Contract Law: Rights of 3 rd Parties

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Paula Lucas
6 years ago
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1 Contract Law: Rights of 3 rd Parties 3 rd Party Rights Arise when Contract has been assigned Contract intended to benefit a third person Assignment of Contracts: Terms Assignment: Transfer of a right under a contract Obligor: Has duty to perform Obligee: person to whom obligor owes a duty; becomes Assignor Assignee: person to whom right is transferred Delegation: Appointment of another person to perform a duty under a contract Copyright Thomas P. Langdon. All Rights Reserved. 1

2 Traditional Common Law View Contracts not transferrable Debts were considered personal Debtor subject to imprisonment; viewed similar to theft Land-based economy did not place great importance on extension of credit Emergence of industrial economy changed the rules Assignment Law Common Law Uniform Commercial Code Article 2 (Sales Contracts) Article 9 (Security Interests) Creating an Assignment Any way sufficient to show intent is permissible Some assignments must comply with Statute of Frauds If security interest, must comply with UCC Article 9 No consideration required Copyright Thomas P. Langdon. All Rights Reserved. 2

3 Limitations on Assignment Contrary to public policy Assignment of future wages, lottery prizes Adversely affects the obligor Materially changes obligor s duties Increases burden of risk on obligor Involves Personal Relationship Personal skill, judgment, character Original Contract Forbids Assignment Assignment & the UCC General language prohibiting assignment [2-210(2)] Interpreted as forbidding only the delegation of duties, not a breach of contract Assignment of right to damages for breach or right arising out of assignor s performance of entire obligation may be assigned even if contract prohibits it. [2-210] Nature of Assignee s Rights Steps into shoes of assignor Has no greater rights than the assignor Assignee should promptly notify obligor Defenses Obligor may assert any defense or claim he could have asserted against assignor Assignee Copyright Thomas P. Langdon. All Rights Reserved. 3

4 Assignor s Warranty Liability to Assignee Assignor impliedly warrants that the claim assigned is valid Obligor has capacity to contract Contract is not illegal Contract not voidable Contract not discharged Assignor also warrants Has good title to rights assigned Written instrument representing the assigned claim is genuine Delegation of Duties: Terms Delegation: obligor indicates intent to appoint another person to perform his/her duties Delegator: person assigning rights Delegatee: person assuming obligation Delegation of Duties Delegation does NOT extinguish duty owed by the delegator Delegator remains liable unless obligee agrees to substitute the delegatee s promise, called a Novation Performance by the delegatee discharges the delegator Copyright Thomas P. Langdon. All Rights Reserved. 4

5 Non-Delegable Duties Delegation would violate public policy Original contract forbids delegation Other party has substantial interest in having original obligor perform the acts required by contract [UCC 2-210(1) and Restatement 2 nd Contracts 318(2)] Performance requiring individual traits, skill, or judgment of the person who owes the duty Assumption of Duties by Delegatee Delegatee not liable unless assumed the duty by expressly or impliedly undertaking an obligation to perform Third Party Beneficiaries General Rule: no one but the parties to a contract or their assignees can enforce the K. Exception Benefit to 3 rd person is essential part of the contract Parties must intend to benefit a thrid party Copyright Thomas P. Langdon. All Rights Reserved. 5

6 Types of 3 rd Party Beneficiaries Intended Beneficiaries Contract made with intent to benefit the party Incidental Beneficiary 3 rd party unable to establish contract made for his/her benefit Includes members of the public with respect to government contracts Types of Intended Beneficiaries Creditor Beneficiary promisor s performance intended to satisfy legal duty owes to 3 rd party Has rights against promisee and promissor Donee Beneficiary Promisee s purpose is to make gift to 3 rd party Donee Beneficiary has cause of action against promissor but not against the promisee Copyright Thomas P. Langdon. All Rights Reserved. 6

PRIVITY OF CONTRACT. An assignment of all rights implies both an assignment and a delegation.

PRIVITY OF CONTRACT. An assignment of all rights implies both an assignment and a delegation. PRIVITY OF CONTRACT As a general rule, only the parties to a contract the promisor and the promisee owe any duties and enjoy any rights arising from the contract. Common law recognizes three exceptions: