Chapter 15: Third-Party
Rights and Discharge
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
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Third Party Rights
•
•
Third parties generally do
not acquire any rights
under other people’s
contracts.
The exceptions are:
1.
2.
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
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Assignment of a Right
Contract No. 1
Debtor
(Obligor)
Right to
enforce
payment of
note
Loan of Money
Contract No. 1:
Creditor
(Obligee)
Contract No. 2:
Assignor
Note
(Promise to pay)
Contract No. 2
Assignment of
note
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
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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
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Successive Assignment of the
Same Right
The American Rule
The English Rule
The Possession of
Tangible Token Rule
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Delegation of a Duty
Promisee
Contract No. 1:
Promisor
(Obligor)
Contract No. 2:
Delegator
Contract No. 1
Promise to Perform
(Obligee)
Duty of
performance
Contract No. 2
Delegation of
duties
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.
– 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
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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 obligordelegator for any resulting
damages.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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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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
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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
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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
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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.
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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.
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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)
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Creditor Beneficiaries
•
A creditor beneficiary
contract usually arises when:
1.
2.
3.
4.
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
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Creditor Beneficiary Contract
Contract No. 1
First sale of goods
First Buyer
Debtor
Note
(Promise to pay)
Contract No. 2
Promise to
pay debt to
creditor
Second
sale of
goods
Contract No. 1:
Creditor
Contract No. 2:
Creditor
Beneficiary
Right to recover
payment
Second Buyer
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
• 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
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Conditions
• A qualified or conditional
promise that becomes a
covenant is met.
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Conditions of Performance
Conditions Precedent
Conditions Subsequent
Concurrent Conditions
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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
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Conditions Subsequent
• This occurs when a contract
provides that the occurrence
or nonoccurrence of a
specific event excuses
performance of a
contractual duty.
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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.
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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.
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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
– Force Majeure clauses
– Commercial impracticability
– Operation of the law
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
• Contracts may become
impossible to perform.
– Death or Incapacity of promisor
– Destruction of subject matter
– Supervening illegality
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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.
– Natural disasters
– Labor strikes
– Shortages of raw materials
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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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
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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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