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Chapter 17
THIRD PERSONS AND CONTRACTS
RESTATEMENT
In some situations, the law affords rights and protections to certain individuals who are not original parties to a
contract. One such situation is when a contract is created to benefit a third party. Called third party beneficiary
contracts, these agreements provide the intended third party beneficiary with rights of recovery for breach of the
contract even though they were not an original party to the contract. The rights of the third party beneficiary vary
according to the nature of the agreement and the intent of the parties to the agreement.
Another situation in which third parties are given rights under a contract is when contract rights are assigned to a
third party. Generally, the third party is assigned the right to payment under a contract. The assignee steps into
the shoes of the original party to the contract and can enforce the terms of the contract.
A delegation of duties is the transfer to a third party of the responsibilities under a contract. Personal duties
cannot be delegated and the original party to a contract is not discharged by delegation. If an assignment or
delegation is made, there should be notification of the assignment, especially for purposes of payment. The
assignee takes no greater rights under the contract than those held by the assignor and the assignor is not
released from liability. In fact, the assignor makes warranties to the assignee about the validity of the contract
benefits. The assignee has rights against the assignor in the event the transferred rights develop problems or do
not materialize.
STUDENT LEARNING OUTCOMES
LO.1: Explain the two types of intended third-party beneficiaries.
LO.2: Explain why an incidental beneficiary does not have the right to sue as a third-party beneficiary.
LO.3: Define an assignment.
LO.4: Explain the general rule that a person entitled to receive money under a contract may generally assign
that right to another person.
LO.5: List the nonassignable rights to performance.
INSTRUCTOR’S INSIGHTS
Break the chapter down into two components – related Learning Outcomes are indicated in ( ):
1. What are third party beneficiary contracts and what are the rights of the parties?
Define third party beneficiary contracts (LO.1)
2. What are assignments of contracts and what rights and obligations do they confer?
Define a contract assignment (LO.3)
Discuss the various forms of contract assignments
CHAPTER OUTLINE
I. What are Third Party Beneficiary Contracts and What are the Rights of the Parties?
A. Definition
1. The third party is in the agreement from the beginning
2. It is probably easiest for the students if you start your presentation with the third party beneficiaries
CASE BRIEF: Prudential Insurance Co. v. Durante
443 S.W. 2d 499 (Tex. App. 2014)
FACTS: Dr. Garcia purchased a Prudential (Pruco) life insurance policy for a death benefit of $750,000,
with his wife, Margarita, the primary beneficiary and his three children contingent beneficiaries.
After her death in 2005, Dr. Garcia married Sagarnaga in 2007. In 2008, Dr. Garcia contacted
Pruco and in a recorded conversation advised Pruco that he wanted to designate his wife,
Sagarnaga, as a 50 percent beneficiary. Pruco sent him a partially completed change of
beneficiary [COB] form. Dr. Garcia completed the remaining information and returned the COB
request to Pruco. Thereafter, the signed COB form dated April 3, 2008, and received by Pruco
on April 10, 2008, listed the beneficiaries as follows: the primary beneficiary designation stated
Sagarnaga was to receive 50 percent of the policy proceeds, 12 percent to Arturo Garcia, Jr., 13
percent to Eloisa, and 25 percent to Cecilia. Contingent beneficiaries were also listed.
According to the terms of the policy, if Pruco received a COB request, Pruco would record the
change and file it. The change of beneficiary would be effective as of the date the request was
signed. Dr. Garcia died in Brazil on September 22, 2009. It was discovered that Dr. Garcia’s
COB form received on April 10, 2008, had not been accepted or recorded because a Pruco
employee saw an ambiguity regarding the contingent beneficiaries section which had not been
resolved prior to Dr. Garcia’s death. Pruco stated that Sagarnaga was, thus, not a beneficiary
under the policy. The children filed a lawsuit against Pruco seeking the entire death benefit.
Pruco contended that Sagarnaga had no standing to sue and asserted that it had not breached
the insurance contract. From a judgment for Sagarnaga, Prudential appealed.
ISSUES: Did Sagarnaga have standing under the insurance contract? Did the insurer breach the
insurance contract?
REASONING: The policy defined the right of the owner to change beneficiaries, and Dr. Garcia’s primary
beneficiary designation was clear and unambiguous. With the signed COB form received by
Pruco on April 10, 2008, Sagarnaga became the intended beneficiary of the policy which vested
on Dr. Garcia’s death. Pruco’s failure to tender the 50 percent death benefit to Sagarnaga was a
breach of contract. She was entitled to interest penalties and attorney’s fees.
3. Necessity of intent
CASE BRIEF: Copeland v. Admiral Pest Control Co.
933 P.2d 937 (Okla. App. 1996)
FACTS: Admiral Pest Control had a standing contract with Lodging Enterprises to spray its motel every
month to exterminate pests. Copeland was a guest in the motel. She was bitten by a spider.
She sued Admiral on the ground that she was a third party beneficiary of the extermination
contract.
ISSUE: Can a motel guest recover from the motel’s exterminator?
REASONING: Judgment against Copeland. There was no intent manifested that guests of the motel were
beneficiaries of the extermination contract. That contract was made by the motel to protect
itself. The guests were merely incidental beneficiaries of that contract and therefore could not
sue for its breach.
4. Description of third party beneficiary – parties’ intent to benefit
a. Creditor beneficiary: hospital or doctor in health insurance
B. Modification or termination of third party beneficiary contract
1. Modification is usually not without consent of the beneficiary
2. Arthur wishes to purchase an automobile, but is in extremely ill health. Arthur tells the bank loan
officer that if the bank will loan him the money to purchase the automobile, he will take out a
C. Limitations on intended third party beneficiary
1. The beneficiary receives no greater rights than the contract provides
D. Incidental beneficiaries
1. The benefit was not intended for this party
2. Direct incidental beneficiary – contractor benefits from construction loan to owner but is not a third
4. Consequence of incidental beneficiary status
CASE BRIEF: Union Pacific Railroad v. Novus International, Inc.
113 S.W.3d 418 (Tex. App. 2003)
FACTS: Novus International, Inc., manufactures a poultry-feed supplement named “Alimet” at its
plant in Chocolate Bayou, Texas. A key component of Alimet is the chemical “MMP.” Novus
contracted with Union Carbide to secure MMP from Carbide’s plant in Taft, Louisiana. Sometime
later, Carbide entered into a major rail-transportation contract with the Union Pacific Railroad
(UP). The rail contract consisted of nearly 100 pages. Exhibit 2 of the contract delineates
inbound and outbound shipments to and from all of Carbide’s Texas and Louisiana facilities.
Among the hundreds of shipments listed in Exhibit 2 are three outbound MMP shipments from
Taft, Louisiana to Chocolate Bayou, Texas. These shipments were described as “Taft outbound
liquid chemicals.” Due to difficulties that arose from its merger with the Southern Pacific
Railroad, UP experienced severe disruptions in its rail service over parts of two years and it was
unable to transport sufficient MMP to Chocolate Bayou. As a result, Novus had to utilize more
expensive methods of transportation to obtain Alimet. It sued UP to recover the increased costs
of premium freight resulting from UP’s breach of its rail contract with Carbide. UP asserts that
Novus did not have standing to sue; and Novus contends that it had standing to sue as an
intended third party beneficiary.
ISSUE: Is Novus an intended third-party beneficiary in the contract between UP and Carbide?
HOLDING: No. Novus is not an intended third-party beneficiary, and thus could not sue UP for its breach of
contract even though Novus had substantial interest in performance of contract. The
REASONING: Third-party beneficiary claims succeed or fail according to the provisions of the contact upon
which suit is brought. After reviewing the rail contract, no intent to confer a direct benefit on
Novus is evident. Novus is never named in the contract, and all obligation flow between UP and
Carbide. Nor is it stated anywhere in the contract that the parties are contracting for the benefit
of Carbide’s customers. Novus, thus, is an incidental beneficiary without standing to sue.
II. What are Assignments of Contracts and What Rights and Obligations Do They Confer?
A. Definitions: a transfer of right to performance – illustrate the advantages of diagrams by working
through one of the court opinions in the textbook on the board or using an overhead projector
B. Form of assignment
1. No consideration is necessary
C. Notice of assignment (See Figure 17-1 in text)
2. Without notification, the obligor has fulfilled its obligation only by paying obligor
The topic of assignment of rights and delegation of duties is one of the more difficult topics in the
text for the students to understand. Obviously, the use of diagrams is important as an organizational
tool; however, a hypothetical case involving a simple fact situation used as a summary of the rules is
also very beneficial. The following hypothetical situation is offered as a guide:
Assume that A and B have a bilateral contract whereby A will cut timber on B’s property to
a. A assigns the right to the $10,000 to an assignee. A successfully cuts the timber and
completes the contract. The assignee goes to B, informs B of the assignment, and
wants the $10,000. B tells the assignee that B paid the $10,000 to A the day before. The
assignee tells B that the rights have been assigned, that B’s payment to A was
b. A assigns the rights to the $10,000 to the assignee, who promptly notifies B of the
assignment. B verifies the assignment. A completes the timber-cutting contract but is
negligent in dropping a tree, which causes $2,000 worth of damage to B’s pickup truck.
In many jurisdictions, the solutions to the above problems would be as follows:
a. B would win the lawsuit, as B had no knowledge of the assignment to the assignee.
This illustrates the critical point of having assignees give notice immediately. If notice
b. B would win the lawsuit because any damages resulting from contract performance by
A are also good as a set-off against the assignee. The assignee stands in the show of
This problem can also be an excellent introduction to the next chapter if you ask the
students whether A would be discharged from performance of the timber -cutting contract for
CASE BRIEF: Credit General Insurance Co. v. NationsBank
299 F.3d 943 (8th Cir. 2002)
FACTS: L&S General Contractors, LLC (L&S), purchased a book-entry certificate of deposit (CD
005) in the principal amount of $100,000 from NationsBank, N.A. L&S later assigned CD 005 to
Credit General Insurance Company (Credit General) as collateral security for performance and
payment bonds on a Howard Johnson construction project. Credit General forwarded to
NationsBank a written notice of the assignment which states, “Please hold this account as
assigned to use until demanded or released by us.” NationsBank recorded the assignment and
executed a written acknowledgment. When CD 005 matured, L&S rolled over the proceeds into
a short term certificate of deposit (CD 058) and, upon maturity, rolled over the proceeds of CD
058 into another short-term certificate of deposit (CD 072).
The bank book entries of CD 058 and CD 072 recorded L&S as the only principal/payee and did
not reflect Credit General’s assignment interest. NationsBank admitted its failure to show
Credit General as assignee on the rollover book entries for CD 058 and CD 072 was a mistake.
Upon maturity, L&S withdrew the proceeds of CD 072 without the knowledge or consent of
Credit General. Later, Credit General made written demand on NationsBank for the proceeds
of CD 005, and NationsBank informed Credit General that CD 005 had been redeemed and
refused payment. Credit General sued NationsBank for wrongful payment of proceeds.
NationsBank argues that the assignment was limited in time to the completion of the Howard
Johnson project.
ISSUE: Can events and documents that are outside the written assignment which infer a
modification invalidate an otherwise valid assignment?
REASONING: Upon notice and acknowledgment of the assignment, NationsBank incurred a legal duty to pay
the account proceeds only to the assignee Credit General, in whom the account was vested by
the terms of the assignment. The assignment was absolute and unambiguous on its face and
clearly was not limited as NationsBank proposes. The assignment language controls.
D. Assignment of right to money (See Figure 17-2)
1. Future rights to money generally can be assigned; contract or example in the text
E. Nonassignable rights
1. If it materially alters or varies performance (personal, etc.), then cannot be assigned
2. Assignment increasing burden of performance
F. Rights of assignee (See Figure 17-3)
1. The assignee stands in the assignor’s shoes
CASE BRIEF: Riviera Plaza Investments, LLC v. Wells Fargo Bank, N.A.
10 N.E. 3d 541 (Ind. App. 2014)
FACTS: On July 7, 2006, Riviera Plaza Investments, LLC, by Haresh Shah, for value received,
executed and delivered a note by which it promised to pay Citibank the sum of $2,925,000.00 in
monthly installment payments of principal plus interest. On the same date, Riviera, again by Mr.
Shah, executed a mortgage in order to secure the payment of the note. Also on that date, Mr.
Shah executed a guaranty in favor of Citibank. Pursuant to the terms of the guaranty, Shah
guaranteed the prompt, complete, and full payment and performance of Riviera’s obligations in
accordance with the terms of the note. Riviera failed to make its monthly payments and
foreclosure proceedings were initiated in 2010. On February 9, 2011 Wells Fargo Bank was
assigned the rights, title, and interest in the loan document and was substituted as the plaintiff
in the foreclosure proceedings against Riviera and Shah in the trial court. As guarantor, Shah
contested litigation. From a judgment against Shah on his obligations under the guaranty, Shah
appealed.
ISSUE: Did the assignee Wells Fargo Bank acquire all of the rights of the assignor City Bank
had against Mr. Shah?
REASONING: The guaranty expressly provided that: “this guaranty shall follow the note and security
Instrument", and “the holder of this guaranty may enforce this guaranty just as if said holder had
been originally named as lender hereunder." The assignment clearly provided that the holder of
the guaranty, Well Fargo Bank, could enforce the guaranty as if it were the lender.
G. Continuing liability of assignor
Emphasize that in the absence of a novation, the assignor is not relieved of contractual obligations by
reason of a delegation of duties. Students tend to think that once a delegation of duties occurs, the
H. Liability of assignee
1. Consumer protection liability of assignee
a. FTC regulations preserve consumer defenses in assignment
3. Defenses and set-offs
a. Some statutes require notification by buyer to assignee of problems
I. Warranties of assignor
1. The assignor does not warrant that the other party will perform
J. Delegation of duties
1. Standardized and nonpersonal vs. personal – can’t delegate personal
3. Delegation of duties under the UCC
CASE BRIEF: Federal Insurance Co. v. Winters
354 S.W. 3d 287 (Tenn. 2011)
FACTS: The Emersons contracted with Martin Winters, the owner of Winters Roofing Company,
to install a new roof on their home. When the new roof leaked, Winters agreed to fix the
problems. Without the knowledge of the Emersons, Winters hired a subcontractor, Bruce
Jacobs, to perform the repair work. Jacobs's use of a propane torch in repairing the roof
resulted in a fire that caused $871,069 in damages to the house and personal property.
Federal Insurance Co. sued Winters to recover sums it paid the Emersons for damages
resulting from the fire. Winters defended that Federal had sued the wrong party because
Winters did not participate in the repair work, but had subcontracted the work out to Jacobs and
was neither at the job site nor supervised Jacobs's work.
ISSUE: Did delegation of the roof repair work to subcontractor Jacobs release Winters for
liability for damages caused by the acts of a subcontractor?
REASONING: Judgment for the plaintiff. Winters, based on his contract with the Emersons, had an implied
duty under the contract to install the roof properly, skillfully, diligently, and in a workmanlike
manner. The delegation of these duties to Jacobs did not serve to release Winters from liability
implicit in the original content.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Third party beneficiary contracts. A life insurance policy is an example of a third party beneficiary contract.
Here, the intent to benefit the third person, the beneficiary of the policy, is very clear because the insurer is
Authors’ Comment: It may also be noted that the death of the insured is a condition precedent to the
obligation of the insurer to make payment of the policy. At the time, the only person in existence who can
Note that it is stated that during the life of the insured, the insurer is not obligated to render any “significant
service” to the insured. The insured typically has the right to surrender the policy for its cash surrender value
2. What constitutes an assignment. No. The assignment of the right to money was effective between the wife
and Pennsylvania as soon as it was made, and therefore it did not matter that John was not notified of the
3. Assignability of a right to performance. No. The right assigned called for the performance of personal
services. Such a right cannot be assigned without the consent of the person who is to render the personal
4. Warranties of assignor. No. An assignor does not warrant that the obligor will pay or perform as required by
Authors’ Comment: In a commercial setting, this problem is commonly met by having the assignor make an
express statement in the assignment that the assignment is made with recourse, or the right to go back
5. Distinction between a third party beneficiary contract and an assignment. No. While the assignment
transaction involves a third party, it is not a third party beneficiary contract. An intent to benefit the third party
is required only in the case of a third party beneficiary contract. In the case of an assignment, there is
6. Consumer protection liability of assignee. Rustic was liable for the amount Washington paid Smithville. This
7. Limitations on third party beneficiary. No. Julie had only such rights as the policy created. The policy required
notice promptly after death. The fact that she was not a party to the contract and had not agreed to the time
8. Distinction between incidental and third party beneficiaries. No. Exchange Bank was not a third party
beneficiary. When a lender agrees to lend a borrower money to pay the borrower’s debts, there is at most an
9. Distinction between an incidental beneficiary and a third party beneficiary who may recover on contract . No.
There was no intent on the part of the contracting parties that any person bitten by a stray dog would have
10. Third party beneficiary (incidental). Linda Caswell could not collect as a beneficiary of the lease agreement.
She was merely a visitor who fell through a trap door and was not an intended beneficiary of the lease
between the store operator and store owner and had no standing to litigate the claim against the owner
11. Consideration not necessary for assignment. Yes. The widow was correct in stating that past benefits could
For an advanced class, discuss the case in which there is a promise to make an assignment, in which event
it would be necessary that there be consideration for that promise. It might also be brought out that when an
12. Third-party beneficiaries right to sue. This contract made between the contractor and subcontractor for the
express benefit of the third-party, AgGrow Oils, could be enforced by the intended third-party beneficiary,
13. Third party beneficiary. The court held that a care provider subject to an audit of reimbursable costs under
LAWFLIX
It Could Happen to You (1996) (PG)
Have the students discuss the legal, ethical and contract issues involved in the first portion of the film in which a
police officer (Nicholas Cage) promises to split a lottery ticket with a coffee shop waitress (Bridget Fonda) as her
tip because he does not have enough money. The lottery ticket (purchased by Cage and his wife, Rosie Perez) is
management system for classroom use.
