1. CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Third-Party Interests FIVEFIVE

2. 5-2 Objectives Chapter Objectives: Use vocabulary regarding third-party beneficiaries, assignments, and delegations properly Differentiate among the various types of third- party beneficiaries Discuss the legal remedies available to the parties to a third-party contract, assignment, or delegation Determine whether the rights and/or obligations under the contract can be assigned and/or delegated

3. 5-3 Objectives This chapter will explore WHO, outside of the contracting parties, may have an interest in the agreement, HOW their interests are created and perfected, and WHAT effect they have on the performance obligations in the agreement

4. 5-4 Definitions Third-party beneficiary –A person, not a party to the contract, who stands to receive the benefit of performance of the contract

5. 5-5 Definitions Privity –A relationship between the parties to the contract who have rights and obligations to each other through the terms of the agreement

6. 5-6 Definitions Intent –Having the knowledge and desire that a specific consequence will result from an action

7. 5-7 Definitions Promisor –The party who makes a promise to perform under the contract Promisee –The party to whom the promise of performance is made

8. 5-8 Types of Third-Party Interests Examples of third-party contracts are wills and insurance policies Wills are contracts between the person writing the will and the state. The state, the promisor, agrees to dispose of the deceased persons possessions, as the promisee, has directed and benefits from the certainty of having these assets divided among her loved onesthe third-party beneficiaries

9. 5-9 Types of Third-Party Interests The same logic follows with respect to insurance policies as third-party contracts

10. 5-10 Types of Third-Party Interests In order to be considered valid third-party beneficiaries, the contract must have named them in the formative stage. The parties must, at the time of contract, intend to benefit the third party. This element is critical as it defines the third- party beneficiary contract

11. 5-11 Types of Third-Party Interests Incidental beneficiaries Persons who may derive some benefit from the performance of a contract but who were not intended to directly benefit from the performance

12. 5-12 The third party has legally enforceable rights under the contract and, although not a party to the transaction, can sue for its enforcement Example: A beneficiary under a life insurance contract may sue to enforce the performance (payment) of the policy if the insurance company fails to pay a valid claim Right To Sue

13. 5-13 Right To Sue In a third-party creditor beneficiary contract, the promisor agrees to pay a debt owed by the promisee

14. 5-14 Right To Sue The more common type of beneficiary is the donee –A donee receives a gift as a result of the transaction. The promisor confers a benefit on the donee at the request of the promisee –Again, it is easy to refer to wills: the donees are the heirs of the estate; they receive their inheritance as a gift from the testator (promisee) through the states probate system (promisor)

15. 5-15 At the time the beneficiary learns of the agreement, her rights in the contract become vested If the third-party beneficiary knows of and consents to the contract, the parties cannot cancel or modify the agreement without the beneficiarys consent Right To Sue

16. 5-16 Who can sue whom ? –Based on privity, both the promisee and promisor can sue each other –Both the beneficiary and the promisee can sue the promisor if the promisor fails to bestow the benefit Right To Sue

17. 5-17 Who can sue whom ? –However, the promisor cannot sue the third- party beneficiary as that party has no obligations with regard to the original obligations under the contract. The third- party beneficiary is merely the recipient of the performance with no other duty to discharge Right To Sue

18. 5-18 Assertion of defenses –Either the original parties or a third-party beneficiary has the right to claim any legal defenses or excuses that they may have as against each other. They are not extinguished by a third party Right To Sue

19. 5-19 Either party, the offeror or offeree, may assign their rights to receive performance and/or delegate their duties to perform under the original contract to a new third party Assignment/Delegation Of Contractual Rights & Obligations

20. 5-20 Assignment –The transfer of the rights to receive the benefit of contractual performance under the contract Delegation –The transfer of the duties/obligations to perform under the contract Assignment/Delegation Of Contractual Rights & Obligations

21. 5-21 Assignor –The party who assigns his rights away and relinquishes his rights to collect the benefit of contractual performance Assignee –The party to whom the right to receive contractual performance is transferred Obligor –The original party to the contract who remains obligated to perform under the contract Assignment/Delegation Of Contractual Rights & Obligations

22. 5-22 Delegant/Delegator –The party who transfers his obligation to perform his contractual obligations Delegate/Delegatee –The party to whom the obligation to perform the contractual obligations is transferred Assignment/Delegation Of Contractual Rights & Obligations

23. 5-23 If the contract is silent as to the ability of the parties to assign their rights, it is usually assumed that assignment is permissible if it is reasonable The assignment does not substantially alter the rights and obligations of the original parties to the contract Assignment/Delegation Of Contractual Rights & Obligations

24. 5-24 Summary If the parties to a contract intend to have the performance, the benefit of the contract, conferred on a person not in privity to the contract, they have created a third-party beneficiary contract The promisor is the person who will bestow the benefit upon the third party and the promisee is the person obligating himself to the promisor

25. 5-25 Summary There are two categories of third-party beneficiaries: creditors and donees At the time the beneficiary learns of the agreement, his rights in the contract become vested A third-party beneficiary can sue for enforcement of the contract and the defendant can assert any defenses that he would have if sued by the party in privity

26. 5-26 Summary After making the contract, the parties may assign their rights and/or delegate their duties under the contract to a third party The most important difference to remember between the twoassignment and delegationis that an assignor usually is no longer liable under the contract, meaning that he is not party to a suit to enforce the assignment, whereas a delegant remains liable under the contract