Third-Party Rights & Discharge - Weblogs at Harvard Law School

CHAPTER 9

THIRD-PARY RIGHTS AND DISCHARGE

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

1

Privity of Contract • Generally only the contracting parties have any rights or obligations under the contract. • The contracting parties are in privity of contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

2

Third-Party Rights •

Third parties generally do not acquire rights under other people’s contracts. Except:

• • •

Assignees to whom rights subsequently are transferred, and Intended third-party beneficiaries to whom the contracting parties intended to give rights under the contract at the time of contracting.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

3

Assignment of Rights • Assignment – Transfer of contractual rights by obligee to another party. • Assignor – Obligee who transfers a right. • Assignee – Party to whom a right is transferred.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

4

Assignment of a Right Contract No. 1

Debtor (Obligor)

Right to enforce payment of note

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

Loan of Money

Contract No. 1: Creditor (Obligee) Contract No. 2: Assignor

Note (Promise to pay)

Contract No. 2 Assignment of note

Assignee

5

Assignment of a Right (continued) • Most rights can be assigned – E.g., sales contracts, contracts for payment of money, sale of mortgages. • Generally no formalities required – E.g., need not use term “assign.” Words such as “sell” or “transfer” are effective.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

6

Rights That Cannot Be Assigned • Personal Service Contracts – E.g., contract to paint a portrait.

• Assignment of Future Rights – Usually, a person cannot assign a currently nonexistent right that he or she expects to have in the future.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

7

Rights That Cannot Be Assigned (continued) • Contracts Where Assignment Would Materially Alter the Risk – A contract cannot be assigned if the assignment would materially alter the risk or duties of the obligor. • E.g., safe driver cannot assign automobile insurance coverage to another driver.

• Assignment of Legal Actions – Right to sue for violation of personal rights usually cannot be assigned. © 2010 Pearson Education, Inc., publishing as Prentice-Hall

8

Effect of Assignment of Rights • Assignee “stands in the shoes of the assignor” and is entitled to performance from the obligor. – Subject to same defenses that existed against assignor. • The unconditional assignment of a contract right extinguishes all the assignor’s rights.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

9

Notice of Assignment •

To protect his or her rights, the assignee should immediately notify the obligor that: •

The assignment has been made, and

•

Performance must be rendered to the assignee.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

10

Anti-Assignment Clause • Prohibits assignment of rights under the contract. • Used when obligor doesn’t want to deal with or render performance to an unknown third party.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

11

Approval Clause • Permits the assignment of the contract only upon receipt of an obligor’s approval. • Approval cannot be unreasonably withheld.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

12

Successive Assignment of Same Right American Rule– 1st in time

Possession of Tangible Token Rule—1st to obtain token

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

English Rule— 1st to give notice

13

Delegation of Duties • Delegation – Transfer of contractual duties by the obligor to another party for performance. • Delegator – Obligor who transferred his or her duty. • Delegatee – Party to whom the duty has been transferred.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

14

Delegation of a Duty Promisee (Obligee)

Duty of performance

Contract No. 1 Promise to Perform

Contract No. 1: Promisor (Obligor) Contract No. 2: Delegator Contract No. 2 Delegation of duties

Delegatee

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

15

Duties that Cannot Be Delegated • If obligee has a substantial interest in having the obligor perform, duties may not be transferred. – Personal service contracts calling for the exercise of personal skills, discretion, or expertise. • E.g., Bruce Springsteen’s contract to give a concert.

– Contracts whose performance would materially vary if duties delegated.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

16

Effect of Valid Delegation • Delegator is legally liable if delegatee fails to perform. • If delegation contains the term assumption, I assume the duties, or other similar language, delegatee is also legally liable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

17

Anti-Delegation Clause • Prohibits delegation. • Generally legally enforceable. – Courts may nonetheless allow delegation of duties that are totally impersonal in nature.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

18

Assignment and Delegation • Transfer of both rights and duties under a contract. • If the contract contains language of assignment, courts generally find a corresponding delegation of duties.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

19

Third-Party Beneficiaries • Third parties sometimes claim rights under others’ contracts. • Such third parties are either: – Intended beneficiaries, or – Incidental beneficiaries.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

20

Intended Beneficiary • A third party who: – is not in privity of contract. – May be named in the contract. • E.g., “I am acquiring this property for Ben.” • “I am hiring you to mow Jane’s lawn.”

– Has rights under the contract. – Can enforce the contract against the obligor.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

21

Third-Party Beneficiary Contracts • Sometimes classified as: – Donee beneficiary contracts – Contracts intended to confer a benefit or gift on an intended third party. • E.g., life insurance policy is donee beneficiary contract.

– Creditor beneficiary contracts – Contracts where promisor agrees to repay promisee’s creditor to satisfy existing debt.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

22

Donee Beneficiary Contract

Insured (Promisee)

Original Contract (Life insurance policy)

Life Insurance Company (Promisor)

Right to enforce contract Named Beneficiary (Donee Beneficiary)

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

23

Creditor Beneficiaries •

Usually arises when: − − − −

Debtor borrows from creditor to purchase some item. Debtor agrees to pay creditor amount of loan plus interest. Debtor sells item to another party before the loan is paid. The new buyer promises the debtor that he or she will pay the remainder of the loan amount to the creditor.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

24

Creditor Beneficiary Contract Contract No. 1 First sale of goods

First Buyer Debtor

Note (Promise to pay)

Contract No. 2

Promise to pay debt to creditor

Second sale of goods

Contract No. 1: Creditor Contract No. 2: Creditor Beneficiary

Right to recover payment

Second Buyer

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

25

Incidental Beneficiary • A party unintentionally benefited by other people’s contracts. • Incidental beneficiary has no rights to enforce or sue under other people’s contracts. – E.g., contract between homeowner and builder to renovate house, which will increase property values of neighbors. Neighbors are only incidental beneficiaries and so have no rights under this contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

26

Covenants • Unconditional promise to perform. • Nonperformance of covenant is breach of contract that gives the other party the right to sue. • Majority of contract terms are covenants.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

27

Conditions • A qualified or conditional promise that becomes a covenant if met. – Indicated by language such as if, on the condition that, provided that, when, after, as soon as.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

28

Types of Conditions Conditions Precedent

Conditions Subsequent

Concurrent Conditions

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

29

Condition Precedent • Event that must occur before a party is obliged to perform. – E.g., “I agree to buy this house if I can obtain a mortgage at 7% or less.”

• Contract may provide that performance must meet party’s satisfaction. – Personal satisfaction – contracts involving taste or comfort. – Satisfaction of reasonable person – most contracts.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

30

Conditions Subsequent • Occurrence or nonoccurrence of a specific event excuses performance of a contractual duty. – E.g., “I agree to work for your accounting firm for two years, unless I am admitted to MBA school.”

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

31

Concurrent Conditions • Parties to a contract must simultaneously render performance. • Each party’s absolute duty to perform is based on the other party’s absolute duty to perform. – E.g., buyer’s duty to pay and seller’s duty to deliver goods.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

32

Express and Implied Conditions • Express conditions exist if parties expressly agree to terms. • Implied-in-fact conditions are implied from the circumstances surrounding the contract and conduct of the parties. – E.g., it is implied that buyer of goods will provide proper access for seller’s delivery truck.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

33

Discharge of Performance • A party’s duty to perform under a contract may be discharged by: – Mutual agreement of the parties – Impossibility of performance – Force Majeure clauses – Commercial impracticability

– Statute of Limitations – Bankruptcy © 2010 Pearson Education, Inc., publishing as Prentice-Hall

34

Discharge by Agreement • The parties mutually agree to discharge or end their contractual duties. – Mutual Rescission – Substituted Contract – Novation – Accord and Satisfaction

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

35

Discharge by Impossibility • Objective impossibility (“It cannot be done.”) discharges both parties. – Death or incapacity of promisor prior to performance of personal service contract. – Destruction of subject matter – Supervening illegality.

• Subjective impossibility (“I cannot do it.”) does not discharge parties.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

36

Force Majeure Clauses • The parties may agree in contract that certain events will excuse nonperformance of the contract. • These clauses are called force majeure clauses. – Natural disasters – Labor strikes – Shortages of raw materials

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

37

Commercial Impracticability • Most states recognize this doctrine as an excuse for nonperformance. • Excuses performance if an unforeseeable event makes it impracticable to perform. • Examined on a case-by-case basis.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

38

Discharge by Operation of Law • Certain legal rules discharge parties from performing contractual duties. – Statutes of Limitations

– Discharge of debts in bankruptcy

© 2010 Pearson Education, Inc., publishing as Prentice-Hall

39