Contracts

2. 3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Rights of Third Parties 17 C H E A P T R “The best minute I spend is the one I invest in people.” Kenneth Blanchard, The One Minute Manager (1993)

5. Learning Objectives • Assignment of Contracts • Delegation of Duties • Third-Party Beneficiaries 17 - 5

6. Overview • Sometimes a person who entered into a contract must transfer contract rights or duties to another person (third party) • Transfer of a right under a contract is called an assignment • Appointment of another person to perform a duty under a contract is called a delegation 17 - 6

7. Limitations on Assignment • Assignment will not be effective if it: • Is contrary to public policy • Violates a non-assignment clause in a contract • See Managed Health Care Associates v. Kethan • Adversely affects obligor in significant way • Involved a personal relationship or element of personal skill or character 17 - 7

8. Limitations on Delegation • Assignment extinguishes assignor’s right and transfers it to assignee, but delegation of a dutydoes not extinguish the duty owed by delegator to obligee • Delegator remains liable to the obligee unless obligee agrees to substitute new party for delegator by novation • In an effective delegation, performance by the delegatee will discharge the delegator 17 - 8

9. Limitations on Delegation • Duties not delegable if delegation: • Is contrary to public policy • Violates non-assignment clause in contract • Adversely affects obligee in significant way • Involved a personal relationship or element of personal skill or character 17 - 9

10. Third-Party Beneficiaries • If parties to a contract intended to benefit a third party, courts permit third party (third-party beneficiary) to enforce the contract • Referred to as third-party beneficiary • See Locke v. Ozark City Board of Ed. • Incidental beneficiaryis one obtaining a benefit as unintended by-product of a contract • No rights under contract 17 - 10

11. Test Your Knowledge • True=A, False = B • A person who assigns a right is an obligee • All duties may be delegated • Non-assignment clauses are enforceable • If a contract contains a non-assignment clause, the clause actually means that duties may not be delegated 17 - 11

12. Test Your Knowledge • True=A, False = B • Sheila assigned her right to the proceeds of a prize to a charity. Sheila is an assignee and the charity is the assignor. • Joshua contracted with Bigg Homes to build a two-story house that will improve the value of nearby homes. Joshua’s neighbor is an incidental beneficiary. 17 - 12

13. Test Your Knowledge • Multiple Choice • James financed car purchase with CarCo, then sold the car to Marsha. Marsha agreed to pay remaining amount of the car loan, but failed to make payments. CarCo may sue: • (a) James only since he contracted with CarCo • (b) James and Marsha since CarCo is a creditor beneficiary of the contract between James and Marsha • (c) Marsha only since Marsha was substituted for James 17 - 13

14. Test Your Knowledge • Multiple Choice • Mack contracted with Dept. Store to play piano and holiday songs in the store during December. Contract had a “non-assignment” clause. Mack got another job and delegated his duties to Sarah. Does Dept. Store have a claim against Mack? • (a) Yes. Mack breached the non-assignment clause by delegating his duties to Sarah • (b) No. Mack found someone to replace him • (c) No. Contract didn’t have non-delegation clause 17 - 14

15. Thought Question • If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses? 17 - 15