CHAPTER 16

Third Parties’ Contract Rights

Assignment of Contract

• Assignment = Rights Transferred by Assignor to Assignee– Can be done orally or in writing– Can be given away or sold

Assignment of Contract

• Assignee May:– Enforce Rights of Assignor– Enforce implied Guarantees Against Assignor– Be Liable for Duties with Assignment

• Example: The court said that since Roberts accepted the benefits of the contracts, he had to assume their burdens. The court said that when an entire contract is assigned, this will be interpreted as including a delegation of the assignor’s duties, absent a clear intent to the contrary. Radley v. Smith, 313 P.2d 465 (Sup. Ct. Utah 1957).

– Note: Assignee is also subject to the same defenses as the Assignor

Assignment of Contract

• Assignment – Question 4 at end of chapter.

• Yes. A covenant not to compete is generally assignable. Special Products acquired Douglas’ contracts through assignment when it acquired all of Page-Wilson’s contract rights. Douglas’ consent was not required. The intellectual property agreement specifically states that the agreement “inure[s] to the benefit of the successors and assigns of Page-Wilson.” The second agreement does not specifically forbid assignment. Executory contracts that do not involve exceptional personal skills on the part of the assignor and that the assignee can perform without adversely affecting the rights and interests of the adverse party are freely assignable unless there is a clear, unambiguous prohibition. There is also no statutory or public policy prohibition. Special Products can enforce the agreement. Special Products Manufacturing, Inc. v. Douglas, 552 N.Y.S.2d 506 (Sup. Ct. App. Div. N.Y. 1990).

Assignment of Contract

• Contracts Not Assignable– If Would Materially Alter Duties of Promisor– Contracts for Personal Rights/Services– Where Expressly Forbidden in Contract or by

Statute• Contra: Claremont Acquisition Corp. v. General

Motors Corp., p.272– A contract is found to be assignable despite a clause

prohibiting assignment without the consent of GM because the dealership was in bankruptcy and assignment was necessary to the sale of the assets.

– The general rule is that trustees can assign executory contracts so long as the assignee provides adequate assurance of future performance.

– Where Contrary to Public Policy

Assignment Relationships

ObligeeObligee ObligorObligorOriginal ContractOriginal Contract

AssignorAssignor

Duties Duties OwedOwed

AssigneeAssignee

Assignment of Assignment of RightsRights

Consequences of Assignment• Rights/Duties Assignees

– Assignor has duty to promptly notify the Promisor

– Priority of Assignees• American Rule - First in time• English Rule - First to give notice

– Implied Guarantees if Paid for, that:• Claim in valid• Good title/rights• No action to impair value• Written instruments representing are valid• Note: No warranty as to solvency of promisor

Consequences of Assignment• Delegation of Duties

– Delegation = Duties Transferred– May not be delegable if depends on special

skill, character or judgment of promisor– Not delegable if against public policy

• Question 6 at end of chapter• Blocher v. DeBartolo Properties Management, Inc.

– A general contractor was found not to have delegated its safety duties to its subcontractor even though the sub had agreed to abide by all safety regulations.

– This decision is consistent with courts’ general emphasis on safety and not excusing people from their duties of care regarding others simply by delegating the work to another.

Consequences of Assignment• Delegation of Duties

– Riegleman v. Kreig, p. 274• A patient was found to have delegated his duty to pay to his law

firm.The appeals court endorsed the trial court’s determination that the medical expenses were reasonable and necessary. It advised that rather than holding the disputed funds indefinitely, the law firm should have brought an action for declaratory judgment and sought guidance from the court as to who was entitled to the funds. As the court finds both Kreig and the law firm jointly and severally liable, this case illustrates the principle that the delegation of a duty does not extinguish the duty owed by the delegator.

Consequences of Assignment• Delegation of Duties

– Not delegable if against public policy• Question 7 at end of chapter.

– No. The payments on the second mortgage were in lieu of child support. Providing shelter is an important part of support and Ricky could not afford to both make mortgage payments and monetary payments. Thus, the mortgage payments were, in effect, child support payments. Public policy does not allow a parent to delegate his obligation to support his children to another party. The duty could not be delegated to Ostendorf, nor could the duty to pay under the second mortgage contract be discharged in bankruptcy. Ricky is still obligated to make the payments. In re LaShelle, 572 N.E. 2d 1190 (Ct. App. Ill. 1991).

Consequences of Assignment

• Promisor who delegates is still liable to the promisee unless new, separate release agreement (Novation).– Rosenberg v. Son, Inc., p.275

• The court finds that no novation was intended, and that the buyer of the Dairy Queen is still liable on the sale contract despite her sale of the facility to a third party.

• Pratt’s duty was unaffected by time; Merit paid the Rosenbergs for 6 years before defaulting.

• If the law did not hold delegating parties liable, they could escape liability simply by delegating to anyone, no matter how irresponsible he or she was.

• The duty to pay was unaffected by the Rosenbergs agreeing to the assignment.

• If the courts did not require good evidence of novation, parties could also easily escape their contractual duties by arguing novation. Having the ability to collect against either the original party to the contract or the assignee increases the chances that the promisor will not be harmed by the delegation.

Third-Party Beneficiaries• Intended - Can Enforce Rights

– Donee - promisee’s primary purpose to make a gift to

• Donee can recover value of• Promisee can recover damages

– Caba v. Barker, p. 276

» Residual beneficiaries of a will are held to be donee beneficiaries of the contract between the testator and her attorney to make the will invulnerable to contest. The beneficiaries also brought a legal malpractice claim, arguing that the attorney assumed a duty to make the will invulnerable and pleaded twelve specifications of negligence. The court explained that because under third-party analysis the contract creates a 'duty' not only to the promisee, the client, but also to the intended beneficiary, negligent nonperformance may give rise to a negligence action as well. Not every such contract will support either claim. Contrast this case with the Mortise case which appears later in the chapter.

Third-Party Beneficiaries• Intended - Can Enforce Rights

– Donee - promisee’s primary purpose to make a gift to

• Donee can recover value of• Promisee can recover damages

– Question 10 at end of chapter» Cherry v. Crow

» A deceased county jail inmate is held to be a donee beneficiary of the contract between the county and the company hired to provide health care services for the inmates.

» The estate sued on three theories: violation of Cherry’s civil rights, negligence, and breach of contract.

» Note: Members of the public are usual incidental beneficiaries of contracts entered into by the government to carry out normal governmental functions.

Third-Party Beneficiaries

• Intended - Can Enforce Rights– Creditor - Performance satisfies a legal duty

promisee owed to a third party• Question 8 at end of chapter.

– Yes. When a person sells his business or other property, and the buyer agrees to pay the seller’s debts, those to be paid are creditor beneficiaries. As such, they can sue the buyer if he does not pay the debts. Spiklevitz is a typical creditor beneficiary whom Markmill agreed to pay when it bought the Herons’s business. Spiklevitz v. Markmill Corp., 357 N.W.2d 721 (Ct. App. 1984).

– Once accepted and relied on, cannot cancel or modify without consent, unless contract gives right to do so (e.g. life insurance)

Third-Party Beneficiaries

• Incidental cannot enforce rights– Mortise v. United States, p.278

• All terrain vehicle riders who were assaulted by Army National Guardsmen during a field training exercise are deemed incidental beneficiaries of a contract between the Guard and the United States.

• The doctrine of sovereign immunity prevents suits against government unless expressly permitted. .

Third-Party Beneficiaries

• Determining intent– Performance directly to beneficiary?

• Question 9 at end of chapter.– Yes. The discussions Anderson had with Monahan identified

Warren as the beneficiary of the contract, and Warren’s subsequent dealings with Monahan clearly establish Warren as the intended beneficiary. Monahan breached the contract with Anderson when it failed to deliver a diamond ring, as promised. This breach deprived Warren of the benefit of owning a diamond ring, which was the purpose of the sale. She can sue for the breach. Warren v. Monahan Beaches Jewelry Center, Inc, 548 So.2d 870 (Fla. Ct. App. 1989).