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Chapter 16
THIRD PARTIES TO CONTRACTS
A. Assignment of Rights 6. Implied Warranties of Assignor
1. Law Governing Assignments 7. Express Warranties of Assignor
2. Requirements of an Assignment 8. Successive Assignments of the Same Right
a. Revocability of Assignments B. Delegation of Duties
b. Partial Assignments 1. Delegable Duties
3. Rights that Are Assignable 2. Duties of the Parties
4. Rights that Are Not Assignable C. Third-Party Beneficiary Contracts
a. Assignments That Materially 1. Intended Beneficiary
Increase the Duty, Risk, or Burden a. Donee Beneficiary
b. Assignments of Personal Rights b. Creditor Beneficiary
c. Express Prohibition against Assignment c. Rights of Intended Beneficiary
d. Assignments Prohibited by Law d. Vesting of Rights
5. Rights of the Assignee e. Defenses Against Beneficiary
a. Obtains Rights of Assignor 2. Incidental Beneficiary
b. Notice
Cases in This Chapter
Reiser v. Dayton Country Club Company Public Service Commission of Maryland v.
Aldana v. Colonial Palms Plaza, Inc. Panda-Brandywine, L.P.
Stine v. Stewart
A. ASSIGNMENT OF RIGHTS
Voluntary transfer to a third party of the rights arising from the contract; the
assignor transfers her rights to the assignee. The transfer may be by a gift or a
sale.
Law Governing Assignments
Comes primarily from the common law of contracts, Article 2 of the UCC (which
applies to assignment of rights under a contract for a sale of goods), and Article 9
of the UCC (which applies to all assignments made to secure performance of an
obligation and all assignments involving rights to payment of goods sold or
leased or for services rendered).
Requirements of an Assignment
There is no particular form required to effect an assignment; courts are more
concerned with the intent of the assignor. Consideration is not necessary, but
where it is given by the assignee the assignment cannot be revoked.
Revocability of Assignments — An assignment unsupported by consideration
may be revoked by the assignor or by operation of law if the assignor should die
or become incapacitated, except where an effective delivery has been made of a
deed or other document evidencing the transferred right.
Partial Assignments — A transfer of a portion of contractual rights to one or
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more assignees.
Rights that Are Assignable
Most contract rights, including rights under an option contract, are assignable,
including the right to the payment of money and other property, such as land or
goods.
Rights that Are Not Assignable
In order to protect the obligor or the public interest, some contract rights are not
assignable. Nonassignable contract rights include:
1. Assignments that Materially Increase the Duty, Risk, or Burden —
An assignment is ineffective if it would significantly change the nature or
extent of the obligor’s duty.
2. Assignments of Personal Rights — When the rights under a contract are
highly personal, in that they are limited to the person of the obligee, such
rights are not assignable.
3. Express Prohibition against Assignment — Most courts interpret a
general prohibition against assignments as a mere promise not to assign.
4. Assignments Prohibited by Law — Various federal and state statutes, as
well as public policy, prohibit or regulate the assignment of certain types of
contract rights, such as assignments of future wages.
CASE 16-1
Reiser v. Dayton Country Club Company
Case Questions
1. What test of personal contracts was used by the court?
2. When can a personal service contract be assigned?
Ethical Question: Is the court’s decision fair to the creditors of Magness and
Redman? Explain.
Critical Thinking Question: Which type of contracts should not be assignable
because of their personal nature? Explain.
CASE 16-2
Aldana v. Colonial Palms Plaza, Inc.
Case Questions
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1. What right was assigned?
2. From the viewpoint of Colonial's would it make any difference who possessed the
right?
3. Why does the prohibition against assignments of the lease not apply?
Ethical Question: Did the landlord act ethically? Did the tenant act ethically?
Explain.
Critical Thinking Question: Should the courts honor contractual prohibitions of
assignment by rendering such assignments ineffective? Explain.
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Rights of the Assignee
Obtains Rights of Assignor — The assignee acquires the rights of the assignor, but
no new or additional rights. The assignee takes the assigned rights with all of the
defenses, defects, and infirmities that could be asserted against the assignor.
Notice — To be valid, notice of an assignment does not have to be given to the
obligor, though this is a recommended practice to avoid payment being made to the
assignor.
Implied Warranties of Assignor
An implied warranty is an obligation imposed by law upon the transferor of property
or contract rights. Usually an assignor who receives value makes the following
implied warranties to the assignee with respect to the assigned right:
1. that he will do nothing to defeat or impair the assignment;
2. that the assigned right actually exists and is subject to no limitations or defenses
other than those stated or apparent at the time of the assignment;
3. that any writing that evidences the right and that is delivered to the assignee or
exhibited to him as an inducement to accept the assignment is genuine and
what it purports to be;
4. and that the assignor has no knowledge of any fact that would impair the value
of the assignment.
Express Warranties of Assignor
An express warranty is an explicitly made contractual promise regarding the property
or contract rights being transferred. The assignor is also bound by any express
warranties he makes to the assignee regarding the right assigned.
Successive Assignments of the Same Right
The owner of a right could conceivably make successive assignments of the same
claim to different persons. Although morally and legally inappropriate, it raises the
question of what rights successive assignees have. The majority rule is that the first
assignee in point of time prevails over later assignees; the minority rule is that the first
assignee to notify the obligor prevails.
The Restatement adopts a third view: the first assignee is entitled to the right and its
proceeds unless the assignment is revocable or voidable by the assignor. The later
assignee may also take precedence if she, in good faith and without knowledge of the
prior assignment, gives value and obtains one of the following: (1) payment of the
obligor’s duty, (2) a judgment against the obligor, (3) a new contract with the
obligor, or (4) possession of written evidence of the right assigned.
*** Qu estion to Discuss ***
Identify those situations in which a delegation of duties is not permitted.
B. DELEGATION OF DUTIES
Delegable Duties
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Most contract duties may be delegated except when:
— the nature of the duties are personal in that the obligee has a substantial interest in
having only the delegator perform the contract;
— the performance is expressly made nondelegable; or
— the delegation is prohibited by statute or public policy.
CASE 16-3
Public Service Commission of Maryland. v. Panda-
Brandywine, L.P.
Case Questions
1. Why was the assignment not upheld by the court?
2. What factors did the court examine to determine if the rights and duties in this
case could be delegated or assigned?
Ethical Question: In what circumstances should a party to a contract be
prohibited from assigning rights or delegating duties? Explain.
Critical Thinking Question: If the APSA had involved only the resale of
electricity purchased from Panda would the court have permitted the
delegation? Explain.
Duties of the Parties
Delegatee — A delegation does not require performance by the delegator until the
delegatee agrees to assume the duty.
Delegator — The delegator is still liable (along with the delegatee) to the obligee
for proper performance of the original contractual duty.
In a novation, a new contract is formed by which the delegator is discharged of
the duty and the delegatee becomes directly bound to the obligee.
*** Qu estions to Discuss ***
Distinguish between an intended beneficiary and an incidental beneficiary.
Explain when the rights of an intended beneficiary vest.
C. THIRD-PARTY BENEFICIARY CONTRACTS
Intended Beneficiary
A third party intended by the two parties to the contract to receive a benefit from
the performance of their agreement:
Donee Beneficiary — A third party is an intended donee beneficiary if the
promisee’s purpose in the agreement is to make a gift to the beneficiary.
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Creditor Beneficiary — A third person is an intended creditor beneficiary if she
and the promisee already have an existing creditor-debtor relationship and if the
promisee’s purpose in the agreement is to satisfy a legal duty owed to the
beneficiary.
CASE 16-4
Stine v. Stewart
Case Questions
1. Who were the parties to the agreements?
2. In establishing whether Stine is an intended beneficiary, of what importance is
the intention of the parties to the contract?
Ethical Question: Did anyone act unethically?
Critical Thinking Question: Why did the court conclude that Stine was not an
intended third-party donee beneficiary?
Rights of Intended Beneficiary — An intended donee beneficiary may take
action against the promisor only, but an intended creditor beneficiary may sue
either the promisor or the promisee.
Vesting of Rights — Even though the states vary considerably, the Restatement
states that if the contract provides that its terms may not be varied without the
consent of the beneficiary, such a provision will be upheld.
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.
The rights of the third party are based upon the promisor's contract with the
promisee. Thus, the promisor may assert the absence of mutual assent or
consideration, lack of capacity, fraud, mistake, and the like against the intended
beneficiary. Once an intended beneficiary’s rights have vested, however, the
promisor may not assert the defense of contractual modification or rescission.
Incidental Beneficiary
An incidental third-party beneficiary is a person to whom the parties to a contract
did not intend a benefit but who nevertheless would derive some benefit by its
performance; she acquires no rights under the contract because no promise was
made to her.