Privity

1
Privity

• Contracts

2
Privity of Contract

• What is it?
• Recent doctrine
• Offshoot of consideration
• Why do we have it?
• Those who are involved should decide whether to
  sue
• Those who are involved know what the contract
  means, and have the evidence to prove it
• Reciprocity
• Judicial economy

3
Privity of Contract (contd)

• So if there are all these reasons not to allow a
  non-contracting party sue to enforce a contract,
  why do we sometimes allow it?
• Life insurance
• Contracts specifically made for the benefit of
  third parties (Beswick v. Beswick)
• Contracts for a family (Jackson v. Horizon
  Holidays)
• Contracts between manufacturer and retailer
  sought to be enforced by the customer (Hallmark
  Pools v. Storey)

4
Privity of Contract (contd)

• Beswick v. Beswick
• 1968 House of Lords
• Facts
• The husband is selling the business to the
  nephew. The husband wishes to care for both
  himself and his wife, provided that he died
  before she did. So, the husband agreed with the
  nephew to give him the assets of the business in
  return for a payment of over 6 a week, and then,
  on his death, a payment of 5 a week during the
  remainder of her life.

5

• Beswick v. Beswick (contd)
• Facts (contd)
• The weekly payments were made during the
  husbands lifetime, and the nephew made a single
  payment of 5 to the wife after the death of the
  husband. After that, the nephew refused to pay
  further.
• The wife is the administratrix of the husbands
  estate.

6
Privity of Contract (contd)

• Beswick v. Beswick (contd)
• Paragraph 3
• in consideration of a sale by A to B. B agrees to
  pay the price of 1,000 to a third party X. Then
  the first question appears to me to be whether
  the parties intended that X should receive the
  money simply as A's nominee so that he would hold
  the money for behoof of A and be accountable to
  him for it, or whether the parties intended that
  X should receive the money for his own behoof and
  be entitled to keep it.
• As As nominee is agency law and/or trust law
  and neither relationship is made out on the facts
  here.

7
Privity of Contract (contd)

• Beswick v. Beswick (contd)
• Paragraph 4
• Where the intention was that X should keep the
  1,000 as his own, what is the nature of B's
  obligation and who is entitled to enforce it?
• The third party cannot enforce the contract even
  if it is expressly made for conferring a benefit
  on the third party (paragraph 7)
• Why? Amongst other reasons, the freedom of
  contract entitles the parties to a contract to
  alter the contract of their own volition.
  Therefore, if we allow the third party to enforce
  the contract, this could place the contracting
  parties in a difficult position of they, prior to
  the suit, have agreed to alter their arrangement
  (paragraph 7)

8
Privity of Contract (contd)

• Beswick v. Beswick (contd)
• Why does the husband not sue on the nephews
  promise to pay the wife?
• He can, but the ordinary remedy is damages.
  Damages are only available for the loss suffered
  by the plaintiff. The plaintiff here would be
  the husband. What has the husband due to the
  failure of the nephew to pay the wife? Very
  little. Therefore, the nephew owes very little
  in damages to the husband (paragraphs 8 and 9).

9
Privity of Contract (contd)

• Beswick v. Beswick (contd)
• What about the wife?
• In her personal capacity, the wife has no right
  to sue at all, as she is a stranger to the
  contract (she is not privy to the contract)
• In her capacity as administratrix, however, she
  stands in the shoes of her husband, as the
  administrator of his estate. In this capacity,
  can maintain the suit. Damages would lead to a
  grossly unfair result (paragraph 9), and are thus
  an inadequate remedy of the purposes of this
  case. Therefore, specific performance is the
  appropriate remedy. If the husband through the
  actions of his administratrix, the wife is able
  to advance specific performance as a remedy, then
  the issue of how much the husband is out of
  pocket does not arise, and the nephew has to pay
  the full amount.

10
Privity of Contract (contd)

• Jackson v. Horizon Holidays Ltd.
• 1975 English Court of Appeal
• Facts
• Guy wants to take his wife and kids on a
  vacation. He wants everything to be of high
  quality.
• Kids room to be adjoining the parents room
• The distance from the beach
• A balcony facing the sun
• Four course meals
• An English-speaking doctor

11
Privity of Contract (contd)

• Jackson v. Horizon Holidays Ltd. (contd)
• Facts (contd)
• Horizon Holidays Ltd. said that the hotel could
  meet the requirements. Then it turned out that
  this hotel would not be ready in time, and
  therefore, Horizon Holidays Ltd. suggested an
  alternative. It was really bad
• Paragraph 5
• Soon after their return, Mr Jackson wrote a
  letter setting out all his complaints from the
  beginning to the end. Then Mr. Jackson brought
  an action for damages in respect of the loss of
  his holiday for himself, his wife and the two
  small children. Horizon Holidays admitted
  liability. The contest was only on the amount of
  damages.

12
Privity of Contract (contd)

• Jackson v. Horizon Holidays Ltd. (contd)
• Holdings
• It is possible to get damages mental distress,
  inconvenience, upset, disappointment and
  frustration (paragraph 6)
• Paragraph 10
• ... I consider it to be an established rule of
  law that where a contract is made with A. for the
  benefit of B., A can sue on the contract for the
  benefit of B., and recover all that B. could have
  recovered if the contract had been made with B.
  himself.
• Not just a trustee situation (para. 11)
• The House of Lords disagrees with the rationale
  for the decision, but not the result there

13
Privity of Contract (contd)

• Hallmark Pool Corporation v. Storey
• 1983 New Brunswick Court of Appeal
• The grandparents wanted to get a pool for the
  grandchildren.
• No annual draining and painting
• 15 year guarantee
• The grandmother calls Aquanaut, a Hallmark
  dealer, inquiring about a pool. Evans, an agent
  of Aquanaut, appeared at the house. He gave them
  pictures and a price list.

14
Privity of Contract (contd)

• Brochure
• Lifetime
• Always looks new
• Because of the minimum time it takes to build a
  Hallmark Pool, your Hallmark Pool builder can
  offer quality, beauty and design at a price
  competitive to pools of inferior quality and
  construction materials.
• Guaranteed durability . . . in writing for 15
  years. Hallmarks amazing and generous 15 year
  Fiberglass Guarantee has made Hallmark one of the
  world's most acceptable pools. It is why Hallmark
  is a better investment!
• Mrs. Storey could not read some of this, and did
  not understand the details of the construction.

15
Privity of Contract (contd)

• Paragraph 12
• The contract, though on a form supplied by
  Hallmark, was made with J. W. Price and
  Associates Ltd., a companion firm of Aquanaut,
  also owned by Mr. Price, and also an authorized
  Hallmark dealer. At that time agreement was
  reached on the location of the pool.
• Literature provided no guarantee but no concern
  at the time (paragraph 13)
• The trial judge
• Dealing with an agent of Hallmark (para. 17)
• Collateral contract (para. 18)
• The Court of Appeal
• No collateral contract created by the attempt to
  repair This would discourage non-contractual
  largesse (para. 19)
• Guarantee is a collateral contract (para. 20)
• Like Carlill
• Stronger than Carlill
• Clearer langauge
• No newspaper direct contact by authorized agent

16
Privity of Contract (contd)

• De la Bere v. Pearson, Ltd., (para. 26)
• Newspaper said they would provide financial
  advice
• Outside adviser
• Not a member of the Stock Exchange undischarged
  bankrupt
• Money stolen
• This case is stronger (para. 27)
• Assertion of competence
• Reliance proven
• The specific terms of the guarantee do not
  necessarily cover what happened here, but this is
  very hard to read and it is not the same as the
  guarantee advertised
• Of its own volition
• In accordance with Instructions

17
Privity of Contract (contd)

• Greenwood Shopping Plaza Ltd. v. Beattie
• 1980 Supreme Court of Canada
• The appellant is the landlord Neil J. Buchanan
  Limited (the company) is the tenant the
  respondents are employees of the company.
• The terms of the lease
• 14.The Lessor shall insure the buildings on the
  Entire Premises against fire and supplemental
  risks on the basis of replacement cost to the
  extent obtainable and shall furnish copies of
  all policies to the Lessee. The Lessor, if itself
  unable to procure insurance on this basis, and
  before insuring on a depreciated cost basis,
  undertakes to give notice to the Lessee of its
  inability to procure such insurance and to permit
  the Lessee to acquire insurance on the basis of
  replacement cost on behalf of the Lessor and for
  which the Lessor agrees to pay.
• 15. Both the Lessor and the Lessee will arrange,
  provided such arrangement is not contrary to the
  wishes of any existing or future mortgagee of the
  Entire Premises, with their respective insurers
  not to grant subrogation rights for the recovery
  of any loss through fire or supplemental perils
  occasioned by acts of the other, provided such
  loss is covered by insurance and to the extent
  only that payment of such loss is made by the
  insurer.

18
Privity of Contract (contd)

• Neither party did it
• Meaning of subrogation Making sure that the
  insurer cannot sue the other party
• Are the employees covered by the clause?
• The Court of Appeal said that paragraph 15 was an
  implied promise by the landlord to cover the
  employees
• Trust and agency Neither is made out here.

19
Privity of Contract (contd)

• Dyck v. Manitoba Snowmobile Association et al.
• 1982 Manitoba Court of Appeal
• Dyck was a snowmobile racer. As the race was
  really ending, Wood, the official starter, Wood
  went onto the track to give the checkered flag to
  the winner. During the giving of the flag,
  Dyck, the third-place finisher, ran into Wood.
  Wood was uninjured Dyck was seriously hurt.
  Before the race began, Dyck signed an agreement
  with the MSA waiving the right to sue the MSA its
  officers and agents. Wood now seeks the
  protection of the exclusionary clause.
• A race does not have to follow the rules of the
  road, but you cannot deliberately hurt people,
  and therefore, there is no contributory
  negligence of the plaintiff (paragraph 17).
• Dyck signed a race form which reads as follows

20
Privity of Contract (contd)

• I have read the supplementary regulations issued
  for this event and agree to be bound by them. In
  consideration of acceptance of this entry or my
  being permitted to take part in this event, I
  agree to save harmless and keep indemnified the
  M.S.A. and/or the M.S.A., its organizers, and
  their respective agents, officials, servants and
  representatives from and against all claims,
  actions, costs and expenses and demands in
  respect to death, injury, loss or damage to my
  person or property, howsoever caused, arising out
  of or in connection with my taking part in this
  event and not withstanding that the same may have
  been contributed to or occasioned by the
  negligence of the said bodies, or any of them,
  their agents, officials, servants or
  representatives.

21
Privity of Contract (contd)

• Interpretation of the clause (paragraphs 22-24)
  We will deal with this later on in the course.
• Privity argument
• Trust argument No evidence of this
• Agency argument (paragraph 34)
• If
• the bill of lading contract makes it clear that
  the stevedore third party is intended to be
  protected by the provisions in it which limit
  liability,
• the bill of lading contract makes it clear that
  the carrier contractual party, in addition to
  contracting for these provisions on his own
  behalf, is also contracting as agent for the
  stevedore third party that these provisions
  should apply to the stevedore third party,

22
Privity of Contract (contd)

• Agency argument (paragraph 34)
• If
• the carrier contractual party has authority
  from the stevedore third party to do that, or
  perhaps later ratification by the stevedore
  third party would suffice, and
• that any difficulties about consideration moving
  from the stevedore third party were overcome.

23
Privity of Contract (contd)

• I have read the supplementary regulations issued
  for this event and agree to be bound by them. In
  consideration of acceptance of this entry or my
  being permitted to take part in this event, I
  agree to save harmless and keep indemnified the
  M.S.A. and/or the M.S.A., its organizers, and
  their respective agents, officials, servants and
  representatives from and against all claims,
  actions, costs and expenses and demands in
  respect to death, injury, loss or damage to my
  person or property, howsoever caused, arising out
  of or in connection with my taking part in this
  event and not withstanding that the same may have
  been contributed to or occasioned by the
  negligence of the said bodies, or any of them,
  their agents, officials, servants or
  representatives.
• Where the assertion that MSA is working as agent
  for Wood? Quite the contrary
• How Wood does give authority to the MSA to get
  this waiver
• I knew there were release signed
• I knew they were protecting us
• Comparison to New Zealand Shipping Ltd

24
Privity of Contract (contd)

• A agrees to sell a drill to B (contract of sale).
  A agrees with D to ship the drill to B via the
  carrier (C). D is the agent of C. Therefore,
  there is a contract of agency in which D is the
  agent, and C is the principal. In this case, A
  is the third party. This is a contract of
  carriage. Once the ship arrives, it needs to be
  unloaded. The carrier (C) hires D to unload the
  ship. This is the stevedoring contract. D owns
  C.
• There is also a bill of lading, as part of the
  contract by carriage. It contains exclusionary
  provisions on which the stevedore D wishes to
  assert against the buyer B.
• The bill of lading is between the carrier and the
  shipper. In other words, it is between A and D.
  But, in entering into both the contract of
  carriage and the bill of lading, D was clearly
  acting as an agent for the carrier (C).
  Therefore, the bill of lading is between A and C.
  D needs to it be between B and D, in order that
  D can assert the exclusionary clause against B.

25
Privity of Contract (contd)

• By operation of law under a bill of lading, the
  buyer B automatically takes over for A, upon
  arrival of the ship and the delivery of the
  proper documents. So far, we have a contract
  between B and C.
• The bill of lading specifically provides
• The stevedore is meant to be covered by the
  exclusionary clause
• The carrier is acting as agent for the stevedore

26
Privity of Contract (contd)

• Since the stevedore (D) owns the carrier (C), and
  is the only stevedore of the carrier in New
  Zealand, authorization was clearly given by D for
  C to act as the agent of D.
• This is a commercial relationship. In other
  words, everybody who is involved in the
  transaction believes that the transaction will
  result in economic benefit to them. This is why
  they are doing their part. Therefore, there is
  valid consideration flowing from D, in return Bs
  promise to pay C for the shipping of the drill.

27
Privity of Contract (contd)

• London Drugs Ltd. v. Kuehne Nagel International
  Ltd.
• 1992 Supreme Court of Canada
• KN is storing a huge transformer for the
  appellant
• Exclusionary clause
• (b) The warehouseman's liability on any one
  package is limited to 40 unless the holder has
  declared in writing a valuation in excess of 40
  and paid the additional charge specified to cover
  warehouse liability.

28
Privity of Contract (contd)

• The appellant refuses the extra insurance offered
  by KN, and got their own insurance
• I am going to assume either that
• This is a subrogated claim or
• The insurance requires proper storage.
• Therefore, either way, the insurance arranged by
  the appellant is irrelevant to the issue at hand
• The individual employee respondents were to load
  the transformer onto a truck and were negligent
  in so doing. They caused over 33,000 in damage.
  

29
Privity of Contract (contd)

• There are two questions
• Is there a duty of care? -- Yes
• Does that mean that the employees can gain the
  benefit of the exclusionary clause
• Two aspects of privity (paragraph 19)
• It precludes parties to a contract from imposing
  liabilities or obligations on third parties.
• It prevents third parties from obtaining rights
  or benefits under a contract it refuses to
  recognize a jus quaesitum tertio or a jus tertii.
  
• Privity is recent (paragraph 20)

30
Privity of Contract (contd)

• Justifications
• A contract is a very personal affair, affecting
  only the parties to it
• It would be unjust to allow a person to sue on a
  contract on which he or she could not be sued
• If third parties could enforce contracts made for
  their benefit, the rights of contracting parties
  to rescind or vary such contracts would be unduly
  hampered
• The third party is often merely a donee and a
  system of law which does not give a gratuitous
  promisee a right to enforce the promise is not
  likely to give this right to a gratuitous
  beneficiary who is not even a promisee.
• Floodgates

31
Privity of Contract (contd)

• Criticisms
• The present state of the law is very complex and
  uncertain
• The traditional justifications for the doctrine
  of privity are largely unfounded
• Only those in privity should be allowed to sue
• Consideration gives the right to sue and
• Preventing double recovery
• The doctrine impairs the enforcement of sensible
  commercial and personal arrangements made on a
  daily basis
• Exceptions to the doctrine have developed with no
  rational basis except to avoid the application of
  the doctrine

32
Privity of Contract (contd)

• Criticisms (contd)
• It is difficult, if not impossible, to reconcile
  the exceptions with the doctrine
• The exceptions are of limited use in many
  situations
• The possibility remains that meritorious claims
  will be defeated by the application of the
  doctrine
• The doctrine has been subject to legislative
  inroads as well as academic and judicial
  criticism

33
Privity of Contract (contd)

• Criticisms (contd)
• Many jurisdictions around the world have
  recognized third party rights by abolishing or
  modifying the doctrine of privity.
• United States
• New Zealand
• Western Australia
• Queensland and
• Quebec It frustrates commercial expectations and
  justice
• It allows one of the parties to frustrate the
  express or implied intentions of the contracting
  parties
• It frustrates insurance allocations

34
Privity of Contract (contd)

• For these and other reasons, even judges who have
  felt compelled to apply the doctrine have called
  for changes to it.
• He rationalizes always the previous decisions of
  the Court
• Greenwood
• Lease rather than a contract for services So
  what?
• Subrogation clause rather general limitation
• No proof that employees would be on premises
  What?
• No evidence to support a finding that the parties
  to the contract intended to confer a benefit on
  the employees by the provisions of the lease
  relied on.
• The parties seeking to obtain benefits from the
  contract in Greenwood Shopping Plaza were viewed
  as complete strangers and not third party
  beneficiaries.

35
Privity of Contract (contd)

• We should not discard privity entirely (paragraph
  58)
• Incremental change only (paragraphs 59 and 64)
• Assessing the deficiencies in the law
• Economic and policy issues
• Subsidiary rules and procedures
• Distinction between the legislative and judicial
  branches
• The status quo (paragraph 66)
• No problem with variation of rescission of
  contracts (paragraph 67)

36
Privity of Contract (contd)

• Special relationship
• Employer-employee identity of interest
• Employer-customer Know that the employees will
  do the work
• The appellant is being scuzzy (paragraph 70)
• Policy reasons (paragraph 71)
• These parties knew what they were doing
• To not defeat their allocation of risk
• The employees do not have insurance
• Nothing is known of their position when the
  contract was made

37
Privity of Contract (contd)

• The test
• 1) The limitation of liability clause must,
  either expressly or impliedly, extend its benefit
  to the employees (or employee) seeking to rely on
  it and
• 2) the employees (or employee) seeking the
  benefit of the limitation of liability clause
  must have been acting in the course of their
  employment and must have been performing the very
  services provided for in the contract between
  their employer and the plaintiff (customer) when
  the loss occurred.

38
Privity of Contract (contd)

• Incremental change
• Intention of the parties
• Close to the agency exception
• Very specific and limited exception to privity
• Application to this case
• No express inclusion
• Implied inclusion
• Performing the very services contracted for by
  the appellant when the damages occurred.

39
Privity of Contract (contd)

• Fraser River Pile Dredge Ltd. v. Can-Dive
  Services Ltd.
• 1999 Supreme Court of Canada
• Fraser River owns a boat. They rented it to
  Can-Dive. In Fraser Rivers insurance policy,
  there was a waiver of subrogation clause. The
  boat was lost in a storm during Can-Dives use of
  it. Fraser River gets paid the full amount of
  the claim, and then makes a deal with the insurer
  to agree to waive the waiver of subrogation
  clause. This way, the insurer, standing in the
  shoes of Fraser River, can sue Can-Dive to
  recover the amount paid to Fraser River

40
Privity of Contract (contd)

• Insurance policy provisions
• It is agreed that this policy also covers the
  Insured, associated and affiliated companies of
  the Insured, be they owners, subsidiaries or
  interrelated companies and as bareboat charterers
  and/or charterers and/or sub-charterers and/or
  operators and/or in whatever capacity and shall
  so continue to cover notwithstanding any
  provisions of this policy with respect to change
  of ownership or management. Provided, however,
  that in the event of any claim being made by
  associated, affiliated, subsidiary or
  interrelated companies under this clause, it
  shall not be entitled to recover in respect of
  any liability to which it would be subject if it
  were the owner, nor to a greater extent than an
  owner would be entitled in such event to recover

41
Privity of Contract (contd)

• Insurance policy provisions (contd)
• In the event of any payment under this Policy,
  the Insurers shall be subrogated to all of the
  Insured's rights of recovery therefor, and the
  Insured shall execute all papers required and
  shall do everything that may be necessary to
  secure such rights, but it is agreed that the
  Insurers waive any right of subrogation
  against...
• (b) any charterer(s) and/or operator(s) and/or
  lessee(s) and/or mortgagee(s).

42
Privity of Contract (contd)

• The test from London Drugs (paragraph 29)
• The parties to the contract must have intended
  the relevant provision to confer a benefit on the
  third party.
• The employees were acting in the course of their
  employment when the loss occurred, and whether in
  so acting they were performing the very services
  specified in the contract between their employer
  and its customer.
• Incremental, but not really
• Principled exception focused primarily on the
  intention of the parties
• Did the parties to the contract intend to extend
  the benefit in question to the third party
  seeking to rely on the contractual provision
  This is easy here because there is a specific
  mention of charterers and
• Are the activities performed by the third party
  seeking to rely on the contractual provision the
  very activities contemplated as coming within the
  scope of the contract in general, or the
  provision in particular, again as determined by
  reference to the intentions of the parties?

43
Privity of Contract (contd)

• Stronger than London Drugs
• Freedom of Contract of the Original Parties
• Inchoate v. Crystallized Rights
• Policy Reasons
• Vandepitte Overruled
• Sophisticated parties
• Ascertainable beneficiaries
• Not wholesale abolition