3rd PARTY RIGHTS 4322-4324

 

PRIVITY OF CONTRACT

 

     Privity of Contract: As a general rule, only the parties to a contract -- the promisor(s) and the promisee(s) -- owe any duties and enjoy any rights arising from the contract.

 

       Common law recognizes three exceptions:

 

     Assignment (of Rights)[4322]: A transaction whereby a party to the contract (the assignor) transfers his or her rights to some third party (the assignee). As a consequence, the assignee may demand performance of the contract by the obligor, and the assignor’s contract rights are extinguished.

 

     Delegation (of Duties)[4323]: A transaction whereby a party to the contract (the delegator) frees himself or herself from his or her duties by having some third party (the delegatee) perform those duties. Unlike the assignor, whose contract rights are extinguished by the assign­ment, the delegator remains liable for his or her contract duties if the delegatee fails to perform.

                                         

     Third-Party Beneficiary[4324]: A third party, X, who is intended, by the terms of the contract between Y and Z, to benefit from Y’s and Z’s performance of the contract.

 

SCOPE OF ASSIGNMENT [4322]

 

 

       As a general rule, all contract rights may be assigned, except where:

 

(1)   the assignment is prohibited by statute;

 

(2)   the contract to be assigned is for personal services, unless all that remains under the contract is a money payment for services previously rendered;

 

(3)   the assignment would materially increase the risk or alter the duties of the obligor; or

 

(4)   the contract specifically forbids assignment.

 

     There are exceptions to this exception, namely the contract may not prevent the assignment of:

 

(a)   the right to receive money;

 

(b)   rights in, or the alienation of, real property;

 

(c)   negotiable instruments; or

 

(d)   the right to recover damages for breach of contract

 

or for payment of an account under the U.C.C.

 


NOTICE OF ASSIGNMENT

 

     Once a valid assignment of rights has been made to a third party, the third party (the assignee) should notify the obligor of the assignment.

 

• N.B.            Notice that we say “should,” rather than “must,” because the assignment is effective immediately, whether or not notice is given to the obligor.

 

     However, until the obligor receives notice of the assignment, he or she may satisfy his or her contractual obligations by performance to the assignor -- even if the assignor has already assigned its rights to the assignee.

 

 

     If the assignor assigns the same rights to two or more parties, the obligor may not know to whom his or her duty to perform is owed. There are two general rules:

 

·               The “Majority” Rule: The first assignment made takes priority over subsequent assignment; and

 

     The “English” Rule: The first assignment recorded or otherwise made known to the obligor takes priority --even over an assignment made before it.

 


SCOPE OF DELEGATION [4323]

 

As a general rule, all contract duties may be delegated, except where:

 

(1)   performance depends on the personal skills or talents of the delegator (e.g., Greg Maddux cannot delegate his pitching duties to Tiger Woods);

 

(2)   the delegator owes the obligee fiduciary duties or other duties arising from a special trust in the delegator;

 

(3)   performance by the delegatee would materially vary the performance expected by the obligee (e.g., Sue Smith contracts with Tiger Woods to give her golf lessons; Tiger cannot delegate those duties to Butch Harmon, Tiger’s own golf instructor, because Sue wanted Tiger’s personal performance); or

 

(4)   the contract specifically forbids delegation.

 

 

 


THIRD-PARTY BENEFICIARIES [4324]

 

 

     The law distinguishes between intended and incidental third-party beneficiaries. Only intended beneficiaries acquire actionable legal rights in a contract.

 

     Intended Beneficiary: A third party for whose benefit a contract is formed.

 

     Incidental Beneficiary: A third party who benefits from the performance of a contract, but whose benefit was not the reason the contract was formed.

 

     In determining whether a third party is an intended or incidental beneficiary, courts generally use an objective, “reasonable person” test: Would a reasonable person have intended to confer on the third party (i) the right to bring suit to enforce the contract, and, thereby, (ii) the right to benefit from the contract? Courts consider whether:

 

·        performance was rendered directly to the third party;

 

·        the third party has the right to control details of the performance; and

 

·        the third party is expressly designated in the contract.

 


 

Types of Intended Beneficiaries: Two of the more widely recognized classes of third-party beneficiaries are:

 

     Creditor Beneficiary: A third party who benefits from a contract in which the promisor promises to pay a debt owed by the promisee to the third-party beneficiary.

 

     Donee Beneficiary: A third party for whose benefit a contract was made whereby the promisor promised the promisee to make a gift to the third-party beneficiary.

 

 

     An intended third-party beneficiary’s rights vest (i.e., become enforceable), subject to any reservation of rights to the contracting parties, when either of the following occurs:

 

     The third party demonstrates manifest assent to the contract (e.g., sends a letter acknowledging awareness of and consent to the contract for his or her benefit); or

 

     The third party materially alters his or her position in detrimental reliance on the contract (e.g., sells his or her automobile in anticipation of receiving a new auto­mobile pursuant to the contract).