Third Party Rights Flashcards
General rule for third party rights
People who are not parties to a contract might benefit from the performance of the agreement, but normally only the parties to the agreement can seek a remedy in case of breach.
Three significant exceptions exist to the general rule: (1) third party beneficiaries, (2) assignment of rights, and (3) delegation of duties.
Rule for intended beneficiaries and the two types
Intended third party beneficiaries may enforce a promise but incidental beneficiaries may not.
If the primary intent of the promisee is to confer a benefit on a third party, then that party is an intended beneficiary. Intended beneficiaries are one of two types—creditor beneficiaries or donee beneficiaries.
- A third party is a “creditor beneficiary” if (1) the promisee owes some legal obligation to the third party and (2) the benefit that the third party receives under the contract discharges that legal obligation.
- Creditor beneficiaries may recover from either the promisor or promisee, but not both.
- A third party is a donee beneficiary if the primary intent of the promisee in contracting for the benefit was to confer a gift or create a right irrespective of motive.
- A donee beneficiary can normally sue only the promisor, but can sue the promisee if the promisee told them of the benefit and the beneficiary relied on it to their detriment.
Rule for incidental beneficiaries
A party is an incidental beneficiary if they receive a benefit by performance of the promise but there was no intent at contract formation to either (1) confer a gift on that party or (2) satisfy a debt or obligation that the promisee owes to that party. No duties or rights are created for incidental beneficiaries.
Another way of stating this is that a party is an incidental beneficiary if they are neither a creditor beneficiary nor a donee beneficiary.
Promisor’s defenses against third party beneficiaries
All defenses and excuses that Promisor has against Promisee can be asserted against Third Party Beneficiary. Consequently, if Promisee totally breached the contract, then the duty that Promisor owed is discharged.
Any defense to formation (mistake, misrepresentation, etc.), changed circumstances, or other argument that would discharge Promisor’s duty could be pled in a lawsuit brought by Third Party Beneficiary.
When may the principal parties to a contract modify a contract that has a third party beneficiary?
The principal parties to the contract may modify the contract to withdraw the right granted to the third party at any time before the third party’s rights have vested. When a right is vested, it is said to be an absolute right.
When may a third party beneficiary assert their rights to enforce a contract?
A third party beneficiary can assert his or her rights and enforce a contract only after the right has vested. The rights of a third party beneficiary vest if, before the third party receives notice of a modification, the third party beneficiary:
- (a) manifests assent to the promise at the request of promisor or promisee; or
- (b) materially changes position in justifiable reliance on the promise; or
- (c) brings a lawsuit to enforce the promise.
When may contractual rights be assigned?
Ordinary rights, including future rights, are freely assignable.
A contractual right cannot be assigned if the assignment would:
- (a) materially change the obligor’s duty or materially increase the burden or risk imposed on him; or
- (b) the assignment is forbidden by statute or public policy, or
- (c) the assignment is validly precluded by contract.
Simple contractual rights, such as the right to purchase goods or the obligation to pay money do not materially change the obligor’s duty. However, if the right being assigned is a personal services contract, then the assignment would normally be considered a material change in the obligor’s duty. Additionally, if the assignment would disproportionately alter the actual output or requirements quantities, then the assignment is not assignable.
Rule for revocation of an assignment
An assignment made for consideration is not revocable.
However, a gratuitous assignment can be revoked unless:
- (a) the obligor has already performed, or
- (b) under a theory of promissory estoppel.
Who may the assignee recover from if the obligor does not perform and what are the defenses?
The assignee can recover from the obligor if the obligor does not perform. However, the obligor can assert any defenses that the obligor has against the obligee. Similar to third party beneficiaries, if the obligee did not perform under the contract or the obligor has a valid defense to formation, then the obligor’s duty to the assignee is discharged.
When does an assignee have a right to enforce the agreement against the assignor?
The assignee has no right to enforce the agreement against the assignor if the obligor breaches, unless:
- (a) The assignor attempts to revoke an irrevocable assignment.
- (b) The assignor misrepresented that the obligor has no valid defenses against the assignor, and the obligor effectively asserts that defense in a lawsuit brought by the assignee.
When may duties be delegated?
An obligor may generally delegate his contractual duties to a third person and the obligee must accept the delegate’s performance.
Duties may not be delegated without the obligee’s consent if:
- (a) The contract is for personal services;
- (b) A special relationship of trust exists between obligor and obligee;
- (c) The delegation results in a material change in performance or expectancy of performance; or
- (d) The contract language prohibits delegation of duties.
In the event of a delegation, who may the obligee assert his rights against?
The obligee can bring a lawsuit against the obligor unless a novation has occurred.
The obligee can bring a suit against the delegate if the delegate promised to perform and the promise is supported by consideration from the obligor. If there was no consideration for the delegate’s promise to perform, then the delegate’s promise is gratuitous and unenforceable unless promissory estoppel applies. However, if the delegate never promised to assume the duty, then the obligee has no recourse against the delegate and must only look to the obligor to enforce the agreement.
