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Contract - Privity

1196303 Inc. v. Glen Grove Suites Inc. (Ont CA, 2015)

In this case the Court of Appeal approved some succinct and useful comments on the law of agency:
[69] An oft-cited definition of agency comes from Gerald Fridman, in Canadian Agency Law, 2d ed. (Markham: LexisNexis, 2012), at p. 4:
Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal’s legal position by the making of contracts or the disposition of property.
See also Applewood Place Inc. v. Peel Condominium Corp. No. 516 (2003), 11 R.P.R. (4th) 253 (Ont. S.C.), at para. 35.

[70] In order for a consensual[4] agency relationship to exist, both principal and agent must agree to the relationship, and the principal must give the agent the authority to affect the latter’s legal position: Fridman, at pp. 4-5; see also Applewood, at para. 35.

[71] While agency is often created by an express contract, setting out the scope of the agent’s authority, the creation of an agency relationship may be implied from the conduct or situation of the parties: see Francis v. Dingman (1983), 1983 CanLII 1985 (ON CA), 2 D.L.R. (4th) 244 (Ont. C.A.), per Lacourciere J.A., at p. 250, leave to appeal to S.C.C. refused, (1984) 23 B.L.R. 234n. Whether an agency relationship exists is ultimately a question of fact, to be determined in the light of the surrounding circumstances: Ogdensburg Bridge & Port Authority et al. v. Edwardsburg (Township) (1966), 1966 CanLII 223 (ON CA), 59 D.L.R. (2d) 537 (Ont. C.A.), at p. 542, leave to appeal to S.C.C. refused (1967), 59 D.L.R. (2d) 546n.
And it continued to make similar expansive comments on the doctrine of privity:
[94] My holding above is sufficient to dispose of this appeal. I do, however, wish to briefly comment on the appellant’s main submission. The appellant submitted that as Glen Grove was a separate corporate entity and it was not a party to the agreement between 119 and 129, Glen Grove could not be bound by the Settlement because 119 lacked privity of contract with Glen Grove. 119’s response, a response that the trial judge accepted, was akin to an estoppel argument based on the companies’ common principal that, for the reasons already given, I have rejected. 119 did not directly address the appellant’s argument that the doctrine of privity of contract ought to apply.

[95] Privity of contract is a common law doctrine that “a contract cannot (as a general rule) confer rights or impose obligations under it on any person except the parties to it.” H.G. Beale, ed., Chitty on Contracts, 31st ed., vol. 1, (London: Sweet & Maxwell, 2012) at 18-003.

[96] The injustice of a rigid application of the doctrine was the subject of comment in Brown v. Belleville, (City), 2013 ONCA 148 (CanLII), 359 D.L.R. (4th) 658, at para. 79. Cronk J.A. on behalf of the court observed that the doctrine of privity of contract is subject to academic and judicial criticism, so much so that some Commonwealth jurisdictions have abrogated it while in other instances, “the reach of the doctrine has been significantly undermined by a growing list of exceptions to the rule" (citations omitted).

[97] The Supreme Court recognized and elaborated a principled exception to the doctrine of privity of contract respecting third party beneficiaries in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 S.C.R. 108, at para. 32. The Court held the rule could be relaxed with respect to a third party beneficiary where: 1) the parties to the initial agreement intended to extend a benefit to the third party; and 2) the activities of the third party were the very activities contemplated as coming within the scope of the contract or particular provision. John D. McCamus in The Law of Contracts, 2d ed. (Toronto: Irwin Law, 2012), at p. 324, observes:
The purpose of the exception is to confer upon courts, in cases where the traditional exceptions of agency and trust do not apply, a discretion to undertake the appropriate analysis, bounded by both common sense and commercial reality, in order to determine whether the doctrine of privity with respect to third-party beneficiaries should be relaxed in given circumstances. [Citations omitted.]
[98] Decisions imposing liability on a third party are fewer but they do exist. Examples are: Seip & Associates Inc. v. Emmanuel Village Management Inc., 2009 ONCA 222 (CanLII), 247 O.A.C. 78; Chan v. City Commercial Realty Group Ltd., 2011 ONSC 2854 (CanLII), 90 C.C.E.L. (3d) 235; Smith v. National Money Mart (2006), 2006 CanLII 14958 (ON CA), 80 O.R. (3d) 81 (C.A.), leave to appeal to S.C.C. refused, [2006] S.C.C.A. No. 267; Gasparini v. Gasparini (1978), 1978 CanLII 1598 (ON CA), 20 O.R. (2d) 113 (C.A.).

[99] In Seip, the defendant companies, Emmanuel Village Homes (EVH), Emmanuel Village Management (EVM) and Emmanuel Village Residence (EVR), were owned and operated by the same principal, Hunking. Seip entered into a contract with EVM to consult on the construction of a retirement residence complex and to manage the property for a five-year term when the first tenant moved in. The first page of the contract named EVM and EVH, but only EVM signed the agreement. EVR was not mentioned anywhere in the agreement.

[100] The defendants EVM and EVH terminated the contract and Seip sued. The trial judge found that EVM and EVH were both parties to the contract despite it being executed only by EVM. The trial judge further found that while EVR was not initially a party to the agreement, it had bound itself to the contract, through its conduct. It purchased the complex with full knowledge of the parties’ agreement. Once EVR became the owner of the retirement complex, the work continued as if nothing had changed. EVR had the same principal as the parties to the contract, and Seip was paid by EVR. EVR took the benefit of Seip’s work.

[101] On appeal, the appellant submitted that the trial judge effectively pierced the corporate veil and ignored the separate legal personality of each defendant. Gillese J.A. disagreed. She held, at para. 35:
While the trial judge noted that EVR had the same principal as the other two corporate defendants, it does not necessarily follow that the trial judge pierced the corporate veil. In my view, the trial judge treated Hunking’s role in the three corporations as one piece of evidence on which to assess whether EVR had assumed the contract through its conduct and, consequently, was bound by it.
[102] Gillese J.A. also considered article 11.2 of EVM’s contract with Seip, which permitted the sale of the project provided the new owner acknowledged in writing its willingness to assume Seip’s contract. Although EVR did not give such written acknowledgment, the role played by Hunking in the three corporate defendants, coupled with EVR’s conduct, was tantamount to such an acknowledgment. Gillese J.A. observed, at para. 38, that Hunking was the directing mind of all three corporate defendants; that Hunking was well aware that the clear intent of article 11.2 was to bind EVR, as purchaser; and that EVR by its conduct accepted the contract, and accepted the role as owner. She did not give effect to EVR’s submission that, as a third party, it had no obligation under the contract, concluding, “The conduct of all parties demonstrated a common intention that the Contract continued with EVR as an owner, in conjunction with the other corporate defendants.”

[103] To summarize, in Seip, the privity of contract rule was relaxed and liability imposed where the following three factors were present: 1) the parties to the initial agreement intended to impose an obligation on the third party; 2) the activities of the third party, upon which basis the parties sought to impose liability, were within the scope envisaged under the agreement and 3) the third party had knowledge of the provision assigning it liability and, by its conduct, the third party assumed the agreement. The first two criteria mirror the requirements of Fraser River, supra. Arguably, all three criteria are present in this case.

[104] As the argument was not made that liability could be imposed based on a principled exception to the doctrine of privity of contract, nor was the decision in Seip the subject of submissions, it would not be fair to decide the case on a point counsel did not have the opportunity to address. Consequently, the doctrinal basis for a principled exception to the doctrine of privity of contract when liability is sought to be imposed on a third party will have to await argument another day.

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