PART 3 – THE LAW OF CONTRACTS

Chapter 11 – The
Extent of
Contractual Rights
Prepared by Douglas H. Peterson, University of
Alberta
Copyright © 2004 McGraw-Hill Ryerson Limited
1
THE EXTENT OF CONTRACTUAL RIGHTS


Privity of Contract
Assignment of Contractual Rights
Copyright © 2004 McGraw-Hill Ryerson Limited
2
PRIVITY OF CONTRACT

Only parties to a contract have rights and
liabilities under the contract




Only parties to the contract can sue or be sued
under the contract
Contract can only effect parties to it
Third parties (strangers) to the contract have
no liability and no rights under the contract
Reason: strangers gave no consideration
Copyright © 2004 McGraw-Hill Ryerson Limited
3
EXCEPTIONS TO THE RULE OF PRIVITY

Land



Certain contractual rights run with the land not
the parties
Buyer takes subject to others who have prior
interests in the property
Most jurisdictions such rights must be registered

Easements, right of ways, tenants rights
Copyright © 2004 McGraw-Hill Ryerson Limited
4
EXCEPTIONS TO THE RULE OF PRIVITY

Trusts – an agreement or arrangement
whereby a party (trustee) holds property for
the benefit of another (beneficiary)

Third party (beneficiary) can enforce the rights
under the trust even though they are not privy
to the trust agreement (not a party)
Copyright © 2004 McGraw-Hill Ryerson Limited
5
EXCEPTIONS TO THE RULE OF PRIVITY


Formal Contract under Seal
Third party may acquire rights under an
agreement if:




Formal agreement addressed to third party
Confers benefit on third party
Delivery of agreement to third party
Third party can sue to enforce should
promissory fail or refuse to perform
Copyright © 2004 McGraw-Hill Ryerson Limited
6
EXCEPTIONS TO THE RULE OF PRIVITY

Statutory exceptions

Insurance contract


Beneficiary of insurance policy can sue for benefits
Law of Tort


Manufacturers – no action in contract if not a
party, but may sue in tort for negligence
Manufacturer owes a duty of care to avoid harm
Copyright © 2004 McGraw-Hill Ryerson Limited
7
Exceptions to the Rule of Privity

Collateral Contracts – an implied contract
that binds a party who is closely associated
with, but not formally a party to, a contract
between other parties

Enlarge sphere of a Q so that persons closely
associated with a business transaction, although
not parties, may find themselves subject to
terms
Copyright © 2004 McGraw-Hill Ryerson Limited
8
EXCEPTIONS TO THE RULE OF PRIVITY

Employment



Employee negligent and commits a tort
Liability - employer and possibly also employee depends on degree of negligence
Traditional scope of exclusion clause


Contract created between business and customer
Contract contains “exclusion clause”




Clause enforceable by employer (party) but not by employee
(stranger)
Exclusion clause enforceable by employee if
Parties intended that employee would perform work
Employee acted in scope of employment
Copyright © 2004 McGraw-Hill Ryerson Limited
9
ASSIGNMENTS



Assignor – a party who assign its rights
under a contract to a third party
Assignee- a third party to whom rights under
a contract have been assigned
Assignment – a transfer by a party of its
rights under a contract to a third party

Only benefits, claims, rights are assigned not
obligations
Copyright © 2004 McGraw-Hill Ryerson Limited
10
ASSIGNMENTS

Novation – the substitution of parties to an
agreement, or the replacement of one
agreement by another agreement



Parties agree by mutual consent to terminate old
contract and establish a new agreement
Third party (original stranger to contract)
becomes a contracting party
Most common with debtor/creditor
Copyright © 2004 McGraw-Hill Ryerson Limited
11
ASSIGNMENTS

Requirements of Novation:





New debtor assumes the complete liability
Creditor must accept the new debtor as a
principal debtor (not agent or guarantor)
Creditor accepts new contract in full satisfaction
and substitution for the old contract
Original debtor is discharged, he or she is no
longer a party to the contract
Cumbersome and inappropriate in certain
transactions
Copyright © 2004 McGraw-Hill Ryerson Limited
12
EQUITABLE ASSIGNMENTS

Choses in actions – a paper document that
represents a right or interest that has value
(intangible property)



A share certificate
Choses in possession - right to tangible
property that may be possessed physically
At common law only choses in possession
could be assigned
Copyright © 2004 McGraw-Hill Ryerson Limited
13
EQUITABLE ASSIGNMENTS


Enforced by equity
Requirements for equitable assignment

Oral or written



With notice to debtor
Assignor had to attach his or name to the action
Taking subject to the equities



Assignee and assignor subject to debtor’s claims
Any defense that a party had against an assignor
is valid against assignee
Assignee can never acquire more or better rights
than assignor had
Copyright © 2004 McGraw-Hill Ryerson Limited
14
EQUITABLE ASSIGNMENT

Contract for personal service or performance
could not be assigned


Professionals, entertainers
Vicarious Performance - a third party
performs on behalf of promissory who
remains responsible for proper performance

Common with companies


Contract with Canadian Tire but mechanic performs
the work vicariously for the company
Allowed as long as specific personal performance
is not stated in the contract
Copyright © 2004 McGraw-Hill Ryerson Limited
15
STATUTORY ASSIGNMENTS


Under equitable assignment requirement that all
parties be present before the court was
inconvenient
Requirements for statutory assignment


Must be in writing and signed by the assignor
Assignment is absolute





Unconditional: not dependent upon future event
Complete: all of existing debt
Must provide debtor with written notice
Title of assignee subject to the equities
If non-compliance with requirements still valid as
an equitable assignment
Copyright © 2004 McGraw-Hill Ryerson Limited
16
STATUTORY ASSIGNMENTS

If effect of non-compliance with
requirements



Invalid as statutory assignment
May be valid as equitable assignment
Contending Assignees one who first gave
notice to Promisor not one who first received
assignment
Copyright © 2004 McGraw-Hill Ryerson Limited
17
STATUTORY ASSIGNMENTS

Set off – When two parties owe debts to
each other, the payment of one may be
deducted from the other, and only the
balance paid to extinguish the indebtedness

Debtor can deduct by way of set off if before
notice of assignment
Copyright © 2004 McGraw-Hill Ryerson Limited
18
ASSIGNMENTS BY LAW

Upon the Death of the Party





When a person dies his/her rights and obligations under
a contract are assigned to a personal representative
Executor – personal representative of a deceased person
named in will
In testate – a person dies without leaving a will
Administrator – personal representative of a person who
dies w/o a will
Role is to pay all just claims against the deceased
and complete performance of all contracts, pursue
claims deceased had against others and then
distribute assets according to the will
Copyright © 2004 McGraw-Hill Ryerson Limited
19
ASSIGNMENTS BY LAW

Bankruptcy






Trustee in Bankruptcy – appointed either when:
Voluntary assignment
Adjudged bankrupt
Receiving Order – court order to commence
bankruptcy proceedings
Trustee takes possession of the bankrupt
debtor’s property and holds it in trust on behalf
of the creditors
Rights of trustee governed by statute
(Bankruptcy Act)
Copyright © 2004 McGraw-Hill Ryerson Limited
20
NEGOTIABLE INSTRUMENTS

An instrument in writing that when
transferred in good faith and for value
without notice of defects passes good title of
the instrument to the transferee




Subject to Bills of Exchange Act
Governs the rights of the parties and assignees
Negotiation is a special type of assignment
(privileged assignment – different
characteristics)
Better rights than a normal assignment
Copyright © 2004 McGraw-Hill Ryerson Limited
21
SUMMARY



Privity – only parties to a contract can acquire
rights and liabilities under a contract
Novation – party may replace another in a contract
and become bound if all parties consent
Vicarious performance – allows others to perform
under the contract


Not allowed under personal services contracts
Assignments

Equitable and Statutory


Under Statutory must give written notice and does away with
requirement to join assignor in any court action
Assignee takes subject to any equities (defenses)
promissory or debtor had
Copyright © 2004 McGraw-Hill Ryerson Limited
22