• 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).