C. Limitations on and Exceptions to the Rule
| Author | John D. McCamus |
| Profession | Professor of Law. Osgoode Hall Law School, York University |
| Pages | 301-319 |
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Application of the third-party beneficiary rule can be avoided if other doctrines, such as agency, trust, collateral contract or tort provide a foundation for a claim by the beneficiary against the promisor. As well, there are recognized exceptions to the doctrine, both statutory and at common law, that ameliorate the harsh consequences of the rule in particular circumstances.
Under the principles of the law of agency, where a principal authorizes an agent to enter into contracts on the principal’s behalf with third parties, the result of the agent’s doing so is that the principal has a direct contractual relationship with the third party.36In what appears to be a third-party beneficiary case, then, it might be successfully argued that the promisee, B, was acting as an agent on behalf of C, the third-party beneficiary, in extracting a promise from A to confer a benefit on C. C, then, would have a direct contractual relationship with A and the third-party beneficiary rule would be avoided. From time to time, this agency analysis has been applied to what might otherwise appear to be a third-party beneficiary case. In MCCANNELL v. Mabee MCLAREN Motors Ltd.,37for example, a dispute arose in the context of a series of agreements entered into by the manufacturer of Studebaker cars and each of its Canadian dealers. In each agreement with a dealer, the manufacturer required the dealer to, in effect, respect the territories assigned to other dealers and
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provided for remedies for breach of this undertaking. The provision also stipulated: "[i]t is understood and agreed that this paragraph shall be construed as an agreement between dealer and all other Studebaker Dealers who have signed a similar agreement."38When one dealer sued another for breach of this agreement, the court held that with respect to this provision, the manufacturer acted as the agent of the several dealers to bring about privity of contract among them. Through the agency of the manufacturer, then, each dealer had entered into a contract with every other dealer concerning this matter.39A similar approach was taken by the Privy Council in New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd.,40a case concerning a sale of equipment to be carried by sea to the purchaser. The seller, as the consignor or sender of the goods, entered into a contract, the bill of lading, with the operator of the vessel. The bill of lading provided: "no servant or agent of the carrier (including every independent contractor from time to time employed by the carrier) shall in any circumstances whatsoever be under any liability ... for any loss or damage."41When the purchaser or consignee of the goods received them, it became apparent that they had been damaged by the stevedores who had been hired by the carrier to unload the vessel. Although the consignee conceded that he was bound by the terms of the bill of lading with respect to any claim against the carrier, the consignee sued the stevedores in negligence and claimed that the stevedores could not rely, as third-party beneficiaries, on the provision of the bill of lading that appeared to be designed to protect them. The bill of lading further stipulated, however, that with respect to this provision, the carrier was acting as an agent on behalf of its servants or agents or any independent contractors whom it might hire. The court held that the effect of this provision was to constitute the carrier as an agent for the purpose of communicating an offer of a unilateral contract to the stevedores. In effect, the consignor and consignee offer an agreement under which they promise that any independent contractors shall be entitled to the protections set out in the bill of lading, which offer can be accepted by an independent contractor, as in this case, by performing the act of unloading the vessel. A similar approach has been adopted in this same context by the Supreme Court of Canada.42
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Although agency analysis may appear to offer a useful device for avoiding application of the third-party beneficiary rule, there are severe limitations on its utility. The application of agency principles, in the normal case, rests on the finding of a genuine intention to create a relationship of agency. Thus, strained applications of the agency concept such as that found in the New Zealand Shipping case are vulnerable to the charge that the parties, in fact, had no such intention. In New Zealand Shipping, for example, Viscount Dilhorne dissented on the ground that the provision in the bill of lading did not either expressly or impliedly contain any such offer as that found by the majority.43Similarly, in the Dunlop case,44the plaintiff tire manufacturer sought to ground relief on the basis that the wholesaler had entered into contracts with the retailer as an agent of the manufacturer. This argument was rejected, however, on the basis that the wholesaler had clearly bought the tires from the manufacturer as a principal and there did not appear to be any separate contractual undertaking negotiated by the wholesaler as an agent of the manufacturer. Cases such as these indicate that reliance on artificial extension of the agency analysis is a precarious device for avoiding application of the third-party beneficiary rule.
In contrast to the entrenchment of the third-party beneficiary rule in the common law of contract, the courts of equity developed the law of trusts under which the rights of third-party beneficiaries were recognized.45Trust arises in circumstances where property is being held by a person, the trustee, subject to an obligation to deal with the property for the benefit of third persons, the beneficiaries of the trust. A parent, for example, may transfer assets into the hands of a trustee to be administered for the benefit of the children. The law of trusts recognizes that the right to enforce a contractual obligation, a so-called chose in action, is included among the kinds of assets that can be made the subject matter of a trust. Accordingly, if a third-party beneficiary of a contract can successfully claim that the promisee held the right to enforce the
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promise as a trustee for the beneficiary, the beneficiary could enforce the promise on the basis of the principles of the law of trusts. Although English and Canadian courts have applied the trust analysis to third-party beneficiary cases, at least in the context of promises to pay money or to transfer land,46the modern authorities indicate that trust analysis will apply only in circumstances where it is clear that the parties actually intended to create a trust relationship.47In Vandepitte v. Preferred Accident Insurance Co.,48for example, it was argued that a provision in a father’s car insurance policy that extended indemnity protection to persons driving the car with permission was held by the father in trust for the benefit of his daughter. The argument was rejected on the basis that there was no evidence that the father "had any intention to create a beneficial interest" for his daughter specifically or as a member of a described class.49As with agency law, then, extended application of the law of trusts to third-party beneficiary contract cases is vulnerable to the charge that no genuine intention to create such a relationship is evident on the facts of the case. The role of trust law as a device for circumventing the third-party beneficiary rule in contracts cases is thus severely limited.
As has been indicated, the distribution of manufacturer’s goods through dealers who purchase the goods from the manufacturer and then sell the goods, in turn, to the consumer may give rise to third-party beneficiary problems. The consumer may be a third-party beneficiary of a manufacturer’s guarantee contained in the contract of sale to the dealer. In some instances, the device of collateral contract may enable the consumer to enforce the manufacturer’s undertaking directly. Such relief is likely limited, however, to cases where the manufacturer has communicated with the consumer. In Shanklin Pier Ltd. v. Detel Products Ltd.,50
for example, the defendant paint manufacturer had represented to the plaintiff that its paint had certain qualities that rendered it appropriate
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for use in repainting the plaintiff’s pier. The plaintiff then required its painting contractor to use the defendant’s paint. The contractor then purchased the paint from the defendant and applied it to the pier. When the paint proved to be unsatisfactory, the plaintiff successfully claimed damages from the manufacturer. Even though the contract for the supply of the paint was between the manufacturer and the contractor, the court held that there was a collateral unilateral contract offered by the manufacturer to the plaintiff. In effect, the manufacturer was held to have offered to the plaintiff that it would be bound by its representations concerning the quality of the paint if the plaintiff instructed its contractor to use its paint on the project. When the plaintiff did so, it accepted the manufacturer’s offer and gave the consideration that rendered the manufacturer’s warranty binding.
Similar unilateral contracts may be found where the advertising material of manufacturers is read by consumers prior to the purchase of goods from an independent supplier.51As the connection between the manufacturer and the consumer becomes more tenuous, however, the inference of contractual intentions of this kind appears more artificial and, hence, unpredictable in...
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