Privity Of Contract And Assignment Of Contractual Rights

So far the focus has been on the original parties to the contract. However, sometimes people outside of the contract are affected by it, termed third parties, in which case the question is what rights and obligations third parties have. This section discusses the concept of privity of contract, vicarious performance by a third party, and assignment of rights to a third party.

Privity of Contract

In general, the privity of contract rule stipulates that a contract does not confer any benefits or place any obligations on a third party. Such a third party would also be prohibited from suing on the contract. Figure outlines the rationale for the privity rule and some of the reasons why the courts have found it to be problematic.

Figure: Privity of Contract

Exceptions to the Privity Rule

Figure discusses exceptions to the privity rule and situations when the rule does not apply based on common law or statutes.

Figure : Exceptions to Privity of Contract

Vicarious Performance

Vicarious performance refers to the situation where a party to a contract obtains someone else to carry out his or her duties. Vicarious performance is permitted only when personal performance by the promisor is not the reason why the promisee entered into the contract, as would be the case, for example, when a musician is hired for a concert.

The original promisor remains accountable for proper performance. The employee who does the work can look only to the promisor for payment. As long as the work is done as well as expected, the party entitled to performance has no complaint. If there is a problem with performance, and there was an implied or express promise to perform personally, the party entitled to performance could sue for breach of contract.

Tort Liability

In the case of an employee who is negligent under tort law while performing a contract vicariously, the employer is normally held liable for damages. The employee would also usually be named as a co-defendant in the event that such negligent conduct fell outside of the normal course of employment.

Exemption Clauses

Employers may use exemption clauses to protect themselves from tort liability. For example, carriers and storage companies often use standard form contracts to limit or exclude their liability and thus keep the cost of their services affordable for purchasers, who often buy their own insurance against loss.

Assignment of Rights

Contracts also affect third parties when one party to the contract gives away, or assigns, his or her rights to a third party. Rights assigned under contract are part of a larger classification of rights to intangible property (such as patents, stocks, and contracts), called choses in action, distinguishable from rights to tangible property (land, goods), called choses in possession.

Assignments Made by a Party to the Contract

Figure compares the two types of assignment of rights to a third party: statutory and equitable.

Figure 3-18: Assignments

In either case, the other party has to complete his obligations only once. Therefore, if he completes the obligations to the assignor because he is unaware of the assignment, the assignee cannot require completion of the obligations as well. However, if a debtor ignores a notice of assignment and pays the original party, he can be sued by the assignee and required to pay the debt a second time. Where notice is received from two or more assignees, the debtor must pay the assignee who first gave notice.

Equity requires that the assignor, assignee, and promisor all be parties to any court action so that all those affected by the decision have an opportunity to argue on their own behalf. An assignee takes subject to the equities, which means that the assignee can never be in a better position to sue the promisor than the assignor was. So, if the promisor had defences and counterclaims to an action by the assignor, the assignee would have the same defences and counterclaims. However, the promisor has the right to set off, that is, the right to deduct existing debts owed to her by the promisee.

Involuntary Assignments or Assignments by Operation of Law

When someone dies, the law automatically assigns that person’s rights and obligations to a personal representative (executor or administrator). The personal representative is able to stand in the deceased's shoes and assert the rights of the deceased and fulfil his or her obligations.

A person who does not voluntarily declare bankruptcy but whose creditors are successful in obtaining a receiving order has both his assets and liabilities, including contractual rights and obligations, assigned to the trustee in bankruptcy.

Negotiable Instruments

Negotiation is the process of assigning a negotiable instrument, such as a cheque or promissory note. The law for negotiation differs in three important aspects from the law for assignment in general:

1. Notice does not have to be given to the promisor;

2. The assignee may stand in a better position than the assignor in either suing the assignor or defending an action by the assignor; and

3. The assignee can sue in his or her own name without joining the assignor as a party to the action.