Suggested Additional Assignments
Drafting Exercise: Avoiding Third-Party Claims
This hypothetical is based on a real suit between sports fans from the University of Wisconsin and the
University of California at Los Angeles (UCLA). The students represent UCLA. This year’s UCLA Bruins
football team is on the verge of winning the PAC10 title, which will guarantee the team a trip to the Rose
Bowl, one of the most prestigious of post-season contests. By coincidence, representatives of the PAC10
are renegotiating a contract with the Big Ten, the other conference that sends a team to the Rose Bowl.
The existing contract requires the school that represents the PAC10 in the game to supply to that year’s
Big Ten school 4,000 tickets to the game, for use by fans, alumni, and so on. Demand for this year’s
tickets is already huge. UCLA is not sure it can supply the 4,000 tickets and does not want to be sued by
disappointed Wisconsin fans. The danger is that Badger supporters might book trips to California relying
on the guaranteed 4,000 tickets, discover that they have no game tickets, and sue UCLA as third-party
beneficiaries. UCLA has spoken to the PAC10 representative about a change in the contract, but she
insists that it is only fair for the PAC10 to do its best to supply the 4,000 tickets to the Big Ten. Students
should draft a proposed contract clause that obligates the PAC10 school to supply tickets to the Big Ten
school but makes it clear that the contract is not intended to benefit anyone other than the two schools. In
other words, the contract should prevent third-party beneficiary claims.
Research: Contract Limits on Assignment
Students who rent housing should review their leases for language limiting their ability to assign the
lease. Do the leases bar assignment outright? Permit it with the landlord’s consent? Can the landlord
withhold consent in its sole discretion or must the landlord have a reasonable basis for not consenting to
an assignment? They should prepare a short summary of their findings to present to the class.
Chapter Overview
Chapter Theme
A moment’s caution should enable contracting parties to anticipate and realistically appraise any rights
and responsibilities of third parties. Parties to a contract generally have the power to assign their contract
rights and delegate their contract duties, with some limitations.
Third-Party Bene$ciary
The two parties who make a contract always intend to gain some benefit for themselves. Often, though,
their bargain will also benefit someone else. A third-party beneficiary is someone who was not a party
to the contract but stands to benefit from it.
In the event that the contract is not performed, whether the third-party beneficiary can sue to enforce the
contract depends on whether the beneficiary is an intended beneficiary or an incidental beneficiary.
Intended Bene$ciaries
A person is an intended beneficiary and may enforce a contract if the parties intended her to benefit and
if either (a) enforcing the promise will satisfy a duty of the promisee to the beneficiary, or (b) the
promisee intended to make a gift to the beneficiary.
The promisor is the one who makes the promise that the third-party beneficiary is seeking to enforce.
The promisee is the other party to the contract.
A third-party is a creditor beneficiary if the promisee is fulfilling some duty. A third-party is a donee
beneficiary if the promisee is making a gift.
Case: Schauer v. Mandarin Gems of California, Inc.1
Facts: Sarah Schauer and her fiancé, Darin Erstad, went shopping for an engagement ring, first at Tiffany
and Cartier, then at Mandarin Gems, where they were captivated by an exceptionally clear 3.01 carat
diamond with a high clarity rating with a clarity grading of “S11.” Erstad bought the ring the same day for
$43,121. Later, Mandarin supplied Erstad with a written appraisal, again rating the ring as an S11, and
valuing the ring it at $45,500. Paul Lam, an A certified gemologist, signed the appraisal.
Diamonds may last forever but this marriage was short-lived. The divorce decree gave each party the
right to keep whatever personal property they currently held, meaning that Schauer could keep the ring.
She had the ring appraised by the Gem Trade Laboratory, which gave it a poorer clarity rating, and a
value of only $20,000.
Schauer sued Mandarin for misrepresentation and breach of contract, but the jeweler defended by
saying that it had never made a contract with her, and that she was not a third-party beneficiary of the
company’s agreement with Erstad. The trial court dismissed Schauer’s suit, and she appealed.
Issue: Does Schauer have any right to sue for breach of contract as a third-party beneficiary?
Decision: Yes, she is entitled to sue. Reversed and remanded.
Reasoning: A true third-party beneficiary may enforce a contract made by others unless they rescinded
the agreement. Persons who expect to incidentally or remotely benefit from a bargain may not enforce it.
A plaintiff claiming status as a third-party beneficiary must demonstrate that the promisor understood that
the promisee intended to benefit the third-party. It is not necessary that both parties intended to benefit the
third-party.
Schauer alleged that she and Erstad went shopping for an engagement ring. They were together when
they looked at the ring, and they explained to the jeweler that Erstad was buying the diamond to give to
Schauer as an engagement ring. The jeweler must have understood that Erstad was entering into a sales
contract intending to benefit Schauer.
Schauer has alleged facts that, if found to be true, establish her as a third-party beneficiary. She is
entitled to proceed with her contract claim against Mandarin Gems.
Question: Was it necessary that both Erstad and Mandarin Gems intend that Schauer benefit from the
agreement in order to establish that Schauer had enforceable rights?
Answer: No. The court ruled that the promisor (Mandarin), given the facts surrounding the purchase
Question: Does this mean that Schauer wins her case against Mandarin Gems?
Question: Is there anything else notable about the parties this case?
Incidental Bene$ciaries
A person who fails to qualify as a donee beneficiary or a creditor beneficiary is merely an incidental
beneficiary, and may not enforce the contract.
Drafting Exercise: Avoiding Third-Party Claims
If you assigned the sports-ticket drafting problem this is an appropriate place to discuss it. A possible
contract clause might read:
1 2005 WL 5730 Court of Appeal of California, 2005.
The parties agree that the participating PAC10 school will supply the participating Big Ten school with
4,000 tickets for seats in sections 318 through 325. The Big Ten school will pay face value for the tickets.
The parties agree that this obligation is intended to benefit the respective schools only. By making this
agreement the two schools intend to give no rights to any other parties, whether so-called third-party
beneficiaries or anyone else. Neither school has any debt to any party that it wishes to satisfy by means of
this clause; neither school intends that this clause create a gift of any kind to any party.
Case: Unite Here Local 30 v. California Department of Parks and
Recreation2
Facts: The California Department of Parks and Recreation (DPR) and Delaware North Companies (DNC)
entered into a contract giving DNC the right to operate a concession stand at a state park in San Diego for
10 years. Four years into the contract, DNC assigned its rights to operate the stand to another company.
DNC fired many of its employees and the new operator did not rehire them. Some of these workers were
members of the union Unite Here Local 30. Local 30 sued to block the assignment. It was joined in the
suit by Bridgette Browning who lived in the area and seemed to care who provided her hot dogs.
The trial court rejected the plaintiff’s claims, and the plaintiffs appealed.
Issue: Do the plaintiffs have the right to enforce the contract between the state and the concession stand
company?
Decision: No. Since the plaintiffs were not intended beneficiaries, they had no right to sue to enforce the
contract.
Reasoning: To enforce someone else’s contract, a party does not have to be specifically named in it. Third
parties may enforce a contract if they are an intended beneficiary, that is, a member of a class of persons
for whose benefit it was made. But note that intended beneficiaries must prove that the contract was
actually made for their benefit, not just that they happened to benefit from the deal.
The plaintiffs argued that they had a right to sue for breach of contract and block the assignment because
the concession contract was indeed intended for their benefit.
Question: Did the terms of the concession contract reveal an intent to benefit Bridgette Browning?
Answer: She argued that state contracts intend to benefit the general public and the taxpayer and that
as a hot-dog-eating, park-going taxpayer of California, she had a right to sue. However, the fact that
Question: Did the terms of the concession contract reveal an intent to benefit Local 30?
Answer: To prove this intent, Local 30 pointed to a clause in the contract that prohibited Delaware
2 2011 Cal. App. LEXIS 510, Court of Appeal of California, 2011.
Additional Case: Register.com v. Verio, Inc.3
Facts: The Internet Corporation for Assigned Names and Numbers (ICANN) is a private, non-profit
public benefit corporation which was established by the U.S. government to administer the Internet
domain name system. Register.com is a domain name registrar. To become a registrar of domain names,
Register was required to enter into a standard form agreement with ICANN (the “ICANN Agreement”).
The ICANN Agreement requires registrars to obtain prescribed contact information from domain name
registrants (“WHOIS data”) and to preserve it, update it daily, and provide for free public access to it
through the Internet. Section II.F.5 of the ICANN Agreement requires that a registrar “not impose terms
and conditions” on the use made by others of its WHOIS data “except as permitted by ICANN-adopted
policy.” The ICANN Agreement requires a registrar to permit use of its WHOIS data “for any lawful
purposes except to. .. support the transmission of mass unsolicited, commercial advertising or solicitations
via email (spam).” Persons downloading WHOIS data from Register.com received it with a restrictive
legend stating the limits on its use. A section of the ICANN Agreement provided as follows:
No Third-Party Beneficiaries: This Agreement shall not be construed to create any obligation by
either ICANN or Registrar to any non-party to this Agreement. ..
Third parties could nonetheless seek enforcement of a registrar’s obligations set forth in the ICANN
Agreement by resort to a grievance process under ICANN’s auspices.
Verio, Inc. is engaged in the business of selling a variety of web site design, development, and operation
services and as such competes with Register’s web site development business. To facilitate its pursuit of
customers, Verio obtained daily updates of WHOIS information from domain name registrars, including
Register.com. Upon acquiring the WHOIS information of new registrants, Verio would send them
marketing solicitations by email, telemarketing, and direct mail. Solicitations sent by email were
inconsistent with the terms of the restrictive legend Register attached to its responses to Verio’s queries;
other solicitations were inconsistent with requests made by domain name registrants not to receive
marketing materials connected to their registration of domain names. To thwart Verio’s use of WHOIS
data gathered from its system, Register.com revised the restrictive legend accompanying downloads of
such data to limit its use for all solicitations, not just email solicitations.
This dispute arose when Register.com sued Verio for unfair competition and breach of contract for
Verio’s use of Register.com’s WHOIS data and trademarks in its marketing campaigns. Verio responded
by claiming that Register.com’s restriction on the use of WHOIS data for all solicitations violated the
ICANN Agreement’s requirement that registrars permit use of such data for any lawful purposes, except
spam. (Note: this case arose before enactment of the CAN-SPAM Act and other laws regulating
unsolicited commercial email.) Relying on the “no third-party beneficiary” language of the ICANN
Agreement Register.com argued that Verio could not enforce the terms of the ICANN Agreement against
it. The trial court agreed with Register.com and enjoined Verio from using Register.com’s WHOIS data
and trademarks in its marketing solicitations.
Issue: Is Verio, Inc. an intended third-party beneficiary of the Agreement between Register.com and
ICANN?
Holding: Judgment for Register.com affirmed. Excerpts from the Court’s opinion:
Verio’s principal argument is that Register was not authorized to forbid Verio from using the data for
direct mail and telemarketing solicitation because the ICANN Agreement prohibited Register from
imposing any “terms and conditions” on use of WHOIS data, “except as permitted by
ICANN-adopted policy,” which specified that Register was required to permit any lawful purpose,
except unsolicited commercial email. Register does not deny that the restrictions it imposed
3 356 F.3d 393; 2004 U.S. App. LEXIS 1074; 69 U.S.P.Q.2D (BNA) 1545 United States Court of Appeals
for the Second Circuit, 2004.
contravened this requirement of the ICANN Agreement. Register contends, relying on the “no
third-party beneficiary” provisions of §II.S.2, that the question whether it violated §II.F.5 of its
Agreement with ICANN is a matter between itself and ICANN, and that Verio cannot enforce the
obligations placed on Register by the ICANN Agreement.
ICANN intervened in the District Court as an amicus curiae and strongly supported Register’s
position, opposing Verio’s right to invoke Register’s contractual promises to ICANN. ICANN
explained that ICANN has established a remedial process for the resolution of such disputes through
which Verio might have sought satisfaction: “If Verio had concerns regarding Register.com’s
conditions for access to WHOIS data, it should have raised them within the ICANN process rather
[than] simply taking Register.com’s data, violating the conditions [imposed by Register], and then
seeking to justify its violation in this Court. [Verio’s claim was] intended to be addressed only within
the ICANN process.”
The Court agreed with ICANN’s argument that §II.S.2 was “vital to the overall scheme of [its]
various agreements” with domain name registrars around the world. “In the fast-paced environment of
the Internet, new issues and situations arise quickly, and sometimes the language of contractual
provisions does not perfectly match the underlying policies. For this and other reasons, hard-and-fast
enforcement [by courts] of the letter of every term of every agreement is not always appropriate.”
Assignment and Delegation
A contracting party may transfer his rights under the contract, which is called an assignment of rights.
Or a party may transfer her obligations under the contract, which is a delegation of duties.
Assignment
An assignment transfers the assignor’s contract rights to the assignee. The assignor is the party making
the assignment. The assignee is the party receiving the assignment. The obligor is the party who is
obligated to do something. The obligee is to party to whom the obligor owes the duty.
What Rights are Assignable?
Most contract rights are assignable. Any contractual right may be assigned unless assignment
(a) would substantially change the obligor’s rights or duties under the contract;
(b) is forbidden by law or public policy; or
(c) is validly precluded by the contract itself.
Case: Tenet Healthsystem Surgical, LLC v. jefferson Parish Hospital
Service District No. 14
Facts: MSC owned a shopping center and leased space to Tenet for use as an outpatient surgery and
general medical practice. According to the lease, Tenet could assign with the consent of the lessor, and
said consent would not be unreasonably withheld.
MSC sold the shopping center to West Jefferson, and a few months later Tenet went out of business.
Tenet requested permission from West Jefferson to assign the lease to Pelican medical, which intended to
use the space for an occupational medical clinic. West Jefferson denied permission claiming Pelican
would be performing work not permitted under the original lease and that Pelican’s proposed uses would
compete with West Jefferson’s adjacent hospital.
Tenet sued claiming West Jefferson unreasonably withheld consent to assign the lease. The trial court
gave summary judgment to West Jefferson and Tenet appealed.
Issue: Did West Jefferson unreasonably withhold permission to assign the lease?
4 426 F.3d 738, Fifth Circuit Court of Appeals, 2005.
Decision: Yes, West Jefferson withheld consent for an improper reason. Reversed and remanded.
Reasoning: Tenet the tenant used the office space for nothing more than minor surgery. Pelican proposed
to offer many medical services in the space, but none were unusual. West Jefferson objected primarily
because it did not want to lose patients to Pelican. This is a reasonable economic concern, but nonetheless
it is not a factor that a landlord may consider in approving a lease assignment. In this situation, a landlord
must make an objective assessment that is not related to its own personal circumstances. Thus, it may
consider only whether the new tenant is financially responsible, will adequately maintain the property,
and will use the premises for a legal business.
Tenet’s lease allowed for “general medical and physician’s offices.” Pelican did not propose to provide any
services not covered by that definition. There was no indication that Pelican would miss lease payments
or damage the property. West Jefferson may have acted as a reasonable business in defending its own
interests, but it acted wrongfully in its role as landlord.
Question: Why did Tenet want to assign their lease to Pelican?
Question: If that is the case, why would West Jefferson deny the assignment to Pelican?
Answer: West Jefferson thought Pelican would use the space for more than that allowed in the lease,
Question: Isn’t it reasonable for West Jefferson to not want to increase competition with its hospital?
Answer: Probably, but that is not the standard for evaluating whether withholding consent to assign a
Question: Isn’t that what West Jefferson did? The proposed use of the facility by Pelican would
compete with its adjacent hospital?
Answer: Potentially, but according to the Court the problem with that argument is that the proposed
How Rights Are Assigned
In general, an assignment may be written or oral, and no particular formalities are required. However,
when someone wants to assign rights governed by the statute of frauds, she must do it in writing.
An assignment can be valid with or without consideration, but an assignment for consideration is
irrevocable. A gratuitous assignment (one made as a gift, for no consideration) is generally revocable if it
is oral and generally irrevocable if it is written.
Notice to the obligor of the assignment is not required in order for the assignment is to be valid, but it is
recommended.
Rights of the Parties After Assignment
Once the assignment is made and the obligor notified, the assignee may enforce her contractual rights
against the obligor. The obligor may generally raise all defenses against the assignee that she could have
raised against the assignor.
Assignor’s Warranty
The law implies certain warranties, or assurances, on the part of the assignor. Unless the parties expressly
agree to exclude them, the assignor warrants that (1) the rights he is assigning actually do exist, and (2)
there are no defenses to the rights other than those that would be obvious, like nonperformance.
Special Issue: The Uniform Commercial Code And Assignments Of Security
Interests
The Uniform Commercial Code’s provisions regarding assignments in contracts for the sale of goods
are very similar to common law rules. However, Article 9 of the Code has special rules about the
assignment of security interests, which are the legal rights in personal property that assure payment.
Companies that sell goods often prefer to assign their security interests to some other firm, such as a
bank or finance company. The bank is the assignee. Just as we saw with the common law, the assignee of
a security interest generally has all of the rights that the assignor had. And the obligor (the buyer) may
also raise all of the defenses against the assignee that she could have raised against the assignor.
Under UCC §9-404, the obligor on a sales contract may generally assert any defenses against the
assignee that arise from the contract, and any other defenses that arose before notice of assignment.
You Be the Judge: Wells Fargo Bank Minn. v BrooksAmerica Mortgage
Corp. 5
Facts: Michael Brooks desperately needed financing for his company, BrooksAmerica, so he agreed to a
sale-leaseback agreement with Terminal Marketing Co. Terminal would pay BrooksAmerica $250,000,
and in exchange would obtain title to BrooksAmerica’s computers and office equipment. The contract
included a “hell or high water clause,” stating that BrooksAmerica’s obligation to pay was “absolute and
unconditional.” Another clause permitted Terminal to assign its rights without notice to BrooksAmerica,
and stated that the assignee took its rights “free from all defenses, setoffs, or counterclaims.” Brooks also
signed a “Delivery and Acceptance Certificate,” stating that BrooksAmerica had received the $250,000
(even though no money had yet changed hands), and reaffirming BrooksAmerica’s absolute obligation to
pay an assignee, despite any defenses BrooksAmerica might have.
Terminal assigned its rights to Wells Fargo. Terminal never paid any of the $250,000 to BrooksAmerica.
BrooksAmerica refused to make the required payments to Wells Fargo. Wells Fargo sued. Brooks
acknowledged that Wells Fargo paid Terminal for the assignment.
You Be the Judge: Is Wells Fargo entitled to its monthly lease payments despite the fact that
BrooksAmerica never received financing?
Holding: Yes, summary judgment for Wells Fargo affirmed. From the decision:
The hell or high water clause at issue here makes BrooksAmerica’s obligation to pay rent absolute
and unconditional. In the context of a finance lease containing a hell or high water clause, the
lessee must make payments regardless of defective performance on the part of the lessor, that is,
“come hell or high water.”
BrooksAmerica’s attempt to frame the issue as one of Terminal’s non-performance such that
BrooksAmerica’s obligations under the lease never arose at all, is unavailing. Non-performance
by the lessor is irrelevant, at least when the lessee was a sophisticated party and the party
asserting the right to rental payments is a good faith assignee.
BrooksAmerica does not dispute that Wells Fargo purchased the lease assignment in good faith
and for value. Moreover, as a certified mortgage broker with over twenty years’ experience,
Michael Brooks is a sophisticated businessman who willingly executed an unambiguous contract
and accompanying documents. This Court will not bail him and BrooksAmerica out just because
they are now unhappy with the contract. Their dissatisfaction is more properly aimed at Terminal,
the alleged wrongdoer.
Question: What is UCC §9-403?
5 2004 WL 2072358 United States District Court for the Southern District of New York, 2004.
Answer: Under UCC §9-403, an agreement by a buyer (or lessee) that he will not assert against an
Question: How does UCC §9-403 apply to this case?
Answer: BrooksAmerica (the lessee) agreed with Terminal (the lessor) not to assert against Wells
Question: What argument does BrooksAmerica make to try to get around UCC §9-403?
Answer: It argues that Wells Fargo should have done a better job investigating the truth of the
Question: Why—was there something wrong with the representations?
Question: Why did BrooksAmerica lie about this?
Question: What did the Court think of BrooksAmerica’s argument that Wells Fargo should have done
a better job of discovering that BrooksAmerica was lying?