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Copyright © 2004 McGraw-Hill Ryerson
Limited 1
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 2
THE EXTENT OF CONTRACTUAL RIGHTS
Privity of Contract Assignment of Contractual Rights
Copyright © 2004 McGraw-Hill Ryerson
Limited 3
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 4
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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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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