1. THIRD PARTIES
Chapter 7
© 2011, Tiffany M. Garrick

2. Objectives Describe what a third party is in the study of contracts.
Explain the phrase “privity of contract” and why it is (or is not) important in the study of contracts in today’s business environment.
Understand the difference between an intended beneficiary and an incidental beneficiary.
Differentiate between an assignment and a delegation.
Define what a personal services contract is and how it might be relevant to third parties and contracts.

3. General Governing Principles
Contracting parties have a legal obligation to perform duties specified in their contract.
A party’s duty of performance may be discharged by:
Agreement of the parties.
Excuse of performance
Operation of law
If one party fails to perform as follows, the other party may enforce the contract and sue for breach.

4. Privity Of Contract Exists between parties to a contract. Example
Jack agrees to sell his home to Jill for $120,000. Jack and Jill are in privity of contract.

5. What is a third party?
Someone who is not the offeror or the offeree but who might still have rights in or be entitled to receive benefits from the agreement.

6. General Rule re: 3rd Parties
Generally, third parties do not acquire any rights under other people’s contracts.
Exceptions:
Assignees to whom rights are transferred.
Intended third-party beneficiaries to whom the parties to the contract intended to give rights under the contract at the time of contracting.

7. Assignment
Transfer of contractual rights

8. Assignment: Who’s Involved
Obligor – owes duty to perform.
Obligee – owed a right under a contract.
Assignor – obligee who transfers the right to receive performance.
Assignee – party to whom the right has been transferred.

9. Assignment of a Right (Promise to Pay) (Loan of Money) Contract #2
(Right to enforce payment note)
of note)
Assignment of a Right
Obligee (K #1)
Assignor
(K #2)
Obligor
Contract No. 1
Assignee

10. Assignment: Formalities
Generally, none required.
Typical language:
“assign”
“sell”
“transfer”
“convey”
“give”

11. Example
Suppose a retail clothing store purchases $5,000 worth of goods on credit from a manufacturer. Payment is due in 120 days. Assume the manufacturer needs cash before the 120-day period expires, so the manufacturer (assignor) sells its right to collect the money to another party (assignee) for $4,000. If the retail store is given proper notice of the assignment, it must pay $5,000 to the assignee.

12. Assignment: Prohibitions
Personal Service Contracts – for example, if an artist contracts to paint someone’s portrait, the artist cannot send a different artist to do the painting without the prior approval of the person to be painted.
When a contract prohibits it.
When it is against public policy.

13. Assignment: Prohibitions (continued)
When the delegate has a substantial interest in the personal performance by the delgator.
Assignment of Future Rights – for example, suppose a multimillion-dollar heiress signs a will, leaving all her property to her grandson. The grandson cannot assign his expected right to receive his inheritance.

14. Assignment: Prohibitions (continued)
Contracts where assignment would materially alter the risk – for example, suppose Laura Peters, who has a safe driving record, purchases automobile insurance from an insurance company. Her rights to be insured cannot be assigned to another driver because the assignment would materially alter the risk and duties of the insurance company.

15. Assignment: Prohibitions (continued)
Assignment of legal action – for example, suppose Donald Matthews is severely injured by Alice Hollyfield in an automobile accident caused by her negligence. Matthews can sue Hollyfield to recover damages for his injuries. He cannot assign his right to sue her to another person.
Caveat: A legal right that arises out of a breach of contract may be assigned. For example, suppose Andrea borrows $10,000 from the bank. If she defaults on the loan, the bank may assign the legal rights to collect the money to a collection agency.

16. Effect of Assignment
Assignee “stands in the shoes” of the assignor (original obligee).
In other words, the assignee now becomes entitled to performance from the obligor.
The assignor’s (original obligee) rights under the contract are extinguished, including the right to sue the obligor for nonperformance.

17. Effect of Assignment (continued)
An assignee takes no better rights under the contract than the assignor had. For example, if the assignor has a right to receive $10,000 from a debtor, the right to receive this $10,000 is all that the assignor can assign the assignee.
An obligor can assert any defense against the assignee that he or she had against the assignor (original obligee).

18. Notice of Assignment
In order for the assignment to be valid, the assignee is under a duty to notify the obligor that: 1) The assignment has been made AND 2) Performance must be rendered to the assignee If the assignee fails to notify the obligor of the assignment, the obligor may continue to render performance to the assignor, who no longer has a right to it. In such a case, the assignee’s only course of action is to sue the assignor for damages.

19. Anti-Assignment Clause
Prohibits the assignment of rights under a contract.
Used if the obligor does not want to deal with or render performance to an unknown third party.
Another alternative is to include an approval clause that requires the obligor to approve any assignment.

20. Delegation
Transfers duties to another party who must perform them.

21. Delegation: Who’s Involved
Delegator – obligor who transfers his/her duty.
Delegatee – party to whom the duty is transferred.

22. Delegation Promisor (K #1) Promisee (Obligor) (Obligee)
Delegator (K #2)
Contract No. 1
(promise to perform)
Contract No. 2
Delegation of Duties
Duty of Performance
Delegatee

23. Delegation: Prohibitions
Personal service contracts calling for the exercise of personal skills, discretion, or expertise.
For example, if Dr. Dre is hired to give a concert on a college campus, the Dixie Chicks cannot appear in his place.
Contracts whose performance would materially vary if the obligor’s duties were delegated.
For example, if a person hires an experienced surgeon to perform a complex surgery, a recent medical school graduate cannot be substituted in the operating room.

24. Effect of Delegation
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.

25. Third-Party Beneficiaries
Third parties sometimes claim rights under others’ contracts.
Such third parties are either intended or incidental beneficiaries.

26. Intended Third-Party Beneficiary
When parties enter into a contract, they can agree that the performance of one of the parties should be rendered to or directly benefit a third party. Under such circumstances, the third party is called an intended third-party beneficiary.
Can enforce the contract against the party who promised to render performance.

27. Incidental Third-Party Beneficiary
In many cases, the parties to a contract unintentionally benefit a third party when the contract is performed. Under such circumstances, the third party is called an incidental beneficiary.
Has no rights to enforce or sue under other people’s contracts