10. CONTRACTS: Rights and Duties of 3rd Parties

There are two basic categories of intended beneficiaries who may sue on the contract:

creditor beneficiary -- promisee's purpose in extracting promise was to discharge an obligation owed to the third party

donee beneficiary -- promisee's purpose in extracting the promise was to confer a gift on the third party

• An intended beneficiary can enforce a contract right only after his rights have vested. Rights have vested when the beneficiary:
• (1) manifests assent to the promise in a manner invited or requested by the parties;
• (2) brings suit to enforce the promise; or
• (3) materially changes position in justifiable reliance on the promise.

Before the intended beneficiary's rights vest, the promisor and promisee are free to modify their contract without consulting the third party; after vesting, third party must consent.

If the promisor fails to perform, the third party beneficiary may sue the promisor on the contract, subject to defenses as follows:

promisors defenses against promisee --> because beneficiary's rights are derivative, the promisor may raise any defense against the beneficiary that he would against the promisee, including: lack of assent, lack of consideration, illegality, impossibility, and failure of condition

A donee generally may not sue the promisee because there is no right to sue for nondelivery of a gift.

If promisee tells the donee of the contract and should foresee reliance by beneficiary, and beneficiary reaonably relies to her detriment, she can sue the promisee directly under a promissory estoppel/detrimental reliance theory.

Creditor beneficiary can sue promisee on underlying obligation. She may sue both the promisor and the promisee.

General rule is that all rights may be assigned, but the following are exceptions:

• (1) Where assigning rights would substantially change obligor's duty, assignment is barred.
• --> personal service contracts -- where obligor is performing unique personal services (doctor, lawyer, etc), cannot assign them to different recipient
• --> can only assign outputs/requirements contracts if outputs/requirements quantity will stay similar

(2) When the obligor's risk would be substantially altered by any attempted assignement, assignment barred.

(3) An assignment of a right expected to arise under a contract of employment not then existing operates only as a promise to assign the right when it arises.

(4) A clause prohibiting the assignment of the contract will be construed as barring only the delegation of the assignor's duties.

• (5) A clause prohibiting the assignment of contractual rights generally does not bar assignment, but merely gives obligor the right to sue for breach if an assignment is made.
• --> However, if the clause states that any attempt to assign will be void, assignment will be ineffective.

• **A writing is usually not required, so an oral assignment is generally effective. However, a writing is required for:
• -- wage assignments;
• -- assignments of an interest in land;
• -- assignments of choses in action worth more than $5,000; and
• -- assignments intended as security interests under art 9 of the UCC

** The right being assigned must be adequately described.

** The assignor must also manifest an intent to transfer his rights under the contract completely and immediately to the assignee.

** Consideration is not required; a gratuitous assignement is effective.

If an assignment has been given for consideration, it is irrevocable.

• A gratuitous assignment is generally revocable unless:
• -- the obligor has already performed;
• -- if a token chose (tangible claim) involving the rights to be assigned (ie, stock certificates, bank book) has been delivered;
• -- if the assignment involves a simple chose, ie, an intangible claim not embodied by an token, setting it forth in a writing will make the assignment irrevocable;
• -- the theory of estoppel may prevent the assignor from revoking if: (1) he should reasonably foresee that the assignee will change her position in reliance on the assignment; and (2) such detrimental reliance does in fact occur.

• A gratuitous revocable assignement may be terminated in a number of ways:
• -- death of the assignor;
• -- bankruptcy of the assignor;
• -- notice of revocation communicated by the assignor to either the assignee or obligor; or
• -- subsequent assignment of the same right by the assignor to another.

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and assignor. The assignee then replaces the assignor as the real party in interest and she alone is entitled to performance under the contract.

The effect of irrevocability is to remove from the assignor the right to revoke or make a subsequent assignment of the same right to a 3rd party. However, even though assignor no longer has the right, he still has the power to do so, but would be liable for breach. (If there has been delivery of a token chose, assignor loses right and power to revoke or further assign.)

The assignor is deemed to give several implied warranties to the assignee:

(1) warranty not to defeat assigned right -- if the assignment is irrevocable, the assignee has the right to enforce the obligation and may proceed against the assignor if he wrongfully exercises his power to revoke

(2) warranty that right is not subject to defenses -- the assignee may also have a cause of action against the assignor where the obligor successfully asserts the defense she had against the assignor -- this is so only if the assignee was without notice of the defense at the time of the assignment

Sub-assignees do not have any rights against the original assignor, the courts reason that there is no privity of contract, the assignee that subassigns becomes assignor and can be held liable.

If the first assignment made is revocable, a second assignment serves to revoke it, so later assignee prevails.

• If the first is irrevocable, the first assignee has priority, except in the following situations when a second assignee who pays value and takes without notice of the earlier irrevocable assignment will prevail:
• (1) if the subsequent assignee gets the first judgment against the obligor;
• (2) if the later assignee gets first payment from the obligor on the assigned claim;
• (3) if subsequent assignee gets first delivery of a token chose from assignor;
• (4) if the second assignee obtains a novation that supersedes the obligation running to the assignor in favor of the new one running to her (assumes the obligor had no knowledge of the prior assignment at the time of the novation);
• (5) if the subsequent assignee is able to set up an estoppel against the first assignee, she will have priority (this could operate in either direction, though)

Under the UCC, assignee who is first to file prevails.

As a general rule, all contractual duties may be delegated to a third party. The exceptions:

(1) If duties involve personal judgment and skill, they may not be delegated.

(2) Where a special trust has been reposed in the delegator, he may not delegate.

(3) If performance by the delegate will materially change the obligee's expectancy under the contract, the duty may not be delegated.

(4) If there is a clause restricting either party's right to delegate duties, such a provision will usually be given strict effect.

No special formalities are required to have a valid delegation -- may be written or oral, but delegator must manifest a present intention to make the delegation.

The delegator will remain liable on the contract, even if the delgate expressly assumes the duties. However, if the obligee expressly consents to this transfer of duties, it could be construed as an offer of novation.

The liability of a delegate turns on the Q of whether there is a mere delegation or that plus an assumption of duty.

Delegation is the creation of a power in another to perform the delegator's contract duty. The nondelegating party to the contract (the obligee) cannot compel the delegate to perform, as the latter has not promised to perform.

An assumption occurs when the delegate promises that she will perform the duty delegated and the promise is supported by consideration or its equivalent. This creates a 3rd party beneficiary situation in which the nondelegating party can compel or bring suit for nonperformance.