Business Law II – Week 1 Lecture 2

Third Party Contracts

Our earlier work on contract law has generally focused on issues between two people contracting together. This lecture will complicate this a little to talk about non-contracting third parties who may have or acquire rights and/or obligations under a contract.

Contracts typically give the contracting parties rights and duties. We can see this in an easy example. Assume that Sally contracts with Jenny. Sally will pay $500 to Jenny, and Jenny will change Sally’s oil. In that case, Sally has the right to get an oil change, and Sally has a duty to pay $500. Jenny, on the other hand, has the right to be paid $500, and Jenny has the duty to change the oil in Sally’s car. These rights and duties can be assigned or delegated (absent some provision in the contract preventing this).

An assignment is the transfer of contract rights to a third person. In the case above for example, Jenny can assign her right to payment to another party (perhaps to pay a debt). When contract rights are assigned, the rights of the assignor (the person making the assignment or Jenny in this example) are extinguished and the assignee (the person receiving the rights) may demand performance from the obligor (the person who owes the duty or Sally in this example). Ordinarily, there are no restrictions on assignments except where a statue prohibits assignment, a contract is personal in nature, the assignment will significantly change the risk or duties of the obligor, or where the contract prohibits assignments. However, this last restriction is not absolute as assignments of the right to receive money, assignments of rights in real estate, assignment of negotiable instruments, and the assignment of the right to receive damages for breach of contract are not assignable.

On the other hand, a delegation is the transfer of duties under a contract. In the example above, Jenny could delegate her duty to perform the oil change to another party. Delegations are permitted except where: a) performance depends on the personal skill or talents of the obligor (the person delegating the duty or Jenny in this example), b) when special trust has been placed in the obligor, c) when performance by a third party will vary materially from that expected by the obligee; d) or when the contract prohibits delegation. It is important to note that this last example is not restricted. Duties are not as freely delegable as assignments are assignable.

The last issue to discuss this week concerns third party beneficiaries. Ordinarily, non-contracting parties do not have the ability to enforce the contract. However, there are times where a party at the time the contract is made intends that performance benefits a third party. In these situations, the third person will become a beneficiary of the contract and that person will have legal rights to enforce the contract (in court if need be). It is important to note that only a party that was intended to be a beneficiary under the contract is accorded this right to enforce a contract. People that just happen to benefit under a contract are known as incidental beneficiaries. For example if a high school contracts with a construction firm to build new bleachers, a patron of the school would incidentally benefit from this construction. However, this would not make that person an intended beneficiary.