CH 15 Third Party Rights and DIscharge

privity of contract

the relationship between parties to a contract

• contracting parties have a legal obligation to perform the duties specified in their contract 

• duty of performance may be discharged by agreement of the parties, excuse of performance, or operation of law 

third parties

• do not acquire any rights under other people’s contract unless the person enforcing the contract is a:

• assignee to whom rights are subsequently transferred

• intended third-party beneficiary to whom the contracting parties intended to give rights under the contract at the same time of contracting 

assignment of a right

The transfer of contractual rights by obligee to another

party

obligor

a party who owes a duty of performance under a contract

obligee

a party who is owned a right under a contract

assignor

An obligee who transfers a right

assignee

The party to whom a right is transferred

rights that cannot be assigned

• personal service contract 

• assignment of future right

• contract where an assignment would materially alter the risk 

• assignment of a legal action 

effect of assignment of rights

• The assignee is entitled to performance from the obligor

• The unconditional assignment of a contract right extinguishes all the assignor’s rights

notice of assignment

to protect his or her rights, the assignee should immediately notify the obligor that 

• the assignment has been made 

• performance must be rendered to the assignee

anti-assignment clause

• prohibits assignment of rights under the contract 

• used when an obligor doesnt want to deal with or render performance to an unknown third party 

approval clause

• Permits the assignment of the contract only upon receipt of an obligor’s approval

• Approval cannot be unreasonably withheld

successive assignment of the same right

• American rule: The first assignment in time prevails

• English rule: The first assignee to give notice to the obligor prevails

• Possession of tangible token rule: The first assignee

who receives a tangible token prevails

american rule

the first assignment in time prevails

english rule

The first assignee to give notice to the

obligor prevails

possession of tangible token rule

the first assignee who receives a tangible token prevails

delegation of a duty

• delegation of duties 

• delegator 

• delegatee

• duties that cannot be delegated

• duties that can be delegated

• assumption of duties 

• declaration of duties 

delegation of duties

Transfer of contractual duties by the obligor to another party for performance

delegator

an obligor who transferred his or her duty

delegatee

a party to whom the duty has been tranferred

duties that cannot be delegated

• Personal service contracts calling for the exercise of personal skills, discretion, or expertise

• Contracts whose performance would materially vary if duties were delegated

duties that can be delegated

duties performed by qualified employees

assumption of duties 

Where a valid delegation of duties contains the term assumption

• Delegatee is legally liable to the obligee for nonperformance

declaration of duties 

there is a valid delegation of duties but the delegatee has not assumed the duties under a contract

anti-delegation clause

A clause that prohibits the delegation of duties under the contract

• Assignment and Delegation – Occurs when there is a transfer of both rights and duties under a contract

third party beneficiaries 

• intended beneficiary 

• donee benficiary contract 

• incidential beneficiary

intended beneficiary

Third party who is not in privity of a contract but who has rights and can enforce the contract against the promisor

donee beneficiary contract

Intended to confer a benefit or gift on an intended third party

– Donee beneficiary: Third party on whom a benefit is to

be conferred

creditor beneficiary

Original creditor who becomes a beneficiary under the debtor’s new contract with another party

creditor beneficiary contract

Contract that arises when:

– A debtor borrows money

– The debtor signs an agreement to pay back the money plus interest

– The debtor sells the item to a third party before the loan is paid off

incidential beneficiary 

A party who is unintentionally benefited by other people’s contracts

covenant

an unconditional promise to perform

condition

a qualified or conditional promise that becomes covenant if met

• indicated by language such as (if, on the condition that, provided that, when, and, after) 

condition precedent

A condition that requires the occurrence of an event before a party is obligated to perform a duty under a contract

• personal satisfaction test

• reasonable person test

personal satisfaction test

Subjective test that applies to contracts involving personal taste and comfort

reasonable person test 

Objective test that applies to commercial contracts and contracts involving

mechanical fitness

conditions subsequent

Condition whose occurrence or nonoccurrence of a specific event automatically excuses the performance of an existing contractual duty to perform

concurrent conditions

Condition that exists when the parties to a contract must render performance

simultaneously

• Each party’s absolute duty to perform is conditioned on the other party’s absolute duty to perform

types of conditions 

• conditions precedent

• conditions subsequent

• concurrent conditions

express and implied conditions

Express conditions exist if parties expressly agree to terms

– Time is of the Essence

 If a contract expressly states “time is of the essence,” performance by the stated time is an express condition

• Implied conditions are implied from the circumstances surrounding the contract and conduct of the parties

discharge of performance

• discharge by agreement 

• accord and satisfaction 

• objective impossibility 

• force majeure clause 

• statue of limitations 

discharge by agreement

The parties mutually agree to discharge or end their contractual duties through various methods

– Mutual Rescission

– Substituted Contract

• novation

novation

agreement that substitutes a new party for one of the original contracting parties and relieves the exiting party of liability on the contract

accord and satisfaction

settlement of a contract dispute

objective impossibility

Nonperformance that is excused if a contract becomes impossible to perform

• Death or incapacity of promisor prior to performance of personal service contract

•  Destruction of subject matter

• Supervening illegality

force majeure clause

A clause in a contract in which the parties specify certain events that will excuse nonperformance

statute of limitations

A statute that establishes the time period during which a lawsuit must be brought

– If the lawsuit is not brought within this period, the injured party loses the right to sue