CHAPTER 15
THIRD PARTIES' CONTRACT RIGHTS
Outline
I. Assignment and delegation in general A. A contract consists of rights and duties. A transfer of rights is called an assignment; a transfer of duties is delegation. B. Most, but not all, contracts are assignable. If the assignment would materially alter the duties of the promisor, the assignment contract is unenforceable. Example: Claremont Acquisition Corp. v. General Motors Corp.: A bankruptcy trustee can assign a contract so long as the assignee gives adequate assurance of future performance. This was not the case here, thus this contract's assignment failed. Consequences of assignment A. An original promisor may assert defenses against the assignee that he could assert against the assignor (that is, the original contracting party.) B. An assignee can assert the original rights of the assignor against the promisor. C. Assignor must notify the promisor of the assignment. D. Assignors who are paid for making an assignment are held to make certain implied guaranties about the assignment. Consequences of delegation A. Like assignment, not all duties are delegable. Example: In re Lashelle, Ex-husband's duty to make mortgage payments was not delegable because such payments were in lieu of child support. B. Generally, an assignment of rights includes a delegation of duty under both the UCC and Restatement. Example: Rosenberg v. Son, Inc.: An assignment of rights and duties is not a novation and the original party to the contract remains liable for its breach along with the assignees. Third-Party Beneficiary Contracts A. There are two types of third-party beneficiaries under a contract: Intended and Incidental. 1. An Intended beneficiary is either a donee or creditor beneficiary, and acquires rights to enforce the original contract depending on which category of beneficiary he/she is. 2. An Incidental beneficiary acquires no contract rights. Example: Mortise v. United States: After being accidentally assaulted during a National Guard field training exercise, the Mortises tried to sue the Federal Government. They could not so they tried to make themselves beneficiaries of an insurance agreement between the Federal government and the county government. The court ruled as unintended beneficiaries could not benefit from the insurance agreement. B. A Donee Beneficiary is a beneficiary of a contract where the promisee's primary purpose was to make a gift to the third party. A donee beneficiary can enforce the contract against the original promisor, but not promisee. Example: Cherry v. Crow: The estate of prisoner who died under the care of a prison hospital sued for breach of contract; and, although a third party beneficiary does not ordinarily benefit, in this case the third party donee beneficiary was an intended beneficiary and can sue. 15-1
II.
III.
IV.
C. Creditor Beneficiaries: If the promisor's performance will satisfy a legal duty that the promisee owes a third party, the third party is a creditor beneficiary and may enforce the contract against both the promisee and promisor.
Learning Objectives
1. 2. 3. 4. 5. 6. 7. You should be able to compare contract rights and duties with assignment and delegation of rights and duties. You should understand the difference between contract rights and duties which are assignable or delegable and those which are not. You should understand the difference between creditor and donee beneficiaries, and incidental beneficiaries. You should understand who the assignor, assignee, and promisor are in the context of an assignment, and what the rights and duties of each are after the assignment occurs. You should understand exactly what a delegation of duties involves and what the rights and duties of the parties are after the delegation occurs. You should know why the assignee should give notice of the assignment to the promisor. You should know what implied warranties are given by an assignor who is paid for the assignment to the assignee.
Learning Hints
1. In every bilateral contract situation there is a promisor and promisee, and each party has corresponding rights and duties. Thus either party (or both) may generally assign rights and transfer duties to a third party, who then acquires certain rights and duties under the contract. A delegate of a duty under a contract must consent to that delegation and assume the duty under the contract in order to be obligated to the promisee. An assignment of rights generally includes a delegation of duty under the UCC and the Restatement. Public policy favors assignment, and anti-assignment clauses are strictly construed and may be unenforceable in some cases for public policy reasons. A third-party beneficiary will only acquire contract rights if he/she is an intended beneficiary. An example of an intended beneficiary is the beneficiary under an insurance contract. Remember that an assignment does not require formalities, a writing, or consideration to be valid. Assignments are not permitted in situations where the assignment would materially change the promisor's duty or the promisor's risk. This means that an assignment of an insurance contract by the party who is both the insured and the beneficiary to another who becomes both insured and beneficiary would be invalid. An example of a situation in which a delegation of duties would be invalid because it is a delegation of duties which depend on personal skill, character, or judgment would be a situation in which B, who is an artist, assigns his contract to paint A's portrait to C, who is not an artist. Remember that the assignee must give notice of the assignment to the promisor or the promisor is not bound to render performance to the assignee. This means that if the promisor renders performance to the assignor because he has not been notified of the assignment, the promisor is discharged and the assignee would be forced to sue the assignor to obtain the assigned benefit. If a duty is properly delegated but the assignee fails to render performance to the promisor, the assignor is still liable to the promisor, and will therefore be legally required to render performance himself. Then the assignor would be forced to sue the assignee to obtain reimbursement for his
2. 3. 4. 5. 6. 7.
8.
9.
10.
15-2
performance of the delegated duties.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False. _____ 1. Delegation of contract duties generally extinguishes the contract obligations of the delegating party. _____ 2. Assignment of rights generally includes delegation of duty. _____ 3. An assignment of rights generally extinguishes the contract rights of the assignor. _____ 4. An assignment of rights for consideration generally includes an implied warranty that the claim is valid. _____ 5. An incidental beneficiary generally does not acquire contract rights. _____ 6. A valid assignment does not require that the assignee give consideration. _____ 7. Contract clauses forbidding assignment are always enforced. _____ 8. If the promisor was a minor at the time the contract was made and it is later assigned, he will have the same defense of lack of capacity against the assignee as he would have had against the assignor. _____ 9. A donee beneficiary is the recipient of a contractual gift. _____ 10. Both assignors who are paid for making an assignment and those who give assignments away are potentially liable to their assignees for certain implied guarantees.
Multiple Choice
Circle the best answer. 1. Which of the following third parties can not enforce the original contract? a. Donee beneficiary; b. Assignee c. Creditor beneficiary; d. Incidental beneficiary. 2. Jenny ordered a bouquet of "Happy Birthday Balloons" from "Balloons Over Buffalo" to be sent to her brother Bill. If "Balloons" fails to deliver, who can enforce the contract? a. Only Jenny; b. Only Bill; c. Either Bill or Jenny; d. Neither Bill nor Jenny. 3. Generally, an assignor for value does not impliedly warrant: a. That the obligor has the capacity to contract; b. That the assignor has not assigned the claim to any one else; c. That the claim is valid; d. That the obligor has the money to pay the claim. 4. A Novation is: a. An agreement between two promisees to shift the risk of the contract to a third party. b. An agreement between the promisor and promisee in which the promissee agrees not to default. c. An agreement between the promisor and promisee to release the promisor from liability after
15-3
5.
6.
7.
8.
9.
10.
the assignment. d. An agreement between the promisee and another party that needs to be enforced. Assume Landlord One assigned a rental agreement with Bob to Landlord Two. Landlord Two failed to provide Bob a clean and safe apartment as required by the original lease. Who is responsible to Bob for breach of the lease obligation? a. Landlord One only; b. Landlord Two only; c. Both Landlord One and Landlord Two; d. Neither Landlord One nor Landlord Two. In which of the following cases might an assignment of contract rights be invalid? a. Where a right to receive money is assigned b. Where a right to receive goods is assigned c. Where the assignor's promise not to compete with the buyer of a business is assigned along with the sale of the business d. Where a right to have one's requirements of coal met is assigned The assignee on a valid assignment: a. takes free of all defenses the promisor has against the assignor. b. is usually subject to an implied delegation of the assignor's duties. c. is entitled to the promisor's performance even if he does not give notice of the assignment to the promisor. d. is a donee beneficiary of the original contract. X, an artist, contracts to paint a portrait for Y, then X assigns the contract to Z, who has no artistic skills. Which is a true statement? a. X's contract rights cannot be assigned because this would materially change Y's obligation. b. X's contract duties cannot be delegated to Z because this would materially impair Y's rights under the contract. c. After the assignment, X will no longer be liable to Y. d. None of the above A hires B to build a building which, unbeknownst to either A or B, will cause C's property values to go up. If B fails to perform, a. C can sue as a donee beneficiary. b. C can sue as a creditor beneficiary. c. C can sue as an intended beneficiary. d. C cannot sue as he is an incidental beneficiary. Which of the following is a true statement about assignments? a. A valid assignment requires consideration. b. To be valid, an assignment must be in writing. c. Contract rights can be given away as well as sold.
d. Once a valid assignment occurs, the delegation of the assignor's contractual duties is always automatic.Short Essay 1. Mike was employed as a store clerk for a local toy store. The store was sold to new owners, and Mike now argues that sale of the store terminated his employment contract because the contract 15-4
was not assignable. Is this employment contract assignable? Why or why not?
2.
Mike was employed as an attorney for a local toy store. The store was sold to new owners, and Mike now argues that sale of the store terminated his employment contract because the contract was not assignable. Is this employment contract assignable? Why or why not?
3.
After an assignment, to what defenses is the assignee subject?
15-5
4.
Carl Civic, a concerned citizen, is irate over the shoddy work done by Crummy Construction Company on the new courthouse in his city. Can Carl sue as a third party beneficiary of the contract between the city and Crummy? Why or why not?
15-6