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Chapter 17 - Rights of Third Parties
17-1
CHAPTER 17
RIGHTS OF THIRD PARTIES
I. OBJECTIVES:
This chapter is designed to acquaint students with the circumstances under which third
parties’ rights and/or duties under contracts and to teach them the nature of those rights
and duties. After reading the chapter and attending class, a student should be able to:
A. Explain the concept of assignment and the consequences of an assignment.
B. Explain the concept of delegation and the consequences of a delegation.
C. Explain the concept of third party beneficiary and distinguish among the three
kinds of third party beneficiaries.
II. ANSWER TO INTRODUCTORY PROBLEM
A. Yes. This chapter discusses two circumstances under which people who were not
confidence, it can be assigned by one employer to another. This problem is based on a
real case, The Evening News Association v. Peterson, 477 F. Supp. 77 (D.D.C. 1979),
in which the court held that the contract was assignable.
C. It’s unlikely. Peterson would not be able to enforce this contract unless he was an
intended beneficiary of the contract.
Peterson does have a job and the competing station will be able to hire someone else.
Everyone else is benefited, so it seems that the action would be ethical under a
Chapter 17 - Rights of Third Parties
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II. SUGGESTIONS FOR LECTURE PREPARATION:
A. Introduction
1. Note that as a general rule, contracts only accord rights to and impose duties on
may gain rights or duties under the contract.
B. Transfer of Contract Rights
1. Define the terms assignment, assignor, assignee, and obligor (or promisor). You
2. Emphasize that an assignment is a transfer of a right owed under a contract. Note
3. Discuss what it means for a right to be assigned--i.e., how assignee can enforce
contract and "steps into the shoes of the assignor." Note that duties cannot be
Example: Problem Case #5.
2. Discuss the limitations on assignability. Explain the reasons why some rights are
not assignable.
to work for another company and Sogeti sued him. The issue was whether the
noncompete was assignable without Martinez’s express consent. It was a case of
enforceable without Martinez’s express consent.
Points for Discussion: Note that this is a federal district court applying Arizona
law—you might want to explain to students why that is done. Would it be
Bedortha, 674 P.2d 76 (Or. Ct. App. 1984).
5. Discuss the enforceability of contractual prohibitions on assignment.
6. Discuss the nature of an assignee's rights.
a. Explain the importance of notifying the obligor that an assignment has
occurred.
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b. Discuss the defenses that can be asserted against the assignee. Note that the
obligor may assert that his duties have been discharged if he has rendered
of the assignee).
1) Note that defenses that arise from the terms or performance of the
after the notification of assignment.
Example: Problem Case #5.
c. Although this is not discussed in the text, you may wish to discuss setoff.
d. Explain the concept of subsequent assignments.
e. Discuss the problem of successive assignments and the significance of notice
of assignment.
7. Discuss the assignor's warranty liability to the assignee. Note that the assignor
C. Delegation of Contract Duties
1. Define the terms delegation, delegatee, and obligee. Give a simple example of a
parties.
2. Discuss the consequences of delegation and distinguish delegation from
Corporation, 2003 U.S. App. LEXIS 25720 (6th Cir. 2003).
3. Discuss what duties are considered to be nondelegable. Refer back to the rules
about nonassignability and draw appropriate parallels.
parties indicate a contrary intent.
4. Discuss the delegatee's personal liability and the significance of assumption.
Note that assumption can be express or implied. The homebuyer who assumes
the seller's existing mortgage can be used as a familiar example of express
assumption. Point out that under both the UCC (section 2-210) and the
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America, alleging that its delegatee, Fiserv, acted on an improper motive when
presented by the establishments for payment, some two to ten days later, and
deprived him of accruing interest on those early-deducted balances. The Bill Pay
services contract gave Bank of America discretion to effect payment through any
of the three methods of electronic transmission, corporate check, or personal
court find there was not such breach? Explore with the students the court’s
explanation of the circumstances under which an assignment or delegation is
invalid and why those were not present in this case. Why did it not matter that
Fiserv’s decision to issue a corporate check rather than a personal check was self-
serving?
5. Explain novation and discuss what must be proven to establish the existence of a
novation.
struck with a holdout for nearly three times the purchase price per acre they had
gotten, they sued for breach of contract. (The contract included a most-favored-
The court found no basis to find that an assignment of rights resulted in a
delegation of duties that would release the original party from liability. Nor did
why there was not a novation. Why is it unlikely that the landowners would have
ever agreed to a novation?
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D. Third Party Beneficiaries
1. Explain the concept of third party beneficiary. Note that the mere fact that a third
third party to enforce the contract.
2. Distinguish intended beneficiaries from incidental beneficiaries, and explain the
consequences of each designation.
began talks with Alegent about compensation. Premier Health and New Century
did not participate in the settlement negotiations. Alegent and the Podrazas
moved for summary judgment on the ground that they were protected by the
release as third party beneficiaries. The court employed the “intent rule,” which
had ruled otherwise. Note that New Century bears the burden of proving that the
Podrazas actually intended to release it. It seems unlikely that it will be able to
prove actual intent.
Additional Examples: Problem Cases #2, 6, and 9.
3. Ethics in Action (p. 493): This problem is patterned on the case of Westendorf v.
computer, and it could therefore be fair to hold her to the burdens of it as well.
the very same computer.
4. Discuss the general rule that members of the public are incidental beneficiaries of
carrying on governmental functions.
Example: New Hampshire Ins. Co. v. City of Madera, 192 Cal. Rptr. 548 (Cal.
Ct. App. 1983).
5. Distinguish donee from creditor beneficiaries, but make it clear that both are
intended beneficiaries.
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6. Discuss the threats to the beneficiary’s interests (the fact that a promisor can
assert defenses against the beneficiary that he could have asserted against the
to the vesting of beneficiary’s rights.
IV. RECOMMENDED REFERENCES:
V. ANSWERS TO PROBLEMS AND PROBLEM CASES
third party beneficiary. Schauer v. Mandarin Gems of Cal., Inc., 23 Cal. Rptr. 3d 233
(Cal. App. 2005).
White v. Taylor Distributing Company, 2010 Mich. App. LEXIS 1663 (Mich. Ct.
App. 2010).
for MHA. Managed Health Care Assoc. v. Kethan, 209 F.3d 923 (6th Cir. 2000).
That was a question of fact that should be decided in further proceedings. Rosenberg
v. Son, Inc., 491 N.W. 2d 71 (Sup. Ct. N.D. 1992).
that no legal right arises out of an unlawful act and no action can be maintained upon
a claim arising out of or based upon an illegal act. Because Jones could assert no
Chapter 17 - Rights of Third Parties
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administration and supervision necessarily involve umpires,” and that indicates that
Locke was an intended direct beneficiary of the contract. Locke v. Ozark City Board
of Education, 2005 Ala. LEXIS 55 (Ala. Sup. Ct. 2005)
7. No. This would require that the client’s sole purpose be to benefit the third party.
could not maintain a suit against Piper. Francis v. Piper, 597 N.W.2d 922 (Ct. App.
Minn. 1999).
8. No. The court held that Deceptive Trade Practices Act (DTPA) claims are not
assignable. The DTPA limits its coverage to consumers, and excludes claims by
who might not know they had a claim or might not understand the value of their
claims. It might also increase litigation. The court stated that the “DTPA is primarily
9. Yes. The educational support provision of the settlement was expressly made for the
purpose of benefiting Jessica, so she is an intended third party beneficiary. In a
enforce obedience to the order by the same process as if that person were a party.
Since Jessica was a third-party beneficiary and had taken out loans in her own name,
obligations; therefore, the Wattses had no basis to force Simpson to buy the property.
Watts v. Simpson, 2007 Ky. App. LEXIS 247 (Ky. Ct. App. 2007).
