Contracts Chapter 16 Third Party Rights

The key points in this chapter include:

1. The relationship of parties to an assignment.

2. Rights that cannot be assigned.

3. What duties cannot be delegated and who is liable for performance.

4. Noncontracting parties who have rights in or to a contract.

5. When a third party beneficiary’s rights vest.

A party to a contract can assign the rights arising from it to another or delegate the duties of the contract by having another perform them. A third party also acquires rights to enforce a contract when the contract parties intend the contract to benefit the third party (who is an intended beneficiary). When a contract only incidentally benefits a third party, he or she is an incidental beneficiary and cannot enforce it.

I. ASSIGNMENTS AND DELEGATIONS
Assignment and delegation occur after the original contract is made, when one of the
parties transfers to another party an interest or duty in the contract.

A. ASSIGNMENTS

1. What an Assignment Is
One party has a right to require the other to perform, and the other has a duty to perform.
The transfer of the right to a third person is an assignment.

2. How Assignments Function
Assignments are involved in much business financing. The most common contractual right
that is assigned is the right to the payment of money.

3. Form of an Assignment
An assignment can take any form, oral or written. Assignments covered by the Statute of
Frauds must be in writing to be enforceable. Most states require contracts for the
assignment of wages to be in writing.

4. Consideration
No consideration is necessary. A gratuitous assignment is as effective as an assignment
made for money.

a. Assignment Made for Consideration Cannot be revoked.

b. Assignment Made Without Consideration
Can be revoked by (1) subsequent assignment of the same right to another party,
(2) death of the assignor, (3) bankruptcy of the assignor, or (4) notice of revocation given to
the assignee.

5. Rights That Cannot Be Assigned

a. Statute Prohibits Assignment
(For example, assignment of future workers’ compensation benefits.)

b. Contract Is Personal
The rights under the contract cannot be assigned unless all that remains is a money
payment. (Personal services are unique to the person rendering them. Rights to receive
personal services are likewise unique and cannot be assigned.)

c. Assignment Materially Increases or Alters Risk or Duties of Obligor

d. Contract Provides That It Cannot Be Assigned
Exceptions: a contract cannot prevent an assignment of—

1). A right to receive money.
2). Rights in real property (restraint against alienation)
3). rights in negotiable instruments (see Chapter 26)
4). a right to receive damages for breach of a sales contract or for payment of an
amount owed under the contract (even if the contract prohibits it).

6. Notice of Assignment
An assignment is effective immediately, with or without notice.

a. Same Right Assigned to More Than One Party
If the assignor assigns the same right to different persons, in most states, the first
assignment in time is the first in right. In some states, priority is given to the first assignee who
gives notice.

b. Discharge before Notice
Until an obligor has notice, his or her obligation can be discharged by performance to the
assignor. Once the obligor has notice, only performance to the assignee can act as a
discharge.

7. Effect of an Unconditional Assignment
(1) The rights of the assignor are extinguished; (2) the assignee has a right to demand
performance from the obligor; and (3) the assignee’s rights are subject to the defenses
the obligor has against the assignor.

B. DELEGATIONS
Duties are delegated. The party making the delegation is the delegator; the party to whom
the duty is delegated is the delegatee.

1. Form of Delegation
No special form is required.

2. Duties That Cannot Be Delegated
Any duty can be delegated, unless (1) performance depends on the personal skill or
talents of the obligor, (2) special trust has been placed in the obligor, (3) performance by a
third party will vary materially from that expected by the obligee (the one to whom
performance is owed) under the contract, or (4) the contract expressly prohibits it.

3. Effect of a Delegation
The obligee (the one to whom performance is owed) must accept performance from the
delegatee, unless the duty is one that cannot be delegated. If the delegatee fails to perform,
the delegator is still liable.

4. Liability of the Delegatee
If the delegatee makes a promise of performance that will directly benefit the obligee, there is an “assumption of duty.” Breach of this duty makes the delegatee liable to the obligee, and the obligee can sue both the delegatee and the delegator.

C. ASSIGNMENT OF ALL RIGHTS
A contract that provides in general words for an assignment of all rights (for example, “I
assign the contract” or “I assign all my rights under the contract”) is both an assignment of
rights and a delegation of duties.

II. THIRD PARTY BENEFICIARIES
Only intended beneficiaries acquire legal rights in a contract.

A. INTENDED BENEFICIARIES
An intended beneficiary is one for whose benefit a contract is made. If the contract is
breached, he or she can sue the promisor.

1. Types of Intended Beneficiaries

a. Creditor Beneficiaries
A creditor beneficiary benefits from a contract in which a promisor promises to pay a debt that
the promisee owes to him or her.

b. Donee Beneficiaries
A donee beneficiary benefits from a contract made for the express purpose of giving a gift to
him or her.

2. Vesting of an Intended Beneficiary’s Rights
To enforce a contract against the original parties, the rights of the third party must first
vest (take effect). The rights vest when (1) the third party manifests assent to the contract
or (2) the third party materially alters his or her position in detrimental reliance

3. Modification or Rescission of the Contract
Until the third party’s rights vest, the others can modify or rescind the contract without the
third party’s consent. If the contract reserves the power to rescind or modify, vesting does
not terminate the power.

B. INCIDENTAL BENEFICIARIES
The benefit that an incidental beneficiary receives from a contract between other parties
is unintentional. An incidental beneficiary cannot enforce a contract to which he or she is
not a party.

C. INTENDED OR INCIDENTAL BENEFICIARY?

1. Reasonable Person Test
A beneficiary is intended if a reasonable person in his or her position would believe that
the promisee intended to confer on the beneficiary the right to sue to enforce the
contract.

2. Other Factors Indicating an Intended Beneficiary
(1) Performance is rendered directly to the third party, (2) the third party has the right to
control the performance, or (3) the third party is expressly designated as beneficiary in the
contract.