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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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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