Supreme Court of Canada

Greenwood Shopping Plaza Ltd. v. Beattie et al., [1980] 2 S.C.R. 228

Date: 1980-06-17

Greenwood Shopping Plaza Limited (Plaintiff) Appellant;

and

Robert Walker Beattie and Roy Vincent Pettipas (Defendants) Respondents.

1980: January 24; 1980: June 17.

Present: Ritchie, Pigeon, Dickson, Beetz and Mclntyre JJ.

ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA, APPEAL DIVISION

Contracts—Privity of contract—Landlord and tenant—Whether insurance clauses in a lease agreement exempted tenant’s employees from liability—Agency—Trust—Written agreement contradicted.

The appellant is the owner of a shopping centre in Nova Scotia. The respondents were employees of a company, Neil J. Buchanan Limited, which became a tenant of the appellant in 1972. The lease included, in paras. 14 and 15, the provisions which covered insurance of the demised premises and under which the lessor was to insure the buildings against fire or, if itself unable to procure insurance, to permit the lessee to acquire insurance on behalf of the lessor (para. 14) and under which both the lessor and the lessee were to arrange with their respective insurers not to grant subrogation rights for the recovery of any loss through fire occasioned by acts of the other (para. 15).

Neither party took any steps towards the performance of these agreements, though both parties were partially insured. On March 3, 1976, a fire which started in the premises leased by the company destroyed part of the shopping centre. The fire was caused by the negligence of the respondents, acting in the course of their employment. The action was brought on behalf of the appellant for the recovery of its uninsured loss and on behalf of its fire insurers by way of subrogation for moneys paid to the appellant by the insurers.

At trial, the company, as the employer, was held vicariously liable in damages, but the judge held that the company was not liable to the appellant for losses which the appellant failed to insure against, or under any subrogated claim on behalf of the appellant’s insurers, and that the respondents, as employees, could no more be sued by the appellant than the company itself. The Court of Appeal dismissed the appeal, being of the opinion that the landlord’s covenant in the lease includ-

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ed a promise to cover the employees and that there was an identification of the employees with the employer which saved them from being “strangers to the contract”. Leave to appeal to this Court was granted on the narrow question of whether the respondents held to have been guilty of negligence which caused the loss, but not parties to the lease and the insuring agreements in paras. 14 and 15, may claim the benefit of those provisions and thereby receive the same protection as that afforded to the company, their employer.

Held: The appeal should be allowed.

The general rule of the common law is that no one but the parties to a contract can be bound by it, or entitled under it. This rule of privity has not always been applied with the rigor which has developed during modern times. There have been many attempts to break out of the rigid mould imposed by the concept of privity and some statutory relief has been provided in special cases but the concept remains one of general application. Exceptions have been recognized by the courts, in the cases of trust and of agency, but none of these exceptions is available to the respondents, in the case at bar: the implications of a contractual link between employer and employee in this case, sufficient to protect the employees from liability for their own separate negligence, cannot be supported on the limited evidence available, and the Court is not referred to any evidence from which a trust could be inferred. Courts must, in cases of this sort, be wary against drawing inferences upon vague and scanty evidence, where the result would be to contradict the clear words of a written agreement and where rectification is not sought or may not be had. Accordingly, whatever may have been in the minds of the contracting parties, the employees who seek the protection of paras. 14 and 15 were not parties to the contract and may neither sue to enforce nor benefit from it.

Agnew-Surpass Shoe Stores Limited v. Cummer-Yonge Investments Limited, [1976] 2 S.C.R. 221; Ross Southward Tire Limited et al. v. Pyrotech Products Limited et al., [1976] 2 S.C.R. 35; T. Eaton Company Limited et al. v. Smith et al., [1978] 2 S.C.R. 749; Scruttons Ltd. v. Midland Silicones Ltd., [1962] A.C. 446; Canadian General Electric Company Limited v. Pickford & Black Limited, [1971] S.C.R. 41; Tweddle v. Atkinson (1861), 1 B.S. 393; Dunlop Pneumatic Tyre Co. and Selfridge and Co., [1915] A.C. 847; New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co.

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Ltd., [1975] A.C. 154; Les Affréteurs Réunis Société Anonyme v. Leopold Walford (London) Limited, [1919] A.C. 801; Vandepitte v. Preferred Accident Insurance Corporation of New York, [1933] A.C. 70, referred to.

APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division[^1], dismissing an appeal from the judgment of the Trial Division. Appeal allowed.

Arthur Moreira, Q.C., Alexander S. Beveridge and A. Williams Moreira, for the plaintiff, appellant.

David Miller, for the defendants, respondents.

The judgment of the Court was delivered by

MCINTYRE J.—This appeal concerns the doctrine of privity of contract and the question of the extent of third party rights under contract. The appellant is the owner of a shopping centre in Greenwood, Nova Scotia. Neil J. Buchanan Limited (the company) is a corporation whose shares are all beneficially owned by one Neil J. Buchanan who was active in the management of the company’s affairs which concerned the operation of a Canadian Tire Store under franchise. The respondents, Beattie and Pettipas, were at all relevant times employees of the company. The company became a tenant of the appellant in 1972, occupying some of the space in the shopping centre. It took over the unexpired term of a lease with the former tenant and, on the expiration of that term, it was renewed. No new lease was executed but an exchange of letters covered the creation of a new term at a new rent subject to the other conditions contained in the lease. It was found at trial, and has not been since contested, that the terms of the tenancy are set out in the earlier lease, save as modified by the exchange of letters. The lease included, in paras. 14 and 15, the provisions which covered insurance of the demised premises. They are set out hereunder:

14. The Lessor shall insure the buildings on the Entire Premises against fire and supplemental risks on the basis of replacement cost to the extent obtainable and shall

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furnish copies of all policies to the Lessee. The Lessor, if itself unable to procure insurance on this basis, and before insuring on a depreciated cost basis, undertakes to give notice to the Lessee of its inability to procure such insurance and to permit the Lessee to acquire insurance on the basis of replacement cost on behalf of the Lessor and for which the Lessor agrees to pay.

15. Both the Lessor and the Lessee will arrange, provided such arrangement is not contrary to the wishes of any existing or future mortgagee of the Entire Premises, with their respective insurers not to grant subrogation rights for the recovery of any loss through fire or supplemental perils occasioned by acts of the other, provided such loss is covered by insurance and to the extent only that payment of such loss is made by the insurer.

Neither party to the lease took any steps towards the performance of the agreements mentioned in paras. 14 and 15. The appellant did not insure to replacement cost and neither party took any steps to obtain express waivers of subrogation. The company did not request and the appellant did not deliver a copy of the policy of insurance mentioned in para. 14. The parties were not, however, wholly without insurance. The company secured a minimal amount of $10,000 on some of its own property and the appellant insured the buildings on the basis of the cost of construction with a percentage addition but did not procure coverage for replacement cost nor did it make any arrangement regarding the waiver of subrogation rights. On the night of March 3, 1976, a large part of the shopping centre was destroyed or damaged by fire. The fire started in the premises leased by the company. It was found at trial—and these findings were accepted in the Court of Appeal and have not been contested here—that the fire was caused by the negligence of the respondents, Beattie and Pettipas, acting in the course of their employment, while using welding equipment to erect tire racks in a part of the demised premises used for garage and storage. The action was brought on behalf of Greenwood for the recovery of its uninsured loss and on behalf of its fire insurers by way of subrogation for moneys paid to the appellant by the insurers. The company, Buchanan personally, and certain other parties were originally involved in this litigation, which involved three separate cases,

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all of which were consolidated for trial and dealt with in one trial judgment. This appeal, however, concerns only the appellant and the two respondent employees of the company.

At trial, Cowan C.J.T.D. found the respondents’ negligence caused the fire and held the company, as the employer, vicariously liable in damages. However, applying the judgments of this Court in Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Limited, [1976] 2 S.C.R. 221[^2], Ross Southward Tire Ltd. v. Pyrotech Products Ltd. et al., [1976] 2 S.C.R. 35[^3], and T. Eaton Company Ltd. et al. v. Smith et al., [1978] 2 S.C.R. 749[^4], and upon a consideration of the effect of paras. 14 and 15 of the lease, he limited the recovery of the appellant as against the company to such damages which exceeded amounts which were or should have been insured against under the insurance provision in paras. 14 and 15. This excluded from the appellant’s recovery against the company both subrogated damages and the appellant’s damages consisting of the difference between the amount of insurance and the cost of reconstruction. Rental loss and some incidental expense resulting from the fire were allowed. Damages, however, were not finally fixed at trial or on appeal and remain to be assessed pending the determination of liability.

At the trial, while the respondents were joined as defendants, the question of their separate liability does not seem to have received serious or extensive argument. In supplementary reasons for judgment given on proceedings which were described as “an application for the order” and which followed the trial and the giving of reasons for judgment, Cowan C.J.T.D. disposed of the matter in these terms:

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A question was also raised as to the position of the defendants, Beattie and Pettipas, and as to whether or not the right of recovery of the Greenwood company against these defendants was similarly limited.

Clause 15 provided that the Greenwood company, as lessor, would arrange with its insurers not to grant subrogation rights for the recovery of any loss through fire or supplemental perils occasioned by acts of the lessee, provided such loss was covered by insurance and to the extent only that payment of such loss was made by the insurer. The defendants, Beattie and Pettipas, were not parties to the lease which was in force between the Greenwood company as lessor and the Buchanan company as lessee. It was suggested that the insurers of the Greenwood company were entitled to subrogation against Beattie and Pettipas, employees of the Buchanan company, acting within the scope of their authority, for whose negligence the Buchanan company is vicariously liable.

Counsel were not able to cite any authority in support of their respective views and the point appears to be one of first impression.

On consideration, it appears to me that the clause in question was intended by the parties to provide that there should be no right of subrogation on the part of the insurers of the Greenwood company in respect of losses, for which the Buchanan company might be liable, either because of its own negligence or because of the negligence of others, for whose actions it would be vicariously liable. That is the effect of the reasons for judgment which I delivered on May 26, 1978.

It seems to me that it follows logically that if there is no right of subrogation against the Buchanan company, in respect of the particular loss, there should be no right of subrogation against the employees of the Buchanan company for whose negligence the Buchanan company is responsible.

In the Court of Appeal, which affirmed the trial decision, MacKeigan C.J.N.S., after agreeing that the company was not liable to Greenwood for losses which Greenwood failed to insure against, or under any subrogated claim on behalf of Greenwood’s insurers, dealt with the position of the respondents in these terms:

Greenwood’s final contention, that in any event the respondents Beattie and Pettipas were not protected by the lease, must, in my opinion, fail. Buchanan, in obtain-

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ing indirect insurance coverage against liability for its own negligence, must have intended to cover also its employees’ liability since its negligence as a corporation only arises vicariously from its employees’ negligent acts or omissions.

Greenwood’s insurance covers fire caused by any means and by any person, including Buchanan and its employees. Clause 14 gives Buchanan the benefit of that presumed insurance. Greenwood can, it seems to me, no more sue Buchanan’s employees than it can sue Buchanan.

After making reference to Scruttons Ltd. v. Midland Silicones Ltd.[^5], and to the comments on that case by Ritchie J. in this Court in Canadian General Electric Company Ltd. v. Pickford & Black Ltd., [1971] S.C.R. 41[^6], at pp. 43 and 44, he dealt with those authorities in these terms:

I need not try to analyze whether the Midland Silicones principle has been diluted by New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd., [1975] A.C. 154 (P.C.), and other recent cases, although I have read with profit comments, generally critical of the principle in (1977) 55 Can. Bar Rev. 327 (S.M. Waddams), (1977) 40 Mod. L. Rev. 706 (Peter Handford), and 709, (J.L.R. Davis), and (1978) 28 U.T.L.J. 75 (Graham Battersby). I find the principle does not apply here because the employees of the tenant and of the landlord are not “strangers” to the contract. They are impliedly beneficaries of the covenant to insure contained in the lease and thus fall within one of Lord Reid’s exceptions (p. 474) to his “fundamental principle”, namely, where the parties to the contract have intended the exemption from liability to extend to the alleged stranger or third party.

He was of the opinion that the landlord’s covenant in the lease included a promise to cover the employees and he found an identification of the employees with the employer which saved them from being “strangers to the contract”. He continued:

Here the landlord’s covenant to insure implied, as we have seen, a promise by the landlord to the tenant to assume by insurance the risk of loss by fire caused by

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any means, including the negligence of the tenant and its employees. That assumption of risk implied a further promise not to sue the tenant for damage which would be covered by that risk. In my opinion, this latter promise must have been intended to extend to the employees through whom and for whom the tenant was responsible.

This presumed intent to benefit the employee, in my view, arises from the identification, in this type of case, of the employees with their corporate employer, an identification which does not occur, for example, between a shipper and an independent contractor, such as a stevedoring company. Their acts and omissions are the employer’s act. All duties imposed on the tenant by the lease are performed by the employees, including the duty not to harm the landlord’s property. Any right of the tenant under the lease, such as the right to occupy the demised premises, or to use the parking lot and other common facilities of the shopping centre, is exercised and enjoyed for the tenant by the employees and becomes a right of the employees, e.g., the implied “right” not to be sued for trespass. Why should the implied right not to be sued for negligence be different?

It will be seen that the learned Chief Justice recognized the general common law principle that a person not a party to a contract can neither sue to enforce it nor rely upon it to protect himself from liability. He considered, however, that the doctrine should be applied with some exceptions and that one was to be found in the case at bar, the respondents being identified with the employer and not independent contractors as in the stevedoring cases.

The order giving leave to appeal to this Court provided:

It is ordered that leave to appeal be granted from the judgment of the Supreme Court of Nova Scotia, Appeal Division, insofar as it relates to the claim of the appellant as against the respondents, Robert Walker Beattie and Roy Vincent Pettipas.

This limits the scope of the appeal to the narrow question of whether the respondents, held to have been guilty of negligence which caused the loss, but not parties to the lease and the insuring agreements in paras. 14 and 15, may claim the benefit

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of those provisions and thereby receive the same protection as that afforded to the company, their employer, who was otherwise equally liable with them for their negligence.

This question, it was argued by the appellant, had been settled in England since Tweddle v. Atkinson[^7]. It was restated in Dunlop Pneumatic Tyre Co. and Selfridge and Co.[^8], and put beyond doubt by the more recent Scruttons Ltd. v. Midland Silicones Ltd., supra. This authority was approved in this Court in Canadian General Electric Co. Ltd. v. Pickford & Black Ltd., supra, and thus the law in Canada has been settled upon this point.

The respondent contended that the case turned on a finding of fact made in the Courts below that the employees of the tenant were within the contemplation of the parties when the agreement regarding insurance revealed in paras. 14 and 15 of the lease was made and they were therefore entitled to its benefit. The effect of the argument was that the employees, if not formal parties to the contract, were nevertheless intended objects of its benefits along with their employer and accordingly the trial judgment was correct. In the alternative, it was contended that the Midland Silicones case had not settled the law in Canada and that the point relied upon by the appellant was still open in this Court.

The rule relating to privity of contract has been stated in many authorities in sometimes varying form, but a convenient expression may be found in Anson’s Law of Contract, 25th ed., 1979, p. 411, in these terms:

We come now to deal with the effects of a valid contract when formed, and to ask, To whom does the obligation extend? What are the limits of a contractual agreement? This question must be considered under two separate headings: (1) the imposition of liabilities upon a third party, and (2) the acquisition of rights by a third party. We shall see that the general rule of the common law is that no one but the parties to a contract can be

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bound by it, or entitled under it. This principle is known as that of privity of contract.

Paragraphs 14 and 15 of the lease are part of a valid contract between Greenwood and the company which confers rights and liabilities upon each of them and for which there was the necessary consideration. It is clear as well that in entering into that contract the parties were fully aware of the use to which the employer would put the demised premises and that the company would engage employees. There was at least some awareness of the risk of fire attendant upon such use because the parties agreed to guard against it by insurance arrangements. Whatever may have been in the minds of the contracting parties, however, the employees who seek the protection of paras. 14 and 15 were not parties to the contract and, according to the common law of contract, may neither sue to enforce nor benefit from it. We have here at most a contract where “A” and “B” entered into certain covenants for their mutual protection, from which it is said benefits were to flow to “C” and “D”. There are many authorities for the proposition that save for certain exceptions, of which agency and trust afford examples, “C” and “D” in the illustration above can take no benefit under the contract.

The rule of privity has not always been applied with the rigor which has developed during modern times. It has been clear, however, since Tweddle v. Atkinson that the rule has had decisive effect in this branch of the law. There are many cases which have applied this principle but those most commonly referred to in England in recent times are Dunlop Pneumatic Tyre Co. v. Selfridge and Company, decided in 1915, and Scruttons Ltd. v. Midland Silicones Ltd., decided in 1962, both in the House of Lords. The law on this point has been settled in England. In Canada, the same rule has generally been followed. In this Court, in Canadian General Electric Co. Ltd. v. Pickford & Black Ltd., the case of Scruttons Ltd. v. Midland Silicones Ltd., was adopted and approved as correctly stating the law but on facts which involved an

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independent contractor rather than an employee. There have been many attempts to break out of the rigid mould imposed by the concept of privity and some statutory relief has been provided in special cases but the concept remains one of general application. If the case at bar cannot be brought into one or other of the exceptions which have become known in the law, or if it cannot be distinguished on its facts from the various cases which would otherwise bind us, this appeal would have to succeed.

The appellant’s factum states the issue at the opening of the argument in these words:

It is respectfully submitted that the overwhelming weight of modern authority, including an applicable series of decisions in this Court, holds that a person can in no circumstances claim the benefit of a contract in which he is not a party, unless it is a contract made on his behalf by his agent, or unless a trust has been constituted of which he is the beneficiary.

For the two exceptions referred to, agency and trust, authority may be found. In New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd.[^9], the benefit of an exemption from liability provided for in a contract of carriage was extended to the non-party stevedore on the basis that the carrier, a party to the contract, had contracted as agent for the stevedore. In this case, however, the stevedore was the carrier’s agent in New Zealand and the Court concluded that the carrier had authority when entering into the contract of carriage to contract for the stevedore. In addition, it was considered that the stevedore, in performing the service of unloading the ship for the shipper, had given consideration. In the case at bar, we were not furnished in this Court with a full transcript of the evidence heard at trial. We are, therefore, unable to ascertain the evidentiary base for the findings which identified the respondents with the company for contractual purposes. The implication of a contractual link between employer and employee in this case, sufficient to protect the employees from liability for their own separate negligence, cannot, in my view, be supported on

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the limited evidence available for our consideration. It therefore appears impossible to give effect to the agency exception.

The other avenue of escape for the respondents would be that of trust. To succeed upon that footing, the respondents would have to show that for the purposes of the covenants in paras. 14 and 15, the company was contracting as their trustee. The base for this argument has frequently been said to be the case of Les Affréteurs Réunis Société Anonyme v. Leopold Walford (London) Ltd.[^10] It has also been recognized in Vandepitte v. Preferred Accident Insurance Corporation of New York, [1933] A.C. 70[^11] by Lord Wright at pp. 79-80:

It cannot be questioned that abstractly such a trusteeship is competent. No doubt at common law no one can sue on a contract except those who are contracting parties and (if the contract is not under seal) from and between whom consideration proceeds: the rule is stated by Lord Haldane in Dunlop Pneumatic Tyre Co. v. Selfridge & Co.: “My Lords in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam.” In that case, as in Tweddle v. Atkinson, only questions of direct contractual rights in law were in issue, but Lord Haldane states the equitable principle which qualifies the legal rule, and which has received effect in many cases, as, for instance, Robertson v. Wait; Affréteurs Réunis Société Anonyme v. Leopold Walford (London) Ltd.; Lloyd’s v. Harper namely, that a party to a contract can constitute himself a trustee for a third party of a right under the contract and thus confer such rights enforceable in equity on the third party. The trustee then can take steps to enforce performance to the beneficiary by the other contracting party as in the case of other equitable rights. The action should be in the name of the trustee; if, however, he refuses to sue, the beneficiary can sue, joining the trustee as a defendant. But, though the general rule is clear, the present question is whether R.E. Berry can be held in this case to have constituted such a trust. But

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here again the intention to constitute the trust must be affirmatively proved.

The question then is, can the trust be shown in the case at bar? Upon this point, I must again conclude against the respondents. We were not referred to any evidence from which a trust could be inferred. Indeed, the issue of trust does not seem to have been argued in the Courts below, and neither trust nor agency was pleaded. I am unable, on a consideration of the limited evidence before this Court, to draw an inference that the company was contracting with Greenwood as a trustee for its employees. A common test applied to determine whether a trust has been created has been to pose the question whether the parties to the contract could change the contractual terms without reference to the alleged cestui que trust. If the answer is yes, no trust has been created. The contracting parties could surely have altered the terms of paras. 14 and 15 without the respondent’s consent in this case. MacKeigan C.J.N.S., in his judgment, nevertheless seems to have had in mind something in the nature of a trust relationship when he referred to the respondents as not being “strangers to the contract”. Despite this fact, it is not, in my view, open to this Court to reach such a conclusion and, in my opinion, the trust exception may not be inferred. Counsel for the respondents argued that in the trial and appeal Courts there had been a concurrent finding of fact to the effect that the parties intended that clause 14 of the lease would require the landlord to assume by insurance the risk of loss by fire and would not sue the tenant or the tenant’s employees for loss or damage caused by fire, whether the loss was occasioned by negligence or otherwise. He argued as well that such findings of fact should not be lightly set aside by this Court. I am in agreement that we should not interfere lightly with findings of fact, but we are referred to no evidence which supports such findings and counsel agrees in his factum that it “undoubtedly rests largely on inference”. It must also be observed that the clear and precise words of paras. 14 and 15 limit the application of the insurance provisions to the parties to the lease, the

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appellant and the company. Courts must, in cases of this sort, be wary against drawing inferences upon vague and scanty evidence, where the result would be to contradict the clear words of a written agreement and where rectification is not sought or may not be had.

I would allow the appeal with costs in this Court, set aside the judgment of the Nova Scotia Supreme Court, Appeal Division, as against the respondents Robert Walker Beattie and Roy Vincent Pettipas and vary the judgment of the Trial Division so that para. 4 of the Order will read:

(4) THAT Greenwood Shopping Plaza Limited do have Judgment against the Defendants Neil J. Buchanan Limited, Robert Walker Beattie and Roy Vincent Pettipas in the amounts of its damages excepting as against the Defendant Neil J. Buchanan Limited those losses which were insured or which should have been insured by virtue of the provisions of clauses 14 and 15 of the lease referred to in the reasons for judgment, together with its costs of the action to be taxed.

Appeal allowed with costs.

Solicitor for the plaintiff, appellant: Arthur R. Moreira, Halifax.

Solicitor for the defendants, respondents: David R. Chipman, Halifax.

[^1]: (1979), 6 B.L.R. 41.

[^2]: [1976] 2 S.C.R. 221.

[^3]: [1976] 2 S.C.R. 35.

[^4]: [1978] 2 S.C.R. 749.

[^5]: [1962] A.C. 446 (H.L.), [1962] 1 All E.R. 1.

[^6]: [1971] S.C.R. 41.

[^7]: (1861), 1 B.S. 393.

[^8]: [1915] A.C. 847 (H.L.).

[^9]: [1975] A.C. 154.

[^10]: [1919] A.C. 801.

[^11]: [1933] A.C. 70.