Chapter 15: Assignment of Contracts & Third Party Beneficiaries



Once it has been determined that a valid and legally enforceable contract exists,
attention can turn to the rights and duties of the parties. Because a contract is a
private agreement between the parties who have entered into it, it is fitting that these
parties alone should have rights and duties under the contract. This principle is
referred to as privity of contract, and it establishes the basic rule that only the parties to
a contract have rights under that contract. A third party one who is not a direct party
to a particular contract normally does not have rights under that contract.

Example: Suppose that I offer to sell you my watch for $100 and you accept. Later, I
refuse to deliver the watch to you, even though you are prepared to give me the $100.
You decide to overlook my breach, but your close friend, Marie, is unhappy with my
action and files suit. Can she receive a judgment? No, because she was not a party to
the contract. She does not have privity of contract. Marie has no standing to sue.

There are exceptions to the rule of privity of contract. One exception allows a party to a
contract to transfer the rights or duties arising from the contract to another person
through an assignment of rights or a delegation of duties. The other exception involves
a third party beneficiary contract--a contract in which the parties to the contract intend
that the contract benefit a third party.


Assignment & Delegation

Assignment: Transfer of rights under a contract by an assignor to an
assignee.

Generally contractual rights are freely assignable unless:

1. The rights to be assigned involve the performance of
unique, nonstandardized personal services; or

2. The assignment would place a significantly greater burden
or risk on the obligor in rendering the promised
performance; or

3. The assignment is not prohibited by law; or

4. The contract itself prohibits assignment.




Delegation: Transfer of duties under a contract by a delegator to a
delegatee.

Generally contractual duties are freely assignable unless:

1. The contractual duties being delegated involve unique,
nonstandardized personal services; or

2. When performance depends on the personal skill or talents
of the delegatee, or when performance by the delegatee will
vary materially from that expected by the obligee; or

3. When the contract expressly prohibits delegation; or

4. When the delegation is prohibited by law.


Rights & Responsibilities of Parties After Assignment or Delegation

Notice of Assignment:

Once a valid assignment of rights has been made, the assignee should
notify the obligor. For example, when Horton assigns to Kuhn his right to
receive $1,000 from Brower, Kuhn should notify Brower, the obligor of the
assignment. Giving notice is not legally necessary to establish the
validity of the assignment, because an assignment is effective
immediately, whether or not notice is given. Two major problems arise,
however, when notice of the assignment is not given to the obligor:

1) If the assignor assigns the same right to two different persons, the
question arises as to which one has priority that is, which one
has the right to the obligor's performance. Although the rule most
often observed in the U.S. is that the first assignment in time is the
first in right, some states follow the English rule, which basically
gives priority to the first assignee who gives notice. [Caveat:
gratuitous assignments can be revoked. A subsequent assignment
of the same right by the assignor to someone else automatically
revokes a prior gratuitous assignment.]

2) Until the obligor has notice of assignment, he can discharge his
obligation by performance to the assignor and this constitutes a
discharge to the assignee. Once the obligor receives proper
notice, only performance to the assignee can discharge the
obligor's obligation.


Effect of Delegation

1) If a delegation of duties is enforceable, the obligee must accept
performance from the delegatee. The obligee can legally refuse
performance from the delegatee only if the duty is one that cannot
be delegated.

2) A valid delegation of duties does not relieve the delegator of
obligations under the contract. If the delegatee fails to perform, the
obligee still has his original contract rights against the delegator.


Novation

A novation if the substitution of a party to a contract, resulting in a new contract
with one of the original parties and one new one. The requirements of a
novation are:


1) A previous valid obligation
2) An agreement of all the parties to a new contract
3) The extinguishment of the old obligation (discharge of the original
party)
4) A new contract that is valid

The effect of this is that if the new party fails to perform, or performs
inadequately, the obligee does NOT have the right to enforce the contract
against the original party. The original party has been discharged from the
contract. Contrast that with a delegation, where the delegator remains liable on
the contract if the delegatee fails to perform.




Third Party Beneficiaries

Another exception to the doctrine of privity of contract exists when the original parties
to the contract intend at the time of contracting that the contract performance directly
benefits a third person. In this situation, the third person becomes a third party
beneficiary of the contract. As an intended beneficiary of the contract, the third party
has legal rights and can sue the promisor directly for breach of contract.

At one time third party beneficiaries had no legal rights in contracts. Over time,
however, the concept developed that a third party for whose benefit a contract was
formed could sue the promisor to have the contract enforced.

Intended beneficiaries vs. Incidental beneficiaries