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Chapter 18
THIRD PERSONS
AND CONTRACTS
Third Party Beneficiary Contracts
When a contract shows a clear intent to benefit
a third person or class of persons, those persons
are called intended third party beneficiaries.
A third party beneficiary is subject to any
limitation or restriction found in the contract.
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Third Party Beneficiary Contracts
A third party beneficiary loses all rights when
the original contract is terminated by operation
of law or if the contract reserves the right to
change beneficiaries and such a change is
made.
Intended third party beneficiaries may sue for
breach of the contract.
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Intended Beneficiaries
Creditor Beneficiary: a party to a contract is
obligated to perform a duty to a third party
beneficiary.
Donee Beneficiary: promisee’s purpose in
making the contract is to make a gift to a third
party beneficiary.
Limitations: 3PB takes contract as is. No
greater rights than given by contract.
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Intended Beneficiaries
Examples:
Donee
Beneficiary
premiums
Roy
insurance
Phoenix
Insurance
benefits
Roy’s son
Creditor
Beneficiary
benefits
Business sold to Harry
Max
Money paid for business
Harry
The prior
creditors of
the business
(Harry takes
over debts.)
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Incidental Beneficiaries
In contrast, an incidental beneficiary benefits
from the performance of a contract, but the
conferring of this benefit was not guaranteed by
the contracting parties.
An incidental beneficiary cannot sue on the
contract.
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Incidental Beneficiaries
Examples:
premiums
Roy
insurance
Phoenix
Insurance
Money paid for business
The insurance agent’s
wife, who benefits from
the agent’s salary.
benefits
Business sold to Harry
Max
benefits
Harry
The owners of the
businesses nearby,
whose business
increases due to
increases in Harry’s
business.
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Assignments
An assignment is a transfer of a right; the
assignor transfers a right to the assignee.
 Usually, there are no formal requirements for an
assignment. Any words manifesting the intent
to transfer are sufficient.
 When a valid assignment is made, the assignee
has the same rights—and only the same
rights—as the assignor.
 The assignee is also subject to the same
defenses and setoffs as the assignor had been.
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Assignments
Assignor: absent an agreement to the contrary,
an assignor remains liable on the original
contract.
Assignee: generally no liability.
Notice: assignment takes effect immediately.
 Assignee should give notice.
 Obligor’s duty can be discharged by making
payment.
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Discharge of Assigned Obligation
Obligor owes money to obligee.
Obligee assigns claim to assignee (obligee becomes assignor).
Obligor pays assignor (original obligee) instead of assignee.
Yes
Has obligor been informed of
assignment and been notified
to pay assignee??
Money paid to assignor does
not reduce or cancel obligor’s
liability to assignee.
No
Money paid by
obligor reduces
or cancels liability.
Assignee can sue
assignor for money
paid by obligor
after assignment.
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Limitations & Nonassignable Rights
Assignment of Right to
Money
Prohibition in Government
Contracts
Assignment of Right to
Performance
Increase of Burden
Personal Satisfaction
Personal Services
Credit Transaction
Delegation of Duties
Personal or Nonstandardized
Performance
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Liabilities
Continuing Liability of Assignor.
 Assignor remains liable unless there is an
agreement to the contrary.
Liability of Assignee: generally not liable.
 Consumer Protection.
 Defenses and Setoffs.
Warranties of Assignor.
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Delegation of Duties
The performance of duties under a contract may
be delegated to another person except when a
personal element of skill or judgment of the
original contracting party is involved.
The fact that there has been a delegation of
duties does not release the assignor from
responsibility for performance.
Delegations under UCC.
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