Chapter 17 Third Persons And Contracts Flashcards
Third -party beneficiary
Third person whom the parties to a contract intend to benefit by the making of the contract and to confer upon such person the right to sue for breach of contract
Creditor beneficiary
Type of third-party beneficiary
When the promisee’s primary intent is to discharge a duty owed to their third party
Donee beneficiary
Type of third-party beneficiary
Person to whom the promisee’s primary intent in contracting is to give a benefit
(Life insurance contract)
Prudential insurance v Durante
- Dr. Garcia had a life insurance policy with Prudential
- after the death of his first wife he later remarried and completed and filed a change of beneficiary form designating his new wife to receive 50% benefit (rest to children)
- policy term says if Prudential received a change of beneficiary ready it would record it and file it effect date it was signed
- Garcia died but the COB form had not been accepted/recorded due to ambiguity in contingent beneficiaries
- original judgement for new wife. Prudential appealed. Appeal judgement for new wife
- beneficiary has right to sue of interest vested (life insurance = person died). Right of owner to change beneficiaries was clearly defined
Intent to create a third party beneficiary
Third party has no status in the contract unless it is clear at the time the contract was formed that the parties intended to impose a direct obligation with respect to the third party
- Surrounding circumstance may be examined
- presumption is that all parties intend to only benefit themselves
Copeland v. Admiral pest control
- guest at a motel sued the pest control company hotel had extermination contract with when she was bitten by a spider
- claims third-party beneficiary
- judgement against Copeland. Intent of the contract was for the motel to protect itself. Guests were only incidental beneficiaries with no right to sue for breach
Identification of third party beneficiary
Not necessary to identify by name. May be identified by class (any member of that class becomes third party beneficiary)
Modification or termination of third-party benefit contract
Only if contact contains express provision allowing for the change of beneficiary or cancellation of contract without consent of the intended third party beneficiary
Right of the beneficiary also destroyed if contract is discharged or ended by operation of law
Limitations on third party beneficiary
Contract gives beneficiary no more rights than provided for in the contract. Beneficiary must take the contract as-is and is bound by the conditions in order to receive the benefits
If contract is non -binding third-party beneficiary may not be able to sue on contract
Incidental beneficiaries
People who benefit from a contract but the benefit was not intended by the parties to the contract
A matter of determining if a reasonable person would believe the promise intended to confirm on the beneficiary an enforceable benefit under the contract
Clear and definite intent in the contract or the circumstances surrounding the contract
Union Pacific railroad v. Novus international
- novus tried to sue union Pacific on the basis of breach of UP’s rail contract with carbide (who supplied chemicals to novus)
- judgement for UP
- novus not mentioned in the contract and no intention to confirm benefit to carbide’s customers mentioned. Novus is an incidental beneficiary, not third-party
Assignment
Transfer of a right; generally used in connection with personal property rights, as rights under a contractor, commercial paper, an insurance policy, a mortgage, or a lease
In contract law: transfer of contractual rights to a third party
Parties: assignor and assignee
Generally done to raise money - factoring of receivables. May also assign claims and causes of action
Obligor
Party owing a duty or a debt under the contract. Promisor
Debtor when buyer on credit
Obligee
Party to whom the obligation is owed - promisee who can claim the benefit of the obligation
Assignor
Party who assigns contract rights to a third party
Assignee
Third party to whom contract benefits are transferred
Form of assignment
Generally any words written or spoken that show an intention to transfer or assign
Some statutes may require certain assignments to be executed in a certain form (ex: written)
Notice of assignment
Assignee should give immediate notice of assignment to obligor, setting forth the obligor’s duty to the assignee
If the obligor receives this notification in any manner the obligation can now only be a discharged to the assignee (not original obligee)
Obligor’s consent to the assignment is irrelevant
Failure to give notice of assignment
If obligor is not notified any fulfillment of obligation to the assignor/obligee reduces/cancels that portion of obligation
remedy then for assignee to sue assignor for recovery of obligation due them
UCC protects consumer-debtors making payments to assignor without knowledge of assignment. Penalty on a contract term that would destroy this protection.
Credit general insurance co. V. NationsBank
- contractor held a CD from NationsBank.
- Contractor assigned the CD to Credit General to secure performance/payment bonds on a project
- Credit General notified NationsBank who recorded the assignment
- BUT when the CD matured and the contractor rolled the proceeds into another CD the record of assignment didn’t transfer
- contractor withdrew proceeds of final CD and credit general sued NationsBank for wrongful payment of proceeds
- judgement for credit general. Assignment language controls and assignment language was unambiguous about assignment of rights
Claim
Right to payment
May be assigned
Cause of action
Right to damages or other judicial relief when a legally protected right of the plaintiff is violated by the unlawful act of the defendant
May be assigned
Assignment of future rights to monry
Future and expected rights to money may be assigned (money not yet due)
Purpose of assignment
- may be a complete transfer of the right to collect and keep money
- may also just be assignment to hold money as security for some other obligation
Prohibition of assignment rights
A clear and specific contractual prohibition against the assignment of rights is enforceable at common law
But under the UCC prohibitions are ineffective against:
- assignment of rights to payment for goods or services, including A/R
- assignment of the rights to damages for breach of sales contractw
Barrow- Shaver Resources v. Carrizo oil & Gas
Borrow shaver and carrizo had contract with clear provision against assignment of rights without the consent of Carrizo
Carrizo refused to allow Borrow-Shaver to assign (sell) rights
Borrow-Shaver sued for violation of an implied covenant in good faith and fair dealing. Original decision for Borrow-Shaver
Carrizo appealed. Decision on appeal for Carrizo as the contract’s consent to assign provision unambiguously gave Carrizo the right to refuse to consent to assignment.
Nonassignable rights
If transfer of a right would material affect or alter a duty or the rights of the obligor then assignment is not permitted
Assignment to right to money: generally no limitation
Assignment of right to performance: limited if assignment increases burden of performance on obligor or in the case of personal services or a credit transaction
Delegation of duties: limited if personal or nonstandarized performance
Assignment of personal services
Contracts for personal services are generally not assignable.
Jurisdictional split regarding if employee noncompete covenants are assignable to a new owner of a business. Allowable in some states. Nonassignable in others (considered personal services agreement)
Assignment of credit rights
Nonassignable
When a transaction is based on extending credit, the person to whom credit is extended cannot assign any rights under contract to another (another entity is a different credit risk)
Rights of assignee
Unless restricted by the terms of assignment or applicable law the assignee acquires all the rights of the assignor. Any conditions applying to the assignor now apply to assignee
Riviera plaza investments v. Wells Fargo bank
Riviera/ Haresh Shah executed a note promising to pay Citibank
Riviera failed to pay and foreclosure proceedings were initiated
During proceedings Wells Fargo was assigned all the rights in the loan document & substituted as plaintiff
Shah contested, first judgement against Shah
Shah appealed. Judgement for Wells Fargo
The guaranty expressly provided for the transfer of the note to a new holder
Continuing liability of the assignor
Making of an assignment does not relieve the assignor of any obligation of the contract.
Assignment of a lease
When a lease is assigned the assignee becomes the principal obligor for rent payments and the leasee becomes a surety towards the lessor for the assignee’s performance
To avoid liability as a surety leassee would have to obtain a discharge of the lease by novation
Novation
Substitution for an old contract with a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party
Allows for the discharge of a contractual obligation by the substitution of a new contract involving a new party
Liability of the assignee
Ordinarily the assignee is not subject to suit by virtue of the fact that the assignment has been made
Consumer protection laws may subject the assignee to some liability for the assignor’s misconduct
Rights of assignee still subject to limitations imposed in the contract, and an assumption of obligations may be implied from an acceptance of benefits
Implied warranty
Warranty that was not made but is implied by law
Warranty of assignor
When assignment made as consideration assignor is regarded as having provided an implied warranty that the right assigned is valid and that they are the valid claimant of the right assigned and that they will not interfere with the assignee’s enforcement of obligation
Delegation of duties
Transfer of duties by a contracting party to another person who is to perform them (obtaining someone else to do the work)
Permitted by law when performance is standardized and nonpersonal (it doesn’t matter who performs the act), if performance involves personal skill, talents, judgement or trust delegation of duties is barred unless person entitled to performance consents
Contracting party remains liable in case of default
Contract may specifically prohibit delegation of a duty
Delegation
Transfer to another of the right and power tondonajnact
Federal insurance co v. Winters
- Emersons contracted with winters for a new roof
- winters subcontracted to Jacobs
- Jacobs caused a fire resulting in major property damage
- insurance company sued winters
- winters claimed since they subcontracted they were suing the wrong party
- judgement for insurance company due to winters implied duty/warranty to install the new roof. Delegation to Jacobs did not release them from that liability
Assignment of rights & delegation of duties
Assignment of rights does not necessarily delegate the performance of duties to the assignee.
Must examine while circumstances for intention
Generally assignment for security is indication of no intention to delegate performance of duty to the assignee
UCC & delegation of duties
In contracts for sale of goods, unless indicated specifically to the contrary and assignment of rights under the contract is a delegation of performance of duties of the assignor. Acceptance of assignment = promise to perform. (Enforceable by assignor or other party to contract)
