Chapter 17 – Rights of Third Parties

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Rights of Third Parties

PA ET RHC 17

The best minute I spend is the one I invest in people.

Kenneth Blanchard, The One Minute Manager (1993)

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Learning Objectives

• Explain the concept and consequences of assignment

• Explain the concept and consequences of delegation

• Discuss the concept of the third party beneficiary and identify the three kinds of beneficiaries

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• Sometimes a person who entered into a contract must transfer the contract rights or duties to another person (third party)– Examples: sublease of your apartment,

asking another person take over work you agreed to do, or doing something to benefit a third person

• Key to successful transfer: understand the third party’s abilities, limitations, and needs

Overview

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• A person who owes a duty to perform under a contract is called an obligor

• The person to whom the duty is owed is called the obligee

Overview

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• Transfer of a right under a contract is called an assignment

• Example: Jane arranges for her employer to transfer her next paycheck to her parents’ bank account– Employer is the obligor (owes Jane

money)– Jane is the obligee and assignor– Jane’s parents are the assignees

Assignment of Contracts

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• Assignments may be made in any way sufficient to show assignor’s intent to assign

• A writing is not necessary– Unless statute of frauds

applies

• Assignee does not need to give consideration to assignor in exchange for the assignment

Details of Assignment

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• Assignment will not be effective if it:– Is contrary to public policy– Violates a non-assignment clause in a

contract– Adversely affects obligor in significant way

• Assignment may be ineffective if the contract right involved a personal relationship or element of personal skill or character

Limitations on Assignment

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• Appointment of another person to perform a duty under a contract is called a delegation

• Example: Mike mows Janet’s lawn weekly. Mike becomes ill and arranges for Sonny to mow Janet’s lawn– Janet is the obligee– Mike is the obligor and delegator– Sonny is the delegatee

Delegation of Duties

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• Caution: an assignment extinguishes the assignor’s right and transfers it to the assignee, but the delegation of a duty does not extinguish the duty owed by delegator– Delegator remains liable to the obligee

unless the obligee agrees to make a new contract substituting the delegatee’s for the delegator

Delegation of Duties

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Delegation Process

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• In an effective delegation, performance by the delegatee will discharge the delegator– Why you should understand delegatee’s

abilities and limitations

Effective Delegation

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• Facts and Opinion: – Watts (seller) and MW Development (buyer; MW)

entered into contract for sale of real estate– Simpson loaned MW money and, as security, MW

assigned rights in real estate contract to Simpson– MW defaulted and Watts sued Simpson alleging

that Simpson obligated under assignment– Court: Simpson did not assume obligation to

purchase under the assignment contract with MW– Affirmed in favor of Simpson

Watts v. Simpson

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• Duties are not delegable if the delegation:– Is contrary to public policy– Is prohibited by a contract clause

• Also, duties that are dependent on the individual traits, skill, or judgment of the person who owes the duty to perform may not be delegable– Example: hip hop artist could not

reasonably delegate concert obligation to opera star

Non-delegable Duties

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• Delegation may be made in any way that shows the delegator’s intent to delegate

• Delegator may be discharged from performance by a substituted contract (novation) in which obligee agrees to discharge original obligor and substitute a new obligor– Effect: Original obligor has no further

obligation

Details of Delegation

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• Facts and Procedural History: – Pratt entered into a contract to buy a Dairy Queen

restaurant from Harold and Gladys Rosenberg– Pratt assigned rights and delegated duties under

contract to Son; contract contained "Consent to Assignment" clause, signed by the Rosenbergs

– Son assigned to Merit Corporation (bankrupt)– Rosenbergs brought collection action for debt

against Son and Pratt; trial court granted summary judgment in favor of Son and Pratt

– Rosenbergs appealed

Rosenberg v. Son, Inc.

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• Opinion: – Well-established principle of contract law that a

contracting party cannot escape contractual liability by merely assigning its duties and rights under the contract to a third party

– Evident from express language of agreement between Pratt and Son that only an assignment was intended, not a novation

– Mere consent to agreement by Rosenbergs was not consent to discharge of principle obligor

– Reversed and remanded in favor of Rosenbergs

Rosenberg v. Son, Inc.

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• If parties to a contract intended to benefit a third party, courts give effect to their intent permitting third party to enforce the contract– Referred to as third-party beneficiary

• Example: Father contracts and pays for Homes, Inc. to build house as gift for Son– Son (third-party beneficiary) may sue Homes,

Inc. if the company breaches the contract• Father may also sue Homes, Inc.

Third-Party Beneficiaries

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• Incidental beneficiary is one obtaining a benefit as unintended by-product of a contract– No rights under

contract• In foregoing example,

Son’s Wife would be an incidental beneficiary

Incidental Beneficiaries

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Test Your Knowledge

• True=A, False = B– A person who assigns a right is an obligee– All duties may be delegated– Non-assignment clauses are enforceable– If a contract contains a non-assignment

clause, the clause actually means that duties may not be delegated

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• True=A, False = B– Sheila assigned her right to the proceeds

of a prize to a charity. Sheila is an assignee and the charity is the assignor.

– Joshua contracted with Bigg Homes to build a two-story house that will improve the value of nearby homes. Joshua’s neighbor is an incidental beneficiary.

Test Your Knowledge

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• Multiple Choice– James financed car purchase with CarCo,

then sold the car to Marsha. Marsha agreed to pay remaining amount of the car loan, but failed to make payments. CarCo may sue:

a) James only since he contracted with CarCob) James and Marsha since CarCo is a creditor

beneficiary of the contract between James and Marsha

c) Marsha only since Marsha was substituted for James

Test Your Knowledge

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• Multiple Choice– Marlyn contracted with Dept. Store to play piano

and holiday songs in the store during December. The contract had a “non-assignment” clause. Marlyn got another job and delegated her duties under the contract to John. Does Dept. Store have a valid claim against Marlyn?

a) Yes. Marlyn breached the non-assignment clause by delegating her duties to John

b) No. Marlyn found someone to replace herc) No. The contract didn’t have a non-

delegation clause

Test Your Knowledge

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Thought Question

• If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses? What about agreements to arbitrate for donee beneficiaries?