Chapter 16 Business Law (Third Parties to Contracts)
EX: (Incidental Beneficiary) 2
- A contract to raze an old, unsightly building and replace it with a costly, modern house would benefit the owner of the adjoining property by increasing his property's value - He would have NO rights under the contract, however, the benefit to him would be unintended and incidental
EX: (Intended Beneficiary)
- Abbot promises Baldwin to deliver an automobile to Carson if Baldwin promises to pay $10,000 - Carson: intended beneficiary
EX: (Incidental Beneficiary)
- Abbott promises to purchase and deliver to Baldwin an automobile for $10,000 - Abbott would acquire the automobile from Davis - Davis would be an incidental beneficiary
EX: (Assignment of Personal Rights)
- Agreement of two persons to marry one another; the prospective groom cannot transfer rights to some third party - Contract between a teacher and school; teacher could not assign to another teacher her right to a faculty position
EX: (Assignment of Rights)
- Ann promises to sell to Bart an automobile - Bart promises to pay $10,000 in monthly installments for the next 3 years - Ann's right is to receive payment from Bart; her duty is to deliver the automobile - Bart's right is to receive the automobile; his duty is to pay for it
EX: (Delegation of Duties)
- Anthony promises to sell Bella a new automobile for which Bella promises to pay $10,000 by monthly installments over the next 3 years - Anthony and Donald agree that Donald will deliver the automobile to Bella - delegation of duties between Anthony and Donald - Anthony would be the delegator - Donald would be the delegatee - Bella would be the obligee
EX: (Successive Assignments of The Same Right)
- Barney owes Andrea $1,000 - June 1 - Andrea for value assigns the debt to Carlos - June 15 - Andrea assigns it to David, who had no knowledge of the prior assignment to Carlos - First assignee in point of time (Carlos) prevails over subsequent assignees
EX: (Notice)
- Donald owes Gary $1,000 due September 1 - Gary assigns the debt to Paula on August 1 but neither he nor Paula informs Donald - September 1 Donald pays Gary - Donald is fully discharged from his obligation whereas Gary is liable for $1,000 to Paula On the other hand... - If Paula had given notice of the assignment to Donald before September 1 and Donald had paid Gary nevertheless - Paula would have the right to recover the $1,000 from Donald or Gary
EX: (Requirements of an Assignment)
- Eve delivers to Harold a writing addressed to Mary - It states: "Pay Harold for his own use $1,000 out of the amount you owe me" - Legally sufficient assignment
EX: (Duties of the Parties)
- Frank owes a duty to Grace - Frank delegates that duty to Henry - Henry is not obligated to either Frank or Grace unless Henry agrees to do so - If Henry promises either Frank (delegator) or Grace (obligee) that he will perform Frank's duty, Henry is said to have assumed the delegated duty and becomes liable to both for nonperformance
EX: (Intended Beneficiary: Creditor Beneficiary)
- Holly loaned Fox $300 in consideration for Fox's promise to pay that sum to Lawrence, a creditor (person who money is owed) of Holly - Fox failed to pay Lawrence, who sued Fox for the $300 - Court held for Lawrence, who was permitted to recover as a third-party creditor beneficiary to the contract between Holly and Fox
EX: (Continuing)
- If Ann were to TRANSFER her right under the contract to Clark for $8,500 in cash - valid assignment of rights - Ann would be the assignor (assigns right; aka transferring her right) - Clark would be assignee (gets assigned) - Bart would be obligor (pay for it)
EX: (Rights of Intended Beneficiary)
- If Willard owes Lola $500 and Julie contracts with Willard to pay his debt to Lola, Willard is not relieved of his liability to Lola - If Julie breaks the contract, Lola, as a creditor beneficiary, may sue her - Lola may also sue Willard as her debtor - Willard is entitled to collect only one judgement - If Lola recovers against Willard, Willard has a right of reimbursement from Julie, the promisor
EX: (Partial Assignment)
- Jack owes Richard $2,500 - Richard assigns $1,000 to Mildred - Neither Richard nor Mildred can maintain action against Jack if Jack objects
EX: (Vesting of Rights)
- Mildred purchases an insurance policy on her own life, naming her husband as beneficiary - Her policy, as such policies do, reserves to mildred the right to change the beneficiary or even cancel the policy completely
EX: (Revocability of Assignments)
- Nancy owes Howard $50,000 - Howard signs a written statement granting Paul a gratuitous assignment of his rights from Nancy but dies prior delivering to Paul the signed, written assignment of the contract - Assignment is terminated and therefore ineffective
Vesting of Rights
A contract for the benefit of an intended beneficiary confers upon that beneficiary rights that she may enforce Until these rights vest (take effect), however, the promisor and promisee may, by later agreement, vary or completely discharge of them If the contract between the promisor and promisee provides that they may not vary its terms without the consent of the beneficiary, such a provision is effective Promisor and promisee may provide that the benefits will never vest
Third-Party Beneficiary Contract
A contract in which a party (promisor) promises to render a certain performance not to the other party (promisee) but to a third person (beneficiary)
Intended Beneficiary: Donee Beneficiary
A third party intended to receive a benefit from the contract as a gift Promisee's purpose in bargaining for and obtaining the agreement with the promisor is to make a gift of the promised performance to the beneficiary
Intended Beneficiary: Creditor Beneficiary
A third person intended to receive a benefit from the agreement to satisfy a legal duty owed to her If the promisee intends the performance of the promise to satisfy a legal duty he owes to the benefiary
Assignments that Materially Increase the Duty, Risk, or Burden
An assignment is ineffective when performance by the obligor to the assignee would differ materially from her performance to the assignor; when the assignment would significantly change the nature of the obligor's duty If a contract explicitly provides that it may be assigned, then rights under it are assignable even if the assignment would change the duty, risk or burden performance on the obligor
Express Prohibition Against Assignment
Contracts prohibiting assignment of rights under the contract are strictly construed; most courts interpret a general prohibition against assignments as a mere promise not to assign As a consequence, the prohibition, if violated, gives the obligor a right to damages for breach of the terms forbidding assignment but does NOT render the assignment ineffective
Novation
Delegator is discharged and the third party becomes directly bound upon his promise to the obligee * to which the obligee is a party, substituting a new promisor for an existing promisor, who is consequently no longer liable on the original contract and is not liable as a delegator
Delegation
Delegator is still bound to perform original obligation
Express Warranties of Assignor
Express Warranty - Explicitly made contractual promise regarding property or contract rights transferred Assignor is further bound by any express warranties he makes to the assignee with respect to the right assigned Assignor does not guarantee that the obligor will pay the assigned debt or perform, unless such a guarantee is stated
Duties of the Parties
If the delegator desires to be discharged of the duty, she is allowed to enter into an agreement by which she obtains the consent of the obligee to substitute a third person in her place Delegation authorizes a third party to perform a duty for the delegator, a delegatee becomes liable for performance only if he assents to perform the delegated duties
Defenses Against Beneficiary
In an action by the intended beneficiary of a third-party contract to enforce the promise, the promisor may assert any defense that would be available to her if the action had been brought by the promisee Rights of the third party are based upon the promisor's contract with the promisee
Rights of Intended Beneficiary
Intended Donee Beneficiary: - May enforce the contract against promisor - May NOT maintain action against the promisee, as the promisee was under no legal obligation to him Intended Creditor Beneficiary: - May enforce the contract against both parties
Intended Beneficiary
Intended by the two parties to the contract (the promisor and promisee) to receive a benefit from the performance of their agreement
Requirements of an Assignment
Manifestation of the assignor' intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance Assignment may be oral
Defenses of Obligor
May be asserted against the assignee
Delegable Duties
Most contract duties may be delegated except: 1. Duties that are personal 2. Duties that are expressly nondelegable 3. Duties whose delegation is prohibited by statute or public policy
Rights that are Assignable
Most contract rights, INCLUDING under an option contract, are assignable
Implied Warranties of Assignor
Obligation imposed by law upon the transfer of property or contract rights * Obligation imposed by law upon the assignor of a contract right
Successive Assignments of The Same Right
Owner of a right could make successive assignments of the same claim to different persons
Delegator
Party delegating his duty to a third party
Assignor
Party making an assignment
Assignee
Party to whom contract rights are assigned
Obligor
Person who owes a duty under a contract
Beneficiary
Person who receives a benefit
Obligee
Person whom a contractual duty is owed
First Assignee in point of time
Prevails over subsequent assignees
Assignments Prohibited by Law
Prohibit or regulate the assignment of certain types of contract rights An assignment that violates public policy will be unenforceable even if the absence of a prohibiting statute
Rights That are Not Assignable
Purpose: To protect the obligor or the public interest 1. Materially change the obligor's duty or materially increase the risk or burden upon the obligor 2. Transfer highly personal contracts rights 3. Are validly prohibited by the contract 4. Are prohibited by statute or public policy
Rights of the Assignee
The assignee stands in the shoes of the assignor Acquires rights of the assignor but with no new rights, and takes the assigned rights
Incidental Beneficiary
The third party is not intended to receive a benefit under the contract * Third party whom the two parties to the contract have no intention of benefiting by their contract and who acquires no rights under the contract
Assignment of Rights
The voluntary transfer to a third party of the rights arising from the contract
Delegatee
Third party to whom the delegator'd duty is delegated
Notice
To be valid, notice of an assignment does not have to be given to the obligor Giving notice is advisable because an assignee will lose his rights against an obligor to pay a claim a second time, when she was not notified that a new party was entitled to payment would be unfair
Delegation of Duties
Transfer of a contractual obligation to a third party Does not extinguish the delegator's obligation to perform
Partial Assignment
Transfer of a portion of the contractual rights to one or more assignees Enforceable
Delegation of duties
Transfer to a third party of a contractual obligation
Revocability of Assignments
When the assignee gives consideration in exchange for an assignment, a contract exists between the assignor and assignee * When the assignee gives consideration, the assignor may not revoke the assignment without the assignee's consent A gratuitous assignment is revocable by the assignor and is terminated by her death, incapacity, or subsequent assignment of right
Assignment of Personal Rights
Where the rights under a contract are highly personal, in that they are limited to the person of the obligee, such rights are not assignable
