P A R T 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. P A R T 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. C H A P T E R 17 Rights of Third Parties “The best minute I spend is the one I invest in people.” Kenneth Blanchard, The One Minute Manager (1993) Learning Objectives Assignment of Contracts Delegation of Duties Third-Party Beneficiaries 17 - 5 Overview Sometimes a person who entered into a contract must transfer the contract rights or duties to another person (third party) Examples: sublease of your apartment, asking another person take over work you agreed to do, or doing something to benefit a third person Key to successful transfer: understand the third party’s abilities, limitations, and needs 17 - 6 Overview A person who owes a duty to perform under a contract is called an obligor The person to whom the duty is owed is called the obligee 17 - 7 Assignment of Contracts Transfer of a right under a contract is called an assignment Example: Jane arranges for her employer to transfer her next paycheck to her parents’ bank account 17 - 8 Employer is the obligor (owes Jane money) Jane is the obligee and assignor Jane’s parents are the assignees Assignment Process 17 - 9 Details of Assignment Assignments may be made in any way sufficient to show assignor’s intent to assign A writing is not necessary Unless statute of frauds applies Assignee does not need to give consideration to assignor in exchange for the assignment 17 - 10 Limitations on Assignment Assignment will not be effective if it: Is contrary to public policy Violates a non-assignment clause in a contract Adversely affects obligor in some significant way Assignment may be ineffective if the contract right involved a personal relationship or element of personal skill or character 17 - 11 But see Managed Health Care Associates v. Kethan Managed Health Care Associates v. Kethan Facts & Procedural History: 17 - 12 Kethan signed an employment agreement with MedEcon that contained a non-compete clause and requirement that modifications be in writing MHA purchased MedEcon and Kethan left to join First Choice, a customer with whom Kethan had developed a sales relationship MHA sought an injunction to prohibit Kethan from working for First Choice, but the district court denied the suit and MHA appealed Managed Health Care Associates v. Kethan Issue and Legal Reasoning: First issue is whether MedEcon’s assignment of Kethan’s employment agreement modified the terms of his contract Second issue is whether a non-competition clause is assignable under Kentucky law 17 - 13 An assignment does not modify the terms of the underlying contract, thus did not modify Kethan’s employment agreement Yes Managed Health Care Associates v. Kethan Holding: 17 - 14 Kethan was able to develop his business relationship with First Choice because MedEcon employed him and placed him in charge of the First Choice account Kethan is precisely the type of employee for whom noncompetition clauses were designed Reversed and remanded in favor of MHA Delegation of Duties Appointment of another person to perform a duty under a contract is called a delegation Example: Mike mows Janet’s lawn weekly. Mike becomes ill and arranges for Sonny to mow Janet’s lawn. Janet is the obligee Mike is the obligor and delegator Sonny is the delegatee 17 - 15 Delegation of Duties Caution: an assignment extinguishes the assignor’s right and transfers it to the assignee, but the delegation of a duty does not extinguish the duty owed by delegator Delegator remains liable to the obligee unless the obligee agrees to make a new contract substituting the delegatee’s for the delegator 17 - 16 Delegation Process 17 - 17 Effective Delegation In an effective delegation, performance by the delegatee will discharge the delegator 17 - 18 The reason why you should understand the delegatee’s abilities and limitations Non-delegable Duties Duties are not delegable if the delegation: Is contrary to public policy Is prohibited by a contract clause Also, duties that are dependent on the individual traits, skill, or judgment of the person who owes the duty to perform may not be delegable 17 - 19 Example: a hip hop artist probably could not delegate concert obligation to an opera star Details of Delegation Delegation may be made in any way that shows the delegator’s intent to delegate Delegator may be discharged from contract performance by a substituted contract (novation) in which obligee agrees to discharge original obligor and substitute a new obligor 17 - 20 Effect: original obligor has no further obligation and obligee looks to the new obligor for performance Third-Party Beneficiaries If parties to a contract intended to benefit a third party, courts give effect to their intent permitting third party to enforce the contract Referred to as third-party beneficiary Example: Father contracts and pays for Homes, Inc. to build house as gift for Son Son (third-party beneficiary) may sue Homes, Inc. if the company breaches the contract 17 - 21 Father may also sue Homes, Inc. Third-Party Beneficiary Diagram 17 - 22 Incidental Beneficiaries Incidental beneficiary is one obtaining a benefit as unintended by-product of a contract No rights under contract In foregoing example, Son’s Wife would be an incidental beneficiary 17 - 23 Locke v. Ozark City Board of Ed. Facts & Procedural History: Locke, a high school teacher and umpire at high school games, was severely injured by a parent of a high school athlete after a game Locke sued the Board because (a) it failed to provide “adequate police protection” as required by the Alabama High School Athletic Assoc., (b) such failure was a breach of contract between Board and AHSAA, and (c) Locke was an intended third-party beneficiary of the contract Trial court entered summary judgment for Board and Locke appealed 17 - 24 Locke v. Ozark City Board of Ed. Issue: Was Locke a third-party beneficiary? Law Applied to Facts: 17 - 25 Locke must show: 1) contracting parties intended direct benefit upon a third party; 2) Locke was an intended beneficiary of the contract; 3) contract was breached, and 4) contract was intended for his direct, as opposed to incidental, benefit Contract states that the purpose of “adequate police protection” is to “provide good game administration and supervision.” Locke v. Ozark City Board of Ed. Holding: 17 - 26 Based on the plain language of the contract and the surrounding circumstances, the contract anticipates third-party umpires, the contract was intended to directly benefit umpires like Locke Reversed and remanded in favor of Locke Test Your Knowledge True=A, False = B 17 - 27 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 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 - 28 Test Your Knowledge Multiple Choice James financed the purchase of a car with CarCo, then sold the car to Marsha. Marsha agreed to pay the remaining amount of the car loan, but failed to make the 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 - 29 Test Your Knowledge Multiple Choice Mack contracted with Dept. Store to play piano and holiday songs in the store during December. The contract had a “non-assignment” clause. Mack got another job and delegated his duties under the contract to Sarah. Does Dept. Store have a valid 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. The contract didn’t have a nondelegation clause 17 - 30 Thought Question If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses? 17 - 31