contracts/sales: Do any 3rd parties have rights and/or obligations under the contract?

Question 1

There are three types of third parties that may have rights and/or duties in the contract

Answer 1

A. Third Party Beneficiary

A Third Party Beneficiary is contemplated by the original contracting parties at the time of contracting

B. Assignee of Rights

C. Delegatee of Duties

Assignees of Rights and Delegatees of Duties appear after the execution of the original contract

Often, contract rights and duties are assigned/delegated to the same third party; when a party to a contract “assigns the contract,” such a transfer acts as both an assignment of rights and a delegation of duties

Question 2

Third Party Beneficiary

Answer 2

If at the time of contracting, the promisor and promisee (the original contracting parties) intend to confer a benefit on a third party (who is named or identifiable in the contract), that third party beneficiary may enforce the agreement against the promisor, unless:

the original contracting parties modified or cancelled the contract prior to the time the third party’s interest in the contract vested. Vesting occurs when the third party (1) assents to the contract; (2) knows of and relies upon the contract; or (3) files suit on the contract or

the promisor has a defense regarding the formation or performance of the contract that would have been enforceable against the promisee (because the third-party beneficiary’s rights to enforce the contract are derivative)

In a third-party-beneficiary contract, the promisee may sue the promisor for an order of specific performance ordering the promisor to provide the goods, services, etc. to the third party.

If the original contracting parties do not expressly intend to confer a benefit on a third party, the third party is merely an “incidental” third party beneficiary and has no right to enforce the contract.

Question 3

Assignment of rights

Answer 3

If after the time the original parties entered into a contract, one of the parties assigns her “rights” under the contract to a third party, this is an assignment of rights. The “assignor” is the party who assigns her rights, the “assignee” is the third party, and the “obligor” is the other original party to the contract. The common law and UCC rules are quite similar regarding assignments.

Contract rights are generally assignable, unless

(1) the contract makes assignments “void,”
(2) the assignment would materially change the duty of the obligor, or
(3) the assignment would materially increase the burden or risk imposed on the obligor.

Language prohibiting “assignment of the contract” is construed as barring delegation of duties and not assignment of rights.

Language prohibiting “assignment of contractual rights” does not bar assignment but merely gives the obligor a right to sue the assignor for breach of contract.

Question 4

Delegation of duties

Answer 4

If after the time the original parties entered into a contract, one of the parties transfers her “duties” (e.g., the work) under the contract to a third party, this is a delegation of duties. The “delegator” or “delegor” is the party who delegates her duties, the “delegatee” or “delegee” or “delegate” is the third party, and the “obligee” is the other original party to the contract. The common law and UCC rules are quite similar for delegation of duties.

Duties may generally be delegated, but not if:

(1) the contract prohibits either delegations or assignments; or
(2) the obligee chose the delegator to perform a “personal service” because of the delegator’s special skills, reputation, or trust (e.g., the delegator is a famous portrait painter). In other words, if the delegation impairs the obligee’s commercially reasonable expectations, the delegation is void.

Under the UCC, the obligee may treat a delegation as creating reasonable grounds for insecurity and thus may demand that the delegatee provide adequate assurances of performance.