1. CHAPTER 14 INTERPRETATION OF THE CONTRACT AND THE RIGHTS AND OBLIGATIONS OF THIRD PERSONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 JUDICIAL INTERPRETATION Courts must interpret what the contract “really says.” Interpretation is used to determine the meaning of the words and other manifestations of intent that the parties used. Courts consider intentions of parties through a frame of reference known as “reasonable person.” Courts must interpret what the contract “really says.” Interpretation is used to determine the meaning of the words and other manifestations of intent that the parties used. Courts consider intentions of parties through a frame of reference known as “reasonable person.”

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 JUDICIAL INTERPRETATION Standards: – General usage: reasonable person who was aware of all operative uses and who was acquainted with the circumstances involved would attach to the agreement. – Limited usage: refers to the way words are interpreted in a specific locale. Standards: – General usage: reasonable person who was aware of all operative uses and who was acquainted with the circumstances involved would attach to the agreement. – Limited usage: refers to the way words are interpreted in a specific locale.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 JUDICIAL INTERPRETATION Rules of Interpretation. – Courts attempt to enforce the intentions of the contracting parties. – Circumstances surrounding a transaction should be taken into account. – Courts examine the contract as a whole in determining the intentions. – Ordinary and technical words will be given ordinary or technical meaning, unless circumstances indicate otherwise. Rules of Interpretation. – Courts attempt to enforce the intentions of the contracting parties. – Circumstances surrounding a transaction should be taken into account. – Courts examine the contract as a whole in determining the intentions. – Ordinary and technical words will be given ordinary or technical meaning, unless circumstances indicate otherwise.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 JUDICIAL INTERPRETATION Conduct and Usage of Trade. – Course of conduct or the conduct of the parties and usage of trade involved in the agreement will also influence interpretation. Conduct and Usage of Trade. – Course of conduct or the conduct of the parties and usage of trade involved in the agreement will also influence interpretation.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 THE PAROL EVIDENCE RULE Parties have signed a complete, written contract, oral agreements made prior to or at the same time as the writing are not admissible. An important part of substantive law. – Substantive law: portion of the law that regulates rights, in contrast to law that grants remedies or enforces rights. Parties have signed a complete, written contract, oral agreements made prior to or at the same time as the writing are not admissible. An important part of substantive law. – Substantive law: portion of the law that regulates rights, in contrast to law that grants remedies or enforces rights.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 THE PAROL EVIDENCE RULE Rules of Integration. – “Face-of-instrument” test, courts examine the “four corners of the writing” to determine if parties intended for document to be integrated. – “All relevant-evidence” test, courts review the document and extrinsic evidence to determine if parties intended integration. – Integration or merger clause, parties declare that the writing is the full and final expression of all the terms in the agreement. Rules of Integration. – “Face-of-instrument” test, courts examine the “four corners of the writing” to determine if parties intended for document to be integrated. – “All relevant-evidence” test, courts review the document and extrinsic evidence to determine if parties intended integration. – Integration or merger clause, parties declare that the writing is the full and final expression of all the terms in the agreement.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 THE PAROL EVIDENCE RULE Total Integration. – Contracts representing the parties’ final and complete statement of their agreement. Partial Integration. – Contract that is intended to be the final statement but is incomplete. Total Integration. – Contracts representing the parties’ final and complete statement of their agreement. Partial Integration. – Contract that is intended to be the final statement but is incomplete.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 ADDITION OF THIRD PARTIES TO THE CONTRACT Contract only affects the rights of parties who directly enter into the agreement. Contracts may influence the rights of third parties. Third party is significant when the contract is initially formed. Third party is added later to the contract. Third party has legal rights and can file a lawsuit to enforce a contract. Contract only affects the rights of parties who directly enter into the agreement. Contracts may influence the rights of third parties. Third party is significant when the contract is initially formed. Third party is added later to the contract. Third party has legal rights and can file a lawsuit to enforce a contract.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 THIRD-PARTY BENEFICIARY CONTRACTS Third party beneficiary contract typically involve agreement to perform an act for a third party, known as a beneficiary. Two people who enter into a contract are called promisor (promises to perform) and promisee (whom the promise is made). The additional person is not a party to the contract and the contract is valid. Third party beneficiary contract typically involve agreement to perform an act for a third party, known as a beneficiary. Two people who enter into a contract are called promisor (promises to perform) and promisee (whom the promise is made). The additional person is not a party to the contract and the contract is valid.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 THIRD-PARTY BENEFICIARY CONTRACTS An Incidental Beneficiary. – Third party one who may receive a benefit merely by accident or chance. – Has no right to enforce a contract as it was never intended by maker that incidental beneficiary directly benefit from the agreement. An Incidental Beneficiary. – Third party one who may receive a benefit merely by accident or chance. – Has no right to enforce a contract as it was never intended by maker that incidental beneficiary directly benefit from the agreement.

12. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 THIRD-PARTY BENEFICIARY CONTRACTS An Intended Beneficiary. – Third party whom one or both of the contracting parties clearly intended or meant to benefit from the agreement. – Intended beneficiary has same right to enforce the contract as does the original contracting parties. An Intended Beneficiary. – Third party whom one or both of the contracting parties clearly intended or meant to benefit from the agreement. – Intended beneficiary has same right to enforce the contract as does the original contracting parties.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 THIRD-PARTY BENEFICIARY CONTRACTS A Donee Beneficiary. – Third party intended beneficiary whose benefit is intended as a gift from one of the contracting parties. – In some states, donee’s interests are vested once contract is made. – In other states the donee’s rights vest only if donee has accepted the contract, either expressly or by reliance. A Donee Beneficiary. – Third party intended beneficiary whose benefit is intended as a gift from one of the contracting parties. – In some states, donee’s interests are vested once contract is made. – In other states the donee’s rights vest only if donee has accepted the contract, either expressly or by reliance.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 THIRD-PARTY BENEFICIARY CONTRACTS A Creditor Beneficiary. – Third party intended beneficiary. – Benefit is intended as payment of a debt that is owed by one of the contracting parties to the beneficiary. – Not much difference between donee and creditor beneficiaries, and both have basically the same rights against the promisor. A Creditor Beneficiary. – Third party intended beneficiary. – Benefit is intended as payment of a debt that is owed by one of the contracting parties to the beneficiary. – Not much difference between donee and creditor beneficiaries, and both have basically the same rights against the promisor.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 THIRD-PARTY BENEFICIARY CONTRACTS Analysis of Third-Party Beneficiary Contracts. – Questions to determine potential third party: 1) Was the additional person involved from the beginning, or was that person added later? 2) Did the promise intend to benefit the third party, or was it an accident? 3) Was the promise making a gift to the third party, or was the promisee fulfilling a contract obligation to the third party? Analysis of Third-Party Beneficiary Contracts. – Questions to determine potential third party: 1) Was the additional person involved from the beginning, or was that person added later? 2) Did the promise intend to benefit the third party, or was it an accident? 3) Was the promise making a gift to the third party, or was the promisee fulfilling a contract obligation to the third party?

16. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 DEFINING ASSIGNMENTS AND DELEGATIONS If third party is granted contractual rights or duties after the contract was created. Third party is not a beneficiary of the contract. Instead, relationship may be either an assignment or delegation. Distinction between assignment and delegation rests on definition of contractual rights and contractual duties. If third party is granted contractual rights or duties after the contract was created. Third party is not a beneficiary of the contract. Instead, relationship may be either an assignment or delegation. Distinction between assignment and delegation rests on definition of contractual rights and contractual duties.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 DEFINING ASSIGNMENTS AND DELEGATIONS Contractual Rights are the parts of the contract a person is entitled to receive. Examples include delivery of or payment for goods, payment for work completed, payments owed to car dealers, mortgage companies, finance companies, and collection agencies. All are rights which are commonly assigned. Contractual Rights are the parts of the contract a person is entitled to receive. Examples include delivery of or payment for goods, payment for work completed, payments owed to car dealers, mortgage companies, finance companies, and collection agencies. All are rights which are commonly assigned.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 DEFINING ASSIGNMENTS AND DELEGATIONS Contractual Duties are the parts of the contract a person is obligated to give. Examples include working an eight-hour day, paying 15% interest on credit card charges, and providing repair services. All duties are commonly delegated. Rights can be assigned and duties can be delegated. Contractual Duties are the parts of the contract a person is obligated to give. Examples include working an eight-hour day, paying 15% interest on credit card charges, and providing repair services. All duties are commonly delegated. Rights can be assigned and duties can be delegated.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 ASSIGNMENTSASSIGNMENTS Person transfers a contractual right to another. Transferor called assignor, and recipient called the assignee. Assignor loses contractual right to the assignee when the right is transferred to another party. Assignor’s right has been extinguished. Person transfers a contractual right to another. Transferor called assignor, and recipient called the assignee. Assignor loses contractual right to the assignee when the right is transferred to another party. Assignor’s right has been extinguished.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 ASSIGNMENTSASSIGNMENTS Formalities Required for Assignments – Assignor must indicate an intent to vest a present right in the contract to the assignee. – A writing is not required unless Statute of Fraud applies. – Consideration is not required to make a valid assignment. Notice of the Assignment – Notice of assignment is not required. Formalities Required for Assignments – Assignor must indicate an intent to vest a present right in the contract to the assignee. – A writing is not required unless Statute of Fraud applies. – Consideration is not required to make a valid assignment. Notice of the Assignment – Notice of assignment is not required.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 ASSIGNMENTSASSIGNMENTS Assignable Rights – Courts generally favor and enforce assignments. – Prevent the assignment, promissor must prove one of the following: 1) Materially change the promissor’s duty. 2) Materially impair the chance of return performance or reduce its value. 3) Materially increase the burden or risk imposed by the contract. Assignable Rights – Courts generally favor and enforce assignments. – Prevent the assignment, promissor must prove one of the following: 1) Materially change the promissor’s duty. 2) Materially impair the chance of return performance or reduce its value. 3) Materially increase the burden or risk imposed by the contract.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 ASSIGNMENTSASSIGNMENTS Contract Clauses Restricting Assignments – Strong contractual language restricting assignment typically enforced by courts. Warranties Implied by the Assignor – Warranties include: 1) An assigned right is valid and actually exists. 2) The right is not subject to any defenses or limitations not stated or apparent. 3) Assignor will not interfere to defeat or impair the value of the assignment. Contract Clauses Restricting Assignments – Strong contractual language restricting assignment typically enforced by courts. Warranties Implied by the Assignor – Warranties include: 1) An assigned right is valid and actually exists. 2) The right is not subject to any defenses or limitations not stated or apparent. 3) Assignor will not interfere to defeat or impair the value of the assignment.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 ASSIGNMENTSASSIGNMENTS Rights Created by Assignment. – Assignee receives the same rights the assignor possessed. Waiver of Defenses Clause. – Attempts to give the assignee better legal rights than the assignor had. – Promisor agrees not to exert defenses. – Reduces the promisor’s bargaining power. Rights Created by Assignment. – Assignee receives the same rights the assignor possessed. Waiver of Defenses Clause. – Attempts to give the assignee better legal rights than the assignor had. – Promisor agrees not to exert defenses. – Reduces the promisor’s bargaining power.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 DELEGATIONSDELEGATIONS Transfer of contractual duties to third party. Promisor (delegator) appoints a new party (delegatee) to perform contractual duties. Relationship between delegator and delegatee may be by contract or gift. – Relationship by gift is enforceable by promissory estoppel: doctrine used to enforce a gift promise because of the justifiable reliance of the promise. Transfer of contractual duties to third party. Promisor (delegator) appoints a new party (delegatee) to perform contractual duties. Relationship between delegator and delegatee may be by contract or gift. – Relationship by gift is enforceable by promissory estoppel: doctrine used to enforce a gift promise because of the justifiable reliance of the promise.

25. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 DELEGATIONSDELEGATIONS Delegations do not occur unless the delegatee assumes the contract duties. In general, the delegator remains liable for proper performance of delegated duty. Whether delegatee can be held liable depends on if the delegatee contractually agreed to perform the duty. Delegations do not occur unless the delegatee assumes the contract duties. In general, the delegator remains liable for proper performance of delegated duty. Whether delegatee can be held liable depends on if the delegatee contractually agreed to perform the duty.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26ANALYSIS To characterize an assignment or delegation ask: – 1) Was additional person involved from the beginning or added later? – 2) Did additional person undertake to perform a contract duty or become entitled to a contract right? Or both? – 3) Did language of the original contract prevent this transfer to an additional person? – 4) Did type of right or duties prevent this transfer to an additional person, because the transfer materially changes the rights or duties of a party? – 5) Is this transfer forbidden by state statute? To characterize an assignment or delegation ask: – 1) Was additional person involved from the beginning or added later? – 2) Did additional person undertake to perform a contract duty or become entitled to a contract right? Or both? – 3) Did language of the original contract prevent this transfer to an additional person? – 4) Did type of right or duties prevent this transfer to an additional person, because the transfer materially changes the rights or duties of a party? – 5) Is this transfer forbidden by state statute?

27. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 UNIFORM COMMERCIAL CODE PROVISIONS Businesspeople need to review its assignment and delegation provisions. Businesspeople need to review its assignment and delegation provisions. Covers assignments and delegations for contracts involving the sale of goods. Covers assignments and delegations for contracts involving the sale of goods.