Third Parties

1
CHAPTER 16
Third Parties
2
Quote of the Day

• For kindness begets kindness evermore, but he
  from whose mind fades the memory of benefits,
  noble is he no more.
• Sophocles,
• Greek playwright

3
Third Party Beneficiary
Someone who was not a party to the contract but
stands to benefit from it.

• An intended beneficiary may enforce a contract if
  the parties intended her to benefit and if
  either
• enforcing the promise will satisfy a duty of the
  promisee to the beneficiary or
• the promisee intended to make a gift to the
  beneficiary.

4
Third Party Beneficiary (contd)

• Any beneficiary who is not an intended
  beneficiary is an incidental beneficiary, and may
  not enforce the contract.
• If the promisee is fulfilling some duty, the
  third party beneficiary is called a creditor
  beneficiary.

5
Assignment and Delegation

• A contracting party may transfer his rights under
  the contract, which is called an assignment of
  rights.
• A contracting party may transfer her duties
  pursuant to the contract, which is a delegation
  of duties.
• The assignor is the one making an assignment and
  the assignee is the one receiving an assignment.

6
Assignment

• Any contractual right may be assigned unless
  assignment
• (a) would substantially change the obligors
  rights or duties under the contract or
• (b) is forbidden by law or public policy or
• (c) is validly precluded by the contract itself.
• Assignment is also prohibited when the obligor is
  agreeing to perform personal services.

7
How Rights Are Assigned

• Writing
• Consideration
• An assignment for consideration is irrevocable.
• A gratuitous assignment is made as a gift for no
  consideration.
• A gratuitous assignment is generally revocable if
  it is oral and generally irrevocable if it is
  written.
• Notice to the Obligor

8
Rights of the Parties after Assignment

• Once the assignment is made and the obligor
  notified, the assignee may enforce her
  contractual rights against the obligor.
• The obligor may generally raise all defenses
  against the assignee that she could have raised
  against the assignor.

9
Assignors Warranty

• Difference under the UCC
• In general, the obligor on a sales contract may
  assert any defenses against the assignee that
  arise from the contract, and that arose before
  notice of assignment.
• An agreement by a buyer that he will not assert
  against an assignee any claim or defense that he
  may have against the seller is generally
  enforceable if he took the assignment in good
  faith, for value, without notice of the potential
  defenses.

10
Delegation of Duties

• Most duties are delegable. But delegation does
  not by itself relieve the delegator of his own
  responsibility to perform the contract.
• An obligor may delegate unless
• (1) delegation would violate public policy, or
• (2) the contract prohibits delegation, or
• (3) the obligee has a substantial interest in
  personal performance by the obligor.

11
Novation

• A novation is a three-way agreement in which the
  obligor delegates all duties to the delegatee and
  the obligee agrees to look only to the delegatee
  for performance.
• The obligee releases the obligor from all
  liability.

12
A moments caution should enable contracting
parties to anticipate and realistically appraise
any rights and responsibilities of third parties.