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

Copyright © 2004 McGraw-Hill Ryerson Limited 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 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 17 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 18 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 19 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 20 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 21 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 22 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