Ch 15: Third Party Rights

Privity of Contract:

• relationship between parties to a contract. Covenants and conditions

  • Third parties have rights/duties under other peoples’ contracts through assignments and delegations or third-party beneficiaries

Exceptions, of rights that cannot be assigned:

• Personal service contract (ex. Star in a movie)

• Assignment of a future right (ex. Receive an inheritance)

• Contract where assignment would materially alter risk (ex. car insurance)

• Assignment of a legal action (ex. Sue person who injures plaintiff)

Assignment of a Right

• Assignment of contractual rights to another party

• No formalities are required and most contract rights are assignable

Notice of Assignment:

• Assignee is under duty to notify person who owes duty of performance that assignment has been made and performance must be rendered to assignee

Anti-Assignment Clause:

• Prohibits assignment of rights under the contract. Used when an obligor doesn’t 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 (out of spite).

Delegation of a Duty

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

• Delegator remains legally liable for the performance of the contract

Duties that cannot be delegated:

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

• Contracts whose performance would materially vary if duties were delegated

Assignment & Delegation:

•  when there’s a transfer of both rights and duties 

Intended Third-Party Beneficiary:

• third party who is not a party to contract but has rights and can enforce the contract against the promisor. ex.) donee or creditor beneficiary

Donee Beneficiary Contract:

• intended to confer a benefit or gift on an intended third party. ex.) life insurance

Creditor Beneficiary Contract:

• original creditor who becomes a beneficiary under the debtor’s new contract with another party (agrees to finish paying off contract)

Incidental Third-Party Beneficiary:

• party who is unintentionally benefited by other people’s contracts. No rights to enforce or sue under the contracting parties’ contract

  • ex.)  Taxpayers and the public 

Covenant

 unconditional promise to perform. Nonperformance is breach of contract that gives the other party the right to sue.

Condition

• qualified or conditional promise that becomes a covenant if met:

  • Indicated by language such as If, on the condition that, provided that, when and, as soon as… 

Condition Precedent:

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

Personal satisfaction test

Subjective test that applies to contracts involving personal taste and comfort ex.) pay based on liking paid portrait

Reasonable person test

• Objective test that applies to commercial contracts and contracts involving mechanical fitness

Condition Subsequent:

• Condition whose occurrence or nonoccurrence of a specific event excuses performance of an existing contractual duty to perform. Failure to meet condition subsequent relieves other party from obligation

Concurrent Condition:

•  Condition that exist 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

Discharge by agreement:

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

Mutual Rescission

• the parties agree to rescind and enter into a second agreement that expressly terminates the first one

Substituted Contract:

• parties enter into a new contract and revoke or discharge the existing one

Novation:

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

Impossibility of performance (objective impossibility):

• Nonperformance that is excused if a contract becomes impossible to perform. ex.) death or incapacity, destruction of subject matter, supervening illegality

Force majeure clause

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

Accord and satisfaction:

• Settlement of a contract dispute

Accord

• Parties agree to accept something different from the original contract. Does not discharge original contract, just suspenses it until the second accord is preformed

  • If the second accord is not satisfied when due, the aggrieved party may enforce either accord or original contract

Satisfaction

• The performance of an accord 

Statute of Limitations

• Period during which a lawsuit must be brought. If lawsuit is not brought within this period, the injured party loses the right to sue

Suit Limitation Clause:

• Contracts may expressly designate a period of time in which to bring a lawsuit for breach of contract that differs from the applicable state’s statute of limitations. Contractual limitations period must be reasonable to be enforceable

  • Included in business, construction, employment, insurance, and other contracts