REALWorld Law


Rights of purchasers, tenants and banks

How are third parties who are not parties to the construction contract – such as purchasers, tenants and lending banks providing finance towards the development – afforded protection and given rights against the original designers and contractors involved in the design and construction of the project?



Privity of contract is a fundamental component of Canadian law. Generally speaking, subject to limited exceptions a contract can neither confer rights nor impose obligations on non-parties to the contract.

Once such limited exception was pronounced in a 1992 Supreme Court of Canada decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd., wherein warehouse employees of London Drugs (who had started a fire) were held to be entitled to the protection of a limitation of liability clause in the contract between their employer, London Drugs and Kuehne & Nagel. In determining whether to apply this limited exception, Canadian courts take into account whether:

  1. The contracting parties clearly intended to extend the benefit of the protection to the non-contracting third party, and
  2. The impugned activities of the non-contracting third party are the very activities coming within the scope of the contract to be performed

Another way in which third parties can enforce obligations in contracts to which they are not parties is to take an assignment of the rights of one of the contracting parties. Unless the contract prohibits assignment, a party receiving notice of the assignment must deal with the third party as if it was the original contracting party. That said, the party receiving notice of the assignment can also raise as against the assignee all the same defences as it could have raised against the original contracting party (the assignor).

A contract also may provide specific requirements with which the contractor must comply in order to afford protections to non-contracting third parties such as a purchaser, tenant, or lender. For example, the contractor may be required cooperate with a purchaser, not interfere with tenant's business, cooperate with lender, enter into an escrow if requested by lender, obey the landlord's rules and regulations, etc. However, generally speaking, the contractor’s compliance with these types of obligations can only be enforced by a party to the contract unless an assignment is given to the purchaser, tenant, lender or landlord in the above example.