Understanding Consideration and Privity in Contract Law
School
Grant MacEwan University**We aren't endorsed by this school
Course
BLAW 210
Subject
Law
Date
Dec 10, 2024
Pages
8
Uploaded by MinisterScience5153
Chapter 8 of Managing the Law: The Legal Aspects of Doing Business deals with two critical concepts in contract law: consideration and privity. Both play essential roles in understanding how contracts are formedand enforced, as well as who is entitled to benefitsand bound by obligationsunder those contracts. Below is a detailed summary based on the given learning objectives. 8.1 The Nature of Consideration Definition and Importance: Consideration is a fundamental element in contract formation. It refers to something of valueexchanged between parties to a contract, such as money, goods, services, or promises. The concept ensures that both parties in a contract have a mutual interest and are offering something in return for what they are receiving. Without consideration, a contract may not be enforceable. Goal to enforce a bargain. Considerationexists when a party either gives (or promises to give) a benefit to someone else or suffers (or promises to suffer) a detriment.oPromise to provide benefit to someoneoPromise to suffer detriment to self. Key Points: Bargained Exchange: Consideration must involve a bargain, meaning both parties provide something of value. This can be tangible (like money or property) or intangible (like a promise to act or refrain from acting).Example: If a company agrees to deliver 100 chairs for $10,000, the money is the consideration from the buyer, while the chairs are the consideration from the seller. Sufficiency and Adequacy(Mutual Benefit): The law requires that consideration be sufficientbut does not necessarily require it to be equal or "adequate." This means that as long as some value is given in exchange for the promise, courts generally do not assess whether the value is fair.oAny value.oExample: If you sell a car worth $10,000 for $1, the consideration is still valid, even though it is inadequate. Courts won’t step in to fix a "bad deal," as long as both parties agree.o Sufficient considerationconsists of almost everything that the law considers valuableo Adequate considerationhas essentially the same value as the consideration for which it is exchanged o Forbearance to sueis a promise to not pursue a lawsuit Past Consideration: Consideration must be contemporaneous, meaning it must be given in exchange for the promise when the contract is formed. Past actions cannottypically be used as consideration for a new promise.oExample: If you helped a friend move last month and then they promise topay you for it now, that promise is not enforceable because the consideration was in the past.
o Mutuality of considerationrequires each party to provide consideration in return for the other party’s consideration. o Past considerationconsists of something that a party did prior to the contemplation of a contract. o Pre-existing obligationis an obligation that exists even before the parties contemplate the creation of a new contract o Pre-existing public dutyis an obligation that is owed by a public official. Pre-existing Legal Duty: Doing something that one is already legally obligatedto do does notcount as new consideration.o Same person cannotbe required to pay twicefor the same benefit.oExample: A police officer cannot receive a reward for capturing a criminalbecause catching criminals is part of their job duty.o Pre-existing obligationis an obligation that exists even before the parties contemplate the creation of a new contract o Pre-existing public dutyis an obligation that is owed by a public official. Promises enforceable without consideration: a promise is enforceable only if it is containedin a contract that is supportedby consideration.o Sealis a symbol that is put on a document to indicate a party’s intention to be bound by its terms. o Estoppelis a rule that precludes a person from denying or retracting anearlier statement. o Doctrine of promissory estoppelprevents a party from retracting a promise that the other party has relied on.Here are the four key requirements for promissory estoppel to apply:1. Representation:oThe representor (the one making the promise) must make a clear and definite promise not to
enforce their legal rights against the representee (the one receiving the promise).oExample: Simply delaying collection of a debt does not constitute a clear promise that the debt will not be collected.2. Reliance:oThe representee must rely on the promise in a way that it would be unfair for the representor to retract it.oExample: If the representee has made significantchanges to their plans or actions based on the promise, this reliance supports their claim.3. Inequitable Behavior:oThe representee must not have engaged in inequitable behavior, such as unfairly pressuringthe representor to make the promise.oExample: If the representee used coercion or manipulation to obtain the promise, promissory estoppel may not apply.4. Existing Legal Relationship:oPromissory estoppel only applies within the context of an existing legal relationship between the parties.oCanadian courts, unlike some American courts, assert that promissory estoppel can only modify existing rights, not create new ones from a gratuitous promise.
Role of Consideration in Contract Formation: Consideration plays a key role in distinguishing a legally binding contract from a gratuitous promise. Without valid consideration, the agreement is merely a promise and not enforceable by law. 8.2 The Doctrine of Privity Definition and Importance: Privity of contract refers to the legal principle that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. In other words, only those who are parties to the contract can sue or be sued under it. Privity: is the relationshipbetween contractual parties. Key Points: Third-Party Rights: A third party, someone who is not a part of the original contract, typically has no right to enforce the contract or claim any benefits from it. This rule protects the sanctity of the contract by ensuring that only those who are privy to the agreement are held accountable.oExample: If Company A contracts with Company B to deliver goods, a third party (Company C) cannot enforce the contract terms even if it benefits from the arrangement.o Strangeris someone who did not participate in the creation of the contract o Privity of contractrefers to the relationship that exists between the individuals who create a contract. o Partyis someone who has privity of contract.
o Third party beneficiaryis a person who expects to take the benefit of a contract but is not a party to that contract.o Agencyoccurs when one person (called an agent) agrees to act on behalf of another (called a principal) . Exceptions and Workarounds: There are various ways to bypassthe doctrine of privity. These exceptionsallow third parties to enforce contract rights or obligations under specific circumstances. Five common ways to work around the doctrine include: Assignment: One party transfersits contractual rightsto a third party (the "assignee"), allowing the third party to step into the shoes of the original party.Example: A company that is owed money can assign that debt to a collection agency, allowing the agency to collect on its behalf.o Assignmentis a process in which a contractual party transfers their rights to a third party o Assignoris the contractual party who transfers away its contractual rights o Assigneeis the stranger who receives the contractual rights o Debtoris the original contracting party who owes the contractual obligationo Equitable assignmentis an assignment that was traditionally enforcedby the courts of equity. o Statutory assignmentis an assignment that satisfies the statutory requirements.WrittenWritten with noticeAbsolute at the time created. (Exact amount)o Subject to the equitiesmeans that the debtor can use the same defenses and counterclaims against the assignee that it could have used against the assignor.Assignments by Operation of LawoAssignments by operation of law refer to the automatic transfer of rightsand obligationsthat occurs under specific circumstances, rather than through the intentional actions of the parties involved. Here are two common examples:oBankruptcy:When an individual or business declares bankruptcy, their contractual rights and liabilities are transferred to a trustee in bankruptcy. This trustee manages the assets and debts of the bankrupt party.The trustee has the responsibility to collect any owed paymentsand pay off the debts of the bankrupt party using the available assets. However, the trustee is not obligated to fulfill personal obligations that were specific to the bankrupt individual.
oDeath:Upon a person’s death, their contractual rights and obligationsare transferred to a personal representative (often an executor or administrator of the estate).This representative manages the deceased's assets and debts, collecting what is owed and paying outstanding liabilities. Similar to bankruptcy, they are not responsible for fulfilling obligations that were of a personal nature to the deceased.Key Points:In both scenarios, the assignments are automatic and mandated by law, ensuring that the rights and responsibilities are handled appropriately. The assignee (trustee or personal representative) must manage the debts but is not held accountable for personal obligations that the bankrupt or deceased individual owed to specific parties. Vicarious performanceoccurs when a contractual party arranges to have a stranger perform their obligations Trusts: If a contract is made with the intention of benefiting a third party, it may create a "trust," where the third party (the beneficiary) is entitled to enforce the contract.Example: A company may set up a pension trust for its employees. The employees are not part of the original contract setting up the trust but can enforce their right to pension benefits.
oTrustoccurs when one person holds property on behalf of another oTrusteeis the person who holds the property on behalf of the other oBeneficiaryis the person on whose behalf the property is held. Statutory Exceptions: Sometimes, legislation provides exceptions to the doctrine of privity. For example, consumer protection laws may allow third parties to benefit from certain contract provisions.Mostly insurances.o Insurance: In many insurance agreements, a third party may enforce the contract, even though they were not a party to the original agreement.Example: Life insurance policies allow beneficiaries to claim the payout, even though they are not parties to the original contract between the insured and the insurer. Employment: In the context of employment, courts recognize that employees can benefit from contracts made between their employer and clients, particularly regarding liability.oExample: If a company has a contract with a client that includes an exclusion clause limiting the client’s ability to sue, but an employee of that company acts negligently and causes damage, the client may still have grounds to sue the employee directly. The courts may allow the employee to rely on the exclusion clause, which was intended to protect them, even without privity of contract.5. Himalaya Clause: A clause included in contracts that extends benefits and protections to thirdparties, often used in shipping and logistics.Himalaya clauseis a special contractual term that protects a third party beneficiary from liability.
Example: If a shipping company’s contract with a client includes a Himalaya clause, it might state that the company’s agents and employees are also protected under the contract’s terms. If a third party is harmed during shipping, they may have the right to claim against the shipping company because of this clause. Importance of Privity in Business Transactions: Privity helps maintain clear boundaries about who can enforce contract rights. Businesses must be aware of the privity doctrine to avoid assuming that third parties have enforceable rights unless they have expressly created such rights through one of the workarounds. Detailed Examples:Consideration in Employment Contracts: If a company offers a bonus in exchange for extra work, the extra work is the employee’s consideration for receiving the bonus.Privity in Construction Contracts: If a homeowner contracts with a general contractor to build a house, and the general contractor hires subcontractors, the homeowner typically cannot sue the subcontractor directly because there is no privity between them.Assignment of Rights: In the case of a loan, a lender can sell the debt to another company. The new company (assignee) now has the right to collect the debt from the borrower, even though the borrower originally contracted with the first lender. In summary, Chapter 8 emphasizes the central role of consideration in forming enforceable contracts and the limitations imposed by the privity doctrine, which restricts contract rights and obligations to the parties directly involved. However, the chapter also explores how exceptions and workarounds, like assignments and statutory exceptions, allow third parties to enforce contract rights in specific situations. Understanding these concepts is crucial for navigating business law effectively.