Chapter 14 Notes- Third Party Rights and Discharge

Question 1

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.

Answer 1

Privity of Contract

Question 2

• Assignments
• Delegations
• Third party beneficiary contracts

Answer 2

Exceptions to Privity of Contract

Question 3

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)

Answer 3

Bilateral Contract

Question 4

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

Answer 4

Assignment

Question 5

• 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

Answer 5

Effect of an Assignment

Question 6

A party who transfers (assigns) his or her rights under a contract to another party (the asignee).

Answer 6

Assignor

Question 7

A party to whom the rights under a contract are transferred, or assigned.

Answer 7

Assignee

Question 8

One to whom an obligation is owed.

Answer 8

Obligee

Question 9

One who owes an obligation to another.

Answer 9

Obligor

Question 10

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.

Answer 10

Extinguishes the Rights of the Assignor

Question 11

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.

Answer 11

Assignee Takes Rights Subject to Defenses

Question 12

• 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

Answer 12

Rights that Cannot be Assigned

Question 13

If a statute expressly prohibits assignment, the right in question cannot be assigned.

Answer 13

When a Statute Expressly Prohibits Assignment

Question 14

When a contract is for personal services, the rights under the contract normally cannot be assigned unless all that remains is a monetary payment.

Answer 14

When a Contract is Personal in Nature

Question 15

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.

Answer 15

When an Assignment will Significantly Change the risk or Duties of the Obligor

Question 16

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.

Answer 16

When the Contract Prohibits Assignment

Question 17

1. A contract cannot prevent an assignment of the right to receive funds.
2. The assignment of ownership rights in real estate often cannot be prohibited
3. The assignment of negotiable instruments cannot be prohibited (checks and promissory notes).
4. 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.

Answer 17

Exceptions to the Rule that a Contract can Prohibit Assignments

Question 18

This exception exists to encourage the free flow of funds and credit in modern business settings.

Answer 18

A Contract Cannot Prohibit an Assignment of the Right to Receive Funds

Question 19

This is because such a prohibition is contrary to public policy in most states. Prohibitions of this kind are called restrains against alienation.

Answer 19

The Assignment of Ownership Rights in Real Estate Cannot be Prohibited.

Question 20

The transfer of title to real property (which “alienates” the real property from the former owner).

Answer 20

Alienation

Question 21

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.

Answer 21

Notice of Assignment

Question 22

1. Priority Issues
2. Potential for discharge by performance to the wrong party

Answer 22

Two Problems that Arise when Notice is not Given of Assignment

Question 23

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.

Answer 23

Priority Issues

Question 24

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.

Answer 24

Potential for Discharge by Performance to the Wrong Party

Question 25

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.

Answer 25

Delegation of Duties

Question 26

A party who transfers (delegates) her or his obligations under a contract to another pary (the delegatee).

Answer 26

Delegator

Question 27

A party to whom contractual obligations are transferred, or delegated.

Answer 27

Delegatee

Question 28

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.

Answer 28

Duties that Cannot be Delegated

Question 29

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).

Answer 29

When Duties are Personal in Nature

Question 30

Contractual duties cannot be delegated in this instance.

Answer 30

When Performance by a Third Party will Vary Materially from that Expected by the Obligee

Question 31

When the contract expressly prohibits delegation by including an antidelegation clause, the duties cannot be delegated.

Answer 31

When the Contract Prohibits Delegation

Question 32

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.

Answer 32

Effect of a Delegation

Question 33

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.

Answer 33

“Assignments of All Rights”

Question 34

One who is not a party to the contract but who stands to benefit from the contract’s performance.

Two types:

1. Intended beneficiaries
2. Incidental beneficiaries

Answer 34

Third Party Beneficiaries

Question 35

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.

Answer 35

Intended Beneficiary

Question 36

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.

Answer 36

Who is the Promisor?

Question 37

1. Creditor beneficiary
2. Donee beneficiary

Answer 37

Types of Intended Beneficiaries

Question 38

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.

Answer 38

Creditor Beneficiary

Question 39

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

Answer 39

Donee Beneficiary

Question 40

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.

Answer 40

When the rights of an Intended Beneficiary Vest

Question 41

The rights have taken effect and cannot be taken away.

Answer 41

Vested

Question 42

1. 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.
2. 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.
3. 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.

Answer 42

The Rights Vest when one of These Things Occurrs

Question 43

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.

Answer 43

Incidental Beneficiary

Question 44

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

Answer 44

Identifying Intended Versus Incidental Beneficiaries

Question 45

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?

Answer 45

Reasonable Person Test

Question 46

1. Performance is rendered directly to the third party
2. The third party has the right to control the details of performance.
3. The third party is expressly designated as a beneficiary in the contract.

Answer 46

Facotrs that Strongly Indicate that the Third Party is an Intended Beneficary of the Contract

Question 47

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

Answer 47

Discharge

Question 48

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

Answer 48

Performance

Question 49

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.

Answer 49

Absolute Promises

Question 50

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.

Answer 50

Condition

Question 51

1. Conditions precedent
2. Conditions subsequent
3. Concurrent conditions

Answer 51

Conditons of Performance

Question 52

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.

Answer 52

Conditions Precedent

Question 53

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.

Answer 53

Conditions Subsequent

Question 54

Conditions that must occur or be performed at the same time- they are mutually dependent. No obligations arise until these conditions are simultaneously performed.

Answer 54

Concurrent Conditions

Question 55

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

Answer 55

Discharge by Performance

Question 56

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.

Answer 56

Tender

Question 57

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).

Answer 57

Complete Performance

Question 58

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.

Answer 58

Substantial Performance

Question 59

1. The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract.
2. 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).
3. The performance must create substantially the same benefits as those promised in the contract.

Answer 59

Basic Requirements for Performance to Qualify as Substantial Performance

Question 60

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.

Answer 60

Effect of Substantial Performance on Duty to Perform

Question 61

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.

Answer 61

Measure of Damages with Substantial Performance

Question 62

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).

Answer 62

Performance to the Satisfaction of Another

Question 63

A contract to be performed to the satisfaction of one of the parties is conditioned, and performance must actually satisfy that party.

Answer 63

Personal Subject Matter

Question 64

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.

Answer 64

Reasonable Person

Question 65

The failure, without legal excuse, of a promisor to perform the obligations of a contract.

Answer 65

Breach of Contract

Question 66

Performance is not at least substantial.

Answer 66

Material

Question 67

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.

Answer 67

Material Breach of Contract

Question 68

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.

Answer 68

Minor Breach (Not Material)

Question 69

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

Answer 69

Anticipatory Repudation of a Contract

Question 70

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.

Answer 70

Repudiation is a Material Breach

Question 71

1. The nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract.
2. 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)

Answer 71

Two Reasons Repudiation is a Material Breach

Question 72

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.

Answer 72

Anticipatory Repuidation may Occur when Market Prices Fluctuate

Question 73

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

Answer 73

Discharge by Agreement

Question 74

Occurs when the parties cancel the contract and are returned to the positions they occupied prior to the contract’s formation.

Answer 74

Recission

Question 75

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

Answer 75

Discharge by Mutual Recission

Question 76

Generally are enforceable even if the original agreement was in writing.

Answer 76

Oral Agreements to Rescind Most Executory Contracts That Neither Party has Performed

Question 77

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.

Answer 77

Contract for the Sale of Goods

Question 78

These agreements to rescind must be evidenced in writing or record.

Answer 78

Contracts Involving Transfers of Reality

Question 79

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.

Answer 79

When one Party has Fully Performed

Question 80

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.

Answer 80

Discharge by Novation

Question 81

1. A previous valid obligation
2. An agreement by all of the parties to a new contract
3. The extinguishing of the old obligation (discharge of the prior party)
4. A new, valid contract

Answer 81

Requirements of Novation

Question 82

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.

Answer 82

Discharge by Accord and Satisfaction

Question 83

The parties agree to accept performance different from the performance originally promised.

Answer 83

Accord and Satisfaction

Question 84

A contract to perform some act to satisfy an existing contractual duty that has not yet been discharged.

Answer 84

Accord

Question 85

The performance of the accord agreement.

Answer 85

Satisfaction

Question 86

• Material alteration
• Statutes of limitations
• Bankruptcy
• Impossibility of Performance
• Commercial impracticability
• Frustration of purpose

Answer 86

Discharge by Operation of Law

Question 87

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.

Answer 87

Material Alteration

Question 88

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.

Answer 88

Statutes of Limitations

Question 89

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

Answer 89

Bankruptcy

Question 90

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.

Answer 90

Discharge in Bankruptcy

Question 91

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.

Answer 91

Impossibility of Performance

Question 92

Must be distinguished from subjective impossibility.

Answer 92

Objective impossibility

Question 93

1. When a party whose personal performance is essential to the completion of the contract dies or becomes incapacitated prior to performance.
2. When the specific subject matter of the contract is destroyed.
3. When a change in law renders performance illegal.

Answer 93

When Performance is Impossible- 3 Basic Situations that may Qualify for Impossibility of Performance

Question 94

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.

Answer 94

Temporary Impossibility

Question 95

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

Answer 95

Commercial Impracticability

Question 96

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

Answer 96

Frustration of Purpose