Deck 12: The Extent of Contractual Rights

Question 1

The Four Guys Garage advertised automobile repairs by "Licensed Mechanics." Terry, a car owner, took his automobile to the Four Guys Garage for repairs. The garage owner, Todd, examined the car, and indicated that extensive repairs were required. Terry left his car with Todd, and the repairs were carried out by another licensed mechanic, Rod, an employee. Terry paid $150 for the repairs, but on his way home discovered that the repairs had been done negligently, and had ruined the engine. Terry may only sue Rod, the mechanic that negligently performed the service.

Answer 1

False

Question 2

Kathy sells her business to Lucy for $40,000 including the stock, the goodwill, and the remainder of the lease. The landlord agrees that Kathy may end her involvement with the leased premises and that Lucy may take over the remainder of the lease on the same terms, and a new lease reflecting this is drawn up and signed by the landlord and Lucy. This new lease is an example of

A) an equitable assignment.
B) a statutory assignment.
C) a novation.
D) a constructive trust.
E) a negotiable instrument.

Answer 2

C

Question 3

Sylvia obtained a full release from the payment of her car loan when she gave the car to her friend, Victoria, who agreed to make all the remaining payments. The arrangement was acceptable to the bank that had made the loan. The bank cancelled the loan and replaced it with one in Victoria's name. This is

A) an example of a chose in possession.
B) an example of a chose in action.
C) a novation.
D) a guarantee.
E) an equitable assignment.

Answer 3

C

Question 4

Chris was indebted to Kirk for a loan of $1,000. Kirk assigned Chris' promise to pay to Bryce. The assignment must be of the entire agreement between Chris and Kirk.

Question 5

Mr. Black enters into a contract with Build-It Construction Ltd. for the construction of a house. The house is not built in accordance with the contract. Mr. Black sues Build-It Construction Ltd. seeking $200,000 in damages. He is successful, but discovers that Build-It Construction Ltd. has insufficient assets to satisfy the judgment as it regularly transfers its assets to its parent company Build-It Holding Company Inc. Can Mr. Black collect the $200,000 from Build-It Holding Company Inc.

A) Yes, according to the doctrine of promissory estoppel.
B) Yes, according to the Statute of Frauds.
C) Yes, this is a statutory novation.
D) No, according to the doctrine of privity of contract.
E) No, according to the parol evidence rule.

Question 6

Chris was indebted to Kirk for a loan of $1,000. Kirk assigned Chris' promise to pay to Bryce. The assignment by Kirk to Bryce must be in writing to be an effective assignment.

Question 7

The Block furniture store granted credit to many customers for the purchase of furniture and appliances. It had separate categories for furniture credit and appliance credit. It statutorily assigned its furniture credit to Prestige Financing Inc. and its appliance credit to Gold Stream Financing Ltd. Karim purchased a bed for $700 and a stove for $700 from The Block and received financing for both purchases on the same contract. When The Block's contracts were assigned, Karim's was assigned to both assignees. On Monday he received a notice of assignment from Prestige Financing Inc. and on Tuesday from Gold Stream Financing Ltd. To whom should Karim make his next payment?

A) The Block
B) Gold Stream Financing Ltd.
C) Prestige Financing Inc.
D) 50% to Gold Stream Financing Ltd. and 50% to Prestige Financing Inc.
E) Karim should not make a payment.

Question 8

The Four Guys Garage advertised automobile repairs by "Licensed Mechanics." Terry, a car owner, took his automobile to the Four Guys Garage for repairs. The garage owner, Todd, examined the car, and indicated that extensive repairs were required. Terry left his car with Todd, and the repairs were carried out by another licensed mechanic, Rod, an employee. Terry paid $150 for the repairs, but on his way home discovered that the repairs had been done negligently, and had ruined the engine. The Four Guys Garage is liable to Terry under the vicarious performance rule for Rod's negligence.

Question 9

On March 6^th, the Limestone Student Society entered into a contract with the "Stumbling Stones", a rock group, to give a performance at the Limestone University Students' Union on March 31^st. On March 29^th, the "Stumbling Stones" fell ill with the flu and were unable to travel to Limestone City. Another rock group was contacted by the Stumbling Stones to appear in their place and arrived at the Students' Union in time to perform. The contract, by its nature, is not subject to vicarious performance.

Question 10

Carten Printing receives an unexpectedly large order for shipping envelopes from one of its regular clients, a major Canadian CD-ROM retailer. In order to meet the order delivery date, Carten farms out part of the printing to another firm, Serger Printing. Serger, in an attempt to raise its own profit margin on the deal, uses lower grade adhesive and cuts corners on printing quality. The faulty shipping envelopes show up as returns made to the retailer from dissatisfied customers. The retailer takes action against Carten for damages. What is the most likely outcome?

A) The retailer will not succeed against Carten but will have a right of recovery against Serger.
B) The retailer will succeed against Carten, and Carten will have no right of recovery against Serger.
C) a novation.
D) The retailer will succeed against Carten, and Carten will have a similar right of recovery against Serger.
E) The retailer will have a right of recovery against both Carten and Serger.

Question 11

The party who holds property for the benefit of another under a trust agreement or arrangement is known as the

A) beneficiary.
B) trustee.
C) rights holder.
D) guarantor.
E) principal.

Question 12

Transfer of rights can be accomplished through which of the following:

A) novation, equitable and statutory assignment, and by operation of law
B) novation, equitable and statutory assignment, vicarious performance, and by operation of law
C) novation, by operation of law, and vicarious performance
D) equitable and statutory assignment, vicarious performance, and by operation of law
E) novation, vicarious performance, and by operation of law

Question 13

On March 6^th, the Limestone Student Society entered into a contract with the "Stumbling Stones", a rock group, to give a performance at the Limestone University Students' Union on March 31^st. On March 29^th, the "Stumbling Stones" fell ill with the flu and were unable to travel to Limestone City. Another rock group was contacted by the Stumbling Stones to appear in their place and arrived at the Students' Union in time to perform. The contract, by its nature, is not subject to assignment.

Question 14

The Four Guys Garage advertised automobile repairs by "Licensed Mechanics." Terry, a car owner, took his automobile to the Four Guys Garage for repairs. The garage owner, Todd, examined the car, and indicated that extensive repairs were required. Terry left his car with Todd, and the repairs were carried out by another licensed mechanic, Rod, an employee. Terry paid $150 for the repairs, but on his way home discovered that the repairs had been done negligently, and had ruined the engine. Money damages awarded by the court for the negligence would be approximately equal to Terry's loss.

Question 15

Luxury Homes Ltd. contracts with Eliza to build her house. The electrical work is completed by Firefly Electric Ltd. under a contract it entered into with Luxury Homes Ltd. The electrician was Wilbur, an employee of Firefly. Eliza moves into the house and three months later it burns to the ground as a result of faulty wiring. Who can Eliza sue for breach of contract?

A) Luxury Homes Ltd.
B) Firefly Electric Ltd.
C) Wilbur
D) Luxury Homes Ltd., Firefly Electric Ltd. and Wilbur
E) Firefly Electric Ltd. and Wilbur

Question 16

On March 6^th, the Limestone Student Society entered into a contract with the "Stumbling Stones", a rock group, to give a performance at the Limestone University Students' Union on March 31^st. On March 29^th, the "Stumbling Stones" fell ill with the flu and were unable to travel to Limestone City. Another rock group was contacted by the Stumbling Stones to appear in their place and arrived at the Students' Union in time to perform. The privity of contract rule would entitle the Limestone Students' Society to reject the substitute rock group and prevent them from performing.

Question 17

Precision Engineering receives a contract to design and build a sewage treatment plant from the town of WaWa. It designs the project and assigns the construction to Dynamic Construction Ltd. The contract has no provisions regarding assignment. Can Precision make the assignment to Dynamic?

A) No, it can only do a novation.
B) Yes, if it obtains the approval of WaWa.
C) Yes, if it notifies WaWa.
D) Yes.
E) No.

Question 18

A business may raise capital by assigning its existing accounts receivable to a collections company or bank in return for an immediate lump-sum percentage payment. What is this method of raising capital called?

A) Bonds
B) Factoring
C) Indemnification
D) Novation
E) Assignment

Question 19

Hammond sells her house to Mendoza for $165,000 subject to a mortgage from Imperial Bank for $90,000. Hammond's mortgage had been arranged at a time when interest rates were low, and prevailing interest rates are now much higher. Mendoza would very much like to assume Hammond's obligation to pay under the existing mortgage, rather than arrange a more costly replacement from his own banker. Imperial Bank is indifferent as to who is repaying the debt as Mendoza is just as acceptable a credit risk as was Hammond. Mendoza pays Hammond the $75,000 difference and takes over both the house and her mortgage. This arrangement is an example of

A) a statutory assignment.
B) a chose in possession.
C) an equitable assignment.
D) a constructive trust.
E) a novation.

Question 20

On March 6^th, the Limestone Student Society entered into a contract with the "Stumbling Stones", a rock group, to give a performance at the Limestone University Students' Union on March 31^st. On March 29^th, the "Stumbling Stones" fell ill with the flu and were unable to travel to Limestone City. Another rock group was contacted by the Stumbling Stones to appear in their place and arrived at the Students' Union in time to perform. The Limestone Student Society must allow the substitute rock group to perform by virtue of the legal doctrine of vicarious performance.

Question 21

Mr. Richards instructed the contractor who was building his new house to face it with a special synthetic marble made by Messier Ltd. Messier had promised Mr. Richards in writing that the synthetic marble would last longer than the Parthenon and be in better shape. Within three months of its installation, which was properly done, the "marble" was cracking, discolouring, and crumbling at the seams. Mr. Richards can sue Messier successfully although it was not he but the contractor who made the purchase from Messier.

Question 22

A student from another class says that assignments were originally common law concepts but are now a statutory process. You disagree with him.

Question 23

Pulpco contracts for logs from A1 Timber Co., who later made a statutory assignment of its rights and obligations to Forest Green Co. (FGC). The quality of FGC logs was less than the fine product usually delivered by A1 Timber, and for which they were known, and Pulpco brought suit against A1 Timber on the grounds that the contract was not assignable. The court would find that the contract was assignable.

Question 24

Chris was indebted to Kirk for a loan of $1,000. Kirk assigned Chris' promise to pay to Bryce. Notice in writing of the assignment must be given to Chris before Chris is obliged to pay Bryce.

Question 25

If Alan is a beneficiary of his father's life insurance with Avuncular Life, he has the statutory right to enforce payment if his father dies and Avuncular refuses to pay on the grounds that Alan lacks privity of contract with it.

Question 26

Chris was indebted to Kirk for a loan of $1,000. Kirk assigned Chris' promise to pay to Bryce. If Bryce fails to give Chris notice of the assignment, Chris may lawfully make payment to Kirk.

Question 27

If the restrictive covenant said that the land was never to be sold to a woman of Scottish descent, Martin could ignore it and sell to whomever he pleased, on the grounds that the clause breached public policy.

Question 28

Harvey sold a quantity of his hand-carved birdhouses to Keaton's Ltd., stipulating in the contract that they were not be to resold for less than a stated price, so that Keaton's would not cause him to lose business when he sold them direct at craft fairs and shows. Keaton's found they could not sell them, so they resold them to Tom Terrific, a discounter, for the minimum price stipulated in the Harvey-Keaton contract. Tom Terrific then sold them at an even lower price as a loss leader since they had just become very popular.
Discuss whether or not Harvey, whose own sales are now slumping, can sue Tom Terrific.

Question 29

Chris was indebted to Kirk for a loan of $1,000. Kirk assigned Chris' promise to pay to Bryce. Payment by Chris to Kirk of the $1,000 before notice in writing of the assignment was given to Chris would require Bryce to recover the payment from Kirk, as he could not sue Chris for the money.

Question 30

Dev contracts to build a computerized printing press for Tyrone. He subcontracts some of the work on the computerized components to another company, Charlie Co., which wired a vital component negligently. The repairs are very costly for Tyrone. He can sue Dev for the losses caused by Charlie Co.

Question 31

Gerry and Juanita agree that Tracey must pay each of them $10 per month. They sign a contract and show it to Tracey, who makes no objection to it. Either Gerry or Juanita may enforce the contract against Tracey if she fails to pay.

Question 32

An expert landscape architect, known for special skill in designing Japanese gardens, is engaged under contract by a municipality for the creation of a public park with a Japanese theme. The architect becomes unable to fulfill the obligation, but to the satisfaction of the municipality can name a replacement architect who will agree to execute the same work on the same terms. The legal mechanism required to affect this will be an equitable assignment.

Question 33

If Martin bought a property from Nevin, knowing (because it was noted on the title deeds) that Nevin had agreed to a restrictive covenant in his contract to purchase the property from Olan, Martin must conform to the restrictive covenant even if it is not included in his contract with Nevin.

Question 34

York Co. assigns a conditional contract with Bevier to Zeno Finance on November 10^th. Zeno Finance notifies Bevier of the assignment on November 17^th. Bevier had mailed his cheque to York Co., due on November 15^th, on November 12^th. If Zeno Finance gave Bevier notice on November 13^th that the November 15^th payment was to be made to them, but Bevier had already mailed the cheque on the 12^th to York Co., then Bevier must put a stop payment on the cheque to York Co. and send a new one to Zeno Finance for the November 15^th payment.

Question 35

York Co. assigns a conditional contract with Bevier to Zeno Finance on November 10^th. Zeno Finance notifies Bevier of the assignment on November 17^th. Bevier had mailed his cheque to York Co., due on November 15^th, on November 12^th. Bevier must put a stop payment on the cheque to York Co. and issue a new one to Zeno Finance for the November 15^th payment.

Question 36

Kevin was injured when a bottle of pop, purchased by Katie and given to him, exploded in his hand. Kevin cannot sue the manufacturer and receive damages for his injuries because he lacks privity of contract.

Question 37

Carl agrees to buy a refrigerator from his local appliance store under an installment plan, with eight monthly payments of $100. The store immediately, and properly, assigns the deal to a finance company for $750 in cash. After the refrigerator is delivered it utterly fails to operate, and Carl refuses to make his payments to the finance company. The finance company demands continued payments and indicates that any issue of faulty goods must be taken up with the store as a separate matter. In this regard, it is in Carl's best interest to continue to make his payments lest he be successfully sued for being in breach of the agreement himself.

Question 38

Boyz Finance Company approaches merchants and gives immediate cash to them in return for the right to collect the series of monthly payments made on account by the merchant's customers. Boyz pays $75 now for the assignment of right to collect $100 in the future. For good reason, Boyz should be examining the business practices of the merchants from whom it accepts assignments as much as it examines the credit-worthiness of the accounts that it purchases.

Question 39

Ace Engineering needed cash and assigned a block of its accounts receivable to Wellington Finance Company. A week later, it assigned another block to Bagot Finance Company. By an oversight, the second block contained an account, a receivable from Smith, which Ace had already assigned to Wellington. The notice of assignment from Bagot arrived at the Smith offices before that of Wellington. Smith should pay against the demand of Bagot Finance Co.

Question 40

James owed Christie $2,500. She asked him to make the payments to her friend, Amira, and they drew up and signed a contract to that effect. After he had made a couple of payments, Christie died, and James told Amira he would not give her any more money. $2,300 is still outstanding.
a. Explain why Amira cannot simply sue James for breach of contract to get the balance of the money.
b. Identify the equitable remedy available to Amira and describe how it would operate to help her here.
c. What should Christie have done to make sure that Amira could enforce the contract if Christie was not there to do so?

Question 41

George was approached by a travelling salesperson, who convinced him to purchase an automatic weaving machine at a price of $900. To encourage the sale, the salesperson had verbally agreed to purchase, for a very modest price, any goods George wove which were up to a marketable standard. It was suitable for a home business, and George undertook a series of payments under a written agreement. The machine did a poor job, producing nothing marketable. The salesperson had disappeared in the meantime, having assigned the agreement to a finance company. The finance company was now looking to George for payment. George refused to pay. Explain the rights and liabilities of the parties.

Question 42

The Smalltown Sawmill entered into a contract with the Little Lumber Co. to supply the sawmill with logs. The sawmill produced a great deal of softwood lumber, particularly pine, for furniture making. The mill especially liked the logs supplied by Little Lumber Co. because they were from older stands of trees, which made the wood a higher quality. Little's logs were also somewhat larger, which made for less waste when cutting the larger pieces of wood required for furniture making. There was a written agreement between the parties which stipulated that the parties "for themselves, their executors and administrators and successors respectively" each covenanted to abide by and perform the terms of the agreement. The relationship continued over several years until the Little Lumber Co. assigned its rights under the agreement to another lumber company, Logs Ltd., which carried on the supply. The sawmill accepted shipments from Logs Ltd. for nearly a year when it decided not to accept any further shipments on the grounds that the contract it had with the Little Lumber Co. was not assignable.
The Little Lumber company decided to take legal action to enforce the agreement on the sawmill. Explain the nature of the action taken and the legal principles the lumber company would rely on. What arguments would the sawmill raise in its defence? Render a decision.

Question 43

Creighton owned a commercial property on the main street of a large city, which he leased for 15 years to a franchise of a nationwide department store. The lease contained a covenant prohibiting the department store tenant from establishing another one of its stores within a 15-kilometre radius of its current location. The main reason for the restrictive covenant was to protect the landlord's rental revenues. The rent for the property was set at a $24,000 minimum per year plus 3% of gross sales receipts. In reality, another franchisee of the department store had been operating a store within six blocks of Creighton's property for the last 10 years. Creighton was well aware of this fact but had never taken any steps to enforce the covenant in his lease.
In December, Creighton sold his property to Murdock and assigned the lease in its entirety. Creighton and Murdock arranged the deal such that Murdock made a lump sum down payment and Creighton held a mortgage that Murdock would pay, in part, with the monthly rental revenues from the property. The assignment was executed under seal and immediately written notice was sent to both the store manager at the leased property and to the national office of the department store chain. The notice informed the tenant that the assignment had occurred and that all future rental payments were to be directed to Murdock. The tenant properly forwarded its monthly payments to Murdock for several months.
In March, Murdock telephoned the tenant to inform it that he had reassigned the right to receive the rental income to Creighton and that future payments should again be made directly to Creighton. The purpose of the reassignment was to reduce the length of time it took each month to get the payments processed from the tenant to Murdock and on to Creighton. In return, Creighton reduced the rate on Murdock's mortgage by one-quarter percent. Murdock pointed out, however, that he retained his capacity as landlord, having assigned only the rental income back to Creighton.
One week later, Creighton brought an action against the tenant for damages for breach of the lease's covenant prohibiting the existence of the second store within 15 kilometres. Creighton sought damages in the amount equal to lost rental revenue for the previous 10 years.
What legal issues are raised in this case? What arguments will be used by both Creighton and the tenant and what will be the likely outcome?

Question 44

Andrews, wished to sell his home and contacted Theo, one of the real estate agents associated with a busy local brokerage. Theo came to the home in order to prepare a specification sheet of the home's features, to take some photographs and to enter into a listing agreement with Andrews. The listing agreement provided that:
"In consideration of your listing and agreeing to offer my property for sale, I hereby give you sole and exclusive authority to sell my said property at the price of $189,000 and upon the terms particularly set out below or at such other price or terms to which I may agree. I further agree to pay you a commission of 6% of the sale price."
Theo held numerous open houses at Andrews' home and generated considerable interest among prospective buyers. Within a short period of time an acceptable agreement of purchase and sale for the home was entered into by Andrews with a purchaser. That agreement contained the following provision:
"THE UNDERSIGNED (Andrews) accepts the above offer and agrees with the Agent above named (Theo) in consideration for his services in procuring the said Offer, to pay him on completion of the sale, a commission of 6% of the sale price which commission may be deducted from the deposit. I hereby irrevocably instruct my solicitor to pay direct to the Agent any unpaid balance of commission from the proceeds."
On the day of closing, Andrews' solicitor received a certified cheque in the full amount from the purchaser. Before the solicitor disbursed the funds, Andrews instructed him not to honour the direction in the agreement of purchase and sale to pay directly to the agent any unpaid commission from the proceeds. The solicitor complied with Andrews' instructions and did not pay the funds to the agent.
What legal issues are raised in this situation and what are the rights and liabilities, if any, of the parties involved?
D.L.R. (4^th) 762, this case deals with the rights of third-party beneficiaries to a contract. The agreement of purchase and sale in which the vendor directed his solicitor to pay the agent's commission directly may not be enforced by the agent. The vendor and solicitor are protected against any action taken by the agent to enforce the provision under the concept of privity of contract. The agent is merely a third party to that agreement upon whom a benefit is purportedly conferred. Thus, the agent who is not a party to the contract may not enforce its performance. Moreover, the promise or benefit to the agent under this agreement is merely gratuitous. There was no new or additional consideration flowing from the agent to the vendor for the inclusion of the irrevocable direction to the solicitor. In addition, the provisions of the purchase and sale agreement add nothing to the already existing obligation of the vendor to pay the agent's commission under the separate listing agreement, which is the governing agreement between vendor and agent. Thus, any argument by the agent that the terms of the agreement of purchase and sale essentially constitute a constructive trust for his benefit may be refuted by the vendor on the grounds that the agent is already entitled to the commission. On this basis the vendor is free at law to withdraw his direction to the solicitor without incurring further liability to the agent. He is still liable for payment of the commission but cannot be compelled to effect direct payment by his solicitor from the proceeds.