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Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 14 Operation of Contracts
LESSON OVERVIEW
The previous chapters discussed the contracts entered into, between two parties. Chapter 14 discusses
contracts involving third parties, and through the use of examples, depicts their relevance in the real life
situations. Students will learn instances in which a contract may involve third parties. The chapter also
covers rights of third parties, assignment of rights, contracts that may not be assigned, and the concept
of delegation of duties. Students may additionally learn the concept of novation and how it differs from
assignment. Finally, students’ understanding of the topic is evaluated through objective-type questions,
discussion questions, and case scenarios. Students are encouraged to conduct their research through the
use of the Internet and other sources.
CHAPTER OUTLINE
A. CONTRACTS INVOLVING THIRD PARTIES (p. 216)
B. RIGHTS OF THIRD PARTIES (p. 216)
1. Third-Party Beneficiaries (p. 216)
2. Incidental Beneficiaries (pp. 216-217)
C. ASSIGNMENT OF RIGHTS (p. 217)
1. Form of Assignment (p. 217)
2. Notice of Assignment (p. 218)
3. Rights That May Be Transferred (p. 218)
4. The Assignor’s Guaranty (p. 218)
D. CONTRACTS THAT MAY NOT BE ASSIGNED (p. 219)
1. Contracts That Include Assignment Restrictions (p. 219)
2. Contracts for Which Assignments Are Prohibited by Law or Public Policy (p. 219)
3. Contracts That Require Personal Services (p. 219)
E. DELEGATION OF DUTIES (pp. 219-220)
F. ASSIGNMENT AND DELEGATION BY LAW (p. 220)
1. Death of a Contracting Party (p. 220)
2. Bankruptcy of a Contracting Party (p. 221)
G. NOVATION (p. 221)
H. CHAPTER SUMMARY (pp. 221-222)
I. CHAPTER ASSESSMENT (pp. 222-229)
1. Matching Key Terms (pp. 222-223)
2. True/False Quiz (pp. 223-224)
3. Discussion Questions (pp. 224-225)
4. Thinking Critically About the Law (pp. 225-226)
5. Case Questions (pp. 226-227)
6. Case Analysis (pp. 227-228)
7. Legal Research (p. 229)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ third-party beneficiary (p. 216)
§ incidental beneficiary (p. 216)
§ assignment (p. 217)
§ assignor (p. 217)
§ assignee (p. 217)
§ guarantor (p. 218)
§ personal-service contract (p. 219)
§ delegation (p. 220)
§ bankruptcy (p. 221)
§ novation (p. 221)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 14 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 14. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Identify two instances in which a contract may involve third parties. (p. 216, PPT slide 2)
2. Distinguish between a third-party beneficiary and an incidental beneficiary, and outline the rights
of each. (pp. 216-217, PPT slides 3-4)
3. Interpret the legal concept of assignment of rights. (p. 217-218, PPT slides 5-11)
4. Identify three kinds of contracts that may not be assigned. (p. 219, PPT slides 12-15)
5. Explain the legal concept of delegation of duties. (pp. 219-220, PPT slide 16)
6. Provide examples of contracts that may be assigned by a court of law. (pp. 220-221, PPT slides
17-18)
7. Discuss novation and how it differs from assignment. (p. 221 PPT slide 19)
LECTURE OUTLINE
A. CONTRACTS INVOLVING THIRD PARTIES
Instances in which a contract may involve third parties are (1) when the purpose of a contract is to
benefit a third party and (2) when rights or duties that arise from a contract are legally transferred to a
third party.
B. RIGHTS OF THIRD PARTIES
Third parties to a contract are those who are in some way affected by it but who are not one of the
parties to the contract. There are two ways in which third parties can be affected by a contract: if they
are either (1) third-party beneficiaries or (2) incidental beneficiaries.
1. Third-Party Beneficiaries
A third-party beneficiary to a contract has a legal right to the benefits resulting from
the contract only if it is the intent of the contracting parties to benefit the third party.
2. Incidental Beneficiaries
An incidental beneficiary is one who may benefit as an indirect consequence of a
contract, although that was not the intent of the contracting parties.
C. ASSIGNMENT OF RIGHTS
When a party to a contract transfers his or her right to a third party and permits the third party to
receive the benefits of the contract, this change of a contract is known as an assignment. The person
who transfers his or her rights is known as the assignor; the third party to whom the rights are
transferred is known as the assignee.
1. Form of Assignment
In general, an assignment may be either written or oral. However, if the original contract
is required to be in writing under the Statute of Frauds, the assignment also must be in
writing.
2. Notice of Assignment
A party to a contract will not be obligated by an assignment made by the other party
without his or her knowledge until notified.
3. Rights That May Be Transferred
Most rights are assignable, except in cases in which the obligations of the parties would
be significantly altered.
4. The Assignor’s Guaranty
The assignor of a contract right becomes a guarantor—that is, one who guarantees the
promises assigned.
D. CONTRACTS THAT MAY NOT BE ASSIGNED
Three types of contracts may not be assigned.
1. Contracts That Include Assignment Restrictions
When parties to a contract include in the contract itself a specific provision forbidding
assignment, both parties are prevented from assigning their rights or delegating their
duties.
2. Contracts for Which Assignments Are Prohibited by Law or Public Policy
Various state and federal statutes have been enacted to prohibit the assignment of certain
contracts.
3. Contracts That Require Personal Services
A personal-service contract is one in which services that require a unique skill, talent,
ability, and so forth are provided by a specific person.
E. DELEGATION OF DUTIES
Just as a party’s rights in a contract can be assigned to another party, a party’s duties can be transferred
to a third party if the duties do not involve unique skills or abilities. This transfer is known as a
delegation of duties.
F. ASSIGNMENT AND DELEGATION BY LAW
Rights or duties under a contract may be assigned by a court of law when a contracting party dies or
becomes bankrupt.
1. Death of a Contracting Party
When a party to a contract dies, all contractual rights are assigned to the administrator or
executor of the estate.
2. Bankruptcy of a Contracting Party
The laws dealing with bankruptcy provide that the assets and contracts of a bankrupt
person or business be assigned to the trustee in bankruptcy.
G. NOVATION
When all parties to a contract agree to a significant change in the contract, the change is called a
novation.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 14. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Identify two instances in which a contract may involve third parties.
A contract may involve more than two parties (1) when the purpose of a contract is to benefit a third
party and (2) when rights or duties that arise from a contract are legally transferred to a third party.
Text Pages: 216
PowerPoint: Slide 2
LO2. Distinguish between a third-party beneficiary and an incidental beneficiary, and outline the
rights of each.
A third-party beneficiary to a contract has a legal right to the benefits resulting from the contract only if
the contracting parties intend to benefit the third party. An incidental beneficiary is one who may
benefit as an indirect consequence of a contract, although that was not the intent of the contracting
parties. An incidental party has no rights in the contract.
Text Pages: 216-217
PowerPoint: Slides 3-4
Discussion Questions: 26
Thinking Critically About the Law: 32-33
Case Questions: 38-39
Case Analysis: 42-44
LO3. Interpret the legal concept of assignment of rights.
An assignment occurs when a party to a contract transfers his or her rights under the contract to a third
party and permits the third party to receive the benefits of the contract.
Text Pages: 217-218
PowerPoint: Slides 5-11
Discussion Questions: 27
LO4. Identify three kinds of contracts that may not be assigned.
Three types of contracts that may not be assigned include (a) contracts that include assignment
restrictions, (b) contracts for which assignments are prohibited by law or public policy, and (c)
contracts that require personal service.
Text Pages: 219
PowerPoint: Slides 12-15
Discussion Questions: 29
Thinking Critically About the Law: 34
Case Questions: 40
Case Analysis: 41
LO5. Explain the legal concept of delegation of duties.
A delegation of duties obliges a third party to carry out the tasks and performance under the terms of
the contract, provided they do not involve unique skills or abilities.
Text Pages: 219-220
PowerPoint: Slide 16
PO6. Provide examples of contracts that may be assigned by a court of law.
A court can assign rights and duties under a contract when a contracting party dies or becomes
bankrupt.
Text Pages: 220-221
PowerPoint: Slides 17-18
Discussion Questions: 28, 30
Thinking Critically About the Law: 36
LO7. Discuss novation and how it differs from assignment.
A novation occurs when parties to a contract agree to a significant change in the contract. A novation
differs from an assignment because (a) unlike an assignment, it requires the mutual consent of all
parties; and (b) a novation transfers all rights and obligations in a contract, but an assignment transfers
only the rights of the assignor and still leaves the assignor with the duty of fulfilling his or her
obligations under the contract.
Text Pages: 221
PowerPoint: Slide 19
Discussion Questions: 31
Thinking Critically About the Law: 35
Case Questions: 37
