Chapter 17 – Rights of Third Parties


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Powerpoint from textbook Business Law - the ethical, global, and e-commerce environment to accompany BA 330 course at the University of Alaska Fairbanks.

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  • With regard to adversely affecting the obligor in some way, any assignment will change an obligor’s duty to some extent. For example, a right to receive money or goods or land is generally assignable, though it will burden an obligor. In addition, covenants not to compete are generally considered to be assignable to buyers of businesses. However, an assignment could be ineffective because of its variation of the obligor’s duty. For example, if the contract right involved a personal relationship or an element of personal skill, judgment, or character, the assignment may be ineffective.
  • Hyperlink is to the Texas Supreme Court opinion. Trivia: PPG began business as Pittsburgh Plate Glass in 1883 and developed the Twindow in 1945 with a registered trademark. Case: One Houston Center, a 46-story skyscraper in Houston, was originally owned by Houston Center Corporation (HCC). The exterior included more than 12,000 Twindows , a dual-pane glass window unit manufactured and installed by PPG. Twindows were chosen for their insulating ability and color, which blended with other buildings in the Houston Center complex. By July 1982, a large number of the Twindows showed fogging and discoloration. At HCC’s request, PPG manufactured and installed replacements for one-fourth of the building’s windows pursuant to a contractual warranty. The replacement project took more than two years. Several years later, HCC entered negotiations to sell One Houston Center to JMB. During its due diligence, JMB learned of the earlier window problems, and that to a limited extent they continued. When JMB inquired whether any warranties still applied, PPG replied that all had expired. JMB bought the building “as is” in December 1989 as part of a $375 million purchase. HCC assigned to JMB all warranties relating to the building, and JMB waived all Deceptive Trade Practices Act claims against HHC. The DTPA is a state statute that provides remedies for certain unfair trade practices. When extensive Twindows problems appeared in 1991, JMB sued PPG for violating the DTPA and breaching warranties issued to HCC.
  • A jury found for JMB on all claims, assessing the cost to replace every Twindow in the building with comparable but nondefective window units at $4,745,037. The trial court trebled the award under the mandatory provisions of the 1973 DTPA, and after a bench trial awarded another $1,716,181 in attorney fees. The court of appeals affirmed the judgment. PPG appealed Court: “To determine whether DTPA claims are assignable, we look first to the words of the statute. The UCC expressly provides that warranty claims are assignable, while the DTPA says nothing about assignment…. The DTPA’s primary goal was to protect consumers …One purpose of the DTPA’s treble damages provisions is …reducing the need for public enforcement. Making DTPA claims assignable would have just the opposite effect…The Legislature did not intend the DTPA for everybody. It limited DTPA complaints to “consumers,”…The DTPA is primarily concerned with people—both the deceivers and the deceived. This gives the entire act a personal aspect that cannot be squared with a rule that allows assignment of DTPA claims as if they were merely another piece of property. Reversed in favor of PPG.”
  • * Delegator retains duty to obligee until performance is rendered by delegatee
  • After MW Development failed to purchase the property, the Wattses sued MW Development, Richard Taylor, and Simpson for breach of contract. In January 2004, the court approved an agreed order which gave Simpson the right to purchase the property pursuant to the June 2003 real estate contract through and including February 25, 2004. The order further provided that if Simpson did not exercise his right to purchase, the Wattses could sell the property to a third party. After Simpson declined to exercise his right to purchase the property, the property was sold to a third party for $1,800,000. The trial court entered partial summary judgment in favor of the Wattses against MW Development in the amount of $91,605.78, which represented the interest accrued on the $1,917,222. It denied the Wattses’ motions for summary judgment against Simpson. It also dismissed the complaint against Simpson. The Wattses appealed. They argued that because of the assignment contract entered into between Simpson and MW Development, Simpson is obligated to perform all of the obligations set forth in the real estate contract, including the purchase of the property. Court: “In this case, there is no language in the assignment contract between Simpson and the Wattses which can be reasonably construed to obligate him to purchase the property pursuant to the terms of the real estate contract between MW Development and the Wattses. … To construe the assignment contract to have also assigned MW Development’s obligation to purchase the Wattses’ property, would be contrary to the ordinary meaning of the language used and the intention of Simpson and MW Development.”
  • A novation requires more than the obligee’s consent to having the delegatee perform the duties. The mere fact that an obligee accepts performance from a delegatee does not create a novation. Rather, there must be some evidence that the obligee agrees to discharge the old obligor and substitute a new obligor. In the Rosenberg v Son, Inc. case, the agreement to discharge the old obligor can be inferred from the language of a contract or such other factors as the obligee’s conduct or the surrounding circumstances.
  • Note that Son is a donee beneficiary . While Son and/or Father could sue Homes, Inc. for breach of contract, Son could not sue Father.
  • Locke, a physical education teacher employed by the Dale County Department of Education, served as an umpire for high school baseball games. On March 30, 1999, Locke was serving as the head umpire in a baseball game between Carroll High School and George W. Long High School. The game was being played at Carroll High School and Carroll High School did not provide police protection or other security personnel for the game. After the baseball game, Mixon Cook, the parent of one of the baseball players for Carroll High School, attacked Locke, punching him three times in the face—in his right eye, on the right side of his face, and on the left side of his neck. As a result, Locke sustained severe physical injuries. Locke sued the Ozark City Board of Education, alleging breach of contract. Locke specifically alleged that Carroll High School is required to follow the rules and regulations of the Alabama High School Athletic Association, which requires that all school principals have the duty to “insure good game administration and supervision by providing for the following: . . . Adequate police protection” at athletic events. Locke alleged that, by not fulfilling its duty under the Directory, the Board breached its contract with the ASHAA by failing to provide police protection at the baseball game, that he was an intended third-party beneficiary of the contract, and that he was injured as a result of the Board’s breach of the contract. The trial court entered a summary judgment in favor of the Board, and Locke appealed.
  • Court: “ To recover under a third-party beneficiary theory, the complainant must show: 1) that the contracting parties intended, at the time the contract was created, to bestow a direct benefit upon a third party; 2) that the complainant was the intended beneficiary of the contract; and 3) that the contract was breached. Further, it has long been the rule in Alabama that one who seeks recovery as a third-party beneficiary of a contract must establish that the contract was intended for his direct, as opposed to incidental, benefit. In Zeigler v. Blount Bros. Construction Co., . . . this court held that because the contract directly benefited the power company and would not necessarily benefit the customer, Zeigler was an incidental, rather than an intended direct, beneficiary of the contract between the power company and the contractor. . . .On the other hand, in H.R.H. Metals, Inc. v. Miller, Vulcan Materials Company contracted with H.R.H Metals, Inc., to purchase and remove three buildings located on property belonging to Vulcan. . . . This court held that the language reflects an intention on the part of the contracting parties to bestow a direct benefit on [the plaintiff]. The contract before us between the Board and the AHSAA, like the one in H.R.H. and unlike the one in Zeigler, anticipates the existence of a third party. . . .The contract states that the purpose of “adequate police protection” is to “provide good game administration and supervision.” Game administration and supervision necessarily involve umpires….”
  • Court: “We hold, based on the plain language of the contract and on the surrounding circumstances, that the contract anticipates third-party umpires, that the contract was intended to directly benefit umpires like Locke, and that Locke has presented substantial evidence creating a genuine issue of fact as to whether he was an intended direct beneficiary of the contract between the Board and the AHSAA.”
  • True. The person is also an assignor. False. Duties may not be delegated if delegation of the duty is contrary to public policy, prohibited by contract, or the duty is unique to the obligor based upon individual traits, skill, or judgment of the person who owes the duty to perform . True. In general, non-assignment clauses are enforceable if reasonable in scope and time. In other words, non-assignment clauses will be interpreted narrowly by courts because public policy favors assignability. True. Under common law and UCC 2–210(2), general language prohibiting assignment of “the contract” or “all my rights under the contract” is interpreted as forbidding only the delegation of duties, unless the circumstances indicate to the contrary.
  • False. Sheila is the assignor and the charity is the assignee. True. The neighbor will derive benefit from Joshua’s home as an incidental beneficiary, but could not sue Joshua or Bigg Homes if either party to the contract breaches the contract. Note that if the homebuilding caused damage to the neighbor’s house or devalued nearby homes, the neighbor may indeed have recourse under nuisance law or other property-based law.
  • The correct answer is (b). CarCo is a creditor beneficiary.
  • The correct answer is (a). Note that Dept. Store could accept the substitution and agree to a novation (essentially, a new contract with Sarah).
  • Opportunity to discuss ethical issues in non-competition and non-assignment clauses.
  • Chapter 17 – Rights of Third Parties

    1. 1. Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Capacity to Contract Illegality Writing Rights of Third Parties Performance and Remedies© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
    3. 3. Rights of Third PartiesThe best minute I spend isthe one I invest in people. Kenneth Blanchard, The One Minute Manager (1993) © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
    4. 4. Learning Objectives Assignment of Contracts Delegation of Duties Third-Party Beneficiaries17 - 4
    5. 5. Overview Sometimes a person who entered into a contract must transfer the contract rights or duties to another person (third party)  Examples: sublease of your apartment, asking another person take over work you agreed to do, or doing something to benefit a third person Key to successful transfer: understand the third party’s abilities, limitations, and needs17 - 5
    6. 6. Overview A person who owes a duty to perform under a contract is called an obligor The person to whom the duty is owed is called the obligee 17 - 6
    7. 7. Assignment of Contracts Transfer of a right under a contract is called an assignment Example: Jane arranges for her employer to transfer her next paycheck to her parents’ bank account  Employer is the obligor (owes Jane money)  Jane is the obligee and assignor  Jane’s parents are the assignees17 - 7
    8. 8. Assignment Process17 - 8
    9. 9. Details of Assignment Assignments may be made in any way sufficient to show assignor’s intent to assign A writing is not necessary  Unless statute of frauds applies Assignee does not need to give consideration to assignor in exchange for the assignment 17 - 9
    10. 10. Limitations on Assignment Assignment will not be effective if it:  Is contrary to public policy  Example: PPG Industries, Inc. v. JMB/Houston Center  Violates a non-assignment clause in a contract  Adversely affects obligor in some significant way Assignment may be ineffective if the contract right involved a personal relationship or element of personal skill or character17 - 10
    11. 11. PPG Industries, Inc. v. JMB/Hous Facts & Procedural History:  PPG installed Twindows in Houston skyscraper for Houston Center Corp. (HCC)  HCC sold building to JMB “as is” (for Twindow defects and PPG’s claim that warranties expired)  JMB waived claims against HCC under state statute for unfair trade practices  Texas Deceptive Trade Practices Act (DTPA)  JMB sued PPG in 1991 under the DTPA for breaching warranties issued to HCC17 - 11
    12. 12. PPG Industries, Inc. v. JMB/Houston Center Supreme Court Appeal:  Jury found for JMB, awarding over $14 million in damages and appellate court affirmed  Texas Supreme Court examined the legislative purpose of the DTPA and determined that  DTPA claims were limited to consumers (unlike JMB) to remedy deceptive acts and has a “personal aspect”  Assignment of the claims would “frustrate the clear intent of the Legislature.”  Reversed in favor of PPG17 - 12
    13. 13. Delegation of Duties Appointment of another person to perform a duty under a contract is called a delegation Example: Mike mows Janet’s lawn weekly. Mike becomes ill and arranges for Sonny to mow Janet’s lawn  Janet is the obligee  Mike is the obligor and delegator  Sonny is the delegatee17 - 13
    14. 14. Delegation of Duties Caution: an assignment extinguishes the assignor’s right and transfers it to the assignee, but the delegation of a duty does not extinguish the duty owed by delegator  Delegator remains liable to the obligee unless the obligee agrees to make a new contract substituting the delegatee’s for the delegator17 - 14
    15. 15. Delegation Process17 - 15
    16. 16. Effective Delegation  In an effective delegation, performance by the delegatee will discharge the delegator  The reason why you should understand the delegatee’s abilities and limitations17 - 16
    17. 17. Watts v. Simpson Facts and Opinion:  Watts (seller) and MW Development (buyer; MW) entered into contract for sale of real estate  Simpson loaned MW money and, as security, MW assigned rights in real estate contract to Simpson  MW defaulted and Watts sued Simpson alleging that Simpson obligated under assignment  Court: Simpson did not assume obligation to purchase under the assignment contract with MW  Affirmed in favor of Simpson17 - 17
    18. 18. Non-delegable Duties Duties are not delegable if the delegation:  Is contrary to public policy  Is prohibited by a contract clause Also, duties that are dependent on the individual traits, skill, or judgment of the person who owes the duty to perform may not be delegable  Example: a hip hop artist could not reasonably delegate concert obligation to an opera star17 - 18
    19. 19. Details of Delegation Delegation may be made in any way that shows the delegator’s intent to delegate Delegator may be discharged from performance by a substituted contract (novation) in which obligee agrees to discharge original obligor and substitute a new obligor  Effect: Original obligor has no further obligation17 - 19
    20. 20. Third-Party Beneficiaries If parties to a contract intended to benefit a third party, courts give effect to their intent permitting third party to enforce the contract Referred to as third-party beneficiary  Example: Father contracts and pays for Homes, Inc. to build house as gift for Son  Son (third-party beneficiary) may sue Homes, Inc. if the company breaches the contract  Father may also sue Homes, Inc.17 - 20
    21. 21. Third-Party Beneficiary Diagram17 - 21
    22. 22. Incidental Beneficiaries Incidental beneficiary is one obtaining a benefit as unintended by-product of a contract  No rights under contract In foregoing example, Son’s Wife would be an incidental beneficiary17 - 22
    23. 23. Locke v. Ozark City Board of Ed. Facts & Procedural History:  Locke, a high school teacher and umpire at high school games, was severely injured by a parent of a high school athlete after a game  Locke sued the Board because (a) it failed to provide “adequate police protection” as required by the Alabama High School Athletic Assoc., (b) such failure was a breach of contract between Board and AHSAA, and (c) Locke was an intended third-party beneficiary of the contract  Trial court entered summary judgment for Board17 - 23
    24. 24. Locke v. Ozark City Board of Ed. Issue on Appeal:  Was Locke a third-party beneficiary? Law Applied to Facts:  Locke must show: 1) contracting parties intended direct benefit upon a third party; 2) Locke was an intended beneficiary of the contract; 3) contract was breached, and 4) contract was intended for his direct, as opposed to incidental, benefit  Contract states that the purpose of “adequate police protection” is to “provide good game administration and supervision.”17 - 24
    25. 25. Locke v. Ozark City Board of Ed. Holding:  Based on the plain language of the contract and the surrounding circumstances, the contract anticipates third-party umpires, the contract was intended to directly benefit umpires like Locke  Reversed and remanded in favor of Locke17 - 25
    26. 26. Test Your Knowledge True=A, False = B  A person who assigns a right is an obligee  All duties may be delegated  Non-assignment clauses are enforceable  If a contract contains a non-assignment clause, the clause actually means that duties may not be delegated17 - 26
    27. 27. Test Your Knowledge True=A, False = B  Sheila assigned her right to the proceeds of a prize to a charity. Sheila is an assignee and the charity is the assignor.  Joshua contracted with Bigg Homes to build a two-story house that will improve the value of nearby homes. Joshua’s neighbor is an incidental beneficiary.17 - 27
    28. 28. Test Your Knowledge Multiple Choice  James financed car purchase with CarCo, then sold the car to Marsha. Marsha agreed to pay remaining amount of the car loan, but failed to make payments. CarCo may sue: (a) James only since he contracted with CarCo (b) James and Marsha since CarCo is a creditor beneficiary of the contract between James and Marsha (c) Marsha only since Marsha was substituted for James17 - 28
    29. 29. Test Your Knowledge Multiple Choice  Mack contracted with Dept. Store to play piano and holiday songs in the store during December. The contract had a “non-assignment” clause. Mack got another job and delegated his duties under the contract to Sarah. Does Dept. Store have a valid claim against Mack? (a) Yes. Mack breached the non-assignment clause by delegating his duties to Sarah (b) No. Mack found someone to replace him (c) No. The contract didn’t have a non- delegation clause17 - 29
    30. 30. Thought Question  If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses?17 - 30