Rights of Third Parties

I. Definitions

A. Assignment: transfer of a right under a contract

B. Delegation: transfer of a duty under a contract

C. Assignor: person who transfers the right

D. Assignee: person to whom right has been transferred

E. Obligor: person who owes duty to perform

F. Obligee: person to whom duty is owed

II. Assignment of Contracts

A. Nature of assignment of rights

1. Contracts rights were not always transferable due to the personal nature of debts

2. Today, public policy favors free assignability of contracts

B. Creation of an assignment

1. No formal language required

2. No writing required (unless within Statute of Frauds)

3. No consideration is necessary (but gratuitous assignments are generally revocable)

C. Assignability of rights

1. Most contract rights are assignable

2. EXCEPTIONS (where rights are not transferable)

a. Contrary to public policy (future wages, lottery prizes)

b. Adversely effects obligor (increases burden or risk)

c. Contract expressly forbids assignments (usually in leases)

i. Interpreted narrowly

ii. Damages generally may be recovered for violation, but the assignment will likely not be invalidated

D. Nature of assignee’s rights

1. Obligor may assert any defense or claim against the assignee that he could have asserted against the assignor

2. Assignee should promptly notify the obligor of assignment in order to ensure the benefit goes to the assignee rather than the assignor

3. Assignor who accepts the benefit will hold it in trust for the assignee

E. Subsequent assignments: if an assignee reassigns the rights to a third party, the third party will be called a subassignee

F. Successive assignments: when an assignor assigns the same right to more than one assignee, courts can apply the following rules

1. American rule: first assignee prevails

2. English rule: first assignee to give notice to the obligor prevails

3. Rest. 2d: first assignee prevails unless the subsequent assignee innocently pays value for the right and

4. Obtains payment;

5. Gets a judgment against the obligor:

a. Obtains a new contract with the obligor by novation (all parties agree to substitute a party); or

b. Possesses a writing indicating assignment

G. Assignor’s warranty liability to assignee

1. Assignor impliedly warrants that the claim assigned is valid

2. Assignor also warrants that he or she has good title to the rights assigned and that any written instrument is genuine

3. HOWEVER, assignor does not impliedly warrant that the obligor is solvent

III. Delegation of Duties

A. Nature

1. Delegation occurs when an obligor indicates an intent to appoint another person to perform duties under a contract

2. Note: the delegator/obligor remains liable to the obligee unless the obligee agrees to a novation (a substitute of the delegatee’s promise for that of the delegator’s promise by agreement of all parties)

B. Delegable duties

1. Can delegate duties capable of being performed by a number of different persons (look to individual traits, skill, or judgment required)

2. Cannot delegate if

3. Would violate public policy; or

4. Original contract forbids delegation

C. Language creating delegation: general language of assignment, such as “I assign my rights under the contract” is interpreted as creating both an assignment and a delegation

D. Assumption of duties

1. A delegatee will not be liable unless he or she has assumed the duty by expressly or impliedly undertaking the obligation to perform

2. Acceptance of an assignment is generally construed as a promise to perform under the contract under both the UCC and Rest. 2d

E. Discharge by novation: novation is a substituted contract where the obligee agrees to discharge the original obligor and to substitute a new obligor (the delegatee)

IV. Third Party Beneficiaries

A. Intended versus incidental beneficiaries

1. Where the parties to a contract intend to benefit a third party (the intended beneficiary), the third party can enforce the contract

2. If a third party benefits from a contract even though the parties did not so intend, the person is an incidental beneficiary

3. Incidental beneficiaries cannot enforce the contract

4. The type of beneficiary determines the extent of enforcement

a. Creditor beneficiary: can enforce the promise against both the promisor and the promisee to the contract

b. Donee beneficiary: can enforce the promise against the promisor only

B. Vesting of beneficiaries’ rights

1. Some courts hold that vesting occurs when the contract is formed

2. Other courts hold that it does not occur until the beneficiary learns of the contract and consents or relies upon it

3. Once the rights vest, the promisor and promisee cannot modify or discharge their obligations