Third-Party Beneficiaries; Assignment & Delegation; Novation
What is necessary for an Effective Assignment?
1. A writing is usually not required. An oral assignment is generally effective. However, assignments of the following must be in writing: Wage assignments, assignments of interests in land, and assignments intended as security interests under Article 9 of the UCC. 2. The right being assigned must be adequately described. 3. The assignor must manifest an intent to transfer his rights under the contract completely and immediately to the assignee. 4. Consideration is not required. A gratuitous assignment is effective.
Are assignments revocable?
1. Assignments for value are irrevocable. An assignment is for value if it is (i) done for consideration, or (ii) taken as security for payment of a preexisting debt. 2. Gratuitous assignments are revocable, unless the obligor already performed, a token chose has been delivered, or the assignment involves a simple chose and is in writing. The theory of promissory estoppel may prevent the assignor from revoking a gratuitous assignment if: (i) the assignor should reasonably foresee that the assignee will change her position in reliance on the assignment; and (ii) such detrimental reliance does in fact occur.
Methods of revocation
A gratuitous revocable assignment may be terminated in a number of ways: (1) Death of the assignor; (2) Bankruptcy of the assignor; (3) Notice of revocation communicated by the assignor to either the assignee or the obligor; (4) the assignor takes performance directly from the obligor; or (5) subsequent assignment of the same right by the assignor to another.
Express Contractual Agreements Against Assignment
(1) A clause prohibiting assignment of "the contract" will be construed as barring only the delegation of the assignor's duties. (2) A clause prohibiting the assignment of contractual rights generally does not bar assignment, but merely gives the obligor the right to sue for breach if an assignment is made. The assignor has the power but not the right to assign.
Assignment of Rights and Delegation of Duties: Generally
A situation in which two parties enter into a contract that does not contemplate performance to or by a third party and one party subsequently seeks to transfer her rights and/or duties under the contract to a third party.
Assignment: Generally
A transfer of a right under a contract is called an "assignment."
When do the Rights of the Beneficiary Vest?
An "intended" beneficiary can enforce a contract only after his rights have vested. The general rule for both creditor and donee beneficiaries is that their rights vest when the beneficiary: (i) Manifests assent to the promise in a manner invited or requested by the parties; (ii) Brings suit to enforce the promise; or (iii) Materially changes position in justifiable reliance on the promise.
Effect of Assignment
Assignment established privity of contract between the obligor and the assignee while extinguishing privity between the obligor and assignor. The assignee then replaces the assignor as the real party in interest, and she alone is entitled to performance under the contract.
Significance of the Vesting of the Beneficiary's Rights
Before the intended third-party beneficiary's rights vest, the promisor and promisee are free to modify their contract--including removing the third-party beneficiary altogether--without consulting the third party. Once the third-party beneficiary's rights have vested, the promisor and promisee cannot vary his rights without his consent.
Rights of the Promisee against the Promisor with Respect to Contracts with Third-Party Beneficiaries
Donor Beneficiary: If the promisor fails to perform and the contract involves a donee beneficiary, the majority view is that the promisee has a cause of action. The promisee generally suffers no actual damage and will therefore usually receive only nominal damages. Most courts have resolved this problem by allowing specific performance in this situation. Creditor Beneficiary: If the promisor fails to perform as to a creditor beneficiary and a promisee has had to pay the beneficiary on the existing debt, the promisee may recover against the promisor. If the debt has not yet been paid by the promisee to the third party, the promisee can compel the promisor to pay in a specific performance action.
What rights may be assigned?
General Rule: All contractual rights may be assigned.
Donee Beneficiary Exception Allowing Suit Against Promisee
If the promisee tells the donee beneficiary of the contract and should foresee reliance by the beneficiary, and the beneficiary reasonably relies to her detriment, the beneficiary can sue the promisee directly under a promissory estoppel/detrimental reliance theory.
Donee Beneficiary
If the promisee's purpose in extracting the promise was to confer a gift on the third party, the third party is a donor beneficiary.
Creditor Beneficiary
If the promisee's purpose in extracting the promise was to discharge an obligation owed to the third party, the third party is a creditor beneficiary.
What are the rights of the Third-Party Beneficiary against the Promisor?
If the promisor fails to perform, the third-party beneficiary may sue the promisor on the contract, subject defenses as follows: 1. The promisor may raise any defense against the third-party beneficiary that he would have against the promisee, including: lack of assent, lack of consideration, illegality, impossibility, and failure of a condition. 2. Whether the promisor can use any of the defenses that the promisee would have against the third-party beneficiary depends on the nature of the promise. Where the promisor made an absolute promise to pay (e.g., "I will pay T $500 in exchange for your services"), the promisor cannot assert the promisee's defenses. Where the promisor only promised to pay what the promisee owes the beneficiary (e.g., "I will pay T whatever you owe him in exchange for your services), the promisor can assert the promisee's defenses.
Rights of the Third-Party Beneficiary Against the Promisee
If the promisor fails to perform, whether the third-party beneficiary may sue the promisee depends on whether the third-party beneficiary is a donee beneficiary or a creditor beneficiary. A donee beneficiary may not sue the promisee because generally there is no right to sue for nondelivery of a gift. However, a creditor beneficiary can sue the promisee on the underlying obligation that the promisor's performance was meant to discharge. A creditor beneficiary may sue either the promisor or her own debtor (i.e., the promisee), but is entitled to only one satisfaction.
Which Third-Party Beneficiaries Can Sue?
Intended beneficiaries can sue. Only intended third-party beneficiaries have contract rights. Whether a person in an intended beneficiary depends on the intent of the parties. Incidental third-party beneficiaries have no contract rights. Incidental third-party beneficiaries benefit from the contract, but that is not the primary purpose of the contract.
Effect of revocation
Once an assignment is revoked, the privity between the assignor and the obligor is restored, and the assignor is once again the real party in interest.
Assignment: Terminology
X and Y have a contract. Y assigns her rights under the contract to Z. Y is the assignor, Z is the assignee, and X is the obligor.
Exceptions to the General Rule: When Assignment is Barred
a) If an assignment of rights would substantially change the obligor's duty, the assignment will be barred. b) When the obligor's risk would be substantially altered by any attempted assignment, the assignment will fail. c) The assignment of a right expected to arise under a contract of employment not then existing operated only as a promie to assign the right when it arises, i.e., when the expected future contract is in fact entered into. In contrast, future rights in existing contracts are generally assignable even though the right may not yet have vested. d) A right may not be assigned if assignment is prohibited by law. E.g., wage assignments. e) Express contractual provision against assignment