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Chapter 16
Third Party Rights
See Separate Lecture Outline System
INTRODUCTION
This chapter considers the extent to which non-contracting parties have rights in or to a contract. Because a contract
represents an agreement between the parties who made it, only these parties have rights and liabilities under it. A party not in
privity of contract has no rights in or to a contract. There are two exceptions: a third party beneficiary contract is made with the
intent to benefit a third party, and the third party has rights in the contract and may sue the promisor, and under some
circumstances the promisee, to have it enforced. Under an assignment of rights or a delegation of duties, one of the parties
transfers contractual rights or obligations to a third party, giving the third party the rights or obligations of the transferor.
ADDITIONAL RESOURCES—
 VIDEO SUPPLEMENTS 
The following video supplements relate to topics discussed in this chapter—
382 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 16.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Drama of the Law
Third Party Beneficiaries—Can Santa Rosa Pull One Out for the kids?—Assignment of rights to proceeds is a
CHAPTER OUTLINE
I. Assignment and Delegations
A. ASSIGNMENTS
The transfer of contract rights to a third person is an assignment. No special form is required. Assignments are
involved in much business financing. Assignments may involve accounts receivable, proceeds from executory
contracts, or general intangibles (property that is a right rather than a physical object—stocks, bonds, and the
goodwill of a business, for example).
1. The Effect of an Assignment
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 317
The Restatement (Second) of Contracts is an authoritative source for some of the principles discussed in this
chapter. Specific sections of the Restatement are noted in the text. The following is the section that relates to and is
cited in this part of the text—Restatement (Second) of Contracts, Section 317.
§ 317. Assignment of a Right
(1) An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s
right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such
(2) A contractual right can be assigned unless
(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the
(b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or
2. Rights Assigned Are Subject to the Same Defenses
3. Form of the Assignment
Case 16.1: Martha Graham School and Dance Foundation, Inc. v.
Martha Graham Center of Contemporary Dance, Inc.
In the 1920s, Martha Graham started a dance company and a dance school, and choreographed works for
commissions. In the 1940s, she started the Martha Graham Center of Contemporary Dance, Inc. (the Center), which
eventually encompassed the school. In 1989, Graham executed a will in which she gave Ronald Protas, the Center’s
general director, “any rights or interests” in “dance works, musical scores [and] scenery sets.” After her death, Protas
asserted ownership of all of Graham’s dances. In 1999, the Center’s board removed Protas, who founded the Martha
Graham School and Dance Foundation, Inc., and began licensing the dances. Protas and his foundation filed a suit in a
federal district court against the Center and others to enjoin their use of, among other things, seventy of the dances.
The Center responded in part that Graham had assigned the dances to it. The court ruled that twenty-one of the
dances had been assigned to the Center. The plaintiffs appealed.
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Notes and Questions
What was the court’s ruling with respect to Protas’s licensing of the dances before they were proved to have been
assigned to the Center? The court held, “As the Artistic Director of the Center, Protas was a fiduciary of the Defendants,
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 16.1
Suppose that Graham had not benefited from the Center’s assumption of the duties associated with her
choreography. Would the alleged assignment have been valid? Why or why not? Probably not, assuming that there
would have been no other consideration shown for the assignment. As the court explains, consideration is a
requirement for a valid assignment, just as it is an element of any valid contract.
ANSWER TO “THE E-COMMERCE DIMENSION” QUESTION IN
CASE 16.1
If Graham’s dances had existed as part of a database available only over the Internet, would the principles applied
in this case, and how they were applied, have been different? Why or why not? No. The legal principles that the court
4. Rights That Cannot Be Assigned
Generally, all rights can be assigned except—
a. When a Statute Prohibits Assignment
b. When a Contract Is Personal in Nature
c. When Assignment Will Significantly Change the Risk or Duties of the Obligor
d. When the Contract Prohibits Assignment
Exceptions to this last exception include—
• An assignment of a right to receive money.
• An assignment of rights in real estate.
• An assignment of a negotiable instrument.
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SPECIAL EXHIBIT—
Assignments
The following illustration summarizes some of the principles of assignment discussed in the text.
WHICH RIGHTS CAN BE ASSIGNED?
All rights can be assigned unless—
• A statute expressly prohibits assignment
• A contract is for personal services
• An assignment will materially increase or alter the obligor’s
risk or duties
WHAT IF THE ORIGINAL CONTRACT PROHIBITS
ASSIGNMENT?
Rights that can be assigned even if a contract prohibits
SHOULD THE ASSIGNEE NOTIFY THE OBLIGOR OF
THE ASSIGNMENT?
Not legally necessary, but establishes—
• Which of two or more assignees has the right to the
obligor’s performance
• Only performance to the assignee can discharge the
obligor’s obligations
ASSIGNOR
ASSIGNEE
OBLIGOR
CHAPTER 16: THIRD PARTY RIGHTS 387
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 318
§ 318. Delegation of Performance of Duty
(1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public
(2) Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee
has a substantial interest in having that person perform or control the acts promised.
(3) Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made
5. Notice of Assignment
An assignment is effective immediately, whether or not notice is given to the obligor. When notice is not
given—
• If the same right is assigned to different persons, the first assignment in time is the first in right (some
B. DELEGATIONS
A party can transfer duties under a contract through a delegation. No special form is required to create a valid
delegation of duties. As long as the delegator expresses a present intention to make the delegation, it is effective.
1. Duties That Cannot Be Delegated
Delegation is prohibited—
2. Effect of a Delegation
Normally, if the delegatee fails to perform, the delegator is still liable to the obligee. (For example, a
contractor who delegates the construction of a house is liable if the delegatee fails to build the house—the
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When a contract provides for assignment of “all rights” (or states “I assign the contract” or uses similar general
words), the contract is construed as implying an assignment of rights and a delegation and an assumption of
duties.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 328
§ 328. Interpretation of Words of Assignment; Effect of Acceptance of Assignment
(1) Unless the language or the circumstances indicate the contrary, as in an assignment for security, an assignment of
(2) Unless the language or the circumstances indicate the contrary, the acceptance by an assignee of such an
assignment operates as a promise to the assignor to perform the assignor’s unperformed duties, and the obligor of the
assigned rights is an intended beneficiary of the promise.
A. TYPES OF INTENDED BENEFICIARIES
1. Creditor Beneficiary
If a promisee’s main purpose in contracting is to discharge a duty or debt he or she already owes to a third
party, the third party is a creditor beneficiary.
CASE SYNOPSIS—
Case 16.2: Allan v. Nersesova
Autumn Allan owned a condominium directly beneath Aslan Koraev’s condominium in a building in Texas. The
condominiums’ governing documents made each owner liable for his or her damage to other units. After eight
incidents of water and sewage “incursion” from Koraev’s unit, Allan filed a suit in a Texas state court against him (and
others, including “Nersesova”) for breach of contract. The court issued a judgment in Koraev’s favor on the ground that
Allan failed to establish a contract between them. Allan appealed.
A state intermediate appellate court reversed. The governing documents formed a contract between the owners
CHAPTER 16: THIRD PARTY RIGHTS 389
enforcement. “action shall be maintainable by the Managing Agent or Board of Directors in the name of the
Association, in behalf of the Owners or, in a proper case, by an aggrieved owner.” Thus, Allan had standing to sue
Koraev for his breach.
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Notes and Questions
Can the relationship between these parties be explained simply? Under the condominiums’ governing documents,
each owner was liable for his or her damage to other units. Each owner was a promisor, making a promise to the
Owners Association to comply with this provision. The documents stated that to enforce this duty “action shall be
maintainable by the Managing Agent or Board of Directors in the name of the Association, in behalf of the Owners or,
ANSWERS TO QUESTIONS AT THE END OF CASE 16.2
1. Why did the court use the term creditor beneficiary to describe Allan? It would seem obvious that the term
creditor beneficiary should refer to a third party beneficiary to whom the promissee in a contract promised to pay a
debt. In this case, however, Koraev did not owe Allan a debt, but a duty—Koraev had a duty not to cause damage to
Allan’s condominium unit. The failure of Koraev to perform that duty allowed Allan to sue him for damages. Only after
it was established that Koraev had breached the contract and owed Allan damages could Allan be called a creditor
creditor beneficiary under the traditional rule, because it was not yet clear that Koraev owed her a debt (of damages).
2. Suppose that Allan had sued Koraev for negligence. Would she be successful? Discuss your answer. In fact, Allan
did win on a negligence claim in the trial court where this lawsuit began. Allan had sued Koraev, the person who
managed his unit (he leased it to tenants), the condominium’s Owners’ Association, its president, and its management
company for both negligence and breach of contract. All of the parties except Koraev and the person who managed his
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that she had already received in the pretrial settlements). The appellate court affirmed this part of the trial court’s
decision.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering whether a third party was an intended beneficiary or an incidental beneficiary of a
contract include the following.
• Brock v. Allen, __ Ga.App. __, __ S.E.2d __ (2002) (home buyers were intended third-party beneficiaries of a
contract between the seller and a termite exterminator, who erroneously reported, under a contract with the seller
who was in turn obligated to provide an accurate report to the buyers, that there was no termite infestation).
2. Donee Beneficiary
If a promisee’s main purpose in making a contract is to confer a gift on a third party, the third party is a
donee beneficiary (a common contract involving a donee beneficiary is a life insurance policy). The “modern
view” is not to distinguish between types of intended beneficiaries.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 309
§ 309. Defenses Against the Beneficiary
(1) A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and
(2) If a contract ceases to be binding in whole or in part because of impracticability, public policy, nonoccurrence of a
(3) Except as stated in Subsections (1) and (2) and in § 311 or as provided by the contract, the right of any beneficiary
claims or defenses against the beneficiary.
(4) A beneficiary’s right against the promisor is subject to any claim or defense arising from his own conduct or
agreement.
B. WHEN THE RIGHTS OF AN INTENDED BENEFICIARY VEST
Until the rights of an intended third party vest, he or she cannot enforce the contract against the original parties.
The rights vest when the original parties cannot rescind or change the contract without the third party’s consent.
This occurs when the beneficiary—
• Materially alters his or her position in justifiable reliance on the contract.
ENHANCING YOUR LECTURE—
  GOVERNMENT CONTRACTS AND
THIRD PARTY BENEFICIARIES
 
Government entities often contract with private organizations to provide certain services to the public. Are those
who benefit under such contracts intended beneficiaries? This question came before the court in a case involving a
person who had registered a domain name with an organization that had contracted with the federal government to
provide domain name registration services.
THE DOMAIN NAME CONFLICT
In 1994, in the early days of the Internet (as a public surfing/shopping vehicle), domain names were free for the
asking. At that time, Network Solutions, Inc. (NSI), was the sole registrar of domain names. NSI had a contract with a
later contacted NSI, he was told that it was too late to undo the transfer. Kremen then turned to the courts for