Download third parties

© 2011, Tiffany M. Garrick

Describe what a third party is in the study of
contracts.

Explain the phrase “privity of contract” and why it is
(or is not) important in the study of contracts in
today’s business environment.

Understand the difference between an intended
beneficiary and an incidental beneficiary.

Differentiate between an assignment and a
delegation.

Define what a personal services contract is and how
it might be relevant to third parties and contracts.

Contracting parties have a legal obligation
to perform duties specified in their contract.

A party’s duty of performance may be
discharged by:
› Agreement of the parties.
› Excuse of performance
› Operation of law

If one party fails to perform as follows, the
other party may enforce the contract and
sue for breach.

Exists between parties to a contract.

Example
Jack agrees to sell his home to Jill for
$120,000. Jack and Jill are in privity of
contract.

Someone who is not the offeror or the
offeree but who might still have rights in
or be entitled to receive benefits from
the agreement.

Generally, third parties do not acquire
any rights under other people’s
contracts.

Exceptions:
› Assignees to whom rights are transferred.
› Intended third-party beneficiaries to whom
the parties to the contract intended to give
rights under the contract at the time of
contracting.

Transfer of contractual rights

Obligor – owes duty to perform.

Obligee – owed a right under a
contract.

Assignor – obligee who transfers the right
to receive performance.

Assignee – party to whom the right has
been transferred.
(Promise to Pay)
Obligor
Obligee (K #1)
Contract No. 1
(Loan of Money)
Assignor
(K #2)
Contract #2
(Right to enforce payment
of note)
Assignment of a Right
(Assignment of
note)
Assignee

Generally, none required.

Typical language:
› “assign”
› “sell”
› “transfer”
› “convey”
› “give”
Suppose a retail clothing store purchases
$5,000 worth of goods on credit from a
manufacturer. Payment is due in 120 days.
Assume the manufacturer needs cash
before the 120-day period expires, so the
manufacturer (assignor) sells its right to
collect the money to another party
(assignee) for $4,000.
If the retail store is given proper notice of
the assignment, it must pay $5,000 to the
assignee.

Personal Service Contracts – for
example, if an artist contracts to paint
someone’s portrait, the artist cannot
send a different artist to do the painting
without the prior approval of the person
to be painted.

When a contract prohibits it.

When it is against public policy.

When the delegate has a substantial
interest in the personal performance by
the delgator.

Assignment of Future Rights – for
example, suppose a multimillion-dollar
heiress signs a will, leaving all her
property to her grandson. The grandson
cannot assign his expected right to
receive his inheritance.

Contracts where assignment would
materially alter the risk – for example,
suppose Laura Peters, who has a safe
driving record, purchases automobile
insurance from an insurance company.
Her rights to be insured cannot be
assigned to another driver because the
assignment would materially alter the risk
and duties of the insurance company.

Assignment of legal action – for example,
suppose Donald Matthews is severely
injured by Alice Hollyfield in an automobile
accident caused by her negligence.
Matthews can sue Hollyfield to recover
damages for his injuries. He cannot assign
his right to sue her to another person.
› Caveat: A legal right that arises out of a breach
of contract may be assigned. For example,
suppose Andrea borrows $10,000 from the bank.
If she defaults on the loan, the bank may assign
the legal rights to collect the money to a
collection agency.

Assignee “stands in the shoes” of the
assignor (original obligee).

In other words, the assignee now
becomes entitled to performance from
the obligor.

The assignor’s (original obligee) rights
under the contract are extinguished,
including the right to sue the obligor for
nonperformance.

An assignee takes no better rights under
the contract than the assignor had. For
example, if the assignor has a right to
receive $10,000 from a debtor, the right
to receive this $10,000 is all that the
assignor can assign the assignee.

An obligor can assert any defense
against the assignee that he or she had
against the assignor (original obligee).
In order for the assignment to be valid, the
assignee is under a duty to notify the obligor
that:
1) The assignment has been made AND
2) Performance must be rendered to the
assignee
If the assignee fails to notify the obligor of
the assignment, the obligor may continue
to render performance to the assignor, who
no longer has a right to it. In such a case,
the assignee’s only course of action is to
sue the assignor for damages.

Prohibits the assignment of rights under a
contract.

Used if the obligor does not want to deal
with or render performance to an
unknown third party.

Another alternative is to include an
approval clause that requires the obligor
to approve any assignment.

Transfers duties to another party who
must perform them.
Delegator – obligor who transfers his/her
duty.
 Delegatee – party to whom the duty is
transferred.

Delegation
Promisee
(Obligee)
Contract No. 1
(promise to
perform)
Promisor (K #1)
(Obligor)
Delegator (K #2)
Contract No. 2
Delegation of
Duties
Duty of Performance
Delegatee

Personal service contracts calling for the
exercise of personal skills, discretion, or
expertise.
› For example, if Dr. Dre is hired to give a concert
on a college campus, the Dixie Chicks cannot
appear in his place.

Contracts whose performance would
materially vary if the obligor’s duties were
delegated.
› For example, if a person hires an experienced
surgeon to perform a complex surgery, a recent
medical school graduate cannot be substituted
in the operating room.

The delegator remains legally liable for
the performance of the contract.

If the delegatee does not perform
properly, the obligee can sue the
obligor-delegator for any resulting
damages.

Third parties sometimes claim rights
under others’ contracts.

Such third parties are either intended or
incidental beneficiaries.

When parties enter into a contract, they
can agree that the performance of one
of the parties should be rendered to or
directly benefit a third party. Under such
circumstances, the third party is called
an intended third-party beneficiary.

Can enforce the contract against the
party who promised to render
performance.

In many cases, the parties to a contract
unintentionally benefit a third party when
the contract is performed. Under such
circumstances, the third party is called
an incidental beneficiary.

Has no rights to enforce or sue under
other people’s contracts