© 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 THIRD-PARY RIGHTS AND DISCHARGE © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 15

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Privity of Contract Generally only the contracting parties have any rights or obligations under the contract. The contracting parties are in privity of contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 Third-Party Rights Third parties generally do not acquire rights under other people’s contracts. Except: 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.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Assignment of Rights Assignment – Transfer of contractual rights by obligee to another party. Assignor – Obligee who transfers a right. Assignee – Party to whom a right is transferred.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Assignment of a Right Contract No. 1: Creditor (Obligee) Contract No. 2: Assignor Debtor(Obligor) Assignee Contract No. 1 Loan of Money Note (Promise to pay) Right to enforce payment of note Contract No. 2 Assignment of note

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Assignment of a Right (continued) Most rights can be assigned –E.g., sales contracts, contracts for payment of money, sale of mortgages. Generally no formalities required –E.g., need not use term “assign.” Words such as “sell” or “transfer” are effective.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Rights That Cannot Be Assigned Personal Service Contracts –E.g., contract to paint a portrait. Assignment of Future Rights –Usually, a person cannot assign a currently nonexistent right that he or she expects to have in the future.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Rights That 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. E.g., safe driver cannot assign automobile insurance coverage to another driver. Assignment of Legal Actions –Right to sue for violation of personal rights usually cannot be assigned.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Effect of Assignment of Rights Assignee “stands in the shoes of the assignor” and is entitled to performance from the obligor. –Subject to same defenses that existed against assignor. The unconditional assignment of a contract right extinguishes all the assignor’s rights.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Notice of Assignment To protect his or her rights, the assignee should immediately notify the obligor that: The assignment has been made, and Performance must be rendered to the assignee.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Anti-Assignment Clause Prohibits assignment of rights under the contract. Used when obligor doesn’t want to deal with or render performance to an unknown third party.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Approval Clause Permits the assignment of the contract only upon receipt of an obligor’s approval. Approval cannot be unreasonably withheld.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Successive Assignment of Same Right American Rule– 1 st in time English Rule— 1 st to give notice Possession of Tangible Token Rule—1 st to obtain token

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Delegation of Duties Delegation – Transfer of contractual duties by the obligor to another party for performance. Delegator – Obligor who transferred his or her duty. Delegatee – Party to whom the duty has been transferred.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Delegation of a Duty Contract No. 1: Promisor (Obligor) Contract No. 2: Delegator Promisee(Obligee) Delegatee Contract No. 1 Promise to Perform Duty of performance Contract No. 2 Delegation of duties

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Duties that Cannot Be Delegated If obligee has a substantial interest in having the obligor perform, duties may not be transferred. –Personal service contracts calling for the exercise of personal skills, discretion, or expertise. E.g., Bruce Springsteen’s contract to give a concert. –Contracts whose performance would materially vary if duties delegated.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Effect of Valid Delegation Delegator is legally liable if delegatee fails to perform. If delegation contains the term assumption, I assume the duties, or other similar language, delegatee is also legally liable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Anti-Delegation Clause Prohibits delegation. Generally legally enforceable. –Courts may nonetheless allow delegation of duties that are totally impersonal in nature.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Assignment and Delegation Transfer of both rights and duties under a contract. If the contract contains language of assignment, courts generally find a corresponding delegation of duties.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Third-Party Beneficiaries Third parties sometimes claim rights under others’ contracts. Such third parties are either: –Intended beneficiaries, or –Incidental beneficiaries.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 Intended Beneficiary A third party who: – is not in privity of contract. –May be named in the contract. E.g., “I am acquiring this property for Ben.” “I am hiring you to mow Jane’s lawn.” –Has rights under the contract. –Can enforce the contract against the obligor.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 Third-Party Beneficiary Contracts Sometimes classified as: –Donee beneficiary contracts – Contracts intended to confer a benefit or gift on an intended third party. E.g., life insurance policy is donee beneficiary contract. –Creditor beneficiary contracts – Contracts where promisor agrees to repay promisee’s creditor to satisfy existing debt.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 Donee Beneficiary Contract Life Insurance Company (Promisor) Insured (Promisee) Original Contract Right to enforce contract (Life insurance policy) Named Beneficiary (Donee Beneficiary)

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 Creditor Beneficiaries Usually arises when: − Debtor borrows from creditor to purchase some item. − Debtor agrees to pay creditor amount of loan plus interest. − Debtor sells 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.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Creditor Beneficiary Contract Contract No. 1: Creditor Contract No. 2: Creditor Beneficiary First Buyer Debtor Second Buyer Contract No. 1 First sale of goods Note (Promise to pay) Right to recover payment Second sale of goods Promise to pay debt to creditor Contract No. 2

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 Incidental Beneficiary A party unintentionally benefited by other people’s contracts. Incidental beneficiary has no rights to enforce or sue under other people’s contracts. –E.g., contract between homeowner and builder to renovate house, which will increase property values of neighbors. Neighbors are only incidental beneficiaries and so have no rights under this contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Covenants Unconditional promise to perform. Nonperformance of covenant is breach of contract that gives the other party the right to sue. Majority of contract terms are covenants.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 Conditions A qualified or conditional promise that becomes a covenant if met. –Indicated by language such as if, on the condition that, provided that, when, after, as soon as.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 29 Types of Conditions Conditions Precedent Conditions Subsequent Concurrent Conditions

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 30 Condition Precedent Event that must occur before a party is obliged to perform. –E.g., “I agree to buy this house if I can obtain a mortgage at 7% or less.” Contract may provide that performance must meet party’s satisfaction. –Personal satisfaction – contracts involving taste or comfort. –Satisfaction of reasonable person – most contracts.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 31 Conditions Subsequent Occurrence or nonoccurrence of a specific event excuses performance of a contractual duty. –E.g., “I agree to work for your accounting firm for two years, unless I am admitted to MBA school.”

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 32 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. –E.g., buyer’s duty to pay and seller’s duty to deliver goods.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 33 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. –E.g., it is implied that buyer of goods will provide proper access for seller’s delivery truck.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 34 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 –Statute of Limitations –Bankruptcy

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 35 Discharge by Agreement The parties mutually agree to discharge or end their contractual duties. –Mutual Rescission –Substituted Contract –Novation –Accord and Satisfaction

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 36 Discharge by Impossibility Objective impossibility (“It cannot be done.”) discharges both parties. –Death or incapacity of promisor prior to performance of personal service contract. –Destruction of subject matter –Supervening illegality. Subjective impossibility (“I cannot do it.”) does not discharge parties.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 37 Force Majeure Clauses The parties may agree in 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

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 38 Commercial Impracticability Most states recognize this doctrine as an excuse for nonperformance. Excuses performance if an unforeseeable event makes it impracticable to perform. Examined on a case-by-case basis.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 39 Discharge by Operation of Law Certain legal rules discharge parties from performing contractual duties. –Statutes of Limitations –Discharge of debts in bankruptcy