Ch 17 Third Parties - Lecture notes 17 PDF

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Professor Betanzos
Textbook: Business Law and the Legal Environment...

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Ch 17 Third Parties Monday, October 19, 2020

10:31 PM

17-1 Third Party Beneficiary • The two parties who make a contract always intent to gain some benefit for themselves • Often, their bargain will also benefit someone else • A third party beneficiary is someone who was not a party to the contract but stands to benefit from it • Many contracts are clear in their intent to create third party beneficiaries

17-1a Intended Beneficiaries • A person is an intended beneficiary and may enforce a contract if the parties intended her to benefit and if either (a) enforcing the promise will satisfy a duty of the promise to the beneficiary or (b) the promisee intended to make a gift to the beneficiary ○ The promisor is the one who makes the promise that the third party beneficiary is seeking to enforce ○ The promisee is the other party to the contract • In other words, a third party beneficiary must show 2 things in order to enforce a contract that 2 other people created 1. First, she must show that the 2 contracting parties were aware of her situation and knew that she would receive something of value from their deal 2. Second, she must show that the promisee wanted to benefit her for one of 2 reasons: i. Either to satisfy some duty owed ii. Or to make her a gift • If the promisee is fulfilling some duty, the third party beneficiary is called a creditor beneficiary ○ Most often, the duty that a promisee will be fulfilling is a debt already owed to the beneficiary • If the promisee is making a gift, the third party is a donee beneficiary

beneficiary • As long as the third party is either a creditor or a donee beneficiary, she may enforce the contract • If she is only an incidental beneficiary, she may not

17-1b Incidental Beneficiaries • A person who fails to qualify as a donee beneficiary or a creditor beneficiary is merely an incidental beneficiary and may not enforce the contract • Definition of Incidental Beneficiary: Someone who might have benefitied from a contract between 2 others but has no right to enforce that agreement

17-2 Assignment and Delegation • A contracting party may transfer his rights under the contract, which is called an assignment of rights • Or a party may transfer her obligations under the contract, which is a delegation of duties • Frequently a party will make an assignemtnand delegation simultaneously, transferring both rights ○ Ex: the right to inhabit an apartment and duties like the obligation to pay monthly rent to a third party

17-2a Assignment • Obligor: the party obligated to do something

What rights are assignable? • Most contract rights are assignable, but not all • Disputes sometimes arise b/w the 2 contracting parties about whether one of the parties could legally assign her rights to a third party • Any contractual right may be assigned unless the assignment: ○ Would substantially change the obligor's rights or duties under the contract, ○ Is forbidden by law or public policy, or ○ Is validly precluded by the contract itself

• Substantial Change: ○ Any assignment is prohibited if it would substantially change the obligor's situation ○ Assignment is also prohibited when the obligor is agreeing to

perform persoanl services § The close working realtionship in such agreements makes it unfair to expect the obligor to work with a stranger

• Public Policy: ○ Some assignments are prohbited by public policy

• Contract Prohibition; ○ One of the contracting parties may try to prohbit assignment in the agreement itself § For example: most landlords include in the written lease a clause prohibiting the tenant from assigning the tenancy without the landlord's written permission

How Rights Are Assigned Writing: • In general, an assignment may be written or oral, and no particular formalities are required • However, when someone wants to assign rights governed by the statutue of frauds, she must do it in writing

Consideration: • An assignment can be valid with or without consideration, but the lack of consideration may have consequences • An assignment for consideration is irrevocable • Gratuitous Assignment: One 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 Obligor: • The assignment is valid from the moment it is made, regardless of whether the assignor notifies the obligor

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

Assignor's Warranty: • The law implies certain warranties, or assurances, on the part of the assignor • Unless the party exprelly agree to exckude the the assignor warrants

• Unless the party exprelly agree to exckude the, the assignor warrants that (1) the rights he is assigning actually do exist and (2) there are no defenses to the rights other than those that would be obvious, such as nonperformance • But the assignor does not warrant that the obligor is solvent

Special Issue: The Uniform Commercial Code and Assignments of Security Interests • The provisions of the UCC regarding assignments in contracts for the sale of goods are very similar to common law rules • However, Article 9 of the UCC has special rules about the assignment of security interests, which are the legal rights in personal property that ensure payment ○ Ex: when an auto dealer sells u a new car on credit, the dealer will keep a security interest in your car. If u do not make your monthly payments, the dealer retains a right to repossess the vehicle. That authority is called a security interest • Companies that sell goods often prefer to assign their security interets to some other firm, such as a bank or finance company ○ Bank is the assignee • Under UCC 9-404, the obligor on a sales cotract may generally assert any defenses against the assignee that arise from a contract, any other defenses that arose before notice of assignment ○ The code's refercne to any defenses that arise from the contract means that if the assignor breached his part of the deal, the obligor may raise that as a defense • Under UCC 9-403, an agreement by a buyer that he will not assert against an assignee any claim or defense that he may have against the seller (or lessor) is generally enforceable by the assignee if he took the assignment in good faith, for value, without notice of the potential defenses

17-2b Delegation of Duties • Promissory note: document guaranteeing that he will repay • Most duties are delegable. But delgation does not by itself relieve the delegator of his own liability to perform the contract

What duties are delegable? • The rules concerning what duties may be delegated mirror those about

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the assignment of rights. Once again, common law agrees with UCC An obligor may delegate his duties unless: ○ Delegation would violate public policy, or ○ The original contract prohibits delegation, or ○ The obligee has a substantial interest in personal performance by the obligor Public Policy: ○ Delegation may violate public policy, such as in a public works contract Contract Prohibition: ○ Very common for contract to prohibit delegation Substantial interest in personal performance: ○ The services of lawyers, doctors, dentists, artists, and performers are considered too personal to be delegated ○ There is no single test that will perfectly define this group, but gernally when the work will test the character, skill, discretion, and good faith of the obligator, she may not delegate her job Improper Delegation and Repudiation: ○ Sometimes parties delegate duties they should not

Novation • A delegator does not automatically get rid of his duties merely by delegating them • Novation: A three-way agreement in which the obligor transfers all rights and duties to a third party...