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Contracts: Third-Party Rights And Duties
I. Overview
A third-party beneficiary contract is a contract in which at least one of the performances is intended for the direct benefit of a person who is not a party to the contract.
Note: The third party who receives the intended benefit is called an intended beneficiary.
The original parties are the promisor and the promisee.
The promisor is the party who promises to render performance.
The promisee is the party to whom the promise is made.
An intended beneficiary is a third party whom the contracting parties intended to benefit directly from the contract.
Note: An intended beneficiary may have the right to enforce the contract once the beneficiary’s rights have vested.
A creditor beneficiary is a third-party beneficiary who benefits because the promisee’s main purpose is to discharge a debt owed to that third party.
Example: Able owes Carr money. Able contracts with Baker to pay Carr. Carr is a creditor beneficiary.
The creditor beneficiary may sue the promisor.
The creditor beneficiary may also sue the original debtor.
Note: In the example, Carr may sue Baker as the promisor or Able as the original debtor.
A donee beneficiary is a third-party beneficiary who benefits because the promisee’s main purpose is to make a gift to the third party.
Example: A life insurance beneficiary is a typical donee beneficiary.
An incidental beneficiary is a nonparty who may benefit if the contract is performed, but whom the parties did not intend to benefit directly.
Note: An incidental beneficiary has no right to sue on the contract.
An intended beneficiary is directly intended to benefit from the contract and may have enforcement rights.
An incidental beneficiary may receive some benefit from performance, but the benefit is unintended and the incidental beneficiary has no right to enforce the contract.
A third-party beneficiary can enforce the contract after the beneficiary’s rights have vested.
A third-party beneficiary’s rights vest when they are fixed, accrued, or absolute, and are no longer contingent.
Note: Before rights vest, the original contracting parties may generally modify or rescind the contract without the third party’s consent.
A third party’s rights are derivative because they are the same as the promisee’s rights.
Note: The promisor may assert against the beneficiary any defense that the promisor could have asserted against the promisee.
No.
An incidental beneficiary is not an intended beneficiary and has no right to sue on the contract.
An assignment occurs when a party to a contract transfers his or her rights under the contract to a third person.
Note: In general, any act or statement, written or oral, is sufficient if it shows an intent to transfer a right.
The assignor is the party who transfers the contractual right.
The assignee is the party to whom the contractual right is transferred.
The obligee is the person to whom a duty is owed.
The obligor is the person who has the duty to perform.
No.
An assignment may be gratuitous, meaning it may be made without consideration.
When rights under a contract are assigned unconditionally, the assignor’s rights are extinguished.
Yes.
Contract rights are generally assignable without consent.
An attempted assignment is ineffective if the contract expressly states that the right is not assignable.
Note: Even if a contract restricts assignment, certain rights may still be assignable despite an agreement not to assign.
The following are generally assignable despite an agreement not to assign:
A right to receive money.
Negotiable instruments.
The right to receive damages for breach of contract.
The right to receive payment of an account owed in a contract for the sale of goods.
A tenant generally has the right to assign or sublease the premises without the landlord’s consent.
Note: This right may be restricted by the lease agreement.
An assignment transfers the lessee’s interest for the entire unexpired term of the original lease.
A sublease is a partial transfer of the tenant’s rights.
Note: A lease term that prohibits assignment alone does not prohibit subleasing, and vice versa.
A right cannot be assigned without consent if the assignment would materially increase or alter the duties or risks of the obligor.
Examples include:
Insurance policies.
Personal services contracts.
Because the contract may have been entered into in reliance on the character, skill, judgment, or creditworthiness of the original party.
An assignment is effective between the assignor and assignee when it is made, even if the obligor has not been notified.
Performance by the obligor to the assignor before receiving notice discharges the obligor’s duty to the extent of the performance.
After notice is given, the assignee has the additional option of suing the obligor directly.
Note: If the assignee does not give proper notice, the assignee may be unable to sue the obligor and may have to sue the assignor instead.
No.
An assignment given for consideration is irrevocable.
Usually, yes.
A gratuitous assignment is usually revocable by the assignor.
A gratuitous assignment may be revoked by:
Notice of revocation communicated by the assignor to the assignee or obligor.
The assignor’s receipt of performance directly from the obligor.
The assignor’s subsequent assignment of the same right to another assignee.
Bankruptcy of the assignor.
Death or insanity of the assignor.
When an assignment is for consideration, the assignor impliedly warrants that:
The assignor will do nothing to affect or impair the value of the assignment.
The assignor has no knowledge of any fact that would do so.
The right assigned exists and is not subject to limitations or defenses, except those stated or apparent.
Any writing given or shown to the assignee as evidence of the right is genuine.
Note: Unless the assignment is with recourse, the assignor does not warrant that the obligor will perform.
It means the assignee receives all the rights possessed by the assignor, and no more.
Note: If the obligor has defenses against the assignor, those defenses may also be asserted against the assignee.
Delegation occurs when a person who has a duty of performance authorizes another person to render the required performance.
The delegator is the party who delegates the duty to perform.
The delegatee is the party who is authorized to perform the duty.
The obligee is the party to whom the duty is owed.
A duty may be delegated if the delegatee’s performance will be substantially similar to the delegator’s performance.
Examples include:
Paying money.
Manufacturing ordinary goods.
Building according to a set of plans and specifications.
Delivering standard merchandise.
General language such as “I hereby assign the contract” may create both:
An assignment of rights.
A delegation of duties.
No.
Delegation of duties does not relieve the original obligor of obligations under the contract unless the contract provides otherwise.
Note: If there is a breach, the obligee may sue the delegatee, the obligor, or both.
Delegation is generally not permitted when the duty involves personal skill, judgment, trust, discretion, or a special relationship.
Examples may include:
Personal services contracts.
Contracts relying on professional judgment.
Contracts involving confidential relationships.
Assignment transfers contract rights.
Delegation transfers contract duties.
Note: A party may assign rights, delegate duties, or do both depending on the language and circumstances.
A contract assigning all rights and duties generally operates as both an assignment of rights and a delegation of duties.
Note: The original party may still remain liable unless there is a valid release or novation.
Only intended beneficiaries may enforce a contract.
Incidental beneficiaries may benefit from performance but cannot enforce the contract.
Contract rights are generally assignable unless assignment is prohibited, materially changes the obligor’s duty or risk, or involves rights that are personal in nature.
Contract duties are generally delegable unless the duties require personal skill, judgment, trust, or the contract prohibits delegation.
Note: Delegation does not automatically discharge the delegator’s liability.