CIIAPTER

I6
ffiww

66Thelawsofa CHA P TE R O UT t I ilE t E A Rl{ I NG O B I E CT I V E S

.ASSICNMENTS AFTER
READING
THISCHAPTER,
YOUSHOULD TO
BEABLE
state
change ANSWER
THE
FOLLOWING
QUESTIONS:
.DELECATIONS
withthe I What is the differencebehveenan assisnmentand
-THIRDPARTY
BENEFICIARIES
changing a delegation?

times,!l 2 If a contractrequiresa party to perform personal

services,can the right to receivethoseservicesbe
Aeschylus,
525-+56B.c.E
(Greekdramatist) assigned?

5 What rights can be assigr-red

despitea contract
clauseexpresslyprohibitingassignment?
4 What factorsindicate that a third party beneficiary
is an intended beneficiary?

5 How do a third party beneficiary'srights become

vestedso that this party can sue to enforcethe
contract?

ecausea contractis a privateagreementbetweenthe partieswho have enteredinto

it, it is fitting that thesepartiesalone should have rights and liabilities under the
PRIVITYOFCONTRACI contract. This concept is referredto as privity of contract, and it establishesthe basic
Therelationship
that existsbetween principle that third partieshave no rights in contractsto which they are not parties.
the promisorand the promiseeof a
contract. You may be convincedb)"to* that for everyrule of contractlaw, there is an exception.
As times change,so must the laws,as indicated in the chapter-openingquotation.When
justice cannot be servedby adherenceto a rule of law, exceptionsto the rule must be
made. In this chapter,we look at some exceptionsto the rule of privity of contract.These
exceptionsinclude assignments anddelegations,aswell asthird party beneficiarycontracts.

In a bilateralcontract,the trvo partieshavecorrespondingrightsand duties.One party has

a right to require the other to perform some task,and the other has a du\, to perform it.
ASSIGNMENT Sometimes,though, a party will transferher or his righis under the contract to someone
Theact of transfening to anotherall
or part of one'srightsarisingundera else.The transferof contract rights to a third person is known as an assignment.(The
contract. transferof contract duties is a delegation,as discussedlater in this chapter.)
Assignments areimportantbecausetheyareutilized in mr-rchbusiness financing.Lending
584IINIIUE! institutions,such asbanks,frequentlyassignthe rightsto receivepaymentsunder their loan
CONTRACTS contractsto other firms, which pay for those rights. If you obtain a loan fi-om a bank to pur-
 585EIEIETN
PARTY
THIRD RIGHTS

chasea car, you may later receivea notice statingthai the bank has transferred(assigned)its
rightsto receivepaymentson the loan to anotherfirm and that you must make your payments
to that firrn.
Lendersthat make mortgage/oozs(loansto allow prospectivehome buyersto purchase
land or a home) often assigntheir rightsto collect the mortgagepaymentsto a third parf,,
such as GMAC MortgageCorporation.Following an assignment,the home buyer is noti-
fied that future paymentsmust be made to the third party, rather than to the original
lender. Billions of dollarschangehands daily in the businessworld in the form of assign-
ments of rights in contracts.

t anAs s ig n m e n t
Effecof
In an assignment,the party assigningthe rightsto a third party is known as the assignor,l ASSIGNOR
A partywho transfers(assigns) his
and the par\, receiving ihe rights is the assignee.Oiher traditional terrninology used to or her rightsundera contractto
describeihe partiesin assignmentrelationshipsarethe obligee2(the personto whom a duty, anotherparty (calledthe ossignee).
or obligation,is owed)and the obligor (the personwho is obligatedto perforrnthe duty). ASSIGNEE
When rigl-rtsunder a contract are assignedunconditionally,the rights of the assignor A partyto whom the rightsundera
contractaretransferred,or assigned,
(the party making the assignrnent)are extinguished.The third party (the assignee, or the
OBIIGEE
partyreceivingthe assignment)hasa right to demandperformancefrom the other original Oneto whom an obligationis owed.
party to the contract(the obligor,the personwho is obligatedto perforrn).laExAMPLtleil oBUCOR
Brent (the obligor) owesAlex $1,000,and Alex, the obligee,assignsto Carmen the righi to Onewho owesan obligationto
receivethe $1,000(thus,Nex is now the assignor).Here, a valid assigr-iment of a debt exists. another.
Carmen, the assignee,can enforcethe contractagainsiBrent, the obligor, if Brent fails to
perform (paythe $1,000).H g"hiblt l6-1 illushatesassignmentrelationships.
The assigneeobtains only those rights that the assignororiginally had. Also, the
assignee'srights are subject to the defensesthat the obligor has againstthe assignor.
lEExAMprEl6r-lBrent owesAlex $1,000 under a contract in which Brent agreedto buy

l. Pronounced uh-syelore.
2. Pronounced obJih-gee (with a hard g).

In the assignment relationshipillustrated hisrightsundera contract

here,Alexassigns that he made
with Brentto a thirdparty,Carmen. Alexthusbecomes theossignorand Carmenthe ossrgnee of
the contractualrights.Brent,theobligor(thepartyowingperformance now
underthe contract),
owesperformance to Carmeninsteadof Alex.Alex'soriginalcontractrightsareextinguishedafter
the assignment.

O r iginal Cont r ac t

D uti es Ow ed
a fter A ssi gnment

As s ignm ent of Right s

386IlNiIiM
CONTRACTS

Alex'sMacBookPro laptop.Alex assigns his right to receivethe $1,000to Carmen.Brent,

You can find a number of
forms that can be used in
the assignmentof different
types of contracts,at
Thissite is maintainedby the
lnternetLegalResearchGroup.
in clecidingto purchasethe laptop, relied on Alex'sfrar-rdulentmisrepresentation that tl'ie
computer had 2 gigabytesof mernory.When Brent discoversthat the computer has onlr
I gigabyteof rnemory,I'retells Aler that he is going to retr-irnthe laptop and cancel the
contract.Even though Alex has assignedl-ris"right" to receivethe $1,000to Carmen,
Brent need not pay Carmen the $ I ,000- Brent can raisethe defenseof Alex'sfraudulent
misrepresentation to avoiclpayrner-rt.
leJ
Unlessthe Statr-rte of Frar-rds
applies,an assignn'ient can take any forn, oral or written.
Naturally, it is n'roredifficuit to prove that an oral assignmentoccurred,so it is practical
to put all assignmentsir-rwriting. The circurnstancesin the following caseillustratesome
of the problemsthat can arisewith oral assignments. 'fhe casealso standsfor the princi-
ple that an assignment, like any contract,must haveconsideratior-r-inthis case,a dance
center'sassumptionof a choreographer'slegal ancl financial duties associatecl witl'i her
cnoreograpn)'.

UnitedStatesCourt of Appeals,SecondCircuit,380 F.3d624 (2OO4)-

8A[KGROUND
ANDFACTS assertedownershipof all of Craham'sdancesand related
--.-jlW.-.".! MarthaCraham'scareeras a
dancer,danceinstructor, and choreographer beganin the first
third of the twentiethcentury.In the 1920s,she starteda
dancecompanyand a danceschooland choreographed works
on commission. In the 1940s,shefundedthe MarthaGraham
Centerof Contemporary Dance,Inc.(the Center).Shesold her
schoolto the MarthaGrahamSchoolof Contemporary Dance,
Inc.(the School),in 1956.By 1980,the Centerencompassed
the School.In I989,h/yoyearsbeforeher death,Craham
executeda will in which she gaveRonaldProtas, the Center's
generaldirector,"any rightsor interests"in "danceworks,
musicalscores[and] scenerysets."After her death,Protas
property.In 1999,the Center'sboardremovedProtasand,due
to financialproblems,suspended operations. Meanwhile,
Protasfoundedthe MarthaGrahamSchooland Dance
Foundation, lnc.,and beganlicensing Graham'sdances.When
the Schoolreooenedin 2001.Protasand his foundationfiled
a suit in a {ederaldistrictcourtagainstthe Centerand others
to enjointheir use of, amongotherthings,seventyof the
dances.The Centerresponded, in part,that Crahamhad
assignedthe dancesto it. The court ruledthat hruenty-one of
the danceshad beenassigned to the Center.The plaintiffs
appealedto the U.S.Courtof Appealsfor the SecondCircuit.

f N THt WORDS0F THt C0URT. . . roN o. NEWMAN.

CircuitJudge.

T'he Appeilantscontend that the District Cor-rrterreclin finding tliat Crahan assigned
to the Center21 dances,x * * which were createdbefore1956,unpublishedat the time
and not commissioned.We disagree.
"f Trlgi"1""t,
Altl-roughthere is no document memorializir-rgGrahan'r'sassignrnentof copyright in
her pre-i956 dancesto the Center,the District Court was entitledto find that Crahanr
assignedto the Center, orally or in lvriting, her copyrightsin her noncon'imissionedpre-
1956dancesthat u'erenot publishedat the time she assigned thern.
The District Court relied on severalitems of evidenceto reach its conclusion.For
example,JeannetteRoosevelt,former Presidentof the Center'sboardof directors,testified
that Graham had giventhe dancesto the Center prior to 1965or 1966,when she joined
the board.There wasadditionalevidencethat the Center actedasthe owner of the dances
by entering into contractswith third parties,and ti'iat Grahan'iwas awareof this and did
not object.Other evidenceshowedthat the Center receivedroyaltiesfor the dancesand
 587EIEEtr
IHIRD
PARTY
RIGHTs

C ASEl 6 .l- Cont inued

treated them as its assets.However, the only evidence that Graham had assignedthe
entiregroup of her pre-1956dances(noncommissioned and unpublished)to the Center
are hvo lettersfrom Lee Leatherman,the Center'sExecutiveAdministratorai that time,
written in l968 and 1971.These lettersindicated that "recently Miss Graham assigned
performing rights to all of her works to the Martha Graham Center of Contemporary
Dance, Inc.," and that "Martha has assignedall rights to all of her works to the Martha
Graham Center, Inc." The Appellantscontend that these lettersare hearsayaand were
impermissiblyconsidered.
These two letters,both in existence20 yearsor more at the time they were offeredas
evidence,were authenticatedx x x . There was no reasonto suspecttheir authenticity.
Moreover,Linda Hodes,a witnesswith relevantknowledge,testifiedthat the letterswere
what they purported Iobe. The letterswere thereforeexceptionsto the hearsayrule [under
which the letterswould othenuisebe inadmissiblel.The District Court did not err in admit-
iing and relying on theseletters.flEmphasisadded.]
Under New York law, an assignment* * * be made without writing or delivery
of any written statementof the claim assigned,x-"yx x provided only IhaI the assignmentis
founded on d rdlid considerationbetweenthe parties.The District Court was entitled to
find that Graham received considerationfor the assignmentof her pre-1956 dances.
Graham benefitedfrom the Center'sassumptionof the legal and financial duties associ-
atedwith her choreography;assigningto the Center the copyrightsin her dancesgaveher
what shewished-freedom from the responsibilitiesof copyrightregistrationand renewal,
licensing,collection of royalties,and archivaltasks.IEmphasisadded.]
The District Court wasentitledto find that Graham assignedher pre-1956dances* * *
to the Center sometimebehveen1957 and the mid-l960s.

rtreU.s.courtofAppeals
ANDREMEDY
DEClSl0N for WHATIF THEFACTS
WERE
DIFFERENT?
the SecondCircuitaffirmedthe lower court'sjudgmenton this Supposethot Grahomhod not benefitedfrom the
issue,"commend[ing]the DistrictCourtfor its carefulrulings Center'sassumption of the duties associated with her
on the manyissuesin this complicatedcase." Theappellate choreogrophy. Would the olleged ossignment hove been volid?
court held that Crahamhad receivedconsideration for her Why or why not?
assignmentof certaindancesand that, althoughthe
assignmenthad been oral,it had been reliablyprovedby
written testimonv.

a, Hearsayis testimonygiven in court about a statementmade by someoneelse,as was discussedin Chapter5.

ThatCannoBteA s s i g n e d
R i g hts
As a generalrule, all rights can be assigned.Exceptionsare made, however,in the follow-
ing specialcircumstances.

When a Statute ExpresslyProhibits Assignment If a statuteexpresslyprohibits assign-

ment, the particular right in questioncannot be assigned.IEExAMilEtG"il Marn is a new
employeeof CompuFuture,Inc. CompuFutureis an employerunder workers'compen-
sationstatutes(seeChapter 40) in this state,so Marn is a coveredemployee.Marn has a
relativelyhigh+isk iob. In need of a loan, she borrowsfrom Stark, assigningto Stark all
workers'compensationbenefitsdue her should she be injured on the job. A statestatute
r88llNil@
CONTRACTS
A music teocher instrucb his pupil.
Assuming thot the boy's mother,
Kotherine, controded with the
teocher for his seruices,con
Katherine assign the right to receive
music lessonsto another pofi?
Why or why noQ
(BuccinaStudios/PhotoDisc Green)
ATIENATION
Theprocessof transferringland
out of one'spossession(thus
the landfrom oneself),
"alienating"
of future workers'cornpensation
prohibits the assignmerr1r
benefits,and thus such rights cannot be assigned.El
When a Contract Is Personalin Nature When a con-
tract is for personalservices,the rights under the contract
normally cannot be assignedunlessall that remains is a
monetarypayment. IEEXAMpLE-I6"+l Brent signsa contract
to be a tutor for Alex's children. Alex then atternptsto
assignto Carrnen his right to Brent's services.Carmen
cannot enforcethe contract againstBrent. Brent may not
like Carmen'schildren or for some other reasonmay not
want to tutor them. Becausepersonalservicesare unique
to the person rendering them, rights to receivepersonal
servicescannot be assigned.E
When an fusignment Will Significantly Change the
Risk or Duties of the Obligor A right cannot be
assignedif assignmentwill significantlyincreaseor alter
the risksor the duties of the obligor (the party owing per-
formanceunder the contract).i lEExAMnFt6.t Alex has a
hotel, and to insureit, he takesout a policy with Northwest
Insurance Company. The policy insuresagainstfire, theft, floods, and vandalism.Alex
attemptsto assignthe insurancepolicy to Carmen, who alsoownsa hotel. The assignment
is ineffectivebecauseit may substantiallyalter the insurancecompany'sduty of perfor-
mance and the risk that the company undertakes.An insurancecompany evaluatesthe
particularrisk of a certain partyand tailorsits policy to fit that risk.If the policy is assigned
to a third party,the insurancerisk is materiallyaltered.E
When the Contract Prohibits Assignment If a contract stipulatesthat the right cannot
be assigned,lhen ordinarily it cannot be assigned.lEExAltpLE16A Brent agreesto build a
house for Alex. The conhact beh.rreen Brent and Alex states,"This contract cannot be
assignedby Alex without Brent'sconsent.Any assignmentwithout such consentrenders
this contractvoid, and all rightshereunderwill thereuponterminate."Alex then assignshis
rightsto Carmen, without first obtainingBrent'sconsent.Carmen cannot enforcethe con-
tract againstBrent. E This rule has severalexceptions:
A contract cannot preventan assignmentof the right to receivefunds. This exception
existsto encouragethe free flow of funds and credit in modern businesssettings.
The assignmentof ownershiprights in real estateoften cannot be prohibited because
such a prohibition is contraryto public policy in most states.Prohibitionsof this kind
are called restraintsagainstalienation (the voluntary transferof land ownership).
5 The assignmentof negotiableinstruments(seeChapter 22) cannol be prohibited.
4 In a contractfor the saleof goods,the right to receivedamagesfor breach of contract
or for paymentof an accountowed may be assignedeventhough the salescontractpro-
hibits such an assignment.a
3 . See Section2-210(2) of the Uniform Commercial Code (UCC)
4. ucc 2-210(2).
 589]?!ET'IEJlt:r
IHIRDPARTY
RICHTS

of A s s ign m e n t
N oti ce
Once a valid assignmentof rights has been made to a third party,the third party should
notify the obligor of the assignment(for example,in Exhibit l6-l on page)85, Carmen
should notify Brent). Giving notice is not legally necessaryto establishthe validity of the
assignmentbecausean assignmentis effective immediately, whether or not notice is
given.Two major problemsarise,however,when notice of the assignmentis nof given to
the obligor:
I If the assignorassignsthe sameright to two different persons,the questionarisesas to
which one has priority-that is, which one has the right to the performanceby the
obligor. Although the rule most often observedin the United Statesis that the first
assignmentin time is the first in right, some statesfollow the English rule, which
basicallygivespriority to the first assigneewho givesnotice. lrExAMnFr6T Brent owes
Alex $5,000 on a contractualobligation. On May l, Alex assignsthis monetary claim
to Carmen, but she doesnot give notice of the assignmentto Brent. On June l, for
servicesDorman has rendered to Alex, Alex assignsthe same monetary claim (to
collect $5,000 from Brent) to Dorman. Dorman immediately notifies Brent of the
assignment.In the majority of states, Carmen would have priority because the
assignmentto her was first in time. In some states,however, Dorman would have
priority becausehe gavefirst notice. E
2 Until the obligor has notice of an assignment,the obligor can dischargehis or her obli-
gation by performanceto the assignor,and this performanceconstitutesa dischargeto
the assignee.Once the obligor receivesproper notice, only performance to the
assigneecan dischargethe obligor's obligations. lEExAMpi.lt6.gl Alex, in the above
example,assignsto Carmen his right to collect $5,000from Brent, and Carmen does
not give notice to Brent. Brent subsequentlypaysNex the $5,000.Although the assign-
ment wasvalid, Brent'spayment to Alex is a dischargeof the debt, and Carmen'sfail-
ure to notifu Brent of the assignmentcausesher to lose the right to collect the $5,000
from Brent. (Note that Carmen still hasa claim againstAlexfor the $5,000.)If Carmer-r
had given Brent notice of the assignment,however,Brent'spaymentto Alex would not
have dischargedthe debt. E

Providing notice of assignment, though not legally required, is one of the best
ways to avoid potential legal disputes over assignments. wh€ther you are the
assignee or the assignor, you should inform the obligor of the assignment. An
assignee who does not give notice may lose the right to performance, but failure
to notify the obligor may have repercussions for the assignor as well. lf no notice
is given and the obligor performs the duty for the assignor, the assignee, to
whom the right to receive perlormance was assigned, can sue the assignor for
breach of contract. Litigation may also ensue if the assignor has assigned a right
to two different parties, which can happen when assigning rights that overlap
somewhat (such as rights to receive profits from a given enterprise).

tr DETEGATION OFDUTIES
Theact of transfeningto anotherall
or partof one'sdutiesarisingunder
a contract.
DETEGATOR
fust as a paiy can transfer rights to a third party through an assignment, a party can A partywho transfers(delegates)her
also transferduties. Duties are not assigned,however;they are delegated.Normally, a or his obligationsundera contractto
delegation of duties does not relieve the par!' making the delegation (the delegator) of anotherparty (calledthe delegatee).
5e0l!NI@
CONTRACTS

the obligationto perform in the eventthat the party to whom the duty l-rasbeen delegated
DELEGATEE (the deiegatee)fails to perform. No specialform is requiredto create-avalid delegation
A partyto whom contractual of duties.is long asthe delegatorexpr;ssesan intention to rnakethe delegation,it is effec-
obligations or
aretransferred,
delegated.
tive; the delegaLr ,'r""d roieuen use the word delegate.Exhibit l6-2 graphically illus-
tratesdelegationrelationships.

BeDelegated
ThatCannot
Duties
As a generalmle, any duty can be delegated.This iule has some erceptions'howerer'
Delegation is prohibiteclin the foilowittg circumstances:
I When performancedependson the personalskill or talentsof the obligor.
2 When specialtrusthasbeen placedin the obligor.
5 When performance by a third party will vary materially frorn that expectedby the
obligee(the one to whom performanceis owed)under the contract'
4 When the contract expresslyprohibits delegation.
The following exampleswill help to clarily the kinds of dutiesthat can and cannot be
delegated:

I Brent contractswith Alex to tutor Alex in variousaspectsof financial ur-rderwritingand

investmentbanking. Brent, who is known for his expertisein finance, delegateshis
This delegationis ineffectivebecauseBrer-rtcontracted
Cnrrr.i.r-r.
dutiesto a thircl prr.-ty,
to render a service founded on his expertiseand Alex placed specialtrust in Brent's
teaching ability. The delegation changes Alex'sexpectancyunder the contract.
2 Brent, a famousmusician,contractswith Alex to persorLally perform at a concert.Then
Brent receivesa better offer and delegateshis duty to perforrn to another musician'
Miles. Regardlessof Miles's musical talents, the delegationis not effectivewithout
Alex'sconsentbecausetl-recontractwasfor personalperformance'

In the delegationrelationshipillustratedhere, Brent delegateshis dufies under a contractthat he

made with"Rlexto a third pjrty, Carmen.Brent thus becomesthe delegotorand Carmenthe
delegateeof the contractualduties.Carmennow owes performance_of the contractualdutiesto
Alex]Notethat a delegationof duties normallydoes not relievethe delegator(Brent) of liabilityif
the delegatee(Carmen)fails to perform the contractualduties.

Original Contract

D el egati on
ol D uti es

P er f o r m a n c e
 5gl m7ffi?im
THIRD
PARTY
RICHTS

Brent, an accountant,contractsto perform annual auditsofAlex's businessrecordsfor

the next five years.'l'he cor-rtract
statesthat Brent rr-rust
providethe serviceshimself and
cannot delegatetheseduties to another.Tu'o yearslater, Brent is busy on other proj-
ectsand delegateshis obligationsto perform Alex'saudit to Arianna, who is a certified
public accountar-rt at the samefirm. This delegatior-r is not effectivebecausethe con-
tractexpressly prohihiteddelegation.
AIex is a wealthy philanthropist r'vhojust created a charitable foundatior-r.Alex has
known Brent for twenty yearsand knorvsthat Brent shareshis beliefson many human-
itarianissues.He contractswith Brent to be in chargeof allocatingfunds amongvari-
ous charitablecauses.Six months later, Brer-rtis experiencinghealth problemsand
delegateshis dutiesto Drew. Alex doesnot approveof Drew as a replacemer-it. In this
situation,Alex can claim the delegationwas not effectivebecauseit materiallyaltered
his expectationsunder the contract.Alex had reasonableexpectationsabout the types
of charitiesto which Brent would give the foundation'sfunds, and substitutingDrelr,'s
perforrnancemateriallychar-rges thoseerpectations.
Brent contractswith Alex to pick up and deliver heavy construction machinery to
Alex'sproperty.Brent delegatesthis dut1,'to Carmen, who is in the businessof deliver-
ing hear'ymachinery.This deiegationis effective.The performancerequiied is of a
routine and nonpersonalnature, and tl-ieclelegationdoes not changeAlex's erpecta-
tionsunder the contracl.

t a Deleg a t i o n
E ffecof
If a delegationof dr-rtiesis enforceable,the obligee(the one to whom performance is
ru'ed) must acceptperformancefrom tl-redelegatee(the one to whoin the duties are del-
rgated). trExAMpLE te'sl In the fifth examplein the above1ist,Brent delegateshis duty (to
pick up and deiiver heavy-construction rnachineryto Alex's property) to Carmen. Alex
the obligee) nust accept perfornrancefrom Carn-ren(the delegatee)becausethe delega-
iron was effective. The obligee can legally refuseperformancefrom the delegateeonly if
r lred rrty one t hatc ann o lb e d e l e g a te d@
is .
A valid delegationof dr,rties does not relievethe delegatorof obligationsrrnderthe con- ftfffiIfil'il'll In an assignment,
In
iract.) the above example, if Carrnen (the delegatee) failsto perform,Brent (the dele- the assignor's originalcontract
rightsare extinguished afterthe
gator)is still liable to Alex (the obligee).The obligeecan alsohold the delegatee liable if assignment. In a delegation,
the delegateemade a promiseof performancethat rvill directly benefit the obligee.In this the delegator remainsliablefor
situation,there is an "assumption of dutyi' on the part of the delegatee,and breach of this oerformance under the contract
if the delegatee failsto perform.
duh, makesthe delegateeliable to the obligee. For exaniple,if Carrnen (the delegatee)
promisesBrent (the delegator),in a contract, to pick up and deliver the construction
equipmentto Aler'spropertybut failsto do so,Alex (the obligee)can sueBrent,Carmen,
or both. Although there are many exceptions,the general rule today is that the obligee
can sue both the delegateeand tl-redelegator.

" Assi g nment

of A ll R i g h t s "
Sometimes,a contractprovidesfor an "assignmentof all rights."The traditionalview wasthat
under this type of assignment,the assignee did not assumeany duties.This viervwasbased
on the theorythat the assignee's agreementto acceptthe benefitsof the contractwasnot suf-
ticient to irnply a promiseto assunethe dutiesof the contract.

5. I.-ora classiccaseon this issue,seeCrcLne

Ice CreamCo. t,.TerminalFreezing& HeatitlgCo., 1'17Md. 588, 128A
r5 (. (1925)
)
592l!triluil
CONTRACTS
THIRDPARTY BENEFICIARY
one for whosebenefita promiseis
madein a contractbut who is not a
partyto the contract.
INTENDED BENEFICIARY
A third partyfor whose benefita
contractis formed.An intended
beneficiarycansuethe promisorif
sucha contractis breached.
A New YorkLow Journol
articlediscussingleading
decisions
fromthe NewYorkCourt
of Appealsis onlineat
thereshallbe/pg5l.htm.
Modern authorities, however,take the view that the probable intent in using such gen-
eral wordsis to createboth an assignmentof rightsand an assumptionof duties.bTherefore,
when generalwordsare used (for example,"l assignthe conhact" or "a11my rights under
the contract"),the contract is construedas implying both an assignmentof righ* and an
assumptionof duties. (Seethe Application feature at the end of this chapter for factorsthat
businesspersons should considerwhen dealingwith assignments and delegations.)
As mentioned earlier in this chapter,to have contractualrights,a personnormally must
be a party to the contract. In other words,privity of contract must exist.An exceptionto
the doctrine of privity existswhen the original partiesto the contract intend, at the time
of contracting,that the contract performancedirectly benefit a third person.In this situ-
ation, the third personbecomesa third party beneficiary of the contract.As an intended
beneficiary of the contract, the third party has legal rights and can sue the promisor
directly for breach ofthe contract.
Who, though, is the promisor?In bilateral contracts,both partiesto the contract are
promisorsbecausetl-reyboth make promisesthat can be enforced.In third party benefici-
ary contracts,courts determine the identity of the promisor by askingwhich party made
the promisethat benefitsthe third party-that personis the promisor.Allowing the third
par[u to sue the promisor directly in effect circumvents the "middle person" (the
promisee)and thus reducesthe burden on the courts.Otherwise,the third party would
sue the promisee,who would then sue the promisor.
A classiccasein the areaof third partybeneficiarycontractsis Lawrencey. Fox- a case
decided in 1859.In the Lawrencecase,which is presentedas this chapter'sLandmark in
the Law feature,the court set asidethe traditional requirement of privity and allowed a
third party to bring a suit directly againstthe promisor.
Types
of Intended
Beneficiaries
The law distinguisl-resbeh.rreenintended beneficiaries and incidental beneficiaries.Only
intendedbeneficiariesacquirelegalrightsin a conhact.One typeof intendedbeneficiaryis
a creditorbeneficiary.Like the plaintiff in Lawerencev. Fox, a creditor beneficiary benefits
from a conhact in which one party(the promisor)promisesanotherparty (the promisee)to
pay a debt that the promiseeowesto a third party (the creditor beneficiary).fu an intended
beneficiary,the creditor beneficiary can sue the promisor directly to enforce the conhact.
Another type of intended beneficiaryis a doneebeneficiary.When a contract is made
for the expresspurposeof giving a gift to a third party,the third party (the donee benefi-
ciary) can sue the promisor directly to enforce the promise.TThe most common donee
beneficiary contract is a life insurance contract. IEEXAMpLE t6Jol Akins (the promisee)
pays premiums to Standard Life, a life insurance company, and Standard Life (the
promisor)promisesto pay a certain amount on Akins'sdeath to anyoneAkins designates
as a beneficiary.The designatedbeneficiaryis a donee beneficiaryunder the life insur-
ance policy and can enforcethe promise made by the insurancecompany to pay her or
him on Akins'sdeath. E
As the law concerningthird partybeneficiariesevolved,numerouscasesarosein which
the third party beneficiarydid not fit readily into either the creditor beneficiaryor the
donee beneficiary category.Thus, the modern view, and the one adopted by the
Restatement(Second)of Contracts,doesnot draw such clear lines and distinguishesonly
6. SeeUCC Z-ZI0]), (4); and Restatement(Second)of Contracts,Section J28.
7 . T h isp r in cip le wa sfi rstenrnci atedi nS eavery.R ansom,224N .Y .ZS S ,I20N .tr.6i 9(1918)
 59IEIEEtr
THIRD RICHTS
PARTY

,:
.

.l
In 1859,the New YorkCourtof Appeals(that state's
highestcourt) decideda case,Lawrencev. Fox,ain
which the court departedfrom the doctrineof
privityof contractand allowed a third partyto sue
the promisordirectly.Priorto that time, contractualliabilityhad alwaysbeen limitedto
the partiesto the contract.

Case Background The caseinvolvedthree parties-Holly,Lawrence, and Fox.Holly

had borrowed$300from Lawrence. Shortlythereafter, Hollyloaned$300 to Fox,who in
returnpromisedHollythat he would pay Holly'sdebt to Lawrenceon the followingday.
WhenLawrencefailedin his attemptsto obtainthe $300from Fox,he sued Foxto
recoverthe funds.
Whydidn't Lawrencesue Hollydirectly,ratherthan pursuethe unusualrouteof suing
Fox,which meantthat his chancesat recovery were much slimmer?Accordingto one
scholar,the answerto this questionis that the "Holly"in this casewas probablyMerwin
SpencerHawley.Both Hawleyand the defendant,ArthurWellesleyFox,were prominent
membersof the businesscommunityin Buffalo,New York.Evidenceat trial suggested
that the debt Hawleyowed Lawrencewas a gamblingdebt.Becausegamblingwas
illegalunderNew Yorklary Lawrencecould not recoverdirectlyfrom Hawleyin court,
as the contractwould havebeen deemedillegalb

Thelssuebeforethe Courtand the Court'sRuling Inanyevent,

theissue
beforethe court was whether Lawrence,who was not a partyto the Holly-Foxcontract,
couldsue Foxdirectlyto recoverthe 9300.The court held that Lawrencecould do so. lt
was manifestly"just," declaredthe court,to allow Lawrenceto recoverthe funds from
Fox.The court enunciatedthe principleof law that "[in the caseofj a promisemadefor
the benefitof another,he for whose benefitit is made may bringan actionfor its
breach."

At the time this decision wos rendered,

ollowing o third party to sue a promisor directly was o novel ideo ond represented o
rodicol deporture from contrqct low. Although privity of controd remoined the guiding
principle until ofter the turn of the century,in two leading casesdecided in I9t6c ond
t g t ad the New YorkCourt of Appeals cited Lawrencev. Foxin iustifying its deporture
from the principle of privity of controd. Sincethen, the third party beneficioryrule hos
been continuouslyexpondedin scope.

ffi To locateinformation on the web concerningfhe Lawrence

v. Foxdecision,go to this text's Websife of www.cengage.com/blaw/blt, select"Chopter
| 6," ond click on "URLsfor Landmorks!'

(18s9).
a. 20 N.Y.268
b. SeeAntonyJon in thePromise:
'TheProperty
Waters, A Studyof theThirdPafi Beneficiary 98
Rule,"
HarvordLawReview11O9,I I68 (1985).
c MocPherson v. BuickMotorCo.,217N.Y.382, I I I N.E.1050('|9'16).
d. Seoverv. Ronsom, 224 N.y.233,12ON.E.639 (1918).

@
5e4MIIUET
CONTRACTS
INCIDENTAT BENEFICIARY
A third partywho incidentally
benefitsfrom a contractbut whose
benefitwas not the reasonthe
contractwasformed.An incidental
beneficiary has no rightsin a contract
and cannotsueto havethe contract
enforced.
betweenintended beneficiaries(who can sue to enforceconhactsmade for their benefit)
(who cannotsue,aswill be discussed
and incidentalbeneficiaries shortly).
W h e nt h eR ig h ts
o f a nIn te n d eBe
d n e ficiaVe
r y st
An intended third party beneficiarycannot enforcea contract againstthe original parties
until the rights of the third party l-ravevested,meaning that the rights have taken effect
and cannot be taken away.Until theserights have vested,the original partiesto the con-
tract-the promisorand the promisee-can modify or rescindthe contractwithout the
consentof the third party.When do the rights of third partiesvest?Generally,the rights
vestwhen one of the followingoccurs:
I When the third party demonstratesmanifestassentto the contract,such as sendinga
letter or note acknowledgingawareness
of and consentto a contractformed for her or
l-risbenefit.
2 When the third party materiallychangeshis or her position in detrimer-rtai
relianceon
the contract, such as when a donee beneficiary contracts to have a home built
in relianceon the receiptof funds promisedto him or her in a donee beneficiary
contract.
5 When the conditionsfor vestingare satisfied.For example,the rights of a beneficiary
under a life insurancepolicy vestwhen the insuredpersondies.
If the contract erpressiyreservesto the contractingpartiesthe rigl-itto cancel, rescind,
or modif, the contract,the rights of the third party beneficiaryare subjectto any changes
that result.In such a situation,the vestingof the third party'srights doesnot terminatethe
power of the original contractir-rg For example,in
partiesto alter their legal relationships.d
most life insurancecontracts,the policyholderreservesthe right to changethe designated
beneficiary.
I n t e n d evde r suln
s cid e n ta
Bel n e ficia r ie s
The benefit that an incidental beneficiary receivesfrom a contract betweentwo parties
is ur-iintentior-ial.
Becausethe benefit is unintentiona/,an incidental beneficiarycannot
sue to enforcethe contract.
Determining Whether a Third Party Is an Intended or an Incidental Beneficiary In
determiningwhether a third party beneficiaryis ar-iintended or an incidental beneficiary,
the courtsfocus on the intent, as expressedin the contract languageand impiied by the
surroundingcircumstances. Although no singletestcan embraceall possiblesituations,
one factor that courts consideris whether a reasonablepersonin the position of the ben-
eficiary wouid believe that the pronisee intended to confer on the beneficiarythe right
to enforcethe contract.In addition, the presenceof one or more of the following factors
stronglyindicatesthat the third party is an intendedbeneficiary.
I Performanceis rendereddirectly to tl-rethird party.
2 The third party has the right to control the detailsof performance.
5 The third party is expresslydesignatedas a beneficiaryin the contract.
Exhibit 16-3 graphically illustratesthe distinction between intended beneficiariesand
incidentalbeneficiaries
8. De{enses raised against third party beneficiaries are given tn the Restaternent (Second) of Contracts, Section 309
 t95nmn?m
THIRD
PARTY
RICHTS

In the following case,a sr,rbcontractor claimed to be an intendedbeneficiaryof the

generalcontractor'scontractualpromiseto obtarn property insuranceafter the construc-
tion of an addition to a building was cornpleted.

t:
Court of Appealsof Indiana,801 N.E.2d661 (2004).

'l+_Eij BAcKcRoUND
ANDFAcTssnowstormcausedthe new additionto collapse.Midwestern
gl.3
: H*{ : ActionSteel,Inc.,enteredinto a
contractwith SystemsBuilders,Inc.,a generalcontractor, to
constructan additionto a commercialbuildingin
Indianapolis, lndiana.The contractprovidedthat afterthe
addition'scompletion,ActionSteelwould obtaininsurance,
which "shallincludethe interestof . . . subcontractors."
The
partieswould then "waiveall rightsagainst. . . any of their
subcontractors." Varco-PrudenBuilding,a subcontractor,
designedthe additionand suppliedthe premadebuilding
systemfor it. The additionwas completedin the summerof
1995.ActionSteelobtainedan insurancepolicyfrom
MidwesternlndemnityCompany.In January1996,a heavy
paid more than millionto ActionSteelfor the loss.
BecauseMidwesternpaidfor the loss,it stoodin Action
Steel'splacein a suitfiled in an Indianastatecourtagainst
Varco-Pruden and othersto recoverthis amount.Varco-
Prudenfiled a motionfor summaryjudgment,arguing,among
otherthings,that it was a third partybeneficiary
of the waiver
clausein the contractbetweenActionSteeland Systems
Builders.The courtissueda summaryjudgmentin {avorof
Varco-Pruden on this point.Midwesternappealedto a state
intermediate appellatecourt,arguingthat Varco-Pruden was
not a third partybeneficiary of the contract.

lN THEW0RDS0F THECOURT
. . . SHARPNAC(
Judge.

]_- -1
Here, the construction contract includes language ir-rdicatingthat if Action Steel
obtainedpropertyinsuranceafterproject completion it would waive its rightsagainstcon-
tractorsand subcontractors. C A S E1 6 . 2 - C o n t i n u e sn e x t pa g e
5e6l!fiiffiil
CONTRACTS

CASE1 6.2 -Con tinued * * * A personor entity who is not d pdrty to a contractmay directlyenforcethat con-
tract as a third par\t beneficiaryif: (1) the partiesintend to benefita third par\; (2) the
contractimposesa du\, ot'tone of the partiesinfator of the third pafty; and (3) the perfor-
lnonce of the termsof the contractrendersa direct benefit to the third parf. fEmpl-rasis
a d d e d .l
Varco-Prr-rdenarguesthat it has satisfiedthe first element, which requiresthat the par-
ties intended to benefit a third party.The plain readingof the constructioncontract indi-
catesthat Action Steel iirtended to benefit Varco-Pruden.* * * Accorclingly,the first
element is satisfiedbecausewhen Action Steel purchasedproperty insurance after tl-re
project wascompleted,it ir-rtended that subcontractors, such asVarco-Pruden,would ben-
efit from the waiver * * * clause.
Varco-Prr-rdenalso arguesthat it has satisfiedthe secondelement,whicir requirestirat
tl-recontractimposea duty r-rponone of the partiesin favor of the third party.Here, * * *
Section 11.3.5 of the construction contract provides tl-rat if Action Steel purchased
propertyinsuranceafterproject completion, it agreedto waive its right x * * with respect
to subcontractorssuch as Varco-Pruden.Accordingly, the second element is satisfied
becausethe cor-rstruction contract imposed a duty upoir Action Steel ir-rfavor of Varco-
Pruden.
Finally, Varco-Prr-rdenarguesthat it hassatisfiedthe final elen'rent,which requiresthat
the performanceof the terms of the contractrendera direct benefit to a third party.Again,
the constructioncontractprovidesthat if Action Steelpurchasedpropertyinsuranceafter
project completion it would waive its right * * * with regardto subcontractors,thereby
requiring that it render a direct benefit to those subcontractors,namely Varco-Pruden.
Varco-Prudenhas satisfiedall three elernentsof the third party beneficiarytest. Thus,
Varco-Prudenis a third party beneficiaryand can enforce the waiver * x x clausecon-
taineclwithin the constructioncontract.

DECI$l0NANDRTMEDYrrrestate
intermediate consequencesfor the beneficiory's liability. ln this situotion,
appellatecourtaffirmedthe lowercourt'sjudgmentthat the Varco-Prudendesigned and supplied the building system for
subcontractor,Varco-Pruden,was a third partybeneficiaryof the oddition, which collopsed during a mojor snowstorm
the contractclausebetweenActionSteeland Systems resulting in millions of dollors in damoges. Nevertheless,
Builders. becauseVorco-Prudenwos the intended beneficioryof a
contract clouse waiving liability, Vorco-Prudencould not be
W H YI 5 T H l SC A S E
IMP 0 R T A NrT?
hiscose held liable for even one cent of the damoqes.
illustroteshow resolvingthe issueof whether o
beneficiaryis intended or incidentalcon hove serious

Examples of Incidental Third Party Beneficiaries The benefit tl'rat an incidental

beneficiaryreceivesfrorn a contractbetweenhvo partiesis unintentional,which is why he
or she cannot enforcea contract.Any beneficiarywho is not deemed an intended bene-
ficiaryis consideredincidental.
EExAMpLE t6iil Spectatorsat a Mike Tyson boxing rnatch in whicl'r Tyson was dis-
qualified for biting his opponent'sear sued Tyson and the fight's promotersfor a refund
on the basisof breach of contract.The spectatorsclain-redthat they had standingto sue
the defendantsas third party beneficiariesof the contract betweenTyson and the fight's
prornoters.The court, however, held that the spectatorsdicl not have star-rdingto sue
becausethey were not in contractual privity with any of the defendants.Furtl-rermore,
 5978m
PARTY
THIRD RIGHTS

an\.benefitsthey rs6eit.6 from the contractwere incidentalto the contract.The court

noted that the spectatorsgot what they paid for: "the right to vierv whatever event
transpired."9 E
In the following case,a national beautypageantorganizationand one of its stateaffil-
iatesagreedtl-ratthe national organizationwould acceptthe rvinner of the statecontestas
a competitor in the national pageant.When the statewinner wasaskedto resignher title,
,he fill<i a suit to enforce the agreementto have herself declared a contestantin the
national pageant.The national organizationargued that she was an incidentai, not an
intended,beneficiaryof the agreement.

2000).SeealsoBouersv. Federation
9. Castillot,. Tyson,268A.D.Zd 316,701 N.YS.Zd423 (Sup.Ct.App.Div.
,-:ternationale F.ld 316 (7th Cir. 2007)
de I'Automobile,489

[r*l+++r+iilrii
Court of Appealsof North Carolina,182 N.C.APP. 334, 641 S'E.2d721 (2007)-
.,,- ..._a

C 0 MP A NPYR 0 F IL tn
I a publiccontest(the StateFinals)to selectMissNorthCarolina
1921,businesses in AtlanticCity, and to prepareher for participation in the MissAmerica
pageant(the NationalFinals).b In return,MAO"accept[s] the
New Jersey, sponsoreda "MissAmerica"contestas a publicity
winnerof the StateFinals. . as a contestantin the
stuntto extendthe summertouristseason.The stunt soon
from eachstatevying N ati Fi
onal nal On
s." June22,2002, MN C P desi
O gnated
evolvedinto an eventwith contestants
Rebekah Revels "Miss North Carolina 2oO2:' On July 19, MAO
everySeptemberfor the title of MissAmerica'Morethan
12,000women participate eachyearin the localand state receivedan anonymouse-mail(whichwas laterdeterminedto
havebeen sent by Revels'sex-boyfriend), implyingthat she
eventsthat culminatein the selectionof the fifty-twonational
hardwork,and had formerlycohabitedwith a "malenon-relative" and that
To succeedrequirescommitment,
finalists.
talent.In 1945,the nonprofitMissAmericaOrganization (MAO) nude photosof her existed.Revelsconfirmedthe existenceof
Today,MAOis the largestprovider
offeredits first scholarship. the photos.on July22, MAo and MNCPoaskedRevelsto
to youngwomen in the world,awardingmore resignas MissNorthCarolinaand told her that if she refused,
of scholarships
annually. she would be excludedfrom competingin the NationalFinals.
than$45 millionin cashand tuitionassistance
On July23, she resigned. Shethen filed a suit in a North
BACKGR0UND ANDFACTSMissNorth carolina CarolinastatecourtagainstMAO,MNCPO,and others,
PageantOrganization, Inc.(MNCPO), is a franchisee of asserting,among other things,breachof contract.The court
MissAmericaOrganization (MAO).Underthe "MissAmerica issueda summaryjudgmentin MAO'sfavor.Revelsappealed
Organization Agreement,"
OfficialFranchise MNCPOconducts thisjudgmentto a stateintermediate appellatecourt.
I
a. ln the "Courtof AppealsOpinions"section,clickon "2007."In the result, IN
scrollto the "20 March2007" sectionand click on the name of the caseto b. A fronchiseis an anangementby which the owner of a trademarl!or N
accessthe ooinion.The North CarolinaAdministrativeOfficeof the Courts other intellectualProPerty,licensesthe use of the mark to anotherParty
maintainsthis Web site. under specificconditions.

l N TH EW 0RDS0 F THEC0URT... McctrLLouG H, )u d g e '

*x < **

Plaintiff contendson appealthat there rvassufficientevidencethat she is a third-party

beneficiaryunder the franchiseagreementbetweenMAO and MNCPO to establishthat
there is a genuine issueof material fact land thus for her clain'rto proceedto trial]. I
In orcleito assertrightsasa third-partybeneficiaryunder the franchiseagreerrent,plain-
tiff must showshe wasan intendedbeneficiaryof the contract.This Court hasheld that lrz
orderto establisha claim as a third-party beneficiary,plaintiff must show:(1) that a contract
existshetweerL two persons and (3) that
or entities;(2'1that the contractis wlid and enforceable;
C A S Et 5 . 5 - C o n t i n u e sn e x t P a g e
I
i
598
tlNlruu
CONTRACTS

C ASE1 5.5 -€o ntin ued
the contractwasexecutedfor the direct,and not incidental,benefitof the third party. A person
is a direct beneficiaryof the contract if the conhacting partiesintended to confer a legally
enforceablebenefit on that person.It is not enough that the conhact, in fact,benefitsthe third
party, if, when the conhact was made, the conhacting partiesdid not intend it to benefit the
ihird party directly.In determiningthe intent of the contractingparties,the court should con-
siderihe circumstancessurroundingthe transactionaswell asthe achrallanguageof the con-
hact. When a third personseeksenforcementof a contract made between other parties,the
contractmust be construedstnctly againstthe parTyseekingenforcement.fEmphasisadded']
There was insufficient evidence before the trial court to support a conclusion that
plaintiffwas an intended beneficiaryunder the franchiseagreement.Plaintiff wasnot des-
ignated as a beneficiaryunder the franchiseagreementand there is absolutelyno _evi-
dence that the franchise agreementwas executedfor her direct benefit. The franchise
agreementdoesprovide that MAO will acceptthe winner of the North Carolina pageant
as a contestantin the national finals. However,this evidenceis insufficientto establisha
showing of intent on the partiesto make plaintiff an intended beneficiary.Further, the
evidenceaddr-rced tended to show that the primary intent of the franchiseagreementwas
to ensureuniformity among all franchiseesand it providedthe incidental benefit of allow-
ing the winner of MNCPO's contestto compete in the national finals.

thelower
rtrecourtaffirmed
DEelSl0H AND nEnnEDY F0RCRITICAL LegaI
A!' lAl.YSIS-
court'sjudgmentin favorof MAO.Revelswas an incidental Considerationfftneagreement MAo
between
beneficiaryof the agreementbetweenMAo and MNCPo.That ond MNCPOhod involved o third porty-on internqtional
the agreementprovidedthat MAOwould acceptthe winner of pogeont orgonizotion-would this hove been o bosis for
the StateFinalsas a contestantin the NationalFinalsdid not concluding thot Revelswos o third party intended beneficiory?
establishthat the two organizationsintendedto makethe Why or why not?
winner a directbeneficiaryof the agreement.Revelswas thus
an incidentalbeneficiaryand could not maintainan action
againstMAO basedon the agreement.

MyrtleJacksonowns againstJackson,arguingthat he is an intendedthird party

severalcommercial beneficiaryof the leaseprovisionrequiringinsuranceand thus
buildingsthat she can sue Jacksonfor failingto enforcethe lease(which requires
leasesto businesses, the restaurantto carryinsurance).Usingthe information
one of which is a presentedin the chapter,answerthe followingquestions.
restaurant. The leasestatesthat tenantsare responsiblefor
I CanJacksondelegateher duty to maintainthe buildingsto
securingall necessary insurancepoliciesbut the landlordis
Dunn?Why or why not?
obligatedto keepthe buildingsin good repair.The owner of
the restauranL Joe McCall,tells his restaurantmanagerto 2 Who can be held liablefor Dunn'sfailureto fix the ceiling,
purchaseinsurance,but the managerneverdoes so.Jackson Jacksonor Dunn?
tells her son-in-laryRob Dunn,to performany necessary
5 WasFaughtan intendedthird partybeneficiaryof the lease
maintenance for the buildings.Dunn knowsthat the ceilingin
betweenJacksonand McCall?Why or why not?
the restaurantneedsrepairbut failsto do anythingabout it.
One day a customer,lan Faught,is dining in the restaurant 4 Supposethat Jacksontells Dan Stryker,a localbuilderto
when a chunkof the ceilingfallson his headand fractures his whom she owes $50,000,that he can collectthe rentsfrom
skull. Faught files suit the
against restaurantand discovers that the buildings'tenantsuntil the debt is satisfied.ls this a
there is no insurancepolicyin effect.Faughtthen files a suit valid assignment?Why or why not?
 399@Etr
THIRD
PARTY
RIGHTS

iJl ssigrments of conlrac- Generally,manufacturers can assignor delegatethe pro-

I n l t, t al r ight sandde l e g a - duction of goodsto a third partyunlessprohibitedby cor-r-
tionsof dutiesare commol tract.Consequently, mostpurchaseorders(contracts)havea
in the busir-iess world.As clausethat prohibitssuchassignments or delegationswithout
vou discovered in this chap- the buyer'sconsent.
ter, third partyrightsand
dutiesstemfrom the law orr CHE CI ( IF
I $OTR
T HEB US I F I E $ S P E RSON
assignments, delegations, and third partybeneficiaries. A third
I Determinewhether you can assignor delegateyour
partymay evenbe unawarethat he or shehasrightsin a con-
rightsor duties under a contractto a third party.
hact,ascan happenwhen a personis the beneficiaryofa life
2 lf you can assignor delegateyour contractrightsor
insurancepolicy.h-rcertainsituations,businesses n-raywish to performance,attempt to determineyour benefitsand
atten-rpt to proliibit a third partyfrom acquiringsuchrigl-rts. obligations,such as noticeto customers,if you do
Tl-regeneralrule, though,is that any contractualrigl-rtor make the assignmentor delegation.
duty can be assigned or delegatedunlessthe assignment or 3 lf you do not want your contractrights or duties to
delegationis prohibitedby (1) the contract,(2) a statute, be assignedor delegated,insert a contractclause
or (3) otherlimitations. that prohibitsassignmentor delegationwithout your
!-or exarnple,a tenantunder a long-termleasecontract consent.
may assignthe leaseto anotherparty.To avoidsuchassign- 4 Wheneveryou might be a third party beneficiaryto a
nents, propertyownersofter-r prohibit the assignment contract,such as a creditorbeneficiarytake stepsto
of the
determineyour rights.
balanceof a leaseterm without the propertyowner'sconsent.
a ThisApplicotionis not meantto substitutefor the servicesof an attorneywho is licensed practice
to law in your state.

alienation588 delegation
of duties589 obligor 585
assignee585 delegatorlas privity of contract 584
assignment 584 incidental
beneficiaryls+ third party beneficiary592
assignor585 intended
beneficiarylsz
delegatee590 obligee385

l. An assignment is the transferof rightsundera contract to a thirdparty.Thepersonassigning

the rightsis the ossignor, andthe partyto whom the rightsareassigned is the assrgnee.
The
assignee hasa rightto demandpedormance fromthe otheroriginalpartyto the contract.
2. Generally,all rightscanbe assigned, exceptin thefollowingcircumstances:
a. Whenassignment is expresslyprohibitedby statute(forexample, workers'compensation
benefits).
b. Whena contract callsfor the performance of personal seruices.
c. Whenthe assignment will materially
increase
or alterthe risk or dutiesof theobligor(the
pafi thatis obligated
to perform).

(Continued)
400
llEiluu
CONTRACTS

d. When the contractitself stipulatesthat the rights cannot be assigned(with some

exceptions).
3. The assigneeshouldnotifythe obligorof the assignment. Althoughnot legallyrequired,
notificationavoidstwo potentialproblems:
a. lf the assignorassignsthe same rightto two differentpersons,generallythe first assignment
in time isihe first in right, but in some statesthe first assigneeto give notice takes priority.
b. Untitthe obligoris notifiedof the assignment, the obligorcan tender performanceto the
assignor.lf the assignoracceptsthe performance, the obligor'sdutiesunderthe contractare
dischargedwithout benefitto the assignee.

Delegations L A defegationis the transferof duties under a contractto a third party (the delegotee),,who
(Seepages389-392.) then aisumesthe obligationof performingthe contractualdutiespreviouslyheld by the one
making the delegation(the delegator).
2. As a generalrule,any duty can be delegated,exceptin the followingcircumstances:
a. When performancedependson the personalskill or talentsof the obligor.
b. When specialtrust has been placedin the obligor'
c. When performanceby a third partywill vary materiallyfrom that expectedby the obligee
(the one to whom the duty is owed) under the contract'
d. Whenthe contractexpresslyprohibitsdelegation.
3. A valid delegationof dutiesdoes not relievethe delegatorof obligationsunderthe contract'lf
the delegateefailsto perform,the delegatoris still liableto the obligee'
4. An "assignmentof all rights"or an "assignmentof the contract"is often construedto mean
that botf the rightsand the dutiesarisingunderthe contractare transferredto a third party'

Third Partv A third pafi beneficiarycontractis one made for the purposeof benefitinga third partry.
Beneficiaries
(Seepages392-3e8.) 1. Intended beneficiary-Onefor whose benefit a contractis created.When the promisor (the one
makingthe contraciualpromisethat benefitsa third party)failsto performas promised,the .
third partycan sue the promisordirectly.Examplesof third partybeneficiariesare creditorand
donee beneficiaries.
2. tncidentol beneficiory-Athird pafi who indirectly(incidentally)benefitsfrom a contractbut
for whose benefitthe contractwas not specificallyintended.Incidentalbeneficiarieshaveno
rightsto the benefitsreceivedand cannotsue to havethe contract enforced.

Answersfor the even-numberedquestionsin this Fat Review sectioncon be lound on this text's occomponyingWeb site ot
www-Cengage-qomlblayltlblt. Select"Chopter 16" and click on "For Review."
I What is the differencebetweenan assignmentand a delegation?
requiresa partyto perform personalservices,can the right to receivethoseservicesbe assigned?
2 If a cor-rtract
5 What rightscan be assigneddespitea contractclauseexpressly prohibiting assignment?
4 What factorsindicatethat a third partybeneficiaryis an intendedbeneficiary?
5 How do a third partybeneficiary'srightsbecomevestedso that this partycan sueto enforcethe contract?