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Chapter 11

Chapter 11 BU231.docx

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Wilfrid Laurier University
Valerie Irie

BU231 Chapter 11 – Privity of Contract & the Assignment of Contractual Rights Privity of Contract The Limited Scope of Contractual Rights and Duties -When parties make a contract, they create a small body of law for themselves -Third party – a person who is not one f the parties to a contract but is affected by it -Privity of contract – the relationship that exists between parties to a contract -To win a contract lawsuit, the plaintiff must prove privity of contract with the defendant -A reason for preventing a third person from suing on a contract is that the third party has not given consideration for the promise -The privity of a contract rule can have harsh consequences when it prevents a third person from enforcing a contract when the whole object was to benefit him Comparison with Rights and Duties in Tort Liability of Sellers of Goods -If a person buys a can of salmon that turns out to be poisonous and that seriously harms her, she may successfully sue the retailed for breach of the implied term that the fish was suitable to eat. But members of her family who were also harmed eating the salmon cannot recover damages against the merchant because the contract of sale was with the buyer, and only she can sue successfully for breach of contract Liability of Manufacturers -Although members of the family have no rights against the retailer, the manufacturer may well be liable for negligence -Manufacturers are liable in tort to the consumer for damages caused by their defective products Applying the Privity of Contract Rule to Performance Vicarious Performance -A third party performs contractual obligations on behalf of the promisor who remains responsible for proper performance -Ex. Hiring a subcontractor to complete the excess or specialized work on its behalf -Vicarious performance is acceptable provided that the contract does not specify personal performance -The other party has no opportunity to protest until the work is finished -If an employee commits a tort such as negligence while vicariously performing a contract for his employer, the injured party may sure both the employer for vicarious liability and the employee personally in tort -Employers often protect themselves from tort and contractual liability by placing an exemption clause in a contract – a clause in a contract that exempts or limits the liability of a party Trusts -Trust – an arrangement that transfers property to a person who administers it for the benefit of another person -Trustee – a person or company who administers the trust -Beneficiary - a person who is entitled to the benefits of a trust -Trust agreement – the document that conveys property to a trustee to be used for the benefit of a third BU231 Chapter 11 – Privity of Contract & the Assignment of Contractual Rights party beneficiary -Constructive trust – a relationship that permits a third party to obtain performance of a promise included in a contract for his benefit Other Exceptions to the Privity of Contract Rule Insurance -In a contract of life insurance, a person pays a premium in exchange for a promise from the insurance company to pay a sum of money on his or her death to a specified person – a spouse – who is not a party to the insurance contract. -Each province has a statute that gives a beneficiary the right to force the insurance company to pay out the contract The Undisclosed Principal -A contracting party who, unknown to the other party, is represented by an agent Contracts Concerning Land -The rules of privity of contract do not apply in land law The Principled Exception – Exemption Clauses -Typical exemption clauses limit the liability of a party to the contract for damages arising in both breach of contract and tort -If the intention of the parties is to extend protection to the particular third party, and the type of work is part of the contract performance and within the scope of the clause, the exclusion clause will protect the third party from liability -Principled exception – allows third parties to rely upon a contractual clause when the parties to the contract intended to include them, and their activities come within the scope of the contract and the exemption clause Assignment of Rights -Assignment – the transfer by a party of its unperformed rights under a contract to a third party -Assignor – a party that assigns its rights under a contract to a third party -Promisor – the party obligated to provide the benefit -Assignee – a third party to whom rights under a contract have been assigned -Choses in action – rights to intangible property such as patents, stocks, and contracts that may be enforced in the courts -Choses in possession – rights to tangible property that may be possessed physically The Importance of Assignments -Choses in action are used to accumulate wealth such as savings in bank accounts and also through the ownership of shares and bond The Role of Equity -In an assignment, the subject matter of the transfer is an intangible asset: an unperformed contractual right; in a sale, the subject matter of the transfer is the ownership in goods BU231 Chapter 11 – Privity of Contract & the Assignment of Contractual Rights Equitable Assignments -Assign – transfer to another person outside the contract -Equitable assignments require only that a clear intention to assign all or part of a contractual benefit be shown either orally or in writing -Then the assignee may receive the benefit of the contract from the promisor -All three parties – the assignee, the assignor, and the promisor – must be part of the legal action Assignment of Part of a Debt -Both the assignee and the assignor are equally anxious that the court find the debtor lia
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