978-1285860381 Chapter 17 Solution Manual Part 1

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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.

Diagramming a Case

Students should diagram the case of Wells Fargo Bank Minnesota v BrooksAmerica Mortgage

Corporation on p. 371 of the text. The diagram should look roughly like the one on p. 372, and should

identify the two contracting parties, the assignor and assignee; indicate what was assigned; and describe

the legal issue that the assignment has caused. The issue is whether Wells Fargo is entitled to its monthly

lease payments despite the fact that BrooksAmerica never received financing.

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.

Quote of the Day

“For kindness begets kindness evermore, but he from whose mind fades the memory of benefits, noble is

he no more.” –Sophocles (c. 495-405 B.C.), Greek playwright, Ajax, 1.522.

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.

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.)

Rathke v. Corrections Corporation of America, Inc.

153 P.3d 303

Supreme Court of Alaska, 2007

Facts: The state of Alaska entered into a contract with Corrections Corporation of America

(CCA), a private company, to house Alaska’s inmates. The contract required CCA to abide by the

terms of a settlement agreement between the state and its inmates known as the Cleary FSA. This

agreement listed Alaska’s duties to its prisoners and also provided a list of permissible

disciplinary procedures.

Gus Rathke was an Alaska inmate at a CCA prison located in Arizona. A routine drug test

revealed marijuana in his system. Rathke’s level of marijuana was within the limit allowed by the

Cleary FSA (50 ng/ml) but exceeded Arizona’s limit (20 ng/ml). CCA applied the more stringent

Arizona standard. As a result, Rathke spent thirty days in punitive segregation and lost his prison

job.

Rathke sued CCA, seeking lost wages and an apology. He claimed that CCA breached its

contract with Alaska when it punished him according to the stricter marijuana standard. Rathke

argued that as an Alaska inmate, he was an intended third-party beneficiary of the contract

between Alaska and CCA.

The trial court disagreed with Rathke. It held that, even though he was entitled to certain

rights under the Cleary FSA, he was not a third-party beneficiary of the CCA/Alaska contract. It

reasoned that the Clearly FSA duties were only between Alaska and the inmates, while the duties

in the CCA/Alaska contract were only between CCA and the state. Rathke appealed to Alaska’s

Supreme Court.

Issue: Was Rathke an intended beneficiary of the contract between the state of Alaska and CCA?

Excerpts from Justice Carpeneti’s Decision:

In determining whether a third party is an intended beneficiary of a contract, we refer to the

Restatement (Second) of Contracts. According to §302, “a beneficiary of a promise is an

intended beneficiary if the circumstances indicate that the promisee intends to give the

beneficiary the benefit of the promised performance.

When applying these provisions, the motives of the parties in executing a contract—especially

the promisee—are determinative. As a general rule, if the promised performance is rendered

directly to the beneficiary, the intent to benefit the third party will be clearly manifested.

The state owes legal duties to all Alaska inmates, including those housed like Rathke at the

CCA’s Arizona facility. These duties are detailed in the Cleary FSA, which is an enforceable

contract between Alaska inmates and the state.

We disagree with the [lower] court’s analysis. First, the Cleary settlement is incorporated

by reference into the ADC/CCA contract. Even more, many of its provisions are repeated

virtually word for word in the contract. For example, portions of the discipline section of the

state/CCA contract, allegedly breached in Rathke’s case are virtually identical to the Cleary FSA.

Given this identity of provisions between the FSA and the state/CCA contract, we

conclude that the prisoners are intended third-party beneficiaries of the portions of the contract

which are taken directly from the FSA.

Accordingly, we hold that inmates have the right to sue CCA for violations of the Cleary

FSA provisions contained in the CCA’s contract with the state

Question: Who is the intended beneficiary in this case?

Question: What is the definition of a third-party beneficiary?

Question: On what source did the Court rely to determine the definition of an “intended

beneficiary?”

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:

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

Recreation1

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: Were the plaintiffs incidental or donee beneficiaries?

Holding: We conclude the trial court correctly determined plaintiffs are not third-party beneficiaries and

therefore lack standing to sue on that basis.

The judgment is affirmed.

1 2011 Cal. App. LEXIS 510, Court of Appeal of California, 2011

Excerpts from Judge Hull’s Decision: Paragraph 37(a) of the contract limits assignments and reads:

“No assignment shall be made unless first consented to in writing by State”. Before State considers such

assignment, the proposed assignment must comply with applicable law. DPR reviewed the evidence

submitted by Delaware North and determined that the proposed assignment met the requirements under

paragraph 37(a).

Plaintiffs contend a third party who is within the class of those for whose benefit a contract is made have

standing to sue for breach of that contract. They further argue, Local 30 and the employees it represents

are clearly intended beneficiaries of the original contract.

The test for determining whether a contract was made for the benefit of a third person is whether an intent

to benefit a third person appears from the terms of the contract. Under the intent test, it is not enough that

the third party would incidentally have benefited from performance. On the other hand, the third person

need not be named or identified individually. A third party may enforce a contract where he shows that he

is a member of a class of persons for whose benefit it was made.

Plaintiffs contend Bridgette Browning has a right to sue as a taxpayer of California. They point out that

paragraph 37 procedures are intended to eliminate favoritism, fraud, corruption and misuse of public

funds. Thus, plaintiffs argue, can be said to have the intent to benefit the general public and the taxpayer.

Of course, any contract entered into by the state would presumably be for the benefit of the state’s

residents and taxpayers, just as a contract entered into by a corporation would presumably be for the

benefit of the corporation’s shareholders. However, the fact that members of the public derive a benefit

from the contract does not make them intended beneficiaries. A person is a donee beneficiary only if the

promisee’s contractual intent is to make a gift to him. Browning is no more than an incidental beneficiary

who benefits merely because the state as a whole benefits.

Likewise, Local 30 is no more than an incidental beneficiary. Plaintiffs argue that because the Concession

Contract contains a neutrality agreement regarding union organizing, Local 30 and the employees it

represents are clearly intended beneficiaries of the original contract. The neutrality agreement states, in

part, “Concessionaire shall not use the Premises to hold a meeting if the purpose is to promote or deter

union organizing.” This provision hardly reveals an intent to confer a benefit on Local 30, or any union

for that matter. At best, it shows an intent not to provide either a benefit or a detriment to union

organizing.

Additional Case: Register.com v. Verio, Inc.2

Facts: 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

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 . . .

2 356 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

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

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

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

After a contract is made, one or both parties may wish to substitute someone else for themselves. A

contracting party may transfer his rights under a contract, which is called an assignment of rights. Or a

party may transfer her obligations under the contract, which is a delegation of duties. What rights are

assignable? Any contractual right may be assigned unless assignment

Would substantially change the obligor’s rights or duties under the contract;

Is forbidden by law or public policy; or

Is validly precluded by the contract itself.

Case: Tenet Healthsystem Surgical, LLC v. jefferson Parish Hospital

Service District No. 13

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?

Holding: Yes, reversed and remanded. According to the court, Tenet used the facility for an outpatient

surgery center. Pelican planned to use the facility for an occupational medical clinic, including services

such as physical exams, drug screenings, low acuity emergencies, and also treat patients for depression,

lacerations, broken bones and pneumonia. These uses fit within the limits of a “general medical and

physicians offices, including related uses” as permitted under the lease.

West Jefferson also opposed the assignment because it claimed Pelican’s proposed uses would

compete with West Jefferson’s adjacent hospital. According to the court, only factors that relate to the

landlord’s interest in preserving the leased property or in having the terms of the lease performed should

be considered, such as the financial responsibility of the proposed subtenant, or the suitability of the

proposed use of the property by the subtenant. “A landlord’s personal taste or convenience is not properly

considered.” Any objection to the assignment must relate to ownership and operation of the premises, not

the landlord’s general economic interest.

Here, West Jefferson’s refusal to consent to the assignment based on Pelican’s increased competition

relates to West Jefferson’s general economic interest rather than the ownership or operation of the facility.

Thus, West Jefferson’s refusal to consent is wholly personal and does not relate to an objective evaluation

of Pelican as a tenant. Moreover, if West Jefferson were allowed to deny consent in this manner, it would

expand West Jefferson’s rights under the lease in such a way never agreed to by the parties to the lease.

Thus West Jefferson’s’ refusal to grant Tenet consent to assign the lease based on increased competition

from Pelican was unreasonable.

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?

3 426 F.3d 738, Fifth Circuit Court of Appeals, 2005.

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

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.