BLAW W6

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Chapter 14
Operation of Contracts

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Contracts Involving Third Parties

• Normally only the two parties to a contract have rights and duties under it.
• Two important exceptions to this rule are:
• When the purpose of a contract is to benefit a third party.
• When rights or duties that arise from a contract are legally transferred to a third party.

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Rights of Third Parties

• Third parties to a contract: Those who are in some way affected by it but who are not one of the parties to the contract.
• Two ways in which third parties can be affected by a contract:
• Third-party beneficiaries, or
• Incidental beneficiaries.

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Third-Party Beneficiaries and Incidental Beneficiaries

• Third-party beneficiary to a contract: Has a legal right to the benefits resulting from the contract only if it is the intent of the contracting parties to benefit the third party.
• Example: A life insurance policy

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Third-Party Beneficiaries and Incidental Beneficiaries C9ont.)

• Incidental beneficiary: One who may benefit as an indirect consequence of a contract, although that was not the intent of the contracting parties.
• Example: A restaurant owner who would have incidentally benefited because of a new development project which was adjacent to her business.

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Assignment of Rights

• Assignment: Change of contract where the law permits a party to a contract to assign rights, to transfer them to a third party and permit the third party to receive the benefits of the contract.
• A party may transfer his or her rights by assignment
• Assignor: The person who transfers his or her rights.
• Assignee: The third party to whom the rights are transferred.

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Delegation of Duties

• Delegation: The appointment of a third party to an existing contract to perform contractual duties.
• A person can delegate his or her duties by delegation, subject to several restraints.
• A person who agrees in a contract to perform a particular task may generally delegate this task to someone else but is still responsible for getting it done.

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Example: Assignment of Rights

• Facts:
• Higgins agreed to conduct a workshop for Randall for $1,200.
• Before conducting the workshop, Higgins assigned his right to the $1,200 to the Holiday Villa Motel, whom he owed $1,500.
• When the workshop was finished, Randall paid the $1,200 to Holiday Villa instead of to Higgins.
• Higgins is the assignor and Holiday Villa is the assignee.

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Form and Notice of Assignment

• An assignment may be either written or oral.
• However, if the original contract is required to be in writing under the Statute of Frauds, the assignment also must be in writing.
• Important assignments should be in writing, whether or not required by the Statute of Frauds.
• A party to a contract will not be obligated by an assignment made by the other party without his or her knowledge until notified.

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Rights That May Be Transferred

• Most rights are assignable, except in cases in which the obligations of the parties would be significantly altered.
• Usually contracts for personal services are neither assignable nor delegable.

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The Assignor’s Guaranty

• Guarantor: The assignor of a contract right; one who guarantees the promises assigned.
• The Uniform Commercial Code (UCC) states, “No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.”

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Contracts That May Not Be Assigned

• Three types of contracts may not be assigned:
• Contracts that include assignment restrictions.
• Contracts for which assignments are prohibited by law or public policy.
• Contracts that require personal services.

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Contracts That May Not Be Assigned (cont.)

• Contracts that Include assignment restrictions.
• When parties to a contract include in the contract itself a specific provision forbidding assignment, both parties are prevented from assigning their rights or delegating their duties.

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Contracts That May Not Be Assigned (cont.)

• Contracts for which assignments are prohibited by law or public policy.
• Example: Members of the armed services are prohibited from assigning their pay, and many state and local governments prohibit the assignment of salaries of public officials.

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Contracts That May Not Be Assigned (cont.)

• Contracts that require personal services.
• Personal-service contract: One in which services that require a unique skill, talent, and/or ability provided by a specific person.
• In such a case, the party who hires the specific person to perform certain duties has a substantial interest in having only the hired person perform.
• Personal-service contracts may not be assigned.

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Example: Contracts That Require Personal Services

• Facts:
• Janik hired Papandreau, an inspirational speaker, to address her salespeople.
• Papandreau canceled her appearance but offered to send her brother to speak in her place.
• Janik refused the offer, claiming that Papandreau was well known and the salespeople were expecting her unique inspirational message.
• Should this case reach a courtroom, a court would find in favor of Janik.

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Delegation of Duties

• Delegation of Duties: A party’s duties can be transferred to a third party if the duties do not involve unique skills or abilities.
• Employment contracts may be assigned if there is no relationship of trust or confidence, or any other circumstance that would create a materially greater burden on the party whose services are being assigned.

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Assignment and Delegation by Law

• Rights or duties under a contract are assigned to the administrator or executor of the estate.
• All rights to the collection of money, to demands for performance, and to the sale or purchase of real or personal property are assigned by law immediately upon the party’s death.

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Essentials of Business Law

Assignment and Delegation by Law (cont.)

• Bankruptcy of a Contracting Party:
• The laws dealing with bankruptcy provide that the assets and contracts of a bankrupt (person or business be assigned to the trustee in bankruptcy.
• The trustee is then empowered to sell the assets and exercise contract rights for the benefit of the creditors of the bankrupt person or firm.

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Novation

• When all parties to a contract agree to a significant change in the contract, the change is called a novation.
• Such a change creates a new contract.
• A novation differs from an assignment in the following ways:
• A novation requires mutual consent of all parties (the original parties to the agreement and any new third parties) just as does a new contract.
• A novation transfers all rights and obligations in a contract.

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Novation

• Novation example :
• Fortesi and Yellen enter into a contract in which Fortesi agrees to build a garage on Yellen’s property.
• Later they and Zink agree that Zink will perform Fortesi’s obligations, with Yellen expressly releasing Fortesi from the original contract.
• This is a novation, and Fortesi’s obligations are now discharged.

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