Privity of Contract: relationship that exists between parties to a contract.
Generally, in order to win a contract lawsuit, the plaintiff must prove privity of contract with the
defendant- that they are both parties to the same contract.
The third party usually cannot be directly sued because he has not given any consideration for
the promise. Not only must consideration for a promise be given by a party to the contract, but it
must be given by the party seeking to enforce the promise.
Liability of sellers of goods: the consumer should receive the benefit of implied terms that the
goods are reasonably suited for.
Liability of Manufacturers: may be liable for negligence (duty to warn/ defective unit)
Vicarious performance: a third party performs contractual obligation on behalf of the promisor
who remains responsible for proper performance; someone hired to do the job on contract the
original promisor cannot escape liability by using a substitute.
• Vicarious performance is allowed when it is not specified in the contract who should
perform the job.
• Injured party of tort liability in this may sue both the employee and the employer; but
obviously it would be smarter to sue the employer
• Exemption clauses: eployees are often protected by the exemption clauses; if they can
prove that the clause was intended to be for their benefit and the damage occurred in
the course of their employment
Trusts: a fund in which is to be handed to a beneficiary in the future (ex. a mom saving money
for her child in the future; college fund)
Trustee: a person who is entitled to the trust
Trust agreement: document that conveys property to a trustee to be used for the benefit of a
third party beneficiary
Constructive trust: a relationship that permits a third party to obtain performance of a promise
included in a contract for his benefit. Unfortunately, parties involved in the contract are not likely
to be aware of the subtleties of a constructive trust.
Other exceptions to the Privity of Contract rule
Insurance: each province has a statue that gives beneficiary the right to force the insurance
company to pay out the contract; this is indemnification, not guarantee.
Undisclosed principal: an agent involved with the contract may sue or be sued on the
contract; without necessarily proving privity of contract for that guy. Contracts concerning land: people who acquire land are subject to the rights and obligations
created in earlier contracts that are recorded on the public record; even though new owner is
not a party to the previous contracts (ex. if a tenant promises landlord to keep repairing the
property while paying rent, they must do that for the next owner as well, legally.)
The principled extension- exemption clauses: Supreme Court of Canada’s two criteria to
decided whether or not a third party may rely on contractual provisions to protect it from liability:
1. Did the parties to the contract intend to extend the protection to the third party claiming
2. Are the activities of the third party within the scope of the contract general, and the
exemption clause in particular?
If these two are satisfied, the exclusion clause will protect the third party from liability. It also
allows the third party to sue to enforce the terms of the contract, too.
Assignment of Rights
Transferring the unperformed right or benefit of the contract to a third party
Choses in action: rights to intangible property; ex. patent, copyright, stock, bonds…etc; used to
accumulate wealth; assignment of rights
Choses in possession: rights to tangible property; sale of goods
Equitable Assignment: requires that a clear intention to assign all part of a contractual benefit
be show neither orally or in writing. If a legal action is necessary to collect from the promisor, the
assignee must make the assignor a party as well.
Statutory Assignment: enables the assignee to sue the other party without joining the assignor
to the action
An assignee may sue the promisor without joining the assignor in the lawsuit provided:
a) The assignment must be complete: it wouldn’t be complete if there is a remaining
balance to be paid afterwards
b) It must be unconditional
c) It was in writing; doesn’t have to be, so be reasonable about this; if it was oral, call the
assignor as a witness to prove
The effect of notice from multiple assignees: The assignee who first gave notice to the debtor is
the one entitled to payment. It may be easier (nay, necessary) to pay the money (obligation) into
court, and let them decide where it goes.
Fundamental rule is that the assignee can never acquire a better right to sue the promisor than
the assignor had. In legal terms, the assignee’s claim is “subject to the equities”: her claim i