Comprehensive Volume, 18th Edition

Chapter 19: Third Persons and Contracts

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1919

Rights and Duties

Ordinarily, only the parties to a contract have rights and duties with respect to that contract.

Exceptions are made in the case of third party beneficiary contracts and assignments.

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Third Party BeneficiaryWhen 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. 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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Types of Intended Beneficiaries

Creditor BeneficiaryWhen one party to a contract is obligated to perform a duty to a third party, that third party is a creditor beneficiary.

Donee BeneficiaryWhen the promisee’s purpose in

making the contract is to make a gift to a third party, that third party is a donee beneficiary.

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Intended Third Party Beneficiary

Roy Phoenix Insurance

Roy’s soninsurance

premiums

benefits

Examples:

The prior creditors of the business (Harry takes over debts.)

benefits

Max Money paid for business

Business sold to Harry

Harry

Donee Beneficiary

Creditor Beneficiary

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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 Third Party Beneficiary

Roy Phoenix Insurance

The insurance agent’s wife, who benefits from the agent’s salary.

insurance

premiums

benefits

Examples:

The owners of the businesses nearby,

whose business increases due to

increases in Harry’s business.

benefits

Max Money paid for business

Business sold to Harry

Harry

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1919

Assignment of Rights

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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Discharge of Assigned Obligation

Assignee can sueassignor for money

paid by obligorafter assignment.

Has obligor been informed of assignment and been notified

to pay assignee??

Obligor pays assignor (original obligee) instead of assignee.

Money paid to assignor doesnot reduce or cancel obligor’s

liability to assignee.

Yes

Money paid byobligor reduces

or cancels liability.

No

Obligor owes money to obligee.

Obligee assigns claim to assignee (obligee becomes assignor).

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Limitations on Transfer of Rights and Duties

Assignment of Right toMoney

Prohibition in GovernmentContracts

Assignment of Right toPerformance

Increase of BurdenPersonal SatisfactionPersonal ServicesCredit Transaction

Delegation of Duties

Personal or Nonstandardized Performance

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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.