Chapter 15: Third-Party Rights and Discharge

Privity of Contract • The state of two specified parties being in a contract. • Contracting parties have a legal obligation to perform the duties specified in their contract. • If one party fails to perform as promised, the other party may enforce the contract and sue for breach. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Third Party Rights • Third parties generally do not acquire any rights under other people’s contracts. • The exceptions are: • Assignees to whom rights subsequently are transferred, and • Intended third-party beneficiaries to whom the contracting parties intended to give rights under the contract at the time of contracting. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Assignment of Rights • Assignment – The transfer of contractual rights by the obligee to another party. • Assignor – The obligee who transfers the right. • Assignee – The party to whom the right has been transferred. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Assignment of a Right Contract No. 1 Loan of Money Contract No. 1: Creditor (Obligee) Debtor (Obligor) Note (Promise to pay) Contract No. 2: Assignor Contract No. 2 Assignment of note Right to enforce payment of note Assignee © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Rights That Can and Cannot Be Assigned • Personal Service Contracts • Contracts for the provision of personal services are generally not assignable. • Assignment of Future Rights • Usually, a person cannot assign a currently nonexistent right that he or she expects to have in the future. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Rights That Can and Cannot Be Assigned (continued) • Contracts Where Assignment Would Materially Alter the Risk • A contract cannot be assigned if the assignment would materially alter the risk or duties of the obligor. • Assignment of Legal Actions • Legal actions involving personal rights cannot be assigned. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Effect of An Assignment of Rights • Where there has been an assignment of a right, the assignee “stands in the shoes of the assignor” and is entitled to performance from the obligor. • The unconditional assignment of a contract right extinguishes all the assignor’s rights. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Notice of Assignment • To protect his or her rights, the assignee should immediately notify the obligor that: • The assignment has been made, and • Performance must be rendered to the assignee. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Anti-Assignment Clause • A clause that prohibits the assignment of rights under the contract. • Used when obligor doesn’t want to deal with or render performance to an unknown third party. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Approval Clause • A clause that permits the assignment of the contract only upon receipt of an obligor’s approval. • Approval cannot be unreasonably withheld. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Delegation of Duties • Delegation –A transfer of contractual duties by the obligor to another party for performance. • Delegator –The obligor who transferred his or her duty. • Delegatee –The party to whom the duty has been transferred. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Delegation of a Duty Contract No. 1: Promisor (Obligor) Contract No. 1 Promise to Perform Promisee (Obligee) Contract No. 2: Delegator Contract No. 2 Delegation of duties Duty of performance Delegatee © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Duties that Can and Cannot Be Delegated • If the obligee has a substantial interest in having the obligor perform the acts required by the contract, duties may not be transferred. • Personal service contracts calling for the exercise of personal skills, discretion, or expertise. • Contracts whose performance would materially vary if the obligor’s duties were delegated. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Effect of Delegation of Duties • If the delegation is valid, the delegator remains legally liable for the performance of the contract. • If the delegatee does not perform properly, the obligee can sue the obligor-delegator for any resulting damages. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Assumption of Duties • When a delegation of duties contains the term assumption, I assume the duties, or other similar language: • The delegatee is legally liable to the obligee for nonperformance. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Declaration of Duties • If the delegatee has not assumed the duties under a contract, the delegatee is not legally liable to the obligee for nonperformance. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Anti-Delegation Clause • Parties to a contract can opt to include this clause. • The courts will generally enforce the clause. • Courts may allow an exception if the duties are totally impersonal in nature. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Assignment and Delegation • Occurs when there is an assignment of both the rights and the duties under a contract. • If the contract contains only allows an assignment, the courts have held that there is also a delegation. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Third-Party Beneficiaries • Third parties sometimes claim rights under others’ contracts. • Such third parties are either: • Intended third-party beneficiaries, or • Incidental third-party beneficiaries. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Intended Beneficiaries • A third party who is not in privity of contract. • Has rights under the contract. • Can enforce the contract against the obligor. • Intended beneficiaries are classified as: • Donee beneficiaries or • Creditor beneficiaries. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Donee Beneficiaries • Donee Beneficiary Contract • A contract entered into with the intent to confer a benefit or gift on an intended third party. • Donee Beneficiary • The third party on whom the benefit is to be conferred. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Donee Beneficiary Contract Life Insurance Company (Promisor) Insured (Promisee) Original Contract (Life insurance policy) Right to enforce contract Named Beneficiary (Donee Beneficiary) © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Creditor Beneficiaries • A creditor beneficiary contract usually arises when: • A debtor borrows money from a creditor to purchase some item. • The debtor signs an agreement to pay the creditor the amount of the loan plus interest. • The debtor sells the item to another party before the loan is paid. • The new buyer promises the debtor that he or she will pay the remainder of the loan amount to the creditor. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Creditor Beneficiary Contract Contract No. 1 First sale of goods Contract No. 1: Creditor First Buyer Debtor Note (Promise to pay) Contract No. 2: Creditor Beneficiary Contract No. 2 Promise to pay debt to creditor Right to recover payment Second sale of goods Second Buyer © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Incidental Beneficiary • A party who is unintentionally benefited by other people’s contracts. • An incidental beneficiary has no rights to enforce or sue under other people’s contracts. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Covenants • An unconditional promise to perform. • Nonperformance of a covenant is a breach of contract that gives the other party the right to sue. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Conditions Precedent • Event that must occur before a party is obliged to perform under a contract. • May be based upon meeting the party’s satisfaction. • Personal satisfaction test • Reasonable person test • Time of performance may be a condition precedent. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Conditions Subsequent • This occurs when a contract provides that the occurrence or nonoccurrence of a specific event excuses performance of a contractual duty. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Concurrent Conditions • Parties to a contract must simultaneously render performance. • Each party’s absolute duty to perform is based on the other party’s absolute duty to perform. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Express and Implied Conditions • Express conditions exist if parties expressly agree to terms. • Implied-in-fact conditions are implied from the circumstances surrounding the contract and conduct of the parties. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Discharge of Performance • A party’s duty to perform under a contract may be discharged by: • Mutual agreement of the parties • Impossibility of performance • Force Majeure clauses • Commercial impracticability • Operation of the law © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Discharge by Agreement • The parties to a contract may mutually agree to discharge or end their contractual duties. • Mutual Rescission • Substituted Contract • Novation • Accord and Satisfaction © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Discharge by Impossibility • Contracts may become impossible to perform. • Death or Incapacity of promisor • Destruction of subject matter • Supervening illegality © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Force Majeure Clauses • The parties may agree in their contract that certain events will excuse nonperformance of the contract. • These clauses are called force majeure clauses. • Natural disasters • Labor strikes • Shortages of raw materials © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Commercial Impracticability • Most states recognize this doctrine as an excuse for nonperformance. • Excuses performance if an unforseeable event makes it impracticable to perform. • Examined on a case-by-case basis. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Discharge by Operation of Law • Certain legal rules discharge parties from performing contractual duties. • Statutes of Limitations • Bankruptcy • Alteration of the Contract © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Chapter 15: Third-Party Rights and Discharge