Contract Law: Rights of 3rd
Parties
3rd Party Rights Arise when…
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Contract has been assigned
Contract intended to benefit a third
person
Assignment of Contracts: Terms

Assignment: Transfer of a right
under a contract
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Obligor: Has duty to perform
Obligee: person to whom obligor
owes a duty; becomes Assignor
Assignee: person to whom right is
transferred
Delegation: Appointment of
another person to perform a duty
under a contract
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
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Traditional Common Law View
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Contracts not transferrable
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Debts were considered personal
Debtor subject to imprisonment;
viewed similar to theft
Land-based economy did not place
great importance on extension of credit
Emergence of industrial economy
changed the rules
Assignment Law
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
Common Law
Uniform Commercial Code

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Article 2 (Sales Contracts)
Article 9 (Security Interests)
Creating an Assignment
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Any way sufficient to show intent is
permissible
Some assignments must comply
with Statute of Frauds

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If security interest, must comply with
UCC Article 9
No consideration required
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
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Limitations on Assignment
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Contrary to public policy
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Adversely affects the obligor

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Materially changes obligor’s duties
Increases burden of risk on obligor
Involves Personal Relationship

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Assignment of future wages, lottery prizes
Personal skill, judgment, character
Original Contract Forbids Assignment
Assignment & the UCC

General language prohibiting
assignment [2-210(2)]


Interpreted as forbidding only the
delegation of duties, not a breach of
contract
Assignment of right to damages for
breach or right arising out of
assignor’s performance of entire
obligation may be assigned even if
contract prohibits it. [2-210]
Nature of Assignee’s Rights
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Steps into shoes of assignor
Has no greater rights than the
assignor
Assignee should promptly notify
obligor
Defenses

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Obligor may assert any defense or claim
he could have asserted against assignor
Assignee
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
3
Assignor’s Warranty Liability to
Assignee
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Assignor impliedly warrants that the claim
assigned is valid
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Obligor has capacity to contract
Contract is not illegal
Contract not voidable
Contract not discharged
Assignor also warrants

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Has good title to rights assigned
Written instrument representing the assigned
claim is genuine
Delegation of Duties: Terms

Delegation: obligor indicates
intent to appoint another person to
perform his/her duties


Delegator: person assigning rights
Delegatee: person assuming
obligation
Delegation of Duties

Delegation does NOT extinguish
duty owed by the delegator

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Delegator remains liable unless obligee
agrees to substitute the delegatee’s
promise, called a Novation
Performance by the delegatee
discharges the delegator
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
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Non-Delegable Duties
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Delegation would violate public policy
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Original contract forbids delegation
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Other party has substantial interest in
having original obligor perform the acts
required by contract [UCC 2-210(1) and
Restatement 2nd Contracts 318(2)]

Performance requiring individual traits, skill, or
judgment of the person who owes the duty
Assumption of Duties by Delegatee

Delegatee not liable unless assumed
the duty by expressly or impliedly
undertaking an obligation to
perform
Third Party Beneficiaries
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General Rule: no one but the
parties to a contract or their
assignees can enforce the K.
Exception

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Benefit to 3rd person is essential part of
the contract
Parties must intend to benefit a thrid
party
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
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Types of 3rd Party Beneficiaries
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Intended Beneficiaries

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Contract made with intent to benefit
the party
Incidental Beneficiary
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3rd party unable to establish contract
made for his/her benefit
Includes members of the public with
respect to government contracts
Types of Intended Beneficiaries
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Creditor Beneficiary
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promisor’s performance intended to satisfy
legal duty owes to 3rd party
Has rights against promisee and promissor
Donee Beneficiary
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Promisee’s purpose is to make gift to 3rd party
Donee Beneficiary has cause of action against
promissor but not against the promisee
Copyright © 2012. Thomas P. Langdon. All Rights Reserved.
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