Chapter 19: Rights of Third Parties

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 19:
Rights of Third Parties

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Learning Objectives
• Explain the nature of third-party
beneficiary contracts.
• Understand the general principles of
assignments.
• Recognize the general principles of
delegation.
• Discuss the meaning of novation.

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19.0 In the News
Iowa Court Says Third-Party Beneficiary
Bound by Policy Limitations
http://bvtlab.com/N48F8
While a passenger in a vehicle could claim underinsured
motorist benefits under a driver’s insurance policy as a
third-party beneficiary, the claim was subject to the
policy’s time limitations, and insurer had no affirmative
duty to notify passenger of an impending deadline.
• Discuss the concept of third-party beneficiaries.
• Should a third-party be held to the same terms and
limitations of the policy? Do you agree with the courts
decision? Explain.

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19.1a Nature of Third-Party
Beneficiary Contracts
Contracts are often made for the express
purpose of benefiting some third party.
• Two types:
– Donee-beneficiary: Promisee was contracted
to provide a gift to third party.
oExample: contract for life insurance
– Creditor-beneficiary: Promisee was contracted
for promise to pay a debt owed to a third party.

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19.1b Legal Requirements (Slide 1 of 2)
• A third-party beneficiary may enforce
performance of a contractual promise.
• Must establish that the parties are
actually intended beneficiary.
• If the benefit to the third party is only
incidental, the beneficiary cannot sue.

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19.1b Legal Requirements (Slide 2 of 2)
• Vesting provides the ability to enforce a
right in court.
• Intent to benefit a third party must be
clear from terms of contract.
• Contract made for express purpose of
benefiting a third party generally may
not be rescinded without the consent of
the beneficiary.

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19.1b Critical Thinking (Slide 1 of 2)
Case: @Wireless Enterprises
Verizon entered into a contract with @Wireless for
the latter to sell cellular service. The contract
contemplated @Wireless delegating to a sub-
contractor. AI became a sub-contractor. @Wireless
breached contract with Verizon, and Verizon
stopped providing services to @Wireless. AI asserts
he was an intended beneficiary of the contract
between Verizon and @Wireless.

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• Why was there no intended
beneficiary in the case?
• What is the difference between a
sub-agent and a third-party
beneficiary?

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19.2a Terminology: Assignments
Obligor: has duty to perform.
Obligee: entitled to receive performance.
Rights: entitlement
Duties: performance obligation
Assignment: transfer of rights or transfer
of duty and rights
Assignor: makes transfer.
Assignee: receives transfer.

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19.2b General Principles
• Consideration, although usually present, is
not required.
• Consent of the non-assigning party
generally is not required.
• Rights and duties arising under an original
contract are usually freely assignable.
• A person who has duties under a contract
cannot relieve him/herself of those duties
by transferring the contract or delegating
the duties to another person.

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Case: Xmh Corp., debtor. Appeal of:
Western Glove Works
Questions the assignability of trademark
licenses in the context of a bankruptcy
proceeding and whether a trademark license is
assignable (that is, salable) without the
licensor’s permission in the absence of a
clause in the agreement.
• Why is a trademark license generally not assignable
without the licensor’s permission?
Does this position make sense?

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• If there had been a clause in the agreement stating
the trademark license was assignable, a court would
generally allow the assignment. Is it common
practice to have provisions allowing for the
assignment of trademark licenses?
• The opinion observed that the parties contemplated
a two-week trademark sublicense. Should the parties
have explained this aspect of the facts? Why?
The attorneys also did not identify what law applies.
Does this inaction on the part of the lawyers surprise
you? Why?

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19.2c Consent Required
One party may assign contract rights without
the consent of the other party.
• Contracts that may not be transferred without
the consent of other party:
– Contracts involving personal rights or duties
– Assignment placing an additional burden or
risk on a party
• Assignor is not relieved of the original liability
just because the non-assigning party has
consented.

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19.2d Consent Required
Under the Code (Slide 1 of 2)
• Duties of either party may be
delegated unless the parties have
agreed otherwise.
• Nondelegating party has “... a
substantial interest in having his
original promisor perform or control
the acts required by the contract.”

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19.2d Consent Required
Under the Code (Slide 2 of 2)
• Rights cannot be assigned where the
assignment would materially change the
duty of the other party
• Rights cannot be assigned that materially
increase the burden or risk imposed.
• Rights cannot be assigned that materially
impair the chance of obtaining return
performance.

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19.2e Anti-assignment Clauses (Slide 1 of 2)
Some contracts contain a clause stating
that the contract cannot be assigned
without the consent of the other party.
Varying interpretations by the court:
• Some allow assignment, but the obligor
has a legal claim for breach.
• Some hold that the clause invalidates the
contract.
• Some allow the parties to prohibit an
assignment.

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19.2e Anti-assignment Clauses (Slide 2 of 2)
Code Interpretation
• Article 2 invalidates these clauses.
• Anti-assignment clause is ineffective to
prohibit the assignment.
• Code typically allows assignment but
prohibits delegation.

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19.2f Claims for Money
General rule, claims for money due, or to
become due, under existing contracts may
be assigned.
• Uniform Consumer Credit Code provides that
a seller cannot take an assignment of
earnings for payment of a debt.
• Assignor warrants that the claim assigned is a
valid, legal claim.
– If this warranty is breached, the assignee has
recourse against the assignor.

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19.2g Rights of the Assignee
• The obligor-debtor must pay or perform
for the assignee.
• Assignee receives the identical rights of
the assignor.
• Assignee “stands in the shoes” of the
assignor.

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19.2h Obligations of the Parties
• Assignor is still liable if the assignee fails to
perform as agreed.
• Mere assignment of a contract by the assignor
does not impose those duties on the assignee.
• An assignment of an entire contract carries an
implied assumption of the liabilities.
• Under the Code, an assignment is also a
delegation of performance of the duties of the
assignor and an assumption of those duties by
the assignee.

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19.2i Notice of Assignment
Assignee should notify the obligor or
debtor of the assignee’s newly
acquired right.
• Right of the assignee to demand
performance can be defeated by failure
to give this notice.
• Notice of assignment offers protection
to innocent third parties.

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19.3a General Principles-Delegations
• Delegations involve the obligation to
perform.
• Those that delegate the duty normally
remain responsible for performance.

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19.3b Duties that Cannot Be Delegated
• Court will enforce an anti-delegation
clause.
– Where performance of duties under
delegation would materially vary from
the performance anticipated under the
contract
• Delegations are not allowed where
the duties are personal in nature.

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19.4 Novation
Describes an agreement whereby a
new party replaces one of the original
parties to a contract.
• A novation discharges the original
contract.
• One party is dismissed completely from
the contract as a third party is substituted.
• All the parties must agree to novation.

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Case: Industrial Development Board
Defendant asserted that by assigning their
option agreements with plaintiffs to third parties,
they could no longer be held liable for breach of
the agreements. The reviewing court followed
the general rule: assigning ones rights, does not
relieve the assignor of their duty to perform,
unless contract provides otherwise or a
novation replaces defendant with a new party,
thereby creating a new contract.

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• Why did the court find the requirements for
establishing a novation were not met?
• What impact would a proper novation
have had on the rights of the parties in this
dispute?

Chapter 19: Rights of Third Parties

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