Comprehensive Volume, 18th Edition
Chapter 19: Third Persons
and Contracts
Rights and Duties
Ordinarily, only the parties to a
contract have rights and duties with
respect to that contract.
Exceptions are made in the case of third
party beneficiary contracts and
assignments.
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Third Party Beneficiary
When a contract shows a clear intent to
benefit a third person or class of persons,
those persons are called intended third party
beneficiaries.
A third party beneficiary is subject to any
limitation or restriction found in the contract.
A third party beneficiary loses all rights when the
original contract is terminated by operation of law
or if the contract reserves the right to change
beneficiaries and such a change is made.
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Intended third party beneficiaries may sue for
breach of the contract.
Types of Intended Beneficiaries
Creditor Beneficiary
When one party to a contract is obligated
to perform a duty to a third party, that
third party is a creditor beneficiary.
Donee Beneficiary
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When the promisee’s purpose in making
the contract is to make a gift to a third
party, that third party is a donee
beneficiary.
Intended Third Party Beneficiary
Examples:
Donee
Beneficiary
premiums
Roy
insurance
Phoenix
Insurance
benefits
Roy’s son
Creditor
Beneficiary
benefits
Business sold to Harry
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Max
Money paid for business
Harry
The prior
creditors of
the business
(Harry takes
over debts.)
Incidental Beneficiaries
In contrast, an incidental beneficiary
benefits from the performance of a
contract, but the conferring of this
benefit was not guaranteed by the
contracting parties.
An incidental beneficiary cannot sue on
the contract.
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Incidental Third Party Beneficiary
Examples:
premiums
Roy
insurance
Phoenix
Insurance
benefits
Business sold to Harry
Max
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Money paid for business
benefits
The insurance agent’s
wife, who benefits from
the agent’s salary.
Harry
The owners of the
businesses nearby,
whose business
increases due to
increases in Harry’s
business.
Assignment of Rights
An assignment is a transfer of a right; the
assignor transfers a right to the assignee.
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Usually, there are no formal requirements for an
assignment. Any words manifesting the intent to
transfer are sufficient.
When a valid assignment is made, the assignee has
the same rights—and only the same rights—as the
assignor.
The assignee is also subject to the same defenses
and setoffs as the assignor had been.
Discharge of Assigned Obligation
Obligor owes money to obligee.
Obligee assigns claim to assignee (obligee becomes assignor).
Obligor pays assignor (original obligee) instead of assignee.
Yes
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Has obligor been informed of
assignment and been notified
to pay assignee??
Money paid to assignor does
not reduce or cancel obligor’s
liability to assignee.
No
Money paid by
obligor reduces
or cancels liability.
Assignee can sue
assignor for money
paid by obligor
after assignment.
Limitations on Transfer of Rights
and Duties
Assignment of Right to
Money
Prohibition in Government
Contracts
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Assignment of Right to
Performance
Increase of Burden
Personal Satisfaction
Personal Services
Credit Transaction
Delegation of Duties
Personal or Nonstandardized
Performance
Delegation of Duties
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The performance of duties under a
contract may be delegated to another
person except when a personal element
of skill or judgment of the original
contracting party is involved.
The fact that there has been a
delegation of duties does not release the
assignor from responsibility for
performance.