CML Obligations Class Notes
Prof. S. Smith – Winter 2008 – Paul Klippenstein
I. Privity of Contract
January 17, 2008
The basic rule is set out in the first three cases. The remainder of the cases look at how jurists get around this rule: in some cases the actual rule has been changed (esp. London Drugs).
The rule is most often cited to Tweddle v. Atkinson: it is assumed to stand for something (although reading it reveals it is more complicated).
Tweddle v. Atkinson (p2)
F: G2 and T2 are to be married. T1 verbally promises T2 a sum of money (K1); G1 verbally promises T2 that a sum of money will be given to G2 (K2). Neither promise is performed, but T1 and G1 make a contract between them to pay T2 the total sum of money, and the Kn stipulates that T2 has the right to enforce (K3). T1 performs, but G1 does not perform before he dies (and executor takes over). T2 seeks to enforce K3.
Q: Can the T2 (who is a third party to K3) enforce the contract (K3)?
D: NO. There is no consideration and no contract.
Rule: Although the judge ruled in terms of lack of consideration, the case has since been taken to stand for the rule that third parties cannot sue in contract.
Discussion:
K1 and K2
There are already potential problems with K1 and K2: there may be some question whether there was an intent to create legal relations (because the Kn is within the family). There is also the issue of consideration: this may be construed as the promise to get married, but this is tenuous.
Moreover, K2 is a classic Kn for the benefit of a third party. Therefore, if T2 sued, he is only entitled to damages that he suffers. In this case, it seems improbable he suffered any damages, so unless the court is willing to grant specific performance (which is unlikely given the exceptional nature of this remedy in CML) he will probably not get anything (we will see this later in Beswick).
Ultimately, the status of K1 and K2 in this case is unclear, especially given that K3 seems to have replaced both.
K3: Consideration
This is also a Kn (between T1 and G1) for the benefit of a third party (T2).
The Court holds that T2 cannot enforce because there is no consideration (natural love and affectation being insufficient for consideration). However, by definition third parties will never give consideration because they don’t obligate themselves.
Why is this not about consideration?
Because the rule against third parties enforcing Kn exists even in jurisdictions where the doctrine of consideration does not exist (CVL, some CML where consideration has been eliminated). The basic idea is that if a promise is made to X, then X is in a different position from someone to whom the promise was actually made (see Smith on p. 13). Also, consideration is a promise to do something (that doesn’t necessarily have to be performed in order to give remedies): mere reliance is not consideration.
Today, the interpretation given to Tweedle is that third parties do not have the right to sue in contract. This is supported by the historical notion that the CML developed in order to correct specific infringements of rights. Thus, the party appearing before the judge must have had a right infringed: it is not sufficient for something bad to have happened in a general sense (recall the swimming pool example).
The strongest arguments for allowing T2 to sue are based on:
1) will of parties
2) reliance
1) What about the clause giving the son the right to sue?
This argument is based on the idea of freedom of contract: if T1 and G1 wanted to give T2 the right to sue, why can they not do so? Going back to the historical nature of the CML: in this case, we do not have a complaint by G1 that his freedom to Kn is being violated. The plaintiff must show his own rights have been infringed. Though many people see the freedom of contract argument as a strong one, Smith is not convinced.
This argument depends on holding the view that the role of Kn law is facilitative: that is, it exists to give parties a means to give legal effect to their promises (ie. Kn law is forward-looking).
Smith is of a different view: Kn law is about protecting the rights of parties: like tort, Kn law is backward-looking, looking for something that went wrong that needs to be corrected.
2) What about reliance?
One could also argue that T2 relied on the Kn between T1 and G1 by ultimately marrying G2. However, traditionally in anglo-Canadian CML estoppel-type arguments such as this one can only be used to defend against claims (as a shield) and not to ground them (not as a sword).
Does T2 have any rights arising from the K? For example, is G1, by K’ing to allow T2 to enforce the K, transferring his right to sue for breach to T2? The problem is that the right to sue G1 does not actually belong to G1, but to T1. There is also the further problem that even if T1 transferred his right, this right is to damages, and it is hard to imagine that T1 suffered damages for T2 not getting his money.
Compare with CVL
1440. A contract has effect only between the contracting parties; it does not affect third persons, except where provided by law.
1444. A person may make a stipulation in a contract for the benefit of a third person.
The stipulation gives the third person beneficiary the right to exact performance of the promised obligation directly from the promisor.
Note that in France there is no provisions equivalent to 1444: judges have interpreted the relevant provisions to allow third parties to exact performance.
Privity of Contract and Limitation of Liability Clauses
Can third parties rely on clauses that exclude or limit liability?
Midland Siicones Ltd. v. Scruttons Ltd. (1962 UK HL p4)
F: The owner of goods (O) enters into a Kn of carriage with the carrier (C) that limits liability of the “carrier, including any person whether acting as carrier or bailee”. C has a contractual relationship with stevedores (M) who unload goods at the dock.
The goods are damaged, and O seeks to sue M in tort.
Q: Can M benefit from the limitation clause as a defense in tort?
D: NO.
Rule: The rule in Tweedle applies equally when third parties attempt to use a clause in Kn as a defence: third parties cannot use Kn as a defense against a lawsuit.
How to find a way around the privity rule?
Agency
If C was acting as the agent of M when entering into contract with O, then M can benefit from the terms of that contract. In this case, the test for agency was not met (the Kn party must be (i) the agent; and (ii) acting as the agent in entering the Kn – this was met in the next case).
Further problems with the agency argument include the fact that M gave no consideration in the K, and it is doubtful whether the stevedores – who in reality are a fluctuating group of people rather than a single entity – agreed to anything at all. Moreover, even if the company M were excluded, this would not stop O from suing individual stevedores (this is a “screwed up” component of company law – see Greenland).
Distinction between Midland and Tweedle:
In Midland, we are not dealing with a K: M just wants to avoid tortious liability. The court found that the limitation clause could only be used in K. However, one could argue that Kn should also be able to be used as “false representation”, which is also actionable in tort.
In this case, M could offer as a defense the fact that O had voluntarily assumed the risk by signing the limitation clause: this is a statement to the world. Does it have to be made specifically to M? It could be argued that since this case is tort law, and not privity, that O should be able to sue, and M should be able to use voluntary assumption of risk as a defence.
Reliance
This case as well could be framed in terms of estoppel: M relied on O’s statement of limitation of liability, and thus O should be estopped from suing. The problem with this argument is the estoppel is normally a representation of existing fact, whereas the limitation of liability was a representation waiving a future right.
Greenwood Shopping Plaza v. Beattie (1980 SCC p8)
F: Shopping centre owner (O) entered into Kn with Canadian Tire Store (S) for a lease. The Kn included a clause in which the parties agreed to get insurance that would not allow subrogation (which means that the insurance company could not sue in place of the insured party: essentially this is an exclusion of liability clause). O gets insurance, but only partial insurance (breach of Kn with S) and no exclusion of subrogation (also a breach of Kn with S).
Employees (E) of S start a fire, damage the store and also the shopping centre. The insurance company sues E in subrogation, and O sues for the remainder.
Q: Can E use the exclusion of liability clause as a defense?
D: NO. E cannot use the clause because the Kn was not made with E.
Note:
“Company law point”
Why distinguish between employees and employer? Company is an artificial, separate legal personality (which is how it has limited liability). Anglo-American law says that employees and employers are separate. Look at London Drugs: LaForest J. talks about “vicarious immunity”. In this case, separation of personality seems to have been taken too seriously.
As a matter of practice (often arising out of employment K), companies will often agree to indemnify employees should they be sued.
Greenwood just shows that Midlands and Tweedle principle applies in Canada.
January 25, 2008
Shanklin Pier, Ltd. v. Detel Products (1951 UK p29)
F: S enters into a kn of service with Painters (P) to paint a bridge. P in turn have a kn of sale with D to for the sale of paint (because S specifies).
The paint is ultimately unsatisfactory (recall that normally Kn of sale carries implied condition that the goods are satisfactory for the purpose for which they are purchased.
How do we deal with this situation?
In this situation:
P could sue D, but what is the damage?
S could perhaps sue P, but P could offer the defense S specified what paint to use.
D had made some representation to S that the paint was suitable.
Q. Does the representation constitute a Kn?
The courts ruled that this representation was in fact a Kn. Courts have in other cases accepted that a statement of fact can be a Kn (regarded as a guarantee, or warranties, ex. “this car is 5 years old”).
Consideration
What is the consideration? S argues successfully that it gave consideration by agreeing to kn with P to use D’s paint. (Note that if this fit the facts, this argument would not pose any problem in law).
Problem: it seems unlikely that S made corresponding representation that they would kn with P to use the paint. Normally, for consideration, something must be exchanged for one another (ex. lawnmower example: neighbour promises to give lawnmower. As consequence, other neighbour promises to cut grass. There is no Kn because the prestations are not dependent on one another.) In this case, however, it seems the courts are “fudging” the exchange in order to allow one party to win, and here it finds a collateral Kn (recall that this is beneficial to S, because Kn damages are often more than tort damages). (This is a creative way to find a Kn for a sympathetic plaintiff.)
Comment:
CVL: In Qc, this could be dealt with in Kn by the fact one can transfer warranty to sub-purchaser or sub-user.
Tort of misrepresentation
CML: Today, following Hedley Byrne v. Heller (1964 Canada), D’s representations might give rise to tort of misrepresentation, but this did not exist prior to that time (France has the equivalent of negligent representation, but Germany does not, so it would have to go through Kn).
New Zealand Shipping v. A.M. Satterthwaite (The Eurymedon) (1975 UK p30)
F: Owners (O) had a Kn of delivery with Carriers (C) that contained a limitation of liability clause. C had a Kn to unload goods with Stevedores (S). S damages goods belonging to O. O sues in tort for damage to goods.
Q: Does the limitation clause cover S as well as C?
D: YES.
R: The Court held that the Kn between O and C was actually two Kns, one with C and one with S (this is not a problem in fact). Did this happen in fact?
Agency
The court finds C made Kn as an agent of S (while simultaneously Kn on their own behalf):
(i) Was there authorization ? Yes (C actually owned by S – matter of fact).
(ii) Were they purporting to act as agents? Yes (This was implicit – matter of fact).
(iii) Does the clause apply to what happened? Yes (matter of interpretation).
(iv) Was there consideration?
Unilateral Kn
On (iv) it is unclear whether S offered anything in exchange. Therefore the courts resort to an exception to consideration: unilateral Kn (not the same meaning as in CVL). In unilateral contract, the consideration is not a promise to do something, but rather the performance of some act (ex. reward for finding dog: consideration is finding the dog; technically this isn’t an exchange, but a consequence).
In this case, the court holds that the act of unloading the ship was consideration: anyone unloading the goods therefore benefits from the consideration clause.
Criticism
If this is a unilateral promise, why use the “agency” argument at all? Once a unilateral Kn is established, it doesn’t matter if C is the agent or not.
Here, one could argue that O had made an open promise (to anyone? to anyone unloading?) that they would not sue. S had unloaded goods knowing they would be protected above a certain amount of liability (although the law is unclear on whether need knowledge: ex. of reward for dumping, someone dumps because everyone is. Do they have a right to the reward?).