Privity of Contract

Hi Everyone,

Privity involves being privy to or a party to a contract.  Only parties involved in the contract are allowed to claim benefits or incur liability.  However, some contracts grant benefits to third parties, or third parties may want to be substituted into the contract.  In these two instances, third parties may try to enforce the contract.  The general rule is that a party not involved in the contract cannot claim benefits or incur liability because they are not privy to the contract.

For example, lets look at a case that involves privity of contract.  In Yashin v. NHL, Yashin refused to play for the Ottawa Senators in his last season of his 5 year deal of his contract.  Yashin wanted to dispute his Standard Player’s Contract with the NHL.  The Standard Player’s Contract is between the NHLPA representing all the players and the NHL representing teams through the Collective Bargaining Agreement.  In Article 17.5 of the CBA, it states that grievances can only be initiated by the NHLPA and NHL only.  Yashin didn’t have the support of the NHLPA because it wouldn’t benefit all players.  Yashin couldn’t benefit from the contract because he was not privy to it. 

Another interesting case involving privity of contract once again involves Yashin.  The case Potechin v. Yashin has a season ticket holder for the Ottawa Senators suing Yashin (the Senators star player) for refusing to play.  The contract to be a season ticket holder was between Potechkin and the Ottawa Senators.  Yashin was not privy to the contract and could not be found liable.

These examples involve a third party not privy to the contract and therefore are not bound.  However, there are a number of other ways that third parties can assert right under a contract.  The ways include novation, vicarious performance, exemption clauses, trusts, and assignments.  These exceptions where third parties can play a role are discussed below:

Novation: The creation of a new contract to substitute in a new party in the existing contract.  Once the new contract is formed, the existing one is terminated.  For example, a company signs a contract to provide plumbing services to the Thompsons.  The business owner of the company decides to retire and recommends another company to replace them.  The new company signs the same contract that was previously held and is thus substituted in, relieving the other company of it’s obligations and giving the owner a happy retirement.

Vicarious Performance: Where one party is substituted to perform the task but the original party remains responsible for liability and performance.  For example, Davidson Homes signs a contract to fix a house that needs stairs repaired.  Davidson Homes subcontracts the job to StairMasters, a company that specializes in building stairs.  StairMasters are responsible for building the stairs but if the stairs aren’t up to performance standards then the liability is on Davidson Homes.

Exemption Clauses: Are put into a contract used to protect parties from liability.  Sports teams use exemption clauses to keep athletes from suing.

Trusts: A legal entity created by a grantor for a beneficiary whereby the property is transferred for their benefit.  For example, John Smith names his son Michael as a trustee in his will in case he dies.  John Smith passes away and all of his estate transfers to his son Michael.

Assignments: A transfer of rights from one party to a third party.  For example, you rent a house and are under contract with Mr. and Mrs. Johnstone.  Mr. and Mrs. Johnstone assign the contract to their son Josh.  You are now required to pay rent to Josh instead of the parents.  It differs from novation because no new contract is formed and your consent is no

Hope you enjoyed learning about privity of contract.

-Mark