Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 12 Third-Party Rights and Discharge

12 - 2Copyright © 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

12 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Third Party Rights Third parties generally do not acquire any rights under other people’s contracts Two exceptions are: 1.Assignees 1.Assignees to whom rights subsequently are transferred, and 2.Intended third-party beneficiaries 2.Intended third-party beneficiaries to whom the contracting parties intended to give rights under the contract at the time of contracting

12 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Assignment of Rights Assignment– Assignment – The transfer of contractual rights by the obligee to another party Assignor – Assignor – The obligee who transfers the right Assignee – Assignee – The party to whom the right has been transferred

12 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

12 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rights That Can and Cannot Be Assigned (1 of 2) Personal Service Contracts. Personal Service Contracts. Contracts for the provision of personal services are generally not assignable Assignment of Future Rights. Assignment of Future Rights. Usually, a person cannot assign a currently nonexistent right that he or she expects to have in the future

12 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Rights That Can and Cannot Be Assigned (2 of 2) Contracts Where Assignment Would Materially Alter the Risk. 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. Assignment of Legal Actions. Legal actions involving personal rights cannot be assigned

12 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

12 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Anti-Assignment and Approval Clauses Anti-Assignment Clause A clause that prohibits the assignment of rights under the contract. Anti-Assignment Clause A clause that prohibits the assignment of rights under the contract. Approval Clause A clause that permits the assignment of the contract only upon receipt of an obligor’s approval Approval Clause A clause that permits the assignment of the contract only upon receipt of an obligor’s approval

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Delegation of Duties Delegation – Delegation – A transfer of contractual duties by the obligor to another party for performance Delegator – Delegator – The obligor who transferred his or her duty Delegatee – Delegatee – The party to whom the duty has been transferred

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 obligor- delegator for any resulting damages

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 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 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Third-Party Beneficiaries Third parties sometimes claim rights under others’ contracts Such third parties are either: Intended Beneficiaries Intended Beneficiaries, or Incidental Beneficiaries Incidental Beneficiaries

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 Donee Beneficiaries or Creditor Beneficiaries Creditor Beneficiaries

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Donee Beneficiaries Donee Beneficiary Contract Donee Beneficiary Contract – A contract entered into with the intent to confer a benefit or gift on an intended third party Donee Beneficiary Donee Beneficiary – The third party on whom the benefit is to be conferred

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Donee Beneficiary Contract Life Insurance Company (Promisor) Insured (Promisee) Original Contract Right to enforce contract (Life insurance policy) Named Beneficiary (Donee Beneficiary)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Creditor Beneficiaries creditor beneficiary contract A creditor beneficiary contract usually arises in the following situation: 1.A debtor borrows money from a creditor to purchase some item 2.The debtor signs an agreement to pay the creditor the amount of the loan plus interest 3.The debtor sells the item to another party before the loan is paid 4.The new buyer promises the debtor that he or she will pay the remainder of the loan amount to the creditor creditor beneficiary contract A creditor beneficiary contract usually arises in the following situation: 1.A debtor borrows money from a creditor to purchase some item 2.The debtor signs an agreement to pay the creditor the amount of the loan plus interest 3.The debtor sells the item to another party before the loan is paid 4.The new buyer promises the debtor that he or she will pay the remainder of the loan amount to the creditor

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 payments Second sale of goods Promise to pay debt to creditor Contract No. 2

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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 sueCovenant 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 Conditions of Performance A qualified or conditional promise that becomes a covenant is met

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Conditions Type of ConditionDescription Condition precedentA specified event must occur (or not occur) before a party is obligated to perform contractual duties Condition subsequentThe occurrence (or nonoccurrence) of a specified event excuses the performance of an existing contractual duty to perform Concurrent conditionThe 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 conditionAn implied-in-fact condition is implied from the circumstances surrounding the contract and the parties’ conduct

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Discharge of Performance A party’s duty to perform under a contract may be discharged by: Mutual agreement Mutual agreement of the parties Impossibility of performance Impossibility of performance Operation of the law Operation of the law

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Discharge by Impossibility Under certain circumstances, the nonperformance of contractual duties is excused: Impossibility of Performance Commercial Impracticability Force majeure clause

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Force Majeure Clauses The parties may agree in their contract that certain events will excuse nonperformance of the contract force majeure clauses These clauses are called force majeure clauses e.g., Natural disasters e.g., Labor strikes e.g., Shortages of raw materials

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Commercial Impracticability commercial impracticality 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

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Discharge by Operation of Law Certain legal rules discharge parties from performing contractual duties: Statutes of Limitations Bankruptcy Alteration of a Contract