ACCT 202 Lecture Notes - Lecture 2: Independent Contractor, Stock Certificate, Negotiable Instrument
29 May 2018
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Chapter 12: The Extent of Contractual Rights( pg.214-223;PDF 247-256)
Chapter Objectives
• How the rule off privity established the rights/obligations under a contract
• Give exceptions to the rule of privity
• How rights/obligations can be transferred to parties outside the contract
• Advantages the transfers give to the party
Privity of contract
A contract may confer a benefit on a thirty parties or give them the liability of some aspect of the
contract, normally only the parties in the contract may perform it only exceptions may transfer the rights
(liability or benefit to third party)
Privity: a common law rules in which a person cannot incur liability under a contract to which he
or she is not a party or enforce the promise to confer the benefit
Exceptions to privity of contract rule:
• There is an exception when the law imposes the liability eg. Under the law of partnership, a
partner (in the ordinary course of partnership business) may bind the partnership in contract with
a third party in a partnership.
• Person may have liability to the contract if they accept goods/land with conditions coming from
that contract negotiated by other parties, they must be aware of the liability upon receiving the
good/land which is similar to a subsidiary agreement to the original agreement
• Contracts that deal with the sale, lease, or transfer of land. The purchaser of the land has
pervious knowledge of the prior registered agreements of the land at the time of title transfer
and under some legislation the purchaser may be bound by unregistered contracts.
Constructive Trusts
• Whe third party’s try to efore the proise i a otrat they are ot a part of, consideration
acting as a bar to the third party getting any rights of the contract because the beneficiary/(third
party) gave no considerations and are not parties of the contract so they have no right to insist
performance.
• If the party in the contract (trustee of the benefit) refused or was unable to act to enforce the
promise, or if trustee is in possession of the benefit ad does’t ofer eefit o eefiiary
(third party) the third party could enforce promise to confer benefit, the rule would be abused
under common law where courts of equity give doctrine of constructive trust.
o the proisor is oliged to perfor as the trustee of the benefit to be conferred on the
third-party eefiiary
Trust: An agreement or arrangement whereby a party (called a trustee) holds property for the
benefit of another (called a beneficiary or cestui que trust).
Promises under Seal
If an agreement under seal contains benefit to the third party and the third party can action against the
promisor to perform rights under the contract.
Statutory Rights and Liabilities
Statutes give beneficiary (third party) the right to enforce the contract only if it falls within that statute/
common law eg. The right of a beneficiary under a contract of life insurance under insurance act
Other Privity Exceptions
• Torts: if the user or consumer can establish a duty on the part of the manufacturer not to injure
the consumer, and if injury ensues as a result of use by the third party, a right of action would lie
against the manufacturer (what) even if not contract exists.
• A right on a party is confirmed, when a third party attempts to enforce rights or benefits under an
agreement to which the third party is not a party but a beneficiary, the consideration for the
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