Chapter 18 THIRD PERSONS AND CONTRACTS

Third Party Beneficiary Contracts 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.

Third Party Beneficiary Contracts 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. Intended third party beneficiaries may sue for breach of the contract.

Intended Beneficiaries Creditor Beneficiary: a party to a contract is obligated to perform a duty to a third party beneficiary. Donee Beneficiary: promisee’s purpose in making the contract is to make a gift to a third party beneficiary. Limitations: 3PB takes contract as is. No greater rights than given by contract.

Intended Beneficiaries Examples: Donee Beneficiary Roy Phoenix Insurance Roy’s son insurance premiums benefits Creditor Beneficiary The prior creditors of the business (Harry takes over debts.) benefits Max Money paid for business Business sold to Harry Harry

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.

Incidental Beneficiaries Examples: Roy Phoenix Insurance The insurance agent’s wife, who benefits from the agent’s salary. insurance premiums benefits The owners of the businesses nearby, whose business increases due to increases in Harry’s business. benefits Max Money paid for business Business sold to Harry Harry

Assignments An assignment is a transfer of a right; the assignor transfers a right to the assignee. 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.

Assignments Assignor: absent an agreement to the contrary, an assignor remains liable on the original contract. Assignee: generally no liability. Notice: assignment takes effect immediately. Assignee should give notice. Obligor’s duty can be discharged by making payment.

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. 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. Yes Money paid by obligor reduces or cancels liability. No Assignee can sue assignor for money paid by obligor after assignment.

Limitations & Nonassignable Rights Assignment of Right to Money Prohibition in Government Contracts Assignment of Right to Performance Increase of Burden Personal Satisfaction Personal Services Credit Transaction Delegation of Duties Personal or Nonstandardized Performance

Liabilities Continuing Liability of Assignor. Assignor remains liable unless there is an agreement to the contrary. Liability of Assignee: generally not liable. Consumer Protection. Defenses and Setoffs. Warranties of Assignor.

Delegation of Duties 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. Delegations under UCC.