Third Party Contracts Rights
Third Party Rights and Obligations Overview
Mnemonic Reminder: Remember the phrase "Love for Dogs, Treat Every Rover Terrifically" to understand the key concepts—T for Terrifically stands for Third Party Rights and Obligations.
Importance of Understanding:
Often overlooked in law school curricula, these concepts are typically found at the end of contract law textbooks.
Essential for bar exam preparations as third-party rights and obligations frequently appear in exam questions.
Third Party Beneficiaries
Definition of Third Party Beneficiary:
A third party beneficiary is someone who, while not a party to the original contract, stands to benefit from it.
Example: Life insurance contracts involving a policyholder, an insurer, and a beneficiary.
Functionality:
In a third-party beneficiary situation, two original parties enter a contract intending to benefit a third party.
Life Insurance Example:
A person (the insured) contracts with an insurer to pay a specified amount upon their death to a beneficiary, e.g., spouse or child.
Scenario: Donald Trump takes a life insurance policy with Allstate for $3,000 annually, designating Heidi Fleiss as the beneficiary for $250,000.
Legal Rights:
The beneficiary (e.g., Heidi Fleiss) can sue the promissor (e.g., Allstate) directly even though they did not sign the contract.
Case Study: Lawrence v Fox
Case Summary:
In Lawrence v Fox, a debtor (Holly) owed money to Lawrence. Holly tells Fox to pay Lawrence directly.
Fox, however, fails to pay Lawrence, which allows Lawrence to sue Fox directly due to the intent to benefit Lawrence established through Holly's instructions.
Key Vocabulary in Third Party Beneficiary Law
Promissor:
The party making a promise that benefits the third party; in the life insurance example, this is Allstate.
Promisee:
The party receiving the promise from the promissor; in the example, this is Donald Trump.
Intended vs. Incidental Beneficiaries:
Intended Beneficiaries have enforceable rights to the contract (e.g., Heidi Fleiss).
Incidental Beneficiaries are those who benefit from the contract but do not have enforceable rights (e.g., a neighbor anticipating increased property values due to a contract related to Walmart).
Vesting of Rights for Third Party Beneficiaries
Definition of Vesting:
Refers to when rights become enforceable.
Common Triggers for Vesting:
When the third party expresses assent.
When the third party brings suit based on the promise.
When the third party relies on the contract to their detriment, hence establishing a vested right.
Example of Reliance:
If a beneficiary learns of a contract and alters their behavior significantly based on it (e.g., disposing of their own bagels due to an expected delivery), their rights under the contract are considered vested.
Rights and Suits Involving Third Party Beneficiaries
What Actions Are Permitted?
The third party beneficiary can sue the breaching promissor directly (e.g., Heidi can sue Allstate if they refuse to pay).
The promisee can also sue the promissor (e.g., Donald Trump can sue Allstate). This can occur regardless of whether the third party beneficiary is involved.
The exception exists for creditor beneficiaries, who can also sue the promisee in certain situations. If Trump owed money to Fleiss, she could sue him as a creditor beneficiary.
Assignment of Rights
Definition of Assignment:
A transfer of contract rights from one party to another, typically involving two steps: first, the original contract is established, and then the rights are transferred.
Example:
Batman contracts with Gotham for $300,000 but later assigns his payment rights to Robin, where Batman is the assignor and Robin is the assignee.
Key Definitions in Assignment:
Assignor: The party who transfers contract rights (e.g., Batman).
Assignee: The party receiving contract rights (e.g., Robin).
Obligor: The party with a duty to perform under the contract (e.g., Gotham).
Rights That Can Be Assigned
Generally permissible to assign rights to be paid money.
Generally not allowed to assign rights where doing so substantially changes the obligor's duties (e.g., transferring Batman's obligation to protect Gotham to another city).
Lawsuits in Assignment Situations
Assignee's Rights:
An assignee can sue the obligor directly despite not being a party to the original contract.
Delegation of Duties:
Transfer of responsibilities under a contract to another party.
Delegation of Responsibilities
General Rule:
Contract duties can be delegated unless explicitly prohibited in the contract or if special circumstances require the original party to perform.
Example of Delegation:
If Batman contracts to paint a house but later assigns Joe to do the painting, that is a delegation.
Liabilities:
The original party remains liable even after delegation to another party.
The delegate can only be liable if he received consideration for the promised duty.
Conclusion
Always evaluate the scenarios concerning third-party rights—who benefits, who has the right to sue, and under what situations.
Differentiating between a third party beneficiary situation, an assignment, and a delegation is crucial in understanding contract law.
In third party beneficiary situations, consider whether benefits are intended or incidental; this distinction has significant legal implications.
Remember, while you can typically assign the right to receive money, obligations cannot be delegated if doing so would change the duties of the other party.