Privity of Contract

• Author: John D. Mccamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 294-321

CHAP TER 9

PRIVITY OF CONTR ACT

A. INTRODUCTION

The doctrine of privit y of contract applies to situations in which one of

the parties to an ag reement has undertaken to confer a benef‌i t on a third

party. For example, A and B may enter into a contract where, in return

for services provided to A by B, A promises to pay money to C. For con-

venience we shall refer to A as the promisor, to B, the part y who gives

consideration to the promisor, as the promisee, and to C as the thi rd-

party benef‌i ciary. According to the doctrine of priv ity, C has no stand-

ing to enforce A’s undertaking. C is a mere third-part y benef‌i ciary of A’s

undertaking and t herefore not truly a part y to the agreement. As has been

explained, “only a person who is a par ty to a contract can sue on it.”1

It is true, of course, that if A bre aches his or her undertaking to

pay C, B could bring an action for dam ages for breach of contract. This

prospect may provide only cold comfort for C, however, for two rea-

sons. First, in m any third-party benef‌i ciary cases, B w ill have sustained

no real loss as a result of A’s non-performance. Although the point is

not free from diff‌i culty,2 it appears that where this is so, B’s claim would

1Dunlop Pneum atic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] A.C. 847 at 853

(H.L.) [Dunlop].

2 Contrast West v. Houghton (1879), 4 C.P.D. 197 (P.C.) with Lloyd’s v. Harper

(1880), 16 Ch. D. 290 at 321 (C.A.), Lush L.J. In Beswick v. Beswick, [1968] A.C.

58 (H.L.), aff’g [1966] Ch. 538 (C.A.) [Beswick], for example, specif‌i c perform-

294

Privit y of Contract 295

likely result in the recover y of only nominal damages. S econd, quite

apart from remedies is sues, it may well be that B is unlikely to bring an

action of this kind. B may be d isinterested or may have disappeared. B

may have no f‌i nancial incentive for bearing the cost of a lawsuit that

might result only in a benef‌i t to C. In m any cases, then, the third-party

benef‌i ciary rule will leave the third party without any effective redress

against the person who promised, for good consideration, to confer a

benef‌i t on the third party.

The third-party benef‌i ciary rule is potentially applicable in a

number of commonplace transactional patter ns. The phenomenon of

agreements in which the promisor undertakes to pay money to the

third-par ty benef‌i ciary ha s been referred to above. In some in stances

of this kind, the intention of the promisee may be to confer a gift on

the third-par ty benef‌i ciary. In others, the promisee’s intent may be to

ensure a disch arge of a pre-existing debt owed by a promi see to the

third-par ty benef‌i ciary. Many insurance contr acts may give ri se to

third-par ty benef‌i ciary is sues. Insurance contract s often impose obli-

gations on the insurer to pay money to a third-party benef‌i ciary in

certain def‌i ned circumstances. The dist ribution of manufactured goods

through the common distribution pattern of a manufacturer selling

goods to a dealer who sells, in turn, to a consumer may give ri se to

similar problems. If t he manufacturer includes, in its contract of sale

with the dealer, a manufacturer’s guarantee that is intended to benef‌i t

the ultimate consumer, the consumer wi ll be a third-par ty benef‌i ciary

of that guarantee.

Similar problems may a rise in the context of building contracts. In

the typical p attern, the owner of land h ires a general contractor to con-

struct a building. In turn, the general contractor will hire subcontract-

ors to supply goods and services of various kind s. The owner would

be a mere third-party benef‌i ciary of the promises given by t he sub-

contractors in their agreements w ith the general contractor. Another

possibility ar ising in this context results f rom the common practice of

owners requiring contractors to ensure that they w ill pay their sub-

contractors by purchasing a p erformance bond under which a surety

guarantees t hat the subcontractors will be paid. The subcontractors are

third-par ty benef‌i ciaries of arrangements of this kind.

ance was awarde d to the plaintiff in order t o avoid, it would appear, resolv-

ing the quest ion of whether C’s damage might be merely nomi nal because A’s

breach cause d no loss to B. See ibid. at 72–73, Lord Reid; and 88 –89, Lord

Pearce. See al so Coulls v. Bagot’s Executor & Trustee Co. Ltd. (1967), 119 C.L.R.

460 at 500 –2 (Aust. H.C.), Windeyer J.