Homework Help

Business Law Chapter 17 Homework Third Party Rights Introduction This

Page Count
11 pages
Word Count
7357 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 17
Third Party Rights
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.
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,
2 UNIT THREE: CONTRACTS AND E-CONTRACTS
proceeds from executory contracts, or general intangibles (property that is a right rather than a physical
objectstocks, bonds, and the goodwill of a business, for example).
1. The Effect of an Assignment
a. Extinguishes the Rights of the Assignor
When contract rights are assigned unconditionally, the rights of the assignor are extinguished,
CASE SYNOPSIS
Case 17.1: Hosch v. Colonial Pacific Leasing Corp.
Edward Hosch entered into loan agreements with Citicapital Commercial Corp. to finance the purchase of
heavy construction equipment. A few months later, Citicapital merged into GE Capital Commercial, Inc. One
year later, GE Capital assigned Hosch’s loans to Colonial Pacific Leasing Corp. When Hosch failed to pay,
Colonial Pacific filed a suit in a Georgia state court to collect. The court issued a judgment in favor of Colonial
Pacific. Hosch appealed.
..................................................................................................................................................
Notes and Questions
What underlies the policy favoring the assignment of most contract rights? Underlying the policy in
support of assignment of contract rights is a desire to encourage the free flow of property, as well as services,
funds, and credit. Prohibiting or restricting assignments can inhibit, and of course block, the transfer of real
estate, money, goods, and services. To encourage business and commerce, prohibitions of this kind are
against the public policy of all states.
b. Assigned Rights Are Subject to the Same Defenses
The assignee’s rights are subject to the defenses that the obligor has against the assignor. (If
a creditor fraudulently procures the right to a debtor’s payment, the debtor may raise the fraud
as a defense against payment to the creditor’s assignee).
c. Form of the Assignment
An assignment can take any formoral or writtensubject tot he Statute of Frauds.
CHAPTER 17: THIRD PARTY RIGHTS 3
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?
WHAT ARE THE ASSIGNOR’S RIGHTS UNDER AN
ASSIGNED CONTRACT?
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
ASSIGNMENT OF
RIGHTS
ORIGINAL
CONTRACT
DUTIES OWED
AFTER ASSIGNMENT
2. 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 an Assignment Will Significantly Change the Risk or Duties of the Obligor
d. When the Contract Prohibits Assignment
Exceptions to this last exception include assignments of
A right to receive money.
CASE SYNOPSIS
Case 17.2: Bass-Fineberg Leasing, LLC v. Modern Auto Sales, Inc.
BassFineberg Leasing, Inc. leased a tour bus to Modern Auto Sales Inc. and Michael Cipriani. The lease
included an option to buy the bus. The lease prohibited Modern Auto and Cipriani from assigning their rights
without BassFineberg's written consent. Later, Cipriani left the bus with Anthony Allie at BVIP Limo Services,
Ltd. for repairs. Modern Auto and Cipriani did not pay for the repairs. At the same time, they defaulted on their
..................................................................................................................................................
Notes and Questions
Was Bass-Fineberg an intended third party beneficiary of the contract between Cipriani and Allie,
and therefore entitled to retain Allie’s $5,000 payment on that contract? No, Bass-Fineberg was not an
intended third party beneficiary of the contract between Cipriani and Allie. A party cannot be a third party
beneficiary of a void contract, and the contract between Cipriani and Allie was void because it violated the
anti-assignment provision in Bass-Fineberg’s lease with Modern Auto and Cipriani.
CHAPTER 17: THIRD PARTY RIGHTS 5
ADDITIONAL BACKGROUND
Rights That Cannot Be Assigned
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. After selected parts of the text in
which sections are noted or are otherwise relevant, the full text of some sections are set out here. The
following is the section that relates to this part of the textRestatement (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
(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 obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his
chance of obtaining return performance, or materially reduce its value to him, or
3. Notice of Assignment
An assignment is effective immediately, whether or not notice is given to the obligor. When notice
is not given
a. Priority Issues
If the same right is assigned to different persons, the first assignment in time is the first in right
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
6 UNIT THREE: CONTRACTS AND E-CONTRACTS
Delegation is prohibited when
a. When the Duties Are Personal in Nature
This occurs when performance depends on the personal skill or talents of the obligor, or when
b. When Performance by a Third Party Will Vary Materially from That Expected by the
Obligee
c. When the Contract Prohibits Delegation
A contract can expressly prohibit delegation.
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
ADDITIONAL BACKGROUND
Effect of a Delegation
The following is a section of the Restatement (Second) of Contracts that relates to this part of the text
Restatement (Second) of Contracts, Section 318.
§ 318. Delegation of Performance of Duty
(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.
C. ASSIGNMENT OF “ALL RIGHTS
When a contract provides for assignment of “all rights” (or states “I assign the contract” or uses similar
ADDITIONAL BACKGROUND
Assignment of “All Rights”
The following is a section of the Restatement (Second) of Contracts that relates to this part of the text
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
(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
II. Third Party Beneficiaries
When a promisee intends at the time of contracting that performance benefit a third person, the third person
becomes a beneficiary of the contract and has legal rights. If the promisor fails to keep the promise that
benefits the third party, the third party normally can bring an action against the promisor to enforce the
contract.
A. WHO IS THE PROMISOR?
The promisor is the party who made the promise that benefits the third party. Under this interpretation,
CASE SYNOPSIS
Case 17.3: Bozzio v. EMI Group, Ltd.
In the 1980s, Dale Bozzio was the front woman of the band Missing Persons. The members of the band
formed Missing Persons, Inc. (MPI), a “loan-out” corporation through which to provide their artistic services.
Capitol Records entered into a contract with MPI to produce and sell the band’s recordings. The band
members agreed to look solely to MPI for payment of all royalties and not to bring any claims against Capitol.
After the group disbanded, MPI was suspended for non-payment of state corporate taxes. Two decades later,
Bozzio filed a suit in a federal district court against Capitol, EMI Group, Ltd., and others, seeking royalties on
..................................................................................................................................................
Notes and Questions
Capitol will of course contend that Bozzio’s agreement to look solely to MPI for payment of all
8 UNIT THREE: CONTRACTS AND E-CONTRACTS
royalties and not to bring any claims against Capitol bars her suit in this case. What is Bozzio’s best
response to this contention? Bozzio’s best response to Capitol’s contention about the interpretation and
effect of the band member’s agreement not to pursue claims against the recording company might be that the
agreement bars only claims arising after royalties have been paid to the band’s loan-out corporation. Her
complaint in this case concerns royalties that have allegedly not yet been paid. Thus, her agreement not to
file claims against Capitol does not apply.
In this case, the plaintiff was Dale Bozzio, a former front-woman for a Los Angeles, new wave band. She
asserted that she was a third party beneficiary of a contract between Capitol Records, the band’s recording
What effect might an ultimate decision in the plaintiff’s favor in this case have on the licensing
and sale of digital music? The effect that an ultimate decision in the plaintiff’s favor in this case might have
on the licensing and sale of digital music would seem to be mostly positive. The artists who create the music
licensed and sold in digital format would realize a fair share of the profits from their efforts. They would thus
B. TYPES OF INTENDED BENEFICIARIES
1. Creditor Beneficiary
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.
C. 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
CHAPTER 17: THIRD PARTY RIGHTS 9
Brings a lawsuit on the promise.
ADDITIONAL BACKGROUND
Defenses against Third Party Beneficiaries
The following is a section of the Restatement (Second) of Contracts that relates to this part of the text
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
(2) If a contract ceases to be binding in whole or in part because of impracticability, public policy, nonoc-
(3) Except as stated in Subsections (1) and (2) and in § 311 or as provided by the contract, the right of any
(4) A beneficiary’s right against the promisor is subject to any claim or defense arising from his own conduct
or agreement.
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
10 UNIT THREE: CONTRACTS AND E-CONTRACTS
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 federal government agency stating that NSI had the primary responsibility for “ensuring the
quality, timeliness, and effective management” of domain name registration services.
Gary Kremen, seeing what he felt was a great opportunity, registered the name “sex.com” with NSI.
Unfortunately for Kremen, Stephen Cohen also saw the potential of that domain name. Cohen, who had just
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 disappearedafter 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?
CHAPTER 17: THIRD PARTY RIGHTS 11
If a reasonable person in the beneficiary’s position would believe that the promisee intended to confer on
the beneficiary the right to enforce the contract, the beneficiary is an intended beneficiary. Other factors
indicating an intended, rather than an incidental, beneficiary include
Performance under the contract is rendered directly to the third party.
The third party has rights to control the details of performance.
The contract expressly designates the third party’s status.
ADDITIONAL CASES ADDRESSING THIS ISSUE
Identifying Intended versus Incidental Beneficiaries
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).
TEACHING SUGGESTIONS
1. Expect students to have some difficulty with the terms used in this chapter. You may want to spend some
2. Assignment and delegation are not conceptually difficult. Ordinarily, students have difficulty only in
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.
12 UNIT THREE: CONTRACTS AND E-CONTRACTS
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 involve accounts receivable, proceeds from executory contracts, or general intangibles (property
2. What rights cannot be assigned? Generally, all rights can be assigned, unless: (1) a statute expressly
prohibits assignment (assignments of future rights to workers’ compensation are statutorily prohibited, for instance);
3. What rights can be assigned despite a contract clause expressly prohibiting assignment? A contract
cannot prevent an assignment of the right to receive money. The assignment of ownership rights in real estate may
4. What problems arise when notice of an assignment is not given to the obligor? If the same right is as-
signed to different persons, who has the right to performance? The majority rule is that the first assignment in time is
5. What is the difference between an assignment and a delegation? The transfer of contract rights to a third
6. What duties cannot be delegated? Generally, any duty can be delegated, except: (1) when performance
depends on the personal skill or talents of the obligor (a personal tutor cannot delegate his or her duties, for instance);
(2) when special trust has been placed in the obligor; (3) when performance by a third party will vary materially from
7. What happens if the delegatee fails to perform? Ordinarily, the delegator is still liable to the obligee. The
8. What do courts focus on when determining whether a third party beneficiary is an intended or an
incidental beneficiary? In determining whether a third party beneficiary is an intended or an incidental beneficiary,
courts focus on intent, as expressed in the language of a contract and implied by the surrounding circumstances.
Courts often apply the reasonable person testwould a reasonable person in the position of the beneficiary believe
that the promisee intended to confer on the beneficiary the right to enforce the contract?
9. What right does the status of an intended beneficiary confer on a third party to a contract? As the
intended beneficiary of a contract, a third party has legal rights and can sue the promisor directly for breach of the
contract. A third person becomes an intended third party beneficiary of a contract when the original parties to the
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
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
14 UNIT THREE: CONTRACTS AND E-CONTRACTS
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
CHAPTER 17: THIRD PARTY RIGHTS 15
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 assignment of, or giving of an order for, wages or salary but does not include an order or assignment
made pursuant to Section 4701 or 4801.6 of the Civil Code or Section 3088 of the Probate Code.
(1) Separate written instrument. The assignment is contained in a separate written instrument, signed by the
(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
(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
(5) Statement of nonexistence of other assignment involving same transaction. No other assignment exists in
(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.
16 UNIT THREE: CONTRACTS AND E-CONTRACTS
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 truth thereof, and the employer shall incur no liability whatsoever by reason of any payments
made by the employer to an assignee under any assignment in reliance upon the facts so stated.
(e) Revocation of assignment of wages or power of attorney. An assignment of wages to be earned is re-
vocable at any time by the maker thereof. Any power of attorney to assign or collect wages or salary is
revocable at any time by the maker thereof. No revocation of such an assignment or power of attorney is
effective as to the employer until the employer receives written notice of revocation from the maker.
(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, retirement, disability, unemployment, or other benefits, for the payment for goods or services furnished
by the employer to the employee or the employee’s family at the request of the employee, or for charitable,
educational, patriotic or similar purposes.
(h) Earned wages except necessities of life. No assignment of wages is valid unless at the time of the
making thereof, such wages or salary have been earned, except for necessities of life and then only to the
person or persons furnishing such necessities of life directly and then only for the amount needed to furnish
such necessities.
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 9: In Lawrence v. Fox, 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
CHAPTER 17: THIRD PARTY RIGHTS 17
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 answers to both questions have to do with the
apparent fact (see Antony Jon Waters, “The Property in the Promise: A Study of the Third Party Beneficiary Rule,” 98
Harvard Law Review (1985) 1109–1168.) that the “Holly” in this case was Merwin Spencer Hawley, a prominent
Buffalo, New York, merchant and president of the Buffalo Board of Trade, of which the defendant, Arthur Wellesley
Fox, was also a member. Evidence at trial suggested that the debt Hawley owed Lawrence was a gambling debt.
Because gambling was illegal under New York law, Lawrence could not recover from Hawley directly in court, as the

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.