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