Contracts and the Rights or Duties of Outsiders
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Do third parties have any right to enforcement a contract to which they are not parties?
A third party may enforce a contract in which she has rights. She only has rights in a contract if the parties to the contract intend to benefit the third party at the time of entering the contract and that intent is manifest within the agreement. A third party may also acquire rights in an already executed contract if one party to the contract validly transfers those rights to the third party. The extent of the third partys rights is determined by their status as donee beneficiary or creditor beneficiary. Example: Bill enters into a requirements contract with Elaine to purchase all of the widgets that Elaine produces. Hank enters into a supply contract with Elaine to supply her with all of the materials necessary to make the widgets that Elaine sells to Bill. Elaine is Hanks only customer for these materials. When entering the contract, he is aware of the quantity of product demanded by Bill and how much material Elaine will need to fulfill that contract. He develops his operations to meet that need. Later, Bill breaches his requirements contract with Elaine and begins to purchase widgets from other producers. While Elaine may sue Bill for breach of contract, Hank has no rights to enforce the contract against Bill because he is not an intended beneficiary under that contract.
What contractual rights does a donee beneficiary have?
A donee beneficiary is a third party who receives contractual rights as a gift from the promisee. If a promisee makes a contract for the benefit of a donee beneficiary and the promisor fails to perform, the third-party may not bring an action against the promisee, but may bring an action against the promisor. Since the transfer to the beneficiary is a gift, there are no grounds for recourse against the promisee. Example: Duval enters into a contract to sell 30 bags of cement to Robert. Robert pays Duval for the cement and transfers the right to receive the 30 bags of cement to Clint as a gift. Duval fails to deliver the cement to Clint. Clint is not an intended beneficiary under the contract; however, Robert validly transfers his rights under the contract to Clint. As such, Clint is a donee beneficiary and now stands in the shoes of Robert with regard to the contract. Clint may sue Duval for breach of contract. Clint may not sue Robert for the failed delivery, as the transfer of the right to receive bags of cement is simply a gift.
What contractual rights does a creditor beneficiary have?
A creditor beneficiary is a third party who receives contractual rights from the promises as satisfaction of a debt. When a promisor fails to perform under the subject contract, the creditor beneficiary can bring an action against the promisee and the promisor. The promisee may also bring an action against the promisor, as her rights have been harmed by the promisors failure to perform. Example: In the above example, Clint is a donee beneficiary, as he acquired the right to receive the bags of cement as a gift. Now suppose that Robert transfers his rights to Clint in order to satisfy a gambling debt that he owes to Clint. In that case, Clint will be able to sue Robert for failure to pay the gambling debt (the transfer of rights is without value) or sue Duval for failure to perform the contract. Since the contract was not performed, Robert still owes Clint and has not received the 30 bags of cement that he paid for. As such, Robert may sue Duval for breach of contract. Note: In the above example, if Clint and Robert both sue Duval, the court will only allow one party to recover. In such a situation, the court would consolidate the legal action into a single proceeding in order to adequately deal with all parties rights and interests.
When can a third-party beneficiary prevent modification of a contract to which she is a beneficiary?
Third-party beneficiaries may be able to prevent the parties to the contract from modifying (or rescinding) the contract without their consent. The third-party beneficiarys authority in this regard depends upon her status as a donee or creditor beneficiary. Further, it depends upon when the third partys rights have vested. Note: Each state has its own rules for when contractual rights vest in third parties. Some states apply these rules uniformly to donee and creditor beneficiaries, while other states vary the vesting time depending on that type of beneficiary. In general, a donee beneficiarys consent is required to modify the contract at the time when her rights vest in the contract. Her rights vest either when the rights are transferred to her and she learns about it or when her rights are expressly reserved in the contract. Example: Tamra enters into a contract to trade widgets with Douglas. Douglas transfers his right to receive Tamras widgets to Louise. He notifies Louise of his intended gift via standard mail. Tamra and Douglas may modify the contract at any time prior to Louises receipt of notice of the gift. Once Tamra receives notice of her gift (assuming the gift is already transferred), Tamra and Douglas cannot modify the contract in a manner that would detriment Louises rights. The creditor beneficiarys rights in the contract vest either: when the contract is made, Note: This is the case when the third-party beneficiary is named in the contract, when the third party learns of the contract and does not expressly reject the benefits, or Note: This situation is the same as that of a donee beneficiary, when the third party takes action in reliance on those benefits. Note: This is the equitable doctrine of detrimental reliance. As with the donee beneficiary, once a creditor beneficiarys rights have vested, the original parties cannot modify or rescind a contract in such a manner that would diminish the third party beneficiary's rights without her consent.
Can contracts be assigned to other parties?
Assignment is the transfer by one party of her right to receive performance from the other party to the contract. As discussed above, assignments can be a gift or an exchange for other value. In general, unless the contract deems otherwise, obligors and obligees may assign their rights or duties under the contract to third parties (assignees). The assignor must give notice to the other party immediately upon assignment. Example: Will owes Eric monthly recurring revenue payments pursuant to a royalty agreement. Eric transfers the right to receive the royalties to Wynona. Eric must notify Will of the assignment in order to obligate Will to make payments to Wynona. Note: In most states, if a party makes an offer of assignment to multiple assignees, the assignee who first notifies the obligor of the assignment has priority in the contract benefits.
What is required to assign a contract?
A contract can be assigned through agreement between the assignor and assignee. Assignments of common law contracts do not have to be in writing. Assignments of contracts for the sale of goods must be in writing if the original contract was subject to the statute of frauds. Example: Jimmy enters into a contract to supply Lia with silicon microchips for use in hand-held computing devices that she produces. The value of the products is $50,000. Lia prepays for a certain amount of inventory. Lia later merges her business with Sarahs business. She transfers the rights to receive the silicon microchips to Sarah. The original contract is subject to the statute of frauds, so the assignment to Sarah must also comply with the statute of frauds to be effective. Note: An assignment between the assignor (a party to the contract) and an assignee (the person receiving the assignment) is an independent or collateral contract to the original contract between the parties.
Are there contracts that cannot be assigned?
Yes, some contracts cannot be assigned. A contract that materially alters the obligors duties under the agreement is not transferable. For example, an assignment that varies greatly a partys delivery requirements cannot be assigned. Doing so may detriment the obligor who has to meet a new (and possibly more taxing) delivery schedule. Example: Robert agrees to paint Samanthas house for a given price per square foot of the house. Samantha decides to sell her home and attempts to gift the service to her brother Will. Wills house is far larger than Samanthas home and is far more difficult to paint. Samantha would not be able to transfer this contract; as such a transfer would considerably increase Roberts duties. Generally, any contract that materially increases the other partys burden, risk, or ability to receive return performance is not assignable. For example, requirement contracts cannot be assigned because the producers duty depends on the individual output requirements of the purchaser. Example: Ilsa enters into a contract with Gabbi to supply all of the bricks that her construction business needs. Gabbi attempts to transfer the contract to Harold. Harolds construction business is far larger than that of Gabbi and requires far more bricks. This would create an undue hardship on Ilsa, who has to meet a higher level of performance. As such, the assignment will likely not be enforceable. Lastly, a party to a contract cannot assign (delegate) performance of duties under a contract when performance depends on the character, skill, or training of that party. For example, one singer cannot transfer her obligations under a contract to another singer if the other party depended upon the skill of that particular vocalist. Example: Katy Perry enters into a contract to perform at the Super Bowl. One week before the event, Katy attempts to transfer the contract to Justin Bieber. Even though both performers are extremely popular, the contract cannot be assigned. The reason is because the nature of the contracted services depends entirely on the individual skill and reputation of the individual artist. Substituting another artist does not replace that part of the bargain. Note: This topic is discussed further below in the context of delegation.
Can a contract be assigned to multiple parties?
A party can partially assign a contract or assign the same contract to multiple parties. Different jurisdictions follow different rules regarding the priority of the assignees. Some jurisdictions allow that the first assignee of a contract who gives notice to the obligor has priority over other assignees. Example: Tom performed services for Payments, Inc., and now has a right to receive three monthly payments of $2,500. Tom transfers this right to receive payments to Anna. He later assigns the same rights to Brad. Brad is the first person to notify Payments, Inc., of the assignment. As such, Brad has priority in the right to payment. Anna will have no legal recourse against Payments, Inc., for failure to make payments to her. Other jurisdictions follow the rule that the first assignee to receive assignment of a contract has priority to performance by the obligor. Example: Pursuant to this rule, Anna would have priority over Brad. If Payments, Inc., makes payment to Brad instead of Anna, she would have a cause of action against it. Still other jurisdictions follow the rule that the first assignee has priority, unless a later assignee: pays value for the assignment in good faith without notice of a prior assignment (and the prior assignee did not receive the assignment in good faith and for value), Note: This principle is known as a purchaser in good faith or a good faith purchaser for value. Example: In the above scenario, if Brad pays Tom for assigning the payment rights to him without notice that he has assigned the rights to Anna, he will have priority over Anna. This scenario assumes that Anna did not pay value for the assignment; otherwise, Anna would retain priority. receives a judgment against the obligor, Note: If a court adjudicates the matter, it may be vested with the authority to establish priority of ownership in the payments. Example: Anna would have priority, unless Brad begins a legal action in which the court orders that Payments, Inc., pay the funds to Brad. executes a novation, or Note: A novation is a new contract between individuals that replaces a party to the contract or obligations or rights under the agreement. Example: Brad may have priority if he enters into a direct contract with Payments, Inc., that supersedes the old contract with Tom. Generally, Tom must agree to formation of this new contract. receives a written assignment capable of transfer. Note: Some agreements, such as assignments that are subject to the statute of frauds, are only capable of being assigned via a valid writing. If a prior assignment does not satisfy the statute of frauds, a subsequent transfer could take precedent. Example: The agreement between Payments, Inc., and Tom was for a stated duration of more than one year. As such, it was subject to the statute of frauds. If the assignment of rights under the contract to Anna was verbal, then it may not be enforceable. If, however, the second assignment to Brad complies with the statute of frauds, it may have priority over Annas assignment. It is important to review the specific rules applicable to the specific jurisdiction when determining ones rights under an assigned contract.
Can an assignment be revoked?
A gratuitous assignment cannot be revoked if the assignment is made pursuant to a written document signed by the assignor. If no writing exists, revoking a gratuitous assignment is extremely easy. It can be revoked by an assignor later assigning the same right (the last assignment controls), the death or incapacity of the assignor, or by the delivery of notification of revocation to the assignee or obligor. Example: Crystal verbally assigns her rights under a contract to William. Later, Crystal sends a written notification to Thomas that she is assigning those same rights to Thomas. She then notifies the obligor that she has assigned the rights to Thomas. The assignment to Crystal is revoked. The same would be true if she sent notice to William. Note: Certain circumstances between the obligor and assignee may also make the assignment irrevocable, including the receipt of payment or other satisfaction of the obligation, obtaining a judgment on the contract against the obligor, the obligor and assignee entering into a novation, or detrimental reliance by the assignee. A contract exchanged for value cannot be revoked.
Can a contract be modified after assignment?
Generally, no. As previously discussed, once a contract has vested, the parties generally cannot modify the contract in a way that impairs the assignees rights. If, however, a modification does not affect the assignees rights, then it may be modified. In some cases, the assignee can effectively alter the contract by disclaiming her rights under the agreement. Example: Richard enters into a contract to provide services to Sammy. Richard assigns his right to receive payments under the contract to Bernice in full payment of an existing debt. Richard and Sammy cannot modify the contract if that modification would affect Bernices rights. They would, however, be able to modify the contract to alter the location of services, if that change of location does not detriment Bernice. Note: There is an exception in commercial contracts that allows for modifications or substitutions in accordance with commercially acceptable standards. This allows for slight modifications that are within the expectations of the parties.
Can a party delegate duties under a contract?
Generally, unless the parties agree otherwise, a party can delegate her obligations or duties under a contract. Most jurisdictions require that the delegatee receive any benefits from the delegation and not suffer a detriment in any way. If, however, the contract calls for personal services that rely on the subjective skill or ability of the obligor, then the contract cannot be delegated. Example: Brad owns a music store. He gives lessons and sells musical equipment. He enters into a contract to sell instruments to the local high school and the agreement does not contain a no-assignment/delegation clause. He also has contracts with multiple students to provide music lessons. When Brad decides to sell his store, he delegates the sales contract to the purchaser. He cannot, however, transfer the services contract without the consent of the music students. The lessons he provides generally require a unique or subjective skill set. Such service contracts cannot be delegated without the consent of the other party to the agreement.
Is a delegator relieved of responsibility after delegating the contract?
No. The party delegating the contract is still potentially liable under the contract if the delegatee fails to perform. If, however, the delegatee and the obligee under the contract enter into a novation, then the delegator is relieved of responsibility. If the delegator expresses her intent to repudiate the contract upon assignment to the delegatee, then there is an implied novation if the obligee does not object. Example: Zach enters into a lawn service contract to maintain Phillis yard. Zach delegates performance to Jason, who has just started his lawn maintenance business. If Jason fails to perform under the agreement, Zach could still potentially be liable to Phillis. To be relieved from potential liability, Phillis and Jason must re-affirm the existing contract or enter into a new contract that supersedes the original agreement with Zach. This is known as a novation. Zach should announce his delegation of the contract and his intention to be relieved from liability on the agreement. If Phillis does not object, then there is an implied novation.
Is the delegatee liable under the contract if no novation takes place?
It depends. The delegatee will be liable under the contract if she expressly or impliedly accepts responsibility for performance. In this case both the delegating party and the delegatee may be liable on the contract. Example: In the above example, Jason now holds the contract to maintain Phillis yard. If there is no novation, then Jason is only liable if he expressly or impliedly assumes responsibility for the services. This includes any form of acknowledgement to Phillis that he will be responsible for servicing her yard.