16: Chapter Third Party Rights 1. Privity of Contract: a contract that is a private agreement between the parties who have entered into it, and traditionally these parties alone have rights and liabilities under the contract. a. Third party: one who is not a direct party to a particular contract 2. Assignments and Delegations a. Assignment: the transfer of contractual rights to a third party i. Assignor: the party assigning the rights to a third party ii.Assignee: the party receiving the rights iii.Obligee: the person to whom a duty, or obligation is owed iv.Obligor: the person who is obligated to perform the duty b. An assignment or a delegation occurs after the original contract was made. c. When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished. i. The third party (assignee) has a right to demand performance from the other original party to the contract d. The assignees rights are subject to the defenses that the obligor has against the assignor. e. In general, an assignment can take any form, oral or written. i. It is more difficult to prove that an oral assignment occurred, so it is practical to put all assignments in writing. 1. Those covered by the Statute of frauds must be in writing to be enforceable f. Generally, all rights can be assigned however for a few exceptions: i. When a statute expressly prohibits assignment of a particular right, that right cannot be assigned. ii.When a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment. iii.A right cannot be assigned if the assignment will significantly increase or alter the rights to or the duties of the obligor (the party owing performance under the contract) iv.When a contract specifically stipulates that a right cannot be assigned then ordinarily the right cannot be assigned. g. Delegation: the transfer of contractual duties to a third party h. Duties are not assigned but are delegated. i. A delegation of duties does not relieve the party making the delegation (the delegator) of the obligation to perform in the event that the party to whom the duty has been delegated (the delegate) fails to perform. i. As long as the delegator expresses an intention to make the delegation, it is effective. j. Duties that cannot be delegated: i. When special trust has been placed in the obligor or when performance depends on the personal skill or talents of the obligor, contractual duties cannot be delegated. ii.When performance by a third party will vary materially from that expected by the obligee under the contract, duties contractual cannot be delegated.
iii.When the contract expressly prohibits delegation by including an anti-delegation clause, the duties cannot be delegated. k. If a delegation of duties is enforceable, the oblige must accept performance from the delegate l. When a contract provides for an assignment of all rights, this wording may create both an assignment of rights and a delegation of duties 3. Third Party Beneficiaries a. As an intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of contract. b. In a bilateral contract, both parties to the contract are promisors because they both make promises that can be enforced i. To determine the identity of the promisor, the court will ask which party made the promise that benefits the third party that person is the promisor. ii.Allowing a third party to sue the promisor directly in effect circumvents the middle person (the promisee) and thus reduces the burden on the courts. c. Types of Third Party Beneficiaries: i. 1859, Lawrence vs. Fox, the court permitted a third party beneficiary to bring suit directly against a promisor 1. Established the rule that a creditor beneficiary can sue the promisor directly 2. A creditor beneficiary is one who benefits from a contract in which one party promises another party to pay a debt that the promisee owes to a third party. ii.When a contract is made for the express purpose of giving a gift to a third party, the third party can sue the promisor directly to enforce the promise (donee beneficiary) d. The Vesting of an Intended Beneficiarys Rights i. An intended third party beneficiary cannot enforce a contract against the original parties until the rights of the third party have vested, which means the rights have taken effect and cannot be taken away. 1. Until these rights have vested, the original parties to the contract can modify or rescind the contract without the consent of the third party. ii.The rights vest when any of the following occurs: 1. The third party materially changes his/her position in justifiable reliance on the promise 2. The third party brings a lawsuit on the promise 3. The third party demonstrates her/his consent to the promise at the request of the promisor or promisee. e. Intended vs. Incidental Beneficiaries i. The benefit that an incidental beneficiary receives from a contract between two parties is unintentional and thus cannot sue to enforce the contract 1. To determine incidental vs Intended, courts look to the intent as expressed in the contract language and implied by the surrounding circumstances.