Chapter 17 Third Persons And Contracts

Question 1

Third -party beneficiary

Answer 1

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

Question 2

Creditor beneficiary

Answer 2

Type of third-party beneficiary

When the promisee’s primary intent is to discharge a duty owed to their third party

Question 3

Donee beneficiary

Answer 3

Type of third-party beneficiary

Person to whom the promisee’s primary intent in contracting is to give a benefit

(Life insurance contract)

Question 4

Prudential insurance v Durante

Answer 4

• 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

Question 5

Intent to create a third party beneficiary

Answer 5

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

Question 6

Copeland v. Admiral pest control

Answer 6

• 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

Question 7

Identification of third party beneficiary

Answer 7

Not necessary to identify by name. May be identified by class (any member of that class becomes third party beneficiary)

Question 8

Modification or termination of third-party benefit contract

Answer 8

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

Question 9

Limitations on third party beneficiary

Answer 9

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

Question 10

Incidental beneficiaries

Answer 10

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

Question 11

Union Pacific railroad v. Novus international

Answer 11

• 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

Question 12

Assignment

Answer 12

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

Question 13

Obligor

Answer 13

Party owing a duty or a debt under the contract. Promisor

Debtor when buyer on credit

Question 14

Obligee

Answer 14

Party to whom the obligation is owed - promisee who can claim the benefit of the obligation

Question 15

Assignor

Answer 15

Party who assigns contract rights to a third party

Question 16

Assignee

Answer 16

Third party to whom contract benefits are transferred

Question 17

Form of assignment

Answer 17

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)

Question 18

Notice of assignment

Answer 18

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

Question 19

Failure to give notice of assignment

Answer 19

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.

Question 20

Credit general insurance co. V. NationsBank

Answer 20

• 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

Question 21

Claim

Answer 21

Right to payment

May be assigned

Question 22

Cause of action

Answer 22

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

Question 23

Assignment of future rights to monry

Answer 23

Future and expected rights to money may be assigned (money not yet due)

Question 24

Purpose of assignment

Answer 24

• 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

Question 25

Prohibition of assignment rights

Answer 25

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

Question 26

Barrow- Shaver Resources v. Carrizo oil & Gas

Answer 26

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.

Question 27

Nonassignable rights

Answer 27

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

Question 28

Assignment of personal services

Answer 28

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)

Question 29

Assignment of credit rights

Answer 29

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)

Question 30

Rights of assignee

Answer 30

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

Question 31

Riviera plaza investments v. Wells Fargo bank

Answer 31

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

Question 32

Continuing liability of the assignor

Answer 32

Making of an assignment does not relieve the assignor of any obligation of the contract.

Question 33

Assignment of a lease

Answer 33

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

Question 34

Novation

Answer 34

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

Question 35

Liability of the assignee

Answer 35

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

Question 36

Implied warranty

Answer 36

Warranty that was not made but is implied by law

Question 37

Warranty of assignor

Answer 37

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

Question 38

Delegation of duties

Answer 38

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

Question 39

Delegation

Answer 39

Transfer to another of the right and power tondonajnact

Question 40

Federal insurance co v. Winters

Answer 40

• 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

Question 41

Assignment of rights & delegation of duties

Answer 41

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

Question 42

UCC & delegation of duties

Answer 42

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)