BU231 Chapter Notes - Chapter 11: Beneficial Owner, Foodborne Illness, The Undisclosed
Privity of Contract and Assignment of Contractual Rights
Privity of Contract
The Limited Scope of Contractual Rights and Duties
• Because a contract creates a small body of laws for the parties involved and has the power to
affect behaviour, it is only reasonable that it should be confined to the parties who agreed to it
• However, sometimes in certain situations justice or business convenience require that a contract
affect the rights of people outside it, or third parties
o Third party - a person who is not one of the parties to a contract but is affected by it
• General rule is that a contract does not give any benefits or impose any obligations on a stranger
to the contract; in a contract lawsuit, plaintiff must prove privity of contract with the defendant
o Privity of contract - the relationship that exists between parties to a contract
• Another reason for preventing a third person from suing on a contract is that the third person has
not given consideration for the promise
o Consideration for a promise must be given by a party to the contract, as well as by the party
seeking to enforce the contract
• Privity of contract can be detrimental to third parties when the whole object was to benefit them
and yet they cannot enforce the contract; as such many exceptions have been developed to limit
the reach of the rule
o This is how tort law came into being
Comparison with Rights and Duties in Court
Liability of Sellers of Goods
• A customer can sue a retailer for breach of implied terms of a contract of sale
o For example, buying a can of salmon that ends up giving you food poisoning; you can sue on
the grounds that it was an implied term that the fish was suitable to eat
• Only the buyer can sue (not the buyer's family or some other party)
o However, family members may be able to sue in tort
Liability of Manufacturers
• Unlike with retailers, manufacturers can be liable to family members for negligence
o This is because in tort the duty of care expands past parties to a contract to include any
foreseeable victims
• As an example: builders, engineers, architects, and designers owe a duty of care to subsequent
owners and occupants of the buildings they build, beyond the parties to the original building
contract
Tort Liability and Vicarious Performance
• Sometimes businesses take on more work than they can complete or a job requires more
specialized skills, in which case they would hire a "subcontractor" to complete the excess or
specialized work on their behalf; this is the practice of vicarious performance
o Vicarious performance - a third party performs contractual obligations on behalf of the
promisor who remains responsible for proper performance
• If an employee vicariously performing for an employer commits a tort such as negligence, the
injured party may sue both the employer for vicarious liability and the employee personally in tort
• However, an exemption clause can protect a third party facing tort liability for vicarious liability
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o Exemption clause - a clause in a contract that exempts or limits the liability of a party
Exceptions to the Privity of Contract Rules
Trusts
What is a Trust?
• Trust - an arrangement that transfers property to a person who administers it for the benefit of
another person
o For example, a mother sets up a trust because she wishes to provide financial security for
her son in case she dies while he is still a child
o Trustee - a person or company who administers a trust
• If the legal owner of the trust dies, the trustee takes their place; however, the beneficiary of the
trust is the true owner, the beneficial owner; through certain equity procedures they can compel
the trustee to carry out its duties under the trust agreement, despite the beneficiary being the
third party
o Beneficiary - a person who is entitled to the benefits of a trust or the person entitled to
receive insurance monies
o Beneficial owner - a person who, although not the legal owner, may compel the trustee to
provide benefits to him
o Trust agreement - the document that conveys property to a trustee to be used for the
benefit of a third party beneficiary
How Trusts Affect Third Parties: Constructive Trusts
• Sometimes the contract containing the promise is not expressly described as a trust, and the
promise may only be one part of a larger deal; this can give rise to resulting trusts or constructive
trusts
o Resulting trust - a trust relationship recognized when the conduct of the parties
demonstrates the intention to hold property for the benefit of the other
o Constructive trust - a trust relationship imposed by the court to prevent a party from being
unjustly enriched by keeping property that should benefit another
Insurance
• Due to the nature of insurance contracts, each province has a statute that allows third parties to
enforce an insurance contract
o For example: a wife whose husband died must be paid life insurance, a person driving with
consent who injures a pedestrian and is required to pay damages may sue the insurance
company to recover her loss
The Undisclosed Principal
• A contracting party who, unknown to the other party, is represented by an agent
• Although the agent was the one who actually arranged and signed the contract, the undisclosed
principal may still sue or be sued over the contract
Contracts Concerning Land
• The rules of privity of contract do not apply in land law
• Rules and obligations set out in land contracts must be performed even if the owner is not a party
to a previous contract
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Document Summary
Privity of contract and assignment of contractual rights. Express language in the contract: enurement clause: a clause in a contract that extends the rights and benefits to those inheriting from a party, succeeding the party, or taking an assignment from a party. Sometimes a party may not be willing to wait for the other to perform the contract and wants to receive their benefit immediately. The importance of assignments: choses in action are used to accumulate wealth and link personal savings to business investment. In less developed countries, many people are reluctant to abandon their tangible assets for intangible ones due to lack of confidence in their legal system; as a result, active capital markets in these countries have been slow to develop. Equitable assignments: equitable assignments require 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 from the promisor.
