Privity of Contract: Not Yet Dead, But On Life Support

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In Brown v. Belleville (City)2013 ONCA 148 (Ont. C.A.), the Court of Appeal for Ontario has signalled that the common law doctrine of privity of contract, while not yet pronounced dead, struggles on life support.

The appeal involved the enforcement of a 1953 agreement entered into between a municipality and a local farmer, where the municipality agreed to perpetually maintain and repair part of a storm sewer drainage system it built on and adjacent to the farmer’s lands. Six years or so after it entered into the agreement, the municipality breach its covenants under the agreement and stopped all maintenance and repair work on the drainage system.

After the farmer died in 1966, his farm property was sold by his heirs to third parties, who in 1980 tried to keep the municipality to its bargain, but the municipality unilaterally repudiated the agreement.

Following a corporate amalgamation in the late 1990s, the appellant, the Corporation of the City of Belleville, stepped into the shoes of the original municipality under the agreement.

In 2003, the lands were again sold to the respondents, Graeme and Monica Brown. Within months of the purchase, the Browns requested the City to honour its maintenance and repair obligations under the agreement, which the City refused and again unilaterally repudiated the agreement.

The Browns then sued the City for specific performance or, alternatively for damages for breach of contract. The City defended stating that the agreement was unenforceable on various grounds.

Following exchange  of pleadings, the parties stated a Special Case under Rule 22 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, seeking the court’s opinion on 14 questions concerning the agreement; ultimately consenting on the proper determination of six of the questions, with the motion judge granting various declarations in favour of the Browns in relation to the remaining eight questions.

The City appealed on three issues:  (1) the Browns’ claims concerning the agreement were statute-barred; (2) the Browns had no standing to enforce the agreement due to lack of privity of contract with the City; and (3) the agreement was contrary to public policy and, hence, unenforceable.

The appeal was dismissed.

Justice Cronk (Justices Armstrong and Epstein concurring) summarizes the doctrine of contractual privity and the parties’ positions as follows:

[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] 2 S.C.R. 228, at para. 9. See also London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 S.C.R. 299, at p. 416; Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co., [1915] A.C. 847 (H.L.), at p. 853. In this case, it is common ground that the Browns have no privity of contract with the City in respect of the Agreement. They are not signatories to the Agreement and no explicit assignment or transfer of the Agreement was made in their favour.

[74] Relying on this lack of privity, the City argues that the Browns have no standing to enforce the Agreement because none of the recognized exceptions to the privity of contract doctrine applies on the facts of this case. The City submits that: (1) its covenants under the Agreement are positive covenants which, by operation of law, cannot run with the land; (2) because the Agreement was not assigned or transferred to the Browns, there is no equitable basis on which the Browns are entitled to enforce it; and (3) in the alternative, even if an equitable basis exists for recognition of an assignment or transfer of the Agreement to the Browns, it is defeated by the application of the doctrine of laches.

[75] In response, the Browns rely on what they describe as three exceptions or qualifications to the privity of contract doctrine, any one of which, they maintain, affords them standing to enforce the Agreement. In his factum, counsel for the Browns identified these three “exceptions” or qualifications in this fashion: (1) the enurement clause of the Agreement, under which the benefit of the Agreement flowed to the Browns; (2) the benefit of the City’s covenants in the Agreement runs with the lands to the benefit the Browns, as Mr. Sills’s successors in title; and (3) the ‘principled exception’ to the privity rule established by the Supreme Court in London Drugs.

Cronk J.A. gives the following diagnosis and prognosis for the terminally ill patient:

[79] It is important to note at the outset that the doctrine of privity of contract is of considerably diminished force in Canada as a continuing principle of contract law. It has been subject to a wealth of repeated academic and judicial criticism, leading to frequent calls for law reform in Canada and elsewhere. See for example, London Drugs, at pp. 418-26; Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108, at para. 26; McCamus, at pp. 296-301. Indeed, several Commonwealth jurisdictions have abrogated the privity doctrine entirely, or in specific contexts, by statute. In other instances, the reach of the doctrine has been “significantly undermined by a growing list of exceptions to the rule”: McCamus, at p. 299. See also Angela Swan and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham: LexisNexus Canada Inc., 2012) at p. 229. Several of the leading cases cited by the parties on this appeal afford abundant evidence of the relaxation of the ambit of the doctrine in particular cases. Thus, while the doctrine survives in Canada, it persists only in weakened form.

The appeal centred on the meaning and effect of an enurement clause, which business lawyers will be intimately familiar with:

THIS INDENTURE Shall [sic] inure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.

Cronk J.A. disagreed with the Browns that the enurement clause is an “exception” or qualification to the privity of contract doctrine, noting that it “does not fall within or constitute, by itself, a recognized exception to the privity rule, such as trust or agency…” (at para. 80). Justice Cronk agreed with the motion judge that the Browns were successors (to a perpetual interest), as contemplated under the enurement clause, which the City had conceded on appeal. The learned justice observes:

[84]   … On the admitted findings of the motion judge, the Browns are Mr. Sills’s successors.  In this sense, the Browns are not strangers or ‘third parties’ to the Agreement.  Rather, they step into Mr. Sills’s shoes and have standing to enforce the Agreement as against the City as if they were the original covenantee(s) to the Agreement: see Angela Swan and Jakub Adamski, Canadian Contract Law, at p. 169 and, generally, at pp. 163-226.

[85]       In these circumstances, given the intention of the contracting parties stipulated in the Agreement under the enurement clause, I conclude that ‘relaxing’ the doctrine of privity in this case does not frustrate the reasonable expectations of the parties at the time the Agreement was formed.  To the contrary, it gives effect to them.

Cronk J.A. notes that the privity doctrine in Greenwood was amputated following the later Supreme Court decisions in London Drugs and Fraser River, and the learned justice’s analysis appears to invoke some form of subrogation and estoppel analysis under the enurement clause; albeit not explicitly using the terms (at para. 93-94). In any event, the principled exception to the privity doctrine is explained by the Court of Appeal thusly,

[110]    I recognize that London Drugs and Fraser River were cases where the third-party beneficiaries sought to rely, by way of defence, on the benefit of the contractual provisions at issue to resist claims brought against them – they were not seeking to enforce the affirmative benefit of the relevant contractual provisions.

[111]    Nonetheless, it is my view that the Browns’ status as the successors of the original covenantee under the Agreement affords them the right to seek to enforce the original covenantor’s contractual obligations, as against the original covenantor.  In effect, for the purpose of enforcement of the Agreement, the Browns are Mr. Sills and the City is Thurlow.  Further, insofar as the performance of the City’s obligations under the Agreement are concerned, there is a clear identity of interest between Mr. Sills and the Browns.  As Mr. Sills’s successors, the Browns stood ready to comply with the activity required of them under the Agreement – the provision of access to their lands.  In all these circumstances, the application of the principled exception to the privity rule advances the interests of justice.

Following Brown v. Belleville (City), do enurement clauses that refer to “successors in interest” now impose liability on third parties, not otherwise within the reasonable contemplation of the parties? For example, in a commercial context, what happens if a third party pays, for full consideration, a liability owed by a debtor to a creditor (mortgagee or lender) and steps into the shoes of the creditor? Does this mean that the third party assumes not only the benefits, but also any latent obligations under the original mortgage or security agreement with unrelated parties who later sue the debtor?

Also, may an individual become a successor in interest to a corporation under a Settlement Agreement to which he or she was not a privy? (See, Agemian v. Pactiv LLC, 2012 ONSC 4571 (CanLII), where I unsuccessfully argued that it does not.)

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One Response to “Privity of Contract: Not Yet Dead, But On Life Support”

  1. Somethings Never Change but Crooked Logic Leads to New and Interesting Legal Structures: Judges, What Have You Done to the Doctrine Privity of Contract? | Rationes Decidendi Says:

    [...] Privity of Contract: Not Yet Dead, But On Life Support (thetrialwarrior.com) [...]

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