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THE LEGAL ISSUES
Kremen sued Cohen, seeking as damages the substantial profits that Cohen had made by using the name. The
court held in Kremen’s favor and awarded him millions of dollars in damages. Kremen could not collect the judgment,
however, because Cohen had disappeared—after first transferring large sums of money to offshore accounts. Kremen
then tried to hold NSI responsible for his losses by alleging, among other things, that he was an intended third party
beneficiary of NSI’s contract with the government. He claimed that because NSI had not “effectively managed” its
duties, as it was obligated to do under the contract, his domain name had been wrongfully transferred.a
FOR CRITICAL ANALYSIS
Kremen also alleged that NSI had breached an implied-in-fact contract with him, but the court dismissed this claim.
Why would the court hold that no contract existed between Kremen and NSI? Was a required element for a valid
contract lacking?
C. INTENDED V. INCIDENTAL BENEFICIARIES
An incidental beneficiary cannot enforce a contract to which he or she is not a party, because the benefit that he
or she receives from the contract is unintentional. A third party is most likely an intended, rather than an
incidental, beneficiary if performance under the contract is to be rendered directly to the third party or the
contract designates the third party’s status
ANSWER TO VIDEO QUESTION LTR. A
Discuss whether a valid contract was formed when Oscar and Vinny bet on the outcome of a football game. Would
Vinny be able to enforce the contract in court? In the video, Vinny acknowledges that gambling is illegal in the town in
which the contract was formed. As discussed in Chapter 13, contracts that are illegal (or contrary to statute) are
CHAPTER 16: THIRD PARTY RIGHTS 393
ANSWER TO VIDEO QUESTION LTR. B
Is the Fresh Air Fund an incidental or intended beneficiary? Why? The Fresh Air Fund is an intended third party
beneficiary to the contract. A beneficiary is intended if a reasonable person in the position of the beneficiary would
believe that the promisee intended to confer on the beneficiary the right to enforce the contract. Here, Oscar and
ANSWER TO VIDEO QUESTION LTR. C
Can Maria sue to enforce Vinny’s promise to donate Oscar’s winnings to the Fresh Air Fund? Probably so. Although
Case 16.3: Revels v. Miss America Organization
Miss North Carolina Pageant Organization, Inc. (MNCPO), is a franchisee of Miss America Organization (MAO).
Under the “Miss America Organization Official Franchise Agreement,” MNCPO conducts a public contest (the “State
Finals”) to select Miss North Carolina and prepare her for the Miss America pageant (the “National Finals”). In return,
MAO “accept[s] the winner of the State Finals . . . as a contestant in the National Finals.” In June 2002, MNCPO
designated Rebekah Revels “Miss North Carolina 2002.” In July, MAO learned that Revels had formerly cohabited with a
“male non–relative” and that nude photos of her existed. MAO’ and MNCPO asked Revels to resign her title and told
her that if she refused, she would be excluded from competing in the National Finals. She resigned but filed a suit in a
North Carolina state court against MAO’, MNCPO, and others, asserting breach of contract. The court issued a
judgment in MAO’s favor. Revels appealed.
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Notes and Questions
In preparation for the National Finals—the Miss America Pageant—MAO sent crews to compile “an up-close and
personal” video of each contestant and to take photos of each contestant for publicity brochures. Revels argued in part
that these steps evidenced an implied contract between MAO and her. MAO had not taken any such steps to prepare
Revels, however, before she resigned. Could the court nevertheless rule that there was an implied contract between
Could MNCPO be considered to have signed the franchise agreement with MAO as Revels’s agent? Revels made
this argument, but the court found no support for it. The court explained, “Principles of agency arise when parties
manifest consent that one shall act on behalf of the other and subject to their control. Whenever the principal retains
the right to control and direct the manner in which the details of the work are to be executed by his [or her] agent, the
doctrine of respondeat superior operates to make the principal vicariously liable for the tortious acts committed by the
agent within the scope of . . . employment. . . . The evidence in the instant case tended to show that MAO had no
control over the day-to-day operations or management of MNCPO. Rather, the purpose of the franchise agreement
. . . was to ensure uniformity between all franchisees. In addition, the franchise agreement specifically stated that the
agreement between MAO and MNCPO did not create an agency relationship.”
an ethical basis on which to legitimately disqualify a contestant. Without this contract provision, however, an ethical
ANSWER TO “THE GLOBAL DIMENSION” QUESTION IN CASE 16.3
If the agreement between MAO and MNCPO had involved a third party—an international pageant organization—
would this have been a basis for concluding that Revels was an intended third party beneficiary? Why or why not? The
outcome would not likely have been different. The agreement between MAO and MNCPO provided that the national
organization would accept the winner of the state pageant as a contestant in the national pageant, but this did not
establish that the two organizations intended to make the winner of the state pageant an intended third-party
CHAPTER 16: THIRD PARTY RIGHTS 395
beneficiary of the agreement. This—not the domestic or global character of the contracting parties—was the
determining factor.”
ANSWER TO “THE E-COMMERCE DIMENSION” QUESTION IN Case 16.3
TEACHING SUGGESTIONS
1. Expect students to have some difficulty with the terms used in this chapter. You may want to spend some time
explaining them before discussing the substantive material. In discussing the substantive material, encourage students
2. Assignment and delegation are not conceptually difficult. Ordinarily, students have difficulty only in discerning
example, when personal services are required.
3. Remind students that unless there is a release or a novation, the assignor remains liable on the contract despite its
assignment. A party who, without notice of an assignment, pays an assignor will not later be liable to the assignee: the
assignee should notify the obligor of the assignment.
Cyberlaw Link
Can traditional contract law that applies to third-party beneficiary contracts, assignments, and delegations, apply
to those same types of contracts entered into on the Internet? Why or why not?
DISCUSSION QUESTIONS
1. How do assignments function? Assignments are involved in many business and financing devices. Assignments may
2. What rights cannot be assigned? Generally, all rights can be assigned, unless: (1) a statute expressly prohibits
3. What rights can be assigned despite a contract clause expressly prohibiting assignment? A contract cannot prevent an
4. What problems arise when notice of an assignment is not given to the obligor? If the same right is assigned to different
persons, who has the right to performance? The majority rule is that the first assignment in time is the first in right, but some
5. What is the difference between an assignment and a delegation? The transfer of contract rights to a third person is an
6. What duties cannot be delegated? Generally, any duty can be delegated, except: (1) when performance depends on
7. What happens if the delegatee fails to perform? Ordinarily, the delegator is still liable to the obligee. The obligee can
8. What factors indicate that a third party beneficiary is an intended beneficiary? The presence of one or more of the
9. What is a creditor beneficiary? If a promisee’s main purpose in contracting is to discharge a duty or debt he or she
10. When do the rights of a third party beneficiary vest? When the rights of a third party vest (become fixed or take
effect), he or she can enforce the contract. The rights vest when the original parties cannot rescind or change the contract
without the third party’s consent. This happens when the beneficiary (1) learns of the contract and manifests assent to it at the
ACTIVITY AND RESEARCH ASSIGNMENT
Most states have statutes providing for defenses against assignees, and a number of states have statutes relating to
other aspects of the assignment of contractual rights. For example, the Uniform Commercial Code deals comprehensively with
transactions that are intended to create security interests in personal property (Article 9) and codifies part of the law governing
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 4: Cited in the discussion of the form that an assignment can take is California Labor Code Section 300.
Under Cal. Labor Code § 300, a contract for the assignment of wages must be in writing. The following is the text of the statute.
LABOR CODE
DIVISION 2. EMPLOYMENT REGULATION AND SUPERVISION
PART 1. COMPENSATION
CHAPTER 2. ASSIGNMENT OF WAGES
§ 300. Validity and exceptions
(a) Assignment of wages; definition. As used in this section, the phrase “assignment of wages” includes the sale or
(1) Separate written instrument. The assignment is contained in a separate written instrument, signed by the person
(2) Consent of spouse. Where the assignment is made by a married person, the written consent of the spouse of the
person making the assignment is attached to the assignment. No such consent is required of any married person (i)
retirement, disability, unemployment, or other benefits, for the payment for goods or services furnished by the
(3) Written consent of parent or guardian. Where the assignment is made by a minor, the written consent of a parent
or guardian of the minor is attached to the assignment.
(4) Statement of age and marital status. Where the assignment is made by a person who is unmarried or who is an
such facts, is attached to or included in the assignment.
(5) Statement of nonexistence of other assignment involving same transaction. No other assignment exists in
connection with the same transaction or series of transactions and a written statement by the person making the
assignment to that effect is attached to or included in the assignment.
(6) Filing with employer. A copy of the assignment and of the written statement provided for in paragraphs (2), (4),
and (5), authenticated by a notary public, is filed with the employer, accompanied by an itemized statement of the
amount then due to the assignee.
(7) Nonexistence of other assignment of wages of employee and no earnings withholding order in force. At the time
the assignment is filed with the employer, no other assignment of wages of the employee is subject to payment and no
earnings withholding order against the employee’s wages or salary is in force.
(c) Maximum portion subject to assignment. Under any assignment of wages, a sum not to exceed 50 per centum of
the assignor’s wages or salary shall be withheld by, and be collectible from, the assignor’s employer at the time of each
payment of such wages or salary.
(d) Reliance of employer on statements. The employer is entitled to rely upon the statements of fact in the written
statement provided for in paragraphs (2), (4), and (5) of subdivision (b), without the necessity of inquiring into the
to an assignee under any assignment in reliance upon the facts so stated.
employer receives written notice of revocation from the maker.
(f) Wages under plan with multiple employers. No assignment of wages, earned or to be earned, is valid under any
circumstances if the wages or salary earned or to be earned are paid under a plan for payment at a central place or
places established under the provisions of Section 204a.
(g) Authorized deductions. This section does not apply to deductions which the employer may be requested by the
employee to make for the payment of life, retirement, disability or unemployment insurance premiums, for the
payment of taxes owing from the employee, for contribution to funds, plans or systems providing for death,
included in the assignment.
CHAPTER 16: THIRD PARTY RIGHTS 399
patriotic or similar purposes.
1989 Main Volume Credit(s)
(Stats.1937, c. 90, p. 202, § 300. Amended by Stats.1941, c. 529, p. 1851, § 5; Stats.1943, c. 1048, p. 2988, § 1;
Stats.1974, c. 1516, p. 3388, § 31, operative Jan. 1, 1977; Stats.1978, c. 1133, p. 3483, § 9, operative Jan. 1, 1980;
Stats.1982, c. 497, p. 2202, § 132.5, operative July 1, 1983.)
Footnote 10: Cited in the text is Lawrence v. Fox. In this case, an individual referred to as “Holly” owed Lawrence
$300. Fox suggested that Holly give him the money and promised to pay it to Lawrence to discharge Holly’s debt. (Sufficient
consideration was present to create a contract between Holly and Fox.) Fox never paid Lawrence, so Lawrence sued Fox,
considering himself a third party beneficiary of the contract between Holly and Fox. The trial court decided that Lawrence had a
legal right to sue Fox for failing to pay the $300 as promised, even though Lawrence was not a direct party to the contract. Fox
appealed. The Court of Appeals of New York affirmed the judgment and ordered Fox to pay Lawrence $300 to fulfill the
contract with Holly. Recognizing Lawrence as a third party beneficiary, the court explained “[t]hat where one person makes a
promise to another for the benefit of a third person, that third person may maintain an action upon it.” The court noted that
this was a “long recognized and clearly established” principle, resting on the ground “that the law operating on the act of the
parties creates the duty, establishes a privity, and implies the promise and obligation on which the action is founded.” This was
one of the first cases in the United States recognizing the rights of a party not in privity. On what basis does the court adopt the
rule? The court adopts the rule on the basis of precedent from its earlier (1806) rulings and on equitable grounds. Were other
courts in agreement with the principle? No—as this court notes, “[W]hatever may be the diversity of opinion elsewhere.”
The case is puzzling for two reasons. First, given the large sum of money involved (about a year’s wages back then),
why wasn’t a promissory note of some kind created and indorsed over to Lawrence by Fox as a means of repayment of the debt,
in accordance with the commercial practice of the times? And second, why didn’t Lawrence sue Holly directly, rather than
pursue the highly unusual and more circuitous route of suing Fox, for which his chances at recovery were much slimmer? The
400 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What is a third party beneficiary contract? What are the circumstances under which a third party can bring an action to
enforce it? When a promisee intends at the time of contracting that performance benefit a third party, the third party is a
2. Who are the parties in an assignment? What are their rights and duties? The parties in an assignment are the assignor
and the assignee (and the obligor). The rights of the assignor are extinguished, and the assignee has a right to demand
performance from the obligor. (To illustrate the terms: a creditor who assigns the right to a debtor’s payment to a collection
agency is an assignor, the agency is an assignee, and the debtor is an obligor.) The assignee takes only those rights that the
assignor originally had, subject to the defenses that the obligor has against the assignor (for example, if the creditor above
fraudulently procured the right to the debtor’s payment, the debtor may raise the fraud as a defense against payment to the
creditor’s assignee).
REVIEWING—
THIRD PARTY RIGHTS
Myrtle Jackson owns several commercial buildings that she leases to businesses, one of which is a restaurant. The
lease states that tenants are responsible for securing all necessary insurance policies but the landlord is obligated to
1. Can Jackson delegate her duty to maintain the buildings to Dunn? Why or why not? Jackson can delegate the duty
2. Who can be held liable for Dunn’s failure to fix the ceiling, Jackson or Dunn? Jackson had an obligation to McCall,
Dunn is in the business of providing such maintenance, by contract, for Jackson, then Dunn could be liable; if Dunn is
3. Was Faught an intended third party beneficiary of the lease between Jackson and McCall? Why or why not? The
4. Suppose that Jackson tells Dan Stryker, a local builder to whom she owes $50,000, that he can collect the rents
from the buildings’ tenants until the debt is satisfied. Is this a valid assignment? Why or why not? The assignment of
income that is owed from other parties to help satisfy a debt is a normal assignment. However, it could not interfere
with the rights in the relationship between Jackson and her tenants.
DEBATE THIS:
As a matter of public policy, personal injury tort claims cannot be assigned. This public policy is wrong and should
be changed. If it’s not against public policy to allow attorneys to take cases in which, if won, the attorneys obtains
and companies would offer money up front—at steep discounts—to pursue individuals’ personal injury tort claims,