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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
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
object—stocks, bonds, and the goodwill of a business, for example).
1. The Effect of an Assignment
a. Extinguishes the Rights of the Assignor
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.
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Notes and Questions
What underlies the policy favoring the assignment of most contract rights? Underlying the policy in
b. Assigned Rights Are Subject to the Same Defenses
c. Form of the Assignment
An assignment can take any form—oral or written—subject 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.
WHAT IF THE ORIGINAL CONTRACT PROHIBITS
ASSIGNMENT?
Rights that can be assigned even if a contract prohibits
assignment include—
• A right to receive money
• Ownership rights in real estate
WHAT ARE THE ASSIGNOR’S RIGHTS UNDER AN
ASSIGNED CONTRACT?
ASSIGNOR
OBLIGOR
ASSIGNMENT OF
RIGHTS
ORIGINAL
CONTRACT
DUTIES OWED
AFTER ASSIGNMENT
4 UNIT THREE: CONTRACTS AND E-CONTRACTS
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.
Bass–Fineberg 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 Bass–Fineberg'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
lease payments. While BVIP retained possession of the bus, Allie signed an agreement with Cipriani to buy it
and to make an initial $5,000 payment to Bass–Fineberg. The lessor filed an action in Ohio state court against
Modern Auto, Cipriani, BVIP, and Allie to regain possession of the bus. The court ordered the bus returned to
Bass-Feinberg and the $5,000 payment refunded to Allie. All of the parties appealed.
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Notes and Questions
Was Bass-Fineberg an intended third party beneficiary of the contract between Cipriani and Allie,
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 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
(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
(some states give priority to the first assignee who gives notice to the obligor).
b. Potential for Discharge by Performance to the Wrong Party
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
special trust has been placed in the obligor.
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
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
(1) An obligor can properly delegate the performance of his duty to another unless the delegation is contrary
to public policy or the terms of his promise.
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.
CHAPTER 17: THIRD PARTY RIGHTS 7
§ 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
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
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
If a promisee’s main purpose in contracting is to discharge a duty or debt he or she already owes to
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
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
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.
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?
D. INCIDENTAL BENEFICIARIES
E. INTENDED V. INCIDENTAL BENEFICIARIES
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—
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);
CHAPTER 17: THIRD PARTY RIGHTS 13
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 test—would 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
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.
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
who is an adult or who is both unmarried and an adult, a written statement by the person making the
assignment, setting forth 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
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-
(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.
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
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
