Chapter 14 Notes- Third Party Rights and Discharge Flashcards
The relationship that exists between the promisor and the promisee of a contract.
- Establishes the basic principle that third parties hve no rights in contracts to which they are not parties.
Privity of Contract
- Assignments
- Delegations
- Third party beneficiary contracts
Exceptions to Privity of Contract
Two parties have corresponding rights and duties. One party has a right to require the other to perform some task, and the other has a duty to perform it.
- Sometimes a party will transfer his or her rights under the contract to someone else (assignment)
Bilateral Contract
The transfer to another of all or part of one’s rights arising under a contract.
- Often used for business transactions, lending institutions, mortgage loans
- Helps many businesses continue to operate
Assignment
- Can take any form-oral or written (advisible to put them all in writing, if covered by statutue of frauds- must be in writing).
- Contracts for assignment of wages must be in writing.
- Extinguishes the rights of the assignor
- Asignee takes rights subject to defenses
Effect of an Assignment
A party who transfers (assigns) his or her rights under a contract to another party (the asignee).
Assignor
A party to whom the rights under a contract are transferred, or assigned.
Assignee
One to whom an obligation is owed.
Obligee
One who owes an obligation to another.
Obligor
When rights under a contract are assigned unconditionally, the rights of the assignor are extinguished.
- The assignee has a right to demand performance from the other original party to the contract, the obligor.
Extinguishes the Rights of the Assignor
The asignee obtains only those rights that the assignor originally had.
- The asignee’s rights are subject to the defenses that the obligor has against the assignor.
Assignee Takes Rights Subject to Defenses
- When a statute expressly prohibits assignment
- When a contract is personal in nature
- When an assignment will significantly change the risk or duties of the obligor
- When the contract prohibits assignment
Rights that Cannot be Assigned
If a statute expressly prohibits assignment, the right in question cannot be assigned.
When a Statute Expressly Prohibits Assignment
When a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.
When a Contract is Personal in Nature
A right cannot be assigned if assignment will significantly alter the risks or the duties of the obligor.
- Example insurance- made specific for each place it ensures so it cannot be assigned because it would alter the insurance policy significantly.
When an Assignment will Significantly Change the risk or Duties of the Obligor
If a contract stipulates that the right cannot be assigned, then ordinarily it cannot be assigned. This restraint operates only against the parties themselves. It does not prohibit an assignment by operation of law, such as an assignment pursuant to bankruptcy or death.
- Whether an antiassignment clause is effective depends, in part, on how it is phrased. A contract that states that any assignment is void effectively prohibits any assignment.
When the Contract Prohibits Assignment
- A contract cannot prevent an assignment of the right to receive funds.
- The assignment of ownership rights in real estate often cannot be prohibited
- The assignment of negotiable instruments cannot be prohibited (checks and promissory notes).
- In a contract for the sale of goods, the right to, the right to receive damages for breach of contract or payment on an account may be assigned even though the sales contract prohibits such an assignment.
Exceptions to the Rule that a Contract can Prohibit Assignments
This exception exists to encourage the free flow of funds and credit in modern business settings.
A Contract Cannot Prohibit an Assignment of the Right to Receive Funds
This is because such a prohibition is contrary to public policy in most states. Prohibitions of this kind are called restrains against alienation.
The Assignment of Ownership Rights in Real Estate Cannot be Prohibited.
The transfer of title to real property (which “alienates” the real property from the former owner).
Alienation
Once a Valid Assignment of Rights has been made to a third party, the third party should notify the obligor of the assignment.
- Giving notice is legally necessary to establish the validity of the assignment because an assignment is effective immediately, whether or not notice is given.
Notice of Assignment
- Priority Issues
- Potential for discharge by performance to the wrong party
Two Problems that Arise when Notice is not Given of Assignment
If the assignor assigns the same right to two different persons, the question arises to which one hs priority- that is, which one has the right to the performance by the obligor.
- Most often in the US- The first assignment in time is the first in right.
- Some States- English Rule- Gives priority to the first assignee who gives notice.
Priority Issues
Until the obligor has notice of an assignment, the obligor can discharge his or her obligation by performance to the assignor, and this performance constitutes a discharge to the assignee.
- Once the obligor receives proper notice, only performance to the assignee can discharge the obligor’s obligations.
Potential for Discharge by Performance to the Wrong Party
The transfer to another of a contractual duty.
- Normally does not relieve the party making the delegation of the obligation to perform in the event that the party to whom the duty has been delegated fails to perform.
- No special formis required
- As long as the dlegator expresses an intention to make the delegation, it is effective.
- The delegator need not even use the word delegate.
Delegation of Duties
A party who transfers (delegates) her or his obligations under a contract to another pary (the delegatee).
Delegator
A party to whom contractual obligations are transferred, or delegated.
Delegatee
As a general rule, any duty can be delegated, these are the exceptions:
- When performance depends on the personal skill or talents of the obligor.
- When special trust has been placed on the obligor.
- When performance by a third party will vary materially from that expected by the obligor.
- When the contract expressly prohibits delegation.
Duties that Cannot be Delegated
When special trust has been placed in the obligor or when performance depends on the obligor’s personal skill or talents, contractual duties cannot be delegated.
- Nonpersonal duties may be delegated (routine and nonpersonal in nature).
When Duties are Personal in Nature
Contractual duties cannot be delegated in this instance.
When Performance by a Third Party will Vary Materially from that Expected by the Obligee
When the contract expressly prohibits delegation by including an antidelegation clause, the duties cannot be delegated.
When the Contract Prohibits Delegation
If delegation of duties is enforceable, the obligee (the one to whom performance is owed) must accept performance from the delegatee (the one to whom the duties are delegated).
- A valid delegation of duties does not relieve the delegator of obligations under the contract. Although there are many exceptions, the general rule today is that the obligee can sue both the delegatee and the delegator for failure to perform.
Effect of a Delegation
This wording may create both an assignment of rights and a delegation of duties.
- Occurrs when general wording is used- a court will normally construe such words as implying both an assignment of rights and a delegation of any duties of performance.
- The assignor remains liable if the assignee fails to perform the contractual obligations.
“Assignments of All Rights”
One who is not a party to the contract but who stands to benefit from the contract’s performance.
Two types:
- Intended beneficiaries
- Incidental beneficiaries
Third Party Beneficiaries
A third party for whose benefit a contract is formed. Can use the promisor if the contract is breached.
- This is the only kind of third party beneficiary that has legal rights in the contract.
Intended Beneficiary
In third party beneficiary contracts, courts determine the identity of the promisor by asking which party made the promise that benefits the third party. (this person is the promisor).
- Allowing the third party to sue the promisor directly circumvents the “middle person” and thus reduces the burden on the courts. (would otherwise sue the promisee who would sue the promisor). The reason was that the third party beneficiary was not a party to the contract, and thus, under the doctrine of privity of contract, had no legal rights under the contract.
Who is the Promisor?
- Creditor beneficiary
- Donee beneficiary
Types of Intended Beneficiaries
Benefits from a contract in which one party (the promisor) promises another party (the promisee) to perform a duty that the promisee owes to a third party (the creditor beneficiary).
- Can sue the promisor directly to enforce the contract.
Creditor Beneficiary
When a contract is made for the express purpose of giving a gift to a third party, the third party is one of these.
- Can sue the promisor directly to enforce the promise.
- Most common example- Life insurance contract
Donee Beneficiary
An intended third party beneficiary cannot enforce a contract against the original parties until the third party’s rights have vested.
- Until these rights have vested, the original parties to the contract (promisor and promisee) can modify and rescind the contract without the consent of the third party.
When the rights of an Intended Beneficiary Vest
The rights have taken effect and cannot be taken away.
Vested
- When the third party demonstrates express consent to the agreement, such as by sending a letter, a note, or an e-mail acknowledging awareness of, and consent to, contract formed for her or his benefit.
- 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 recepit of funds promised to him or her in a donee beneficiary contract.
- When the conditions for vesting are satisfied. For instance, the rights of a beneficiary under a life insurance policy vest when the insured person dies.
The Rights Vest when one of These Things Occurrs
A third party who benefits from a contract even though the contract was not formed for that purpose. Has no rights in the contract and cannot sue to have it enforced.
Incidental Beneficiary
The courts focus on the parties’ intent, as expressed in the contract language and implied by the surrounding circumstances.
- Often apply the reasonable person test
- Factors to help determine
Identifying Intended Versus Incidental Beneficiaries
Would a reasonable person in the position of the beneficiary believe thatthe promisee intended to confer on the beneficiary the right to enforce the contract?
Reasonable Person Test
- Performance is rendered directly to the third party
- The third party has the right to control the details of performance.
- The third party is expressly designated as a beneficiary in the contract.
Facotrs that Strongly Indicate that the Third Party is an Intended Beneficary of the Contract
The termination of an obligation, such as occurs when the parties to a contract have fully performed their contractual obligations.
- By performance
- By agreement of the parties
- By operation of law
Discharge
The fulfillment of one’s duties under a contract- the normal way of discharging one’s contractual obligations.
- Duty can be conditioned on the occurrence or nonoccurrence of a certain event
- Duty can be absolute
Performance
In most contracts, promises of performance are not expressly conditioned or qualified. Instead they are these. They must be performed, or the party making the promise will be in breach of contract.
Absolute Promises
A qualification, provision, or clause in a contractual agreement, the occurrence or nonoccurrence of which creates, suspends, or terminates the obligations of the contracting parties.
- If these are not satisfied, the obligations of the parties are discharged.
Condition
- Conditions precedent
- Conditions subsequent
- Concurrent conditions
Conditons of Performance
A condition in a contract that must be met before a party’s promise becomes absolute.
- Precedes the absolute duty to perform.
- Many contracts are conditioned on an independent appraisal of value.
Conditions Precedent
A condition in a contract that, if it occurs, operates to terminate a party’s absolute promise to perform.
- Follows, or is subsequent to, the absolute duty to perform.
- If the condition occurs, the party need not perform any further.
Conditions Subsequent
Conditions that must occur or be performed at the same time- they are mutually dependent. No obligations arise until these conditions are simultaneously performed.
Concurrent Conditions
The contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised.
- Performance can also be accomplished by tender
- Complete performance
- Substantial performance
- Performance to the satisfaction of another
- Material breach of contract
- Anticipatory repuidation of a contract
Discharge by Performance
An unconditional offer to perform an obligation by a person who is ready, willing, and able to do so.
- Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract.
- If the other party refuses to perform, the party making the tender can consider the duty discharged and sue for breach of contract.
Tender
When a party performs exactly as agreed, there is no question as to whether the contract has been performed.
- When the party’s performance is perfect, it is said to be complete.
- Normally, conditions expressly stated in the contract must fully occur in all aspects for complete performance (strict performance) of the contract to take place.
- Any deviation breaches the contract and discharges the other party’s obligations to perform. (material breach, did not expressly make the specifications a condition).
Complete Performance
A party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under this doctrine.
- Good faith is required
- Intentional failing is breach
- Courts decide whether a performance is this based on a case-by-case basis, examining all of the facts in a particular situation.
Substantial Performance
- The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract.
- The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages).
- The performance must create substantially the same benefits as those promised in the contract.
Basic Requirements for Performance to Qualify as Substantial Performance
If one party’s performance is substantial, the other party’s duty to perform remains absolute. (The party can, however, sue for damages due to the minor deviations).
- The parties must continue performing under the contract.
- If performance is not substantial, there is a material breach and the nonbreaching party is excused from further performance.
Effect of Substantial Performance on Duty to Perform
Because substantial performance is not perfect, the other party is entitled to damages to compensate for the failure to comply with the contract.
- Measure of damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable under the circumstances.
- If cost is unreasonable, the damages is the difference in value between the performance that was rendered and the performance that would have been rendered if the contract had been performed completely.
Measure of Damages with Substantial Performance
Contracts often state that completed work must personally satisfy one of the parties or a third person.
Question is:
- Whether the satisfaction becomes a condition precedent (requiring actual personal satisfaction or approval for discharge)
- Whether the test of satisfaction is performance that would satisfy a reasonable person (substantial performance).
Performance to the Satisfaction of Another
A contract to be performed to the satisfaction of one of the parties is conditioned, and performance must actually satisfy that party.
Personal Subject Matter
Most other contracts need be performed only to the satisfaction to a reasonable person unless they expressly state otherwise.
- When such contracts require performance to the satisfaction of a third party- courts are divided
- Personal judgement must be made honestly, or the condition will be excused.
Reasonable Person
The failure, without legal excuse, of a promisor to perform the obligations of a contract.
Breach of Contract
Performance is not at least substantial.
Material
The nonbreaching party is excused from the performance of contractual duties and can sue for damages caused by the breach.
- Only this breach (not minor) discharges the nonbreaching party from the contract.
- Contracts should be terminated if major problems arise.
Material Breach of Contract
The nonbreaching party’s duty to perform may sometimes be suspended until the breach is remedied, but the duty is not entirely excused.
- Once this is cured (corrected), the nonbreaching party must resume performance of the contractual obligations.
Minor Breach (Not Material)
An assertion or action by a party indicating that he or she will not perform a contractual obligation.
- Before either party to a contract has a duty to perform.
- Repudiation is a material breach
- May occur when market prices fluctuate
Anticipatory Repudation of a Contract
When anticipatory repuidation occurs, it is treated as a material breach of the contract, and the nonbreaching party is permitted to bring an action for damages immediately, even though the scheduled tiem for performance under the contract may still be in the future.
- Until the nonbreaching party treats this early repudiation as a breach, however, the breaching party can retract the anticipatory repuidation by proper notice and restore the parties to their original obligations.
Repudiation is a Material Breach
- The nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract.
- The nonbreaching party should have the opportunity to seek a similar contract elsewhere. (may have a duty to do so to minimize his or her loss)
Two Reasons Repudiation is a Material Breach
An anticipatory repudiation occurs when performance of a contract would be extremely unfavorable to one of the parties because of a sharp fluctuation in market prices.
Anticipatory Repuidation may Occur when Market Prices Fluctuate
Any contract can be discharged by agreement of the parties. The agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract.
- Discharge by mutual recission
- Discarge by novation
- Discharge by accord and satisfaction
Discharge by Agreement
Occurs when the parties cancel the contract and are returned to the positions they occupied prior to the contract’s formation.
Recission
The parties must make another agreement that also satisfies the legal requirements for a contract for this to take place. (There must be an offer, acceptance, and consideration). If parties agree to recind the original contract, their promises not to perform those acts promised in the original contract will be legal consideration for the second contract.
- Can be oral or written
Discharge by Mutual Recission
Generally are enforceable even if the original agreement was in writing.
Oral Agreements to Rescind Most Executory Contracts That Neither Party has Performed
A writing or electronic record is required to rescind this kind of contract under the Uniform Commercial Code when the contract requires a written recission.
Contract for the Sale of Goods
These agreements to rescind must be evidenced in writing or record.
Contracts Involving Transfers of Reality
An agreement to rescind the original contract usually is not enforceable unless additional consideration or restitution is made.
- Because the performing party was received no consideration for the promise to call of the original bargain, additional consideration is necessary.
When one Party has Fully Performed
The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated.
- Substitutes a third party for one of the original parties.
- Expressly or impliedly revokes and discharges a prior contract
- Parties involved must expressly state in the contract
- If not expressly stated, it will be impledly discharged if the new contract’s terms are inconsistent with the old contract’s terms.
Discharge by Novation
- A previous valid obligation
- An agreement by all of the parties to a new contract
- The extinguishing of the old obligation (discharge of the prior party)
- A new, valid contract
Requirements of Novation
Once the accord has been made, the original obligation is merely suspended until the accord agreement is fully performed.
- If it is not performed, the party to whom performance is owed can bring an action on the original obligaton or for a breach of the accord.
Discharge by Accord and Satisfaction
The parties agree to accept performance different from the performance originally promised.
Accord and Satisfaction
A contract to perform some act to satisfy an existing contractual duty that has not yet been discharged.
Accord
The performance of the accord agreement.
Satisfaction
- Material alteration
- Statutes of limitations
- Bankruptcy
- Impossibility of Performance
- Commercial impracticability
- Frustration of purpose
Discharge by Operation of Law
To discourage parties from altering written contracts, the law allows an innocent party to be discharged from a contract that has been materially altered.
- If only person alters a material term of contract without the knowledge or consent of the other party, the party who was unaware of the alteration can treat the contract as discharged or terminated.
Material Alteration
Limit the period during which a party can sue on a particular cause of action. After the applicable limitatons have passed, a suit can no longer be brought.
- Usually two to three years for oral contracts
- Usually four to five years for written contracts
- Lawsuits for breach for the sale of goods must be brought within four years after the cause of action has accrued. (parties can agree under their original contract to bring this down to not less than one year) they cannot agree to extend it past four years.
Statutes of Limitations
A proceeding in bankruptcy attempts to allocate the debtor’s assets to the creditors in a fair and equitable fashion.
- After assets are allocated- debtor receives a discharge in bankruptcy
Bankruptcy
Ordinarily prevents the creditors from enforcing most of the debtor’s contracts.
- Partial payment of debt after discharge in bankruptcy will not revive the debt.
Discharge in Bankruptcy
A doctrine under which a party to a contract is relieved of his or her duty to perform when performance becomes objectively impossible or totally impracticable.
- Applied when parties could not have reasonably foreseen, at the time the contract was formed, the event or events that rendered performance impossible.
Impossibility of Performance
Must be distinguished from subjective impossibility.
Objective impossibility
- When a party whose personal performance is essential to the completion of the contract dies or becomes incapacitated prior to performance.
- When the specific subject matter of the contract is destroyed.
- When a change in law renders performance illegal.
When Performance is Impossible- 3 Basic Situations that may Qualify for Impossibility of Performance
The occurrence of the event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases.
- Once the temporary event ends, the parties ordinarily must perfrom the contract as originally planned.
- Sometimes the lapse of time and change in circumstances surrounding such a contract make it substantially more burdensome for the parties to perform the promised acts. In this situation, the contract may be discharged.
Temporary Impossibility
Courts may excuse parties from their performance obligations when the performance becomes much more difficult or expensive than the parties originally comtemplated.
- Must be extremely difficult or costly
- Must not have been foreseeable by the parties when the contract was made
Commercial Impracticability
A court-created doctrine under which a party to a contract will be relieved of her or his duty to perform when the objective purpose for performance no longer exists due to reasons beyond that party’s control.
- Must not have been foreseeable
- Typically involves an event that deceases the value of what a party receives under the contract
Frustration of Purpose
