PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 15
Third-Party Rights and
Discharge
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
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.

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Third Party Rights


Third parties generally do not acquire any
rights under other people’s contracts.
The exceptions are:
1. Assignees to whom rights subsequently
are transferred, and
2. Intended third-party beneficiaries to
whom the contracting parties intended to
give rights under the contract at the time of
contracting.
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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.

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Assignment of a Right
Contract No. 1
Debtor
Loan of Money
(Obligor)
Note
Contract No. 1:
Creditor
(Obligee)
Contract No. 2:
Assignor
(Promise to pay)
Contract No. 2
Assignment of
note
Right to
enforce
payment of
note
Assignee
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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.

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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.

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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.

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Notice of Assignment

To protect his or her rights, the assignee
should immediately notify the obligor that:
1. The assignment has been made, and
2. Performance must be rendered to the
assignee.
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Anti-Assignment and Approval Clauses
Anti-Assignment Clause

A clause that prohibits
the assignment of rights
under the contract.
Approval Clause

A clause that permits
the assignment of the
contract only upon
receipt of an obligor’s
approval.
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Successive Assignment of the Same Right
The American Rule
The English Rule
The Possession of
Tangible Token Rule
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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.

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Delegation of a Duty
Promisee
Contract No. 1
Promise to Perform
(Obligee)
Contract No. 1:
Promisor
(Obligor)
Contract No. 2:
Delegator
Contract No. 2
Delegation of
duties
Duty of
performance
Delegatee
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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.


e.g., Personal service contracts calling for the
exercise of personal skills, discretion, or
expertise.
e.g., Contracts whose performance would
materially vary if the obligor’s duties were
delegated.
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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.

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Effect of Delegation of Duties (continued)
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.
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Effect of Delegation of Duties (continued)
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.
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Third-Party Beneficiaries
Third parties sometimes claim rights under
others’ contracts.
 Such third parties are either:

Intended Beneficiaries, or
 Incidental Beneficiaries

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Intended Beneficiary

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

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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.

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Donee Beneficiary Contract
Insured
(Promisee)
Original Contract
(Life insurance policy)
Life Insurance
Company
(Promisor)
Right to
enforce
contract
Named
Beneficiary
(Donee
Beneficiary)
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Creditor Beneficiaries

A creditor beneficiary contract usually
arises in the following situation:
A debtor borrows money from a creditor to purchase
some item.
2. The debtor signs an agreement to pay the creditor the
amount of the loan plus interest.
3. The debtor sells the item to another party before the loan
is paid.
4. The new buyer promises the debtor that he or she will
pay the remainder of the loan amount to the creditor.
1.
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Creditor Beneficiary Contract
Contract No. 1
First sale of goods
First Buyer
Debtor
Second
sale of
goods
Contract No. 2
Note
(Promise to pay)
Promise to
pay debt to
creditor
Contract No. 1:
Creditor
Contract No. 2:
Creditor
Beneficiary
Right to recover
payment
Second Buyer
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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.
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Covenants and Conditions
Covenant
 An unconditional
promise to perform.

Nonperformance of a
covenant is a breach
of contract that gives
the other party the
right to sue.
Conditions of
Performance
 A qualified or
conditional promise
that becomes a
covenant is met.
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Conditions of Performance (continued)
Conditions Precedent
Conditions Subsequent
Concurrent Conditions
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Discharge of Performance

A party’s duty to perform under a contract
may be discharged by:

Mutual agreement of the parties

Impossibility of performance

Operation of the law
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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

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Discharge by Impossibility

Under certain circumstances, the
nonperformance of contractual duties is
excused:

Impossibility of Performance

Commercial Impracticability

Frustration of Purpose
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Discharge by Operation of Law

Certain legal rules discharge parties from
performing contractual duties.

Statutes of Limitations

Bankruptcy

Alteration of the Contract
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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.

e.g., Natural disasters
 e.g., Labor strikes
 e.g., Shortages of raw materials

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