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117
“An honest man’s word is as good as his bond.”
Don Quixote
I. Teacher to Teacher Dialogue
The materials relating to contract third parties present an interesting challenge to the teacher.
While it is relatively easy to talk about intended beneficiaries, talking about assignments and the
like represents “the wall” to many students. Over and over again, student feedback identifies the
I always discuss intended beneficiaries first. In this part of the presentation, I find that use of
In this section, I first give an overview of why third parties get involved, such as credit or
commodity trading transactions. Then I use a diagram on the board to illustrate some of the key
aspects of assignment and novation. What I have found really helps with this material is to
remind students of notice duties between the old and new parties to the contract. Then mark on
points, the better.
This chapter has four essential subparts to it: third party involvement ab initio, third party
involvement after formation, the role of conditions, and discharge of performance.
Third parties can become involved in a contract ab initio (from its inception) or after the fact.
citizens and provide for their young in case any unforeseen calamity befalls them. Thus,
insurance is taken out for young Junior as beneficiary of his parent’s insurance policy even
THIRD-PARTY RIGHTS AND
DISCHARGE
15
Chapter 15
collateral for the loan. B can now be named as a loss-payee (a person named in the policy to be
paid in case of loss) up to the amount owed, even though B has not paid for, or been a signatory
to, the insurance policy between A and his or her insurance company.
The third category, incidental beneficiaries, is not really intended beneficiaries at all, but
and immediate benefit the government contract was made.
The fourth category of third-party involvement in contracts is the introduction of a third party
after the contract was already formed. This party joins the dance by way of assignment or
novation. In assignment, one of the original parties transfers rights or duties to a new third-party
trade. The transfer of contract rights from one person or business entity to another facilitates these
commercially critical practices.
The second objective of this chapter is to introduce students to the concept of performance
obligations and discharge from contracts. The rules of performance and breach of contract are
are the covenants entered into before performance is to be initiated? Were there any conditions
that may affect the rights and duties of the parties to contract? Conditions are certain events that
have a triggering effect on the obligations of contract. The timing of conditions can be
superimposed upon the contract. A precondition or condition precedent calls for the event to take
to both parties. A condition subsequent is found where performance may be excused by a certain
event after the contract was entered into. For example, a parolee is allowed to stay out of prison
as long as the conditions of the parole release are met.
There are certain circumstances that will act to excuse nonperformance. These circumstances
Third-Party Rights and Discharge
to be enforced after death or disability? Or does it make sense to accept performance after
illegality.
In addition to excused nonperformance, there are a number of possible circumstances that
may result in a discharge from any further contractual performance. These fall into two main
categories: discharge by acts of the parties or by operation of law. Discharges by acts of the
parties are voluntary postcontract formation events such as mutual recission, reformation, accord
contract duty has not been discharged, excused, or performed, and the absolute duty to perform
has been breached, one must examine what remedies are available to the nonbreaching party.
II. Chapter Objectives
1. Describe assignment of contracts and what contract rights are assignable.
2. Define an intended beneficiary and describe this person’s rights under a contract.
3. Define covenant.
4. Distinguish between conditions precedent, conditions subsequent, and concurrent conditions.
5. Explain when the performance of a contract is excused because of objective impossibility.
III. Key Question Checklist
How does a contract create third-party beneficiary rights at the time of its formation?
Is a contract subject to involvement of third parties after the time of its formation?
What is a novation?
What are the basic performance covenants under a contract?
Assuming no conditions are in effect, are there any excuses from enforcement of a contract?
How can the parties change their performance obligations?
IV. Text Materials
Introduction to Third-Party Rights and Discharge
Parties to a contract are said to be in privity of contract and have a legal obligation to perform
Chapter 15
Assignment of a Right
Transfer of contractual rights is called an assignment of rights.
Form of Assignment – The obligor owes the duty of performance to the obligee. An obligee who
Personal Service Contract – Contracts for the provision of personal services are generally not
assignable.
Assignment of a Future Right – People are usually unable to assign currently nonexistent rights.
Contract Where an Assignment Would Materially Alter the Risk – These contracts cannot be
Assignment of Legal Action – The right to sue another party for a violation of personal rights
Effect of Assignment of Rights – The assignee will “stand in the shoes of the assignor,” taking
Notice of Assignment – The assignee is under a duty to notify the obligor of the assignment. If
the assignee fails to give the requisite notice and the obligor continues to perform his duties as
Successive Assignments – An obligee (the party who is owed performance, money, a right, or
another thing of value) has the right to assign a contract right or a benefit to another party.
If the obligee fraudulently makes successive assignments of the same right to a number of
assignees then according to the American rule holds that the first assignment in time prevails, but
the obligor prevails.
Third-Party Rights and Discharge
Delegation of a Duty
delagatee.
Duties That Can and Cannot Be Delegated – When the obligee has a substantial interest in
having the obligor actually perform the contract, as in personal contracts requiring personal skills,
Effect of Delegation of Duties – Where there has been a delegation of duties, the liability of the
delegatee is determined by the following rules:
When the delegate has assumed the duties, the obligee can sue the delegatee and recover
recover damages from the delegatee.
Anti-Delegation Clause – These clauses are generally held to be valid, except in the case where
the duties are totally impersonal in nature.
Third-Party Beneficiary
Third parties sometimes claim rights under others’ contracts; these parties are called third-party
beneficiaries.
Donee Beneficiary – When a person enters into a contract with the intent to confer a benefit or
Creditor Beneficiary – Creditor beneficiary contracts arise when debtors borrow money and sign
Incidental Beneficiary – An incidental beneficiary is a party who is unintentionally benefited by
Case 15.1 Third Party Beneficiary: Does I-XI, Workers in China, Bangladesh, Indonesia,
Swaziland, and Nicaragua v. Walmart Stores, Inc.
Chapter 15
Circuit
due damages for Walmart’s breach of the Standards. The U.S. District Court held that the
plaintiffs were not intended third-party beneficiaries to Walmart’s contracts with its foreign
suppliers and dismissed their lawsuit. The plaintiffs appealed.
Issue: Are the foreign workers intended third-party beneficiaries under Walmart’s contracts with
its foreign suppliers?
beneficiaries.
Ethics Questions: Walmart’s Standards provide some degree of protection to foreign workers
because it expects its foreign suppliers to adhere to local law and local industry working
conditions but Walmart reserves the right to inspect the suppliers and it is not bound by a duty to
inspect them. It would be ethical for Walmart to require that its foreign suppliers provide the
Covenants
A covenant is an unconditional promise to perform.
Conditions
Conditions Precedent – If a contract requires the occurrence (or nonoccurrence) of an event
before a party is obligated to perform a contractual duty, this is a condition precedent.
Conditions Precedent Based on Satisfaction – Some contracts require payment only if the
contracts.
Contemporary Environment: “Time is of the Essence” Contract
Generally, there is a breach of contract if a contract is not performed when due. Nevertheless, if
the other party is not jeopardized by the delay, most courts treat the delay as a minor breach and
Third-Party Rights and Discharge
Concurrent Conditions – Concurrent conditions arise when the parties to a contract agree to
circumstances surrounding the contract.
Discharge of Performance
Discharge by Agreement – The duty to perform may be discharged by mutual agreement. The
discharging their old agreement.
Novation – This substitutes a third party for one of the original contracting parties. All
Force Majeure Clauses – The parties may agree in a contract that certain events will excuse
non-performance of the contract. These clauses are called force majeure clauses.
Statute of Limitations
V. Key Terms and Concepts
Accord and satisfaction—The settlement of a contract dispute. The accord is the agreement
regardless of notice.
Anti-assignment clause—A clause that prohibits the assignment of rights under the contract.
Anti-delegation clause—A clause that prohibits the delegation of duties under the contract.
Chapter 15
Assignment and delegation—Transfer of both rights and duties under the contract.
another party.
Assignor—The party who transfers the right.
Assumption of duties—When a delegation of duties contains the term assumption or I assume
the duties or other similar language; the delegatee is legally liable to the obligee for
nonperformance.
other party’s absolute duty to perform.
Condition precedent based on satisfaction—Clause in a contract that reserves the right to a
party to pay for the item or services contracted for only if they meet his or her satisfaction.
Condition precedent—A condition that requires the occurrence of an event before a party is
obligated to perform a duty under a contract.
conditions.
Covenant—An unconditional promise to perform.
Creditor beneficiary contract—A contract that arises in the following situations: (1) a debtor
borrows money, (2) the debtor signs an agreement to pay back the money plus interest, (3)
the debtor sells the item to a third party before the loan is paid off, and (4) the third party
contract with another party.
Declaration of duties—If the delegatee has not assumed the duties under a contract, the
delegatee is not legally liable to the obligee for nonperformance.
Delegate—To transfer the performance of the duties.
Delegatee—The party to whom the duty has been transferred.
performance.
Delegator—The obligor who transferred his or her duty.
Discharge—Party’s duty of performance may be discharged by agreement of the parties,
excuse of performance, or operation of law.
Donee beneficiary contract—A contract entered into with the intent to confer a benefit or gift
on an intended third party.
obligor prevails.
Express condition—An express condition exists if the parties expressly agree on it.
Third-Party Rights and Discharge
rights under the contract and can enforce the contract against the obligor.
Mutual rescission—If a contract is wholly or partially executory on both sides, the parties can
agree to rescind (i.e., cancel) the contract.
Notice of assignment—When an assignor makes an assignment of a right under a contract,
Personal satisfaction test—Subjective test that applies to contracts involving personal taste
and comfort.
Personal service contract—Contracts for the provision of personal services are generally not
assignable.
prevails over subsequent assignees.
Privity of contract—The state of two specified parties being in a contract.
Promisee—The contracting party who directs that the benefit be conferred on another.
Promisor—The contracting party who agrees to confer performance for the benefit of the
third person.
involving mechanical fitness.
Statute of limitations—Statute that establishes the time period during which a lawsuit must be
brought; if the lawsuit is not brought within this period, the injured party loses the right to
sue.
Subsequent assignee—The assignee can assign the right to yet another person called a
subsequent assignee.
