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The Second Opinion: Can a Non-Contracting Party Sue for Breach of Contract? The Ontario Court of Appeal Addresses the Doctrine of Privity

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Hovsep Afarian

When can a person who is not a formal party to a contract sue for its breach? The Ontario Court of Appeal grappled with this and related privity issues in its recent decision in Brown v. Belleville (City), 2013 ONCA 148.

The facts of the decision in Brown are, briefly, as follows. The Township of Thurlow, which subsequently amalgamated with the City of Belleville (the “City”), entered into an agreement with a farmer, undertaking to perpetually maintain and repair a storm sewer drainage system on the farmer’s land (the “Agreement”). The land in question was sold to third parties called the Pleizers. The Pleizers subsequently sold the land to the Browns. The Agreement was never expressly assigned to either the Pleizers nor to the Browns. However, the Agreement did contain a clause stating that it “[s]hall [e]nure to the benefit of and be binding upon the parties hereto and their respective heirs, administrators, successors and assigns.” The City disavowed its obligations under the Agreement. The Browns ultimately sued the City, seeking specific performance of the Agreement or damages for its breach. In defence, the City argued, among other things, that the Browns did not have standing to sue it for breach of the Agreement.

The Ontario Court of Appeal ruled that the Browns could sue for breach of the Agreement. While recognizing that it is “an established principle of contract law…that ‘no one but the parties to a contract can be bound by it or entitled under it’”, the Court went on to state that this “doctrine…is of considerably diminished force in Canada” and that “it persists only in weakened form.” Although the traditional exceptions to the doctrine of privity – namely, trust and agency – were not engaged by this case, the Court nevertheless ruled that doctrine did not bar the claim by the Browns.

The Court rested its decision principally on the enurement clause, stating that:

“[T]he broad and unqualified language of the enurement clause constitutes an express stipulation by the contracting parties that they intended the benefit of the Agreement to be shared by the future owners of the…lands…as his successors…”

Thus, the Court reasoned, the Browns were “not strangers or ‘third parties’ to the Agreement”. The Court also drew support for its conclusion based on the perpetual nature of the obligations under the Agreement which contemplated a benefit to the whoever owned the property from time to time.

The Court was also prepared to ground its decision, alternatively, on the “principled” exception to the privity doctrine set out by the Supreme Court of Canada in London Drugs and Fraser River. The principled exception to the privity principle applies if two conditions are met. First, the parties must have intended the benefit to extend to the third party seeking to rely on the contractual provision. Second, the actions of the third party must come within the scope of the contract between the initial contracting parties. The Court ruled that both of these requirements were met.

Significantly, the Court permitted the principled exception to the privity rule to be used as a “sword” to “enforce the affirmative benefit of the…contractual provisions” rather than its conventional narrow use as a defence to a claim.

An earlier post on the Brown case addressing issues of contractual repudiation can be found here.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.