. BC and every other province amended their insurance acts to allow third parties to sue to insurance policies.
EXCEPTION 3: Collateral Contract
Shanklin Pier v. Detal products (1951 – Kings Bench)
- FACTS: P owned a pier. D said that his paint would be perfect to withstand the weather. P hires a contractor to do the work, includes a term that contractor must use D’s paint. Paint fails to work. P sues. Problem is that contract is with contractor, not with P.
- COURT: held for P. There is a collateral contract between the D and the P. Contract: if you use my paint, I guarantee the results. P used the paint but didn’t get the results. Sue’s on collateral contract.
- Easy facts because P and D had actually spoken.
o Doctrine has expanded so that even advertising to the public is enough to create a representation that if relied upon can be converted into collateral contract.
EXCEPTION 4: Tort law – breach of contract between A and B causes damage to C
- Donoghue v. Stevenson. Contract was between restaurant owner and manufacturer, but customer incurred the injury. Skirt the contractual problem by framing it as tort.
- White v. Jones (1995 – House of Lords) - Solicitor negligently draws up a will that would have benefited certain people. Those beneficiaries can sue in tort for the loss.
EXCEPTION 5 – Assignment
- Assign debts and chose in action. Rights under a contract can be assigned to someone else. Subject matter must be a chose in action. Cannot be a personal matter. Ex. A is creditor, B is debtor. A can sell credit to C. C can now sue B.
- Only a narrow range in which assignment is useful
EXCEPTION 6 – Statute
- ex. What happened in Van Peddick case. They legislated that insurance contracts will be binding to third parties.
EXCEPTION 7 – Employment – the principled exception
Doctrine of privity of contract must be relaxed for employees (
- the employees or users were intended to be 3rd party beneficiaries (express or implied)
- employees or users were doing exactly what the contract spoke of (employees doing the work or someone using the equipment)
- FACTS: lease of premises in mall by Canadian Tire. As part of lease, mall had fire insurance such that Canada Tire wouldn’t be sued for fire. Mall would just go to insurance company. Fire at Canada Tire started by employees. Mall’s insurance sues employees who started the fire for negligence. Third party beneficiary problem. Employees are not a party to the K.
- COURT: employees are not party to the contract. They were held liable.
- NOTE: this is an unfair and unrealistic result.
- D’s employee’s damage an item while unloading it into P’s warehouse. D is protected through limitation clause with P, so insurance company goes after employees.
- COURT: employees are covered in liability clause. “principled exception” to the third party beneficiary rule.
- Employees are covered if:
o (1) employees were intended to be 3rd party beneficiaries (express or implied)
o (2) employees were acting in the course of employment, doing services contemplated in contract
- Distinction between third parties and third party beneficiaries
o True third party has no interest and cannot enforce a K. If contract mentions a third party, that is a third party beneficiary.
o In
o In London Drugs, it was a contract that necessarily involved employees doing something – they are third party beneficiaries.
Fraser River Pile & Dredge v. Can-Dive Services Ltd. (1999, SCC, Iacobucci J) p.384
- FACTS: D charters barge with a waiver of subrogation rights in the K against charterers of the barge. Users were a third party, acting negligently and the barge was sunk. Since signing the K, the two contracting parties had removed the waiver of subrogation. Owner of the barge (P) goes after the employees. Removes waiver of subrogation clause after the fact.
- COURT: Held for D – applies London Drugs two part test to non-service contract.
o London Drugs is not to be read narrowly. Does not apply merely to service contracts
o once the contract is signed, the third party’s rights are crystallized and cannot be taken away.
What happens to third party beneficiaries if two original parties tear up/ change the K?
Legislative Solutions:
-
- NB legislation – main parties may vary or rescind the contract at any time. But if there has been reliance, the third party is protected on that reliance to the extent that the promisor knew or ought to have known that the third party would rely. Similar to promissory estoppel. If you make a promise and someone relies on it, you are responsible for that promise.
Common law Solutions: 3rd party rights crystallize
- in
Case for abolishing the privity of contract rule entirely.
Can produce unjust results. Beswick and
No convincing rationale has been given for the rule. The consideration and privity analysis doesn’t work.
- Argument that third party beneficiaries are like gifts and are not enforceable. Generally allow donors to change their mind so that they are not unfairly surprised by having the gift enforced. In a contract, the parties have already expressly agreed to the benefit, so it would be no surprise.
- Doctrine is unstable and arbitrary. It is not predictable because there are so many exceptions to the rule.
- Distorting effects on other doctrines. For example, borrowing from the law of agency or trust to solve third party beneficiary rule. Distort the doctrine you’re borrowing from.
- Floodgates argument from the other side – worried about opening up gates of litigation. BUT, several jurisdictions do not have the rule (
- Who should be behind the abolition? To abolish the rule by the courts would be a fundamental change. Therefore legislature should do it. But there is no pressure to do this so it probably won’t ever happen. And what about the problem is some provinces changing but other don’t.
o Maddog – when a rule is so unstable and unpredictable, courts have a duty to step in
o Maddog – the change is not that crazy and large. “What’s the big deal?” Making a change like this has happened in other areas.
Recission – tearing up the contract at the beginning. As if the K never happened
Repudiation – stopping contract where its at.
Estoppel
If you make a statement or conduct, and someone relies upon it, you are estopped from going back on it. Protects RELIANCE by enforcing promises where there has been reasonable reliance but no consideration
RATIONALE FOR RULE: doctrine of consideration doesn’t protect all promises. In unilateral contracts, can revoke at any time up to full performance. This doesn’t seem right because someone has relied on the promise and expended effort, spent money, etc. Fuller and Perdue article – reliance is the most worthy of protection.
NOTE: also look to consideration – Roffey – focus consideration on the benefit to the promisor
REQUIREMENTS OF ESTOPPEL (1-3 from High Trees)
(1) A representation of a fact (present or future)
(2) Representor knows or ought to know that the other party may rely on that representation
(3) The other party does in fact rely on that representation
(4) no reason not to enforce promise (i.e. duress). (D & C builders)
Three types of Estoppel
(1) Representational estoppel
- about persuading someone into a contract by lying about a present fact (Patterson)
- cannot be used as a sword
(2) Proprietary Estoppel
- about making a misrepresentation about land. Can be used as a cause of action. Do not need a previous legal relationship (Crabb)
(3) Promissory Estoppel
- representation of a future fact. (High Trees)
- cannot be used as a cause of action, need pre-existing legal relationship (Coombe)
(1) Representational Estoppel
Patterson Motors v. Riley (SK)
- FACTS: Widow was told that the old car was paid off by insurance. So she trades up. Car was not paid off, and now she owes payments. She claim representational estoppel
- COURT: contract is valid, but the P is estopped from claiming payments. Her reliance on the P’s statements were upheld
(2) Proprietary Estoppel
Crabb (1975, Lord Denning)
- FACTS: D owns part of property, P owns 2 lots on the other side. D builds a road on the property. D says that P will have access to the road. D even built gates showing that it was going to give access. D knew that P was going to sell the 2 lots at different times. D then denied P access on road, making his property inaccessible, asks for $3000 for access.
- COURT: Held for P because of proprietary estoppel. D made a representation primarily by its conduct. P relied upon it by not negotiating any other access to the second lot.
Errington v Errington (1952, English KB, Lord Denning)
- FACTS: father represented to the couple that they would get the house if they paid the mortgage
- COURT: held for couple because of part performance of a unilateral contract. It was a stretch to decide on consideration. Today this would be considered proprietary estoppel.
(3) Promisory Estoppel – representation of a future fact
- P leases flats to D in 1937. War breaks out, flats aren’t rented, D and P agree to lower the rate. The war finishes, P sues for full amount of rent, relying on that there was no consideration for the lower rent (pre-existing duty).
- COURT: D does not have to pay higher rent because of promissory estoppel
o Equity overrules the pre-existing duty rule of consideration – that a lesser sum will not be consideration of a greater sum (Foakes v. Beer)
o Applies estoppel – problem is that this is a representation of a future fact, not a present fact. Creates doctrine of Promisory estoppel.
Combe v. Combe (1951,
- Cheating husband agreed to pay $100/year to wife if she didn’t sue in divorce court, but he never paid. Wife brings action for breach of contract
- COURT: held for husband.
o The original contract for $100 was not enforceable because there was no consideration (the forbearance to sue was not real consideration)
o Wife cannot sue on estoppel because estoppel is not a cause of action
§ “[Estoppel] may be part of a cause of action but not a cause of action in itself” (p.296- Denning)
o Estoppel is used to ALTER contracts, not MAKE them
o Promissory estoppel is to be used as a shield, not a sword
Roberts v. Minister of Pensions (1949)
- Government had accepted a particular injury as qualifying and paid person. Then the government changes their mind and says that it doesn’t qualify
- COURT: Pensioner was relying on the payments. Government can’t change their representation that was relied upon. Government was estopped from changing promise
D & C Builders v. Rees (1966,
- Contracting company (P) did work for $400 but was not paid. D knows that P is in financial trouble and so offers $300. P accepts, but then sues for the extra $100. D argues promissory estoppel – wants to hold P to his promise to pay less.
- COURT: held for P
o Acceptance was not voluntary, forced because of economic duress. Even if there was consideration, duress would override.
o Difference than Stott v. Meritt Investments
§ In Stott, the stock broker waited 2 years to sue. The contract was accepted as enforceable, despite duress
§ In D&C, they sued right away
Economic Duress (p.306)
(1) did he protest?
(2) was there an alternative available?
(3) Was he independently advised?
o Did he take steps to avoid the contract?
Problem with promissory estoppel not being used as a sword
Sword/shield distinction is illogical and arbitrary. Enforceability of a K variation depends on whether the promisee is asserting the promise or refuting the promise. Only refuting a promise will work because that is seen as a shield. However, reliance is the real issue. There is reliance no matter if the promisee is enforcing the K variation or acting in accordance with it. Application of promisory estoppel provides anomalous results.
Look to
Ex. 1 Grape grower had a contract to sell 10 tons of grapes for $10,000. he had a bad year. The buyer says that they’ll buy the 10 tons for $12,500. The grape grower acts in reliance and gets enough grapes for 10 tons and delivers. The buyer then says that the contract is for $10,000. Grape Grower sues for the extra $2,500. This is combe v. combe - trying to use estoppel as a cause of action. There was no consideration for the extra $2500 so that contract is not valid. Only the original $10,000 is enforceable.
Ex 2. Same circumstances as above except buyer agrees to accept only 8 tons for $10,000. On delivery, buyer says that he won’t pay unless he gets the other 2 tons. Grape grower is suing on the original contract for the original price. Buyer says that this is a breach of contract. Grape grower relied on the statement that they only needed to grow 8 tonnes. Estoppel works. Where is the consideration for the second contract?
- concerned with protecting reliance. Use reliance instead of consideration
- have taken High Trees to its ultimate conclusion – it can be used as a sword and doesn’t need pre-existing legal relations
- solves unilateral contract problem – all that is needed in substantial performance (aka. reliance) and there is an enforceable contract.
Amending a K without consideration
Parties want to amend their contract. Parties rely on the changes. Consideration is not a useful took in protecting reliance on amended contracts. There are many times that a business will want to accept a lower sum
Issues to overcome:
(1) cannot accept a lesser sum for a greater sum because that is not consideration (Foakes)
- overcome in Raggow. If lesser sum is accepted, imply rescission of original K and creation of a new K
- BUT -- If the only change is in price, will not be rescission (Gilbert Steel)
(2) doing what you are already obligated to do is not consideration (Stilk v. Myrick)
- overcome in Roffey. Look to the benefit to the promisor as evidence of consideration, not just detriment to the promise. But must have an existing contractual relationship
- Roffey Bros can be used when: (p.282)
o if A has entered into a contract with B to do work for, or to supply foods or services to, B in return for payments by B and
o at some stage before A has completely performed his obligations under the contract B has reason to no doubt whether A will, or will be able to, complete his side of the bargain and
o B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time and
o As a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit, and
o B’s promise is not given as a result of economic duress or fraud on the part of A
o THEN The benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding.
Raggow v. Scougall (1915, Darling J)
- FACTS: employees accept a wage cut during the war. One employee sues for full wage
- COURT: This is a new contract. There has been rescission of the old contract - there was a mutual agreement that I won’t enforce my obligations if you won’t enforce yours.
o There is no pre-existing duty problem because old contract is gone.
o CRITIQUE: how can you tell that the old contract was rescinded and not just amended? Perhaps policy. Court thought that the company was doing the honorable thing in war-time and that the sympathy was with the company
Gilbert Steel v. University Construction (1976, Ont CA
- FACTS: Written contract for steel (K #1). Part way thru contract, steel producer increases steel prices, parties make a new written contract with new prices (K #2). Steel producer increases price again, parties orally agree to K #3. Contractor will only pay written contract price in K #2 and not the new higher price in K #3. Steel company sues.
- COURT: K #3 fails for lack of consideration (pre-existing duty).
o NOT promissory estoppel - there hasn’t been any reliance on the promise of a higher price.
o NOT Rescission. This is not a new agreement like Raggow because the only change in the price
o Policy -- perhaps court thought steel producer was asking for more money only because he could. That would be economic duress.
Williams v. Roffey Bros (1991,
- FACTS: contractor offers incompetent subcontractor extra cash to finish on time, then refuses to pay.
- COURT: Judgment for P. D must pay extra cash
o Rejected argument that the $10,000 was for the whole contract, not per apartment
o NOT economic duress because D offered to pay more
o NOT promissory estoppel – that would be using it as a cause of action
o Decided on consideration – “benefit to the promisor” side of the test
§ Usually consideration looks at detriment to promisee
§ There was consideration –second K conferred a benefit on D
· 1. D avoids penalty fees
· 2. avoid time and expense of finding other workers
· 3. by being willing to pay more there must be some benefit that the D is getting. He would not pay more for no new benefit.
§ court distinguishes Stilk v. Merrit: although there was no new detriment to P added, there is a new benefit to the D added.
o Court limits this to amendment of existing contractual relationship. Must have a prior contract. Don’t want this to be used to create contracts between people.
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