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Chapter 11: Third Party Rights and Discharge. Learning Objectives. What is the difference between an assignment and a delegation? What rights can be assigned despite a contract clause expressly prohibiting assignment?
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Learning Objectives • What is the difference between an assignment and a delegation? • What rights can be assigned despite a contract clause expressly prohibiting assignment? • What factors indicate that a third party beneficiary is an intended beneficiary?
Learning Objectives • How are most contracts discharged? • What is a contractual condition, and how might a condition affect contractual obligation?
Introduction • Privity of Contract: only original parties to a contract have rights and liabilities under the contract. • Exceptions: Assignments, Delegations, and Third party Beneficiary Contracts.
Assignments • Terminology. • Assignor: party assigning rights to third party. • Assignee: party receiving rights. • Obligee: person to whom a duty or obligation is owed. • Obligor: person who is obligated to perform the duty.
Assignments • Effect of An Assignment. • When rights of assignor are unconditionally assigned, her rights are extinguished. • The third party (assignee) has right to demand performance from original party to contract.
Assignments • Rights That Cannot be Assigned. • When a statute expressly prohibits an assignment. • When a contract is personal in nature. • CASE 11.1 Malone v. Flattery (2011). Why was Stanek’s right of first refusal “personal”? • When the Assignment will Significantly Change the Risk or Duties of the Obligor.
Assignments • Rights That Cannot be Assigned. • When the Contract Prohibits Assignment. • Exceptions: • Cannot prevent right to receive money. • Cannot prevent rights in land. • Negotiable instruments. • Damages in sales of goods.
Assignments • Rights That Cannot be Assigned. • Notice of Assignment. • Issues: same right assigned to two difference parties, or obligor discharges performance before receiving notice of assignment.
Delegations • Contractual duties in a bilateral contract that are delegated to a third party. • Terminology: • Delegator: party making the delegation of duty. • Delegatee: party to whom the duty is owed.
Delegations • Duties That Cannot Be Delegated: • When Duties are Personal in Nature (special trust). • When Performance by a Third Party Will Vary Materially From that Expected by the Obligee. • When Contract Prohibits Delegation.
Delegations • Effect of a Delegation. • Delegator remains liable, even after delegation. • Delegatee is liable if delegation contract creates a third party beneficiary relationship in the obligee. • “Assignment of All Rights.”
Third Party Beneficiaries • Second Exception to Privity of Contract. • Original parties to the contract intend at the time of contracting to directly benefit a third person, the “intended beneficiary” .
Third Party Beneficiaries • Intended Beneficiary: contract is made for the express purpose of promisor giving a gift to a third party (donee), the donee can sue the promisor directly if the promisor breaches the contract.
Third Party Beneficiaries • Types of Intended Beneficiaries. • Incidental : a third party beneficiary’s benefit from contract between two parties is unintentional. • Incidental beneficiary cannot sue to enforce the contract.
Third Party Beneficiaries • Types of Intended Beneficiaries. • Donee : a third party’s benefit is a gift. • Donee beneficiary has a right to sue the promisor directly to enforce the contract. • CASE 11.2 Allan v. Nersesova (2010). Why was the court wrong in holding the Koraev was an intended beneficiary?
Third Party Beneficiaries • When the Rights of an Intended Beneficiary Vest. • When the third party demonstrates express consent to the agreement, such as by sending a letter or note acknowledging awareness of, and consent to, a contract formed for her benefit.
Third Party Beneficiaries • When the Rights of an Intended Beneficiary Vest. • When the third party materially alters his or her position in detrimental reliance on the contract, such as when a donee beneficiary contracts to have a home built in reliance on the receipt of funds promised to him or her in a donee beneficiary contract.
Third Party Beneficiaries • When the Rights of an Intended Beneficiary Vest. • When the conditions for vesting are satisfied. For example, the rights of a beneficiary under r a life insurance policy vest when the insured person dies.
Third Party Beneficiaries • Intended vs. Incidental Beneficiaries. • 3P Intended Beneficiaries (Creditor and Donee) Original parties to K intend at the time of contracting that the contract performance directly benefit a 3rd party. After rights vest, 3P can sue for breach. • 3P Incidental Beneficiaries. Benefit is unintentional. 3P has no rights.
Contract Discharge • A party may be discharged from a valid contract by: • A condition occurring -- or not occurring. • Full performance or material breach by the other party. • Agreement of the parties. • Operation of law.
Contract Discharge • Conditions Precedent. • A possible future event, the occurrence or nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract. • CASE 10.2 Pack 2000, Inc. v. Cushman (2011). What should Pack have done differently?
Contract Discharge • Conditions Subsequent. • Condition that serves to terminate a party’s absolute promise to perform. • The condition follows the absolute duty to perform; if the condition occurs the party need not perform further.
Contract Discharge • Concurrent Conditions. • Each party’s duty to perform is conditioned upon the other party’s duty to perform. • Normally, these are simultaneous duties.
Contract Discharge • Discharge by Performance. • Tender: ready, willing, and able. • Complete Performance. • Parties perform exactly as agreed, or ‘perfect.’ • All conditions satisfied.
Contract Discharge • Discharge by Performance. • Substantial Performance. • Party in good faith performs substantially all of the terms, can enforce the contract. • Confers Most of the Benefits Promised: performance must not vary greatly from what was promised.
Contract Discharge • Discharge by Performance. • Substantial Performance. • But damages can be awarded. • Entitles the Other Party to Damages. • Measure of damages is cost to bring object of contract into compliance.
Contract Discharge • Discharge by Performance. • Performance to Satisfaction of Another. • Material Breach of Contract. • A material breach occurs when performance is not substantial, and nonbreaching party is excused from performance and entitled to damages.
Contract Discharge • Discharge by Performance. • Material Breach of Contract. • In a minor (non-material) breach, the duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.
Contract Discharge • Discharge by Performance. • Anticipatory Repudiation. Occurs when one party refuses to perform his contractual obligation, before performance is due. • Treated as a material breach, and nonbreaching party may sue for damages immediately, even though performance is not due.
Contract Discharge • Discharge by Performance. • Anticipatory Repudiation. • Notice by repudiating party may restore parties to original obligations. • Rational for Treating Repudiation as Breach. • Anticipatory Repudiation and Market Prices.
Contract Discharge • Discharge by Agreement. • Discharge by Mutual Rescission. • For an executory contract, parties must make a new contract, oral or written. Under UCC, contracts must be in writing. • If one party has performed, agreement to rescind must have additional consideration.
Contract Discharge • Discharge by Agreement. • Discharge by Novation: parties agree to substitute a third party for an original party. • Requirements: previous valid obligation, agreement by all parties, extinguishment of all old obligations, and new valid contract.
Contract Discharge • Discharge by Agreement. • Discharge by Accord and Satisfaction. • Accord: contract to perform existing contractual duty not yet discharged. • Satisfaction: performance of the accord.
Contract Discharge • Discharge by Operation of Law. • Material Alteration of The Contract: innocent party is discharged after material alteration. • Statutes of Limitations. • Bankruptcy: generally bars enforcement of non-exempt transactions.
Contract Discharge • Discharge by Operation of Law. • Objective Impossibility: the supervening event was not foreseeable: • Death or incapacitation in personal contract prior to performance, • Destruction of the subject matter; or • Change in law renders performance Illegal.
Contract Discharge • Discharge by Operation of Law. • Temporary Impossibility. • Commercial Impracticability. • Performance becomes extremely difficult or costly, and must not have been known by parties when contract made.
Contract Discharge • Discharge by Operation of Law. • Frustration of Purpose. • Supervening event make it impossible to attain purpose both parties had in mind. • Event must not have been reasonably foreseeable, and decreases value of what a party receives under contract.
