PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
5th Edition
by Henry R. Cheeseman
Chapter 12
Third-Party Rights and
Discharge
Slides developed by
Les Wiletzky
Wiletzky and Associates
Copyright © 2006 by Pearson 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
 Two 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
(Promise to pay)
Right to
enforce
payment of
note
Contract No. 1:
Creditor
(Obligee)
Contract No. 2:
Assignor
Contract No. 2
Assignment of
note
Assignee
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Rights That Can and Cannot Be
Assigned (1 of 2)
 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 (2 of 2)
 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
Approval Clause
 A clause that permits the
assignment of rights under
the contract.
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assignment of the contract
only upon receipt of an
obligor’s approval
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Successive Assignments
 If the obligee makes successive
assignments of the same right, one of the
following rules applies:
American Rule (or New York Rule)
 English Rule
 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)
Duty of
performance
Contract No. 1:
Promisor
(Obligor)
Contract No. 2:
Delegator
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
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 (1 of 2)
 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
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Effect of Delegation of Duties (2 of
2)
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
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:
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
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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
payments
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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Types of Conditions
Type of Condition
Description
Condition precedent
A specified event must occur (or not occur) before a party is
obligated to perform contractual duties
Condition subsequent
The occurrence (or nonoccurrence) of a specified event
excuses the performance of an existing contractual duty to
perform
Concurrent condition
The parties to a contract are obligated to render
performance simultaneously. Each party’s duty to perform is
conditioned on the other party’s duty to perform
Implied condition
An implied-in-fact condition is implied from the
circumstances surrounding the contract and the parties’
conduct
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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
 Force majeure clause

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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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Commercial Impracticability
 Many states recognize the doctrine of
commercial impracticality as an excuse for
non-performance of contracts
 Commercial impracticability excuses
performance if an unforeseeable event
makes it impractical for the promisor to
perform
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Discharge by Operation of Law
 Certain legal rules discharge parties from
performing contractual duties:
Statutes of Limitations
 Bankruptcy
 Alteration of a Contract

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