Do third parties have rights/obligations under the contract?

Question 1

three types of third parties

Answer 1

• There are three types of third parties that may have rights and/or duties in the contract:

• A. Third Party Beneficiary
– A Third Party Beneficiary is contemplated by the original contracting parties at the time of contracting

• B. Assignee of Rights

• C. Delegatee of Duties
– Assignees of Rights and Delegatees of Duties appear after the execution of the original contract
»> Often, contract rights and duties are assigned/delegated to the same third party; when a party to a contract “assigns the contract,” such a transfer acts as both an assignment of rights and a delegation of duties

Question 2

third party beneficiaries - 3 rules (definition; enforceability by 3pb; who can sue for specific performance; intent to confer benefit)

Answer 2

• If at the time of contracting, the promisor and promisee (the original contracting parties) intend to confer a benefit on a third party (who is named or identifiable in the contract), that THIRD PARTY BENNY may enforce the agreement against the promisor, unless:

– the original contracting parties modified or cancelled the contract prior to the time the third party’s interest in the contract vested. Vesting occurs when the third party:

> > > (1) assents to the contract in a manner invited/requested by the parties (**mere knowledge is insufficient!);
(2) knows of and relies upon the contract; or
(3) files suit on the contract. OR

– the promisor has a defense regarding the formation or performance of the contract that would have been enforceable against the promisee (because the third-party beneficiary’s rights to enforce the contract are derivative)

• In a third-party-beneficiary contract, the PROMISEE may sue the promisor for an order of specific performance ordering the promisor to provide the goods, services, etc. to the third party.
• If the original contracting parties do not expressly intend to confer a benefit on a third party, the third party is merely an “incidental” third party beneficiary and has no right to enforce the contract.

Question 3

assignment of rights - 6 general rules (what is it; what language must be used; when can you do this; prohibiting language; who may enforce; how does it change the contract)

Answer 3

• If after the time the original parties entered into a contract, one of the parties assigns her “rights” (e.g., benefits—often the right to payment) under the contract to a third party, this is an assignment of rights.
»> The “assignor” is the party who assigns her rights, the “assignee” is the third party, and the “obligor” is the other original party to the contract. The common law and UCC rules are quite similar regarding assignments.

• **requires language of PRESENT transfer (NOT “I promise to transfer…” instead, “I hereby transfer.”)
»> but note, no consideration is required

• general rule: contract rights are generally assignable
»> UNLESS (1) the contract makes assignments “void,” (2) the assignment would materially change the duty of the obligor, or (3) the assignment would materially increase the burden or risk imposed on the obligor.

• Language prohibiting “assignment of the contract” is construed as barring delegation of duties and not assignment of rights.
»> Language prohibiting “assignment of contractual rights” (as opposed to making them “void”) does not bar assignment but merely gives the obligor a right to sue the assignor for breach of contract.

• If an assignment is effective, the ASSIGNOR (but not the assignor) may sue the obligor to enforce it. The assignee’s rights to enforce the contract are derivative; thus, the assignee is subject to most defenses the obligor could assert against the assignor.
• Once the obligor has knowledge of a valid assignment, the obligor must render performance to or pay the assignee; if the obligor renders performance to or pays the assignor, the obligor does so at his or her own risk.

Question 4

assignment contracts - rules for order of superiority

Answer 4

Order of Superiority

– An ORAL GRATUITOUS assignment is generally revocable by the assignor.
»> Such assignments are automatically revoked (1) by the death or bankruptcy of the assignor; (2) by the assignor’s subsequent assignment of the same rights to another assignee; or (3) if the assignor takes performance directly from the obligor.

– Assignments FOR VALUE (e.g., as payment for a preexisting debt) and WRITTEN gratuitous assignments (e.g., a signed writing or delivery of a token chose, such as a savings account passbook or a lottery ticket) are generally irrevocable by the assignor.

– If the assignor assigns the same contract rights to more than one assignee, the following rules apply:
»> If the first assignment is revocable, a subsequent assignment revokes it.
»> If there are two or more irrevocable assignments, the first irrevocable assignee usually prevails.
»»> The losing assignee (for value), however, has a breach of warranty action against the assignor.

Question 5

delegation of duties - general rules (what is it; when is delegation not allowed; adequate assurance)

Answer 5

• If after the time the original parties entered into a contract, one of the parties transfers her “duties” (e.g., the work) under the contract to a third party, this is a delegation of duties.
»> The “delegator” or “delegor” is the party who delegates her duties, the “delegatee” or “delegee” or “delegate” is the third party, and the “obligee” is the other original party to the contract. The common law and UCC rules are quite similar for delegation of duties.

– general rule: duties may generally be delegated
»> UNLESS (1) the contract prohibits either delegations OR assignments; or (2) the obligee chose the delegator to perform a “personal service” because of the delegator’s special skills, reputation, or trust (e.g., the delegator is a famous portrait painter). In other words, if the delegation impairs the obligee’s commercially reasonable expectations, the delegation is void.

– Under the UCC, the obligee may treat a delegation as creating reasonable grounds for insecurity and thus may demand that the delegatee provide ADEQUATE ASSURANCES of performance.

Question 6

delegation of duty - ancillary rules (results of proper delegation - 2 rules)

Answer 6

• If the delegation is proper, the obligee MUST accept the performance of the delegatee; if the obligee refuses to accept such performance, the obligee forfeits any rights it has against the delegatee and the delegator.

• If a delegation is valid and the delegatee does not perform (or does not fully perform), the OBLIGEE may sue the delegator (unless there was a novation) or the obligee may sue the delegatee as a third party beneficiary of the contract (of delegation) between the delegator and the delegatee**
»> In such cases, the delegatee has primary liability and the delegator has secondary liability as a surety.
»> so delegator always liable if it was a true delegation, and delegatee only liable **if there was consideration* (i.e. delegation needs to be a valid contract) for the delegation