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Chapter 1: Legal EthicsCHAPTER 11: THIRD PARTYRIGHTS AND DISCHARGE

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Learning Objectives1. What is the difference between an

assignment and a delegation? 2. What rights can be assigned despite a

contract clause expressly prohibiting assignment?

3. What factors indicate that a third party beneficiary is an intended beneficiary?

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Learning Objectives4. How are most contracts discharged?5. What is a contractual condition, and how

might a condition affect contractual obligation?

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Introduction• Privity of Contract: only original parties to a

contract have rights and liabilities under the contract.– Exceptions: Assignments, Delegations, and Third

party Beneficiary Contracts.

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Assignments Terminology.–Assignor: party assigning rights to third

party.–Assignee: party receiving rights.–Obligee: person to whom a duty or

obligation is owed.–Obligor: person who is obligated to

perform the duty.

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Assignments Effect of An Assignment.–When rights of assignor are

unconditionally assigned, her rights are extinguished. –The third party (assignee) has right to

demand performance from original party to contract.

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Assignment Relationships

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Assignments Rights That Cannot be Assigned. –When a statute expressly prohibits an

assignment. –When a contract is personal in nature. • CASE 11.1 MALONE V. FLATTERY (2011).

Why was Stanek’s right of first refusal “personal”?–When the Assignment will Significantly

Change the Risk or Duties of the Obligor.

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Assignments Rights That Cannot be Assigned. –When the Contract Prohibits

Assignment.• Exceptions:–Cannot prevent right to receive money.–Cannot prevent rights in land.–Negotiable instruments.–Damages in sales of goods.

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Assignments Rights That Cannot be Assigned. –Notice of Assignment.• Issues: same right assigned to two

difference parties, or obligor discharges performance before receiving notice of assignment.

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Delegations Contractual duties in a bilateral

contract that are delegated to a third party.

Terminology:–Delegator: party making the delegation

of duty.–Delegatee: party to whom the duty is

owed.

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Delegations

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Delegations Duties That Cannot Be Delegated:–When Duties are Personal in Nature

(special trust).–When Performance by a Third Party Will

Vary Materially From that Expected by the Obligee. –When Contract Prohibits Delegation.

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Delegations• Effect of a Delegation.– Delegator remains liable, even after delegation.– Delegatee is liable if delegation contract creates a

third party beneficiary relationship in the obligee.• “Assignment of All Rights.”

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Third Party Beneficiaries Second Exception to Privity of

Contract. –Original parties to the contract intend

at the time of contracting to directly benefit a third person, the “intended beneficiary” .

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Third Party Beneficiaries Intended Beneficiary: contract is

made for the express purpose of promisor giving a gift to a third party (donee), the donee can sue the promisor directly if the promisor breaches the contract.

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Third Party Beneficiaries Types of Intended Beneficiaries.–Incidental : a third party beneficiary’s

benefit from contract between two parties is unintentional.• Incidental beneficiary cannot sue to

enforce the contract.

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Third Party Beneficiaries Types of Intended Beneficiaries.–Donee : a third party’s benefit is a gift.• Donee beneficiary has a right to sue the

promisor directly to enforce the contract.• CASE 11.2 ALLAN V. NERSESOVA (2010).

Why was the court wrong in holding the Koraev was an intended beneficiary?

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Third Party Beneficiaries

When the Rights of an Intended Beneficiary Vest.1. When the third party demonstrates

express consent to the agreement, such as by sending a letter or note acknowledging awareness of, and consent to, a contract formed for her benefit.

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Third Party Beneficiaries

When the Rights of an Intended Beneficiary Vest.2. When the third party materially alters his or

her position in detrimental reliance on the contract, such as when a donee beneficiary contracts to have a home built in reliance on the receipt of funds promised to him or her in a donee beneficiary contract.

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Third Party Beneficiaries When the Rights of an Intended

Beneficiary Vest.3. When the conditions for vesting are

satisfied. For example, the rights of a beneficiary under r a life insurance policy vest when the insured person dies.

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Third Party Beneficiaries Intended vs. Incidental Beneficiaries.– 3P Intended Beneficiaries (Creditor and

Donee) Original parties to K intend at the time of contracting that the contract performance directly benefit a 3rd party. After rights vest, 3P can sue for breach.

– 3P Incidental Beneficiaries. Benefit is unintentional. 3P has no rights.

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Third Party Beneficiaries

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Contract Discharge A party may be discharged from a

valid contract by:–A condition occurring -- or not

occurring. –Full performance or material breach by

the other party.–Agreement of the parties.–Operation of law.

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Contract Discharge Conditions Precedent.– A possible future event, the occurrence or

nonoccurrence of which will trigger the performance of a legal obligation or terminate an existing obligation under a contract.

– CASE 10.2 PACK 2000, INC. V. CUSHMAN (2011). What should Pack have done differently?

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Contract Discharge Conditions Subsequent.– Condition that serves to terminate a

party’s absolute promise to perform.– The condition follows the absolute duty

to perform; if the condition occurs the party need not perform further.

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Contract Discharge Concurrent Conditions.– Each party’s duty to perform is

conditioned upon the other party’s duty to perform.

– Normally, these are simultaneous duties.

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Contract Discharge

Discharge by Performance.– Tender: ready, willing, and able.– Complete Performance.• Parties perform exactly as agreed, or

‘perfect.’ • All conditions satisfied.

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Contract Discharge Discharge by Performance.–Substantial Performance.• Party in good faith performs substantially

all of the terms, can enforce the contract.• Confers Most of the Benefits Promised:

performance must not vary greatly from what was promised.

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Contract Discharge Discharge by Performance.–Substantial Performance.• But damages can be awarded.• Entitles the Other Party to Damages.• Measure of damages is cost to bring

object of contract into compliance.

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Contract Discharge Discharge by Performance.–Performance to Satisfaction of Another.–Material Breach of Contract.• A material breach occurs when

performance is not substantial, and nonbreaching party is excused from performance and entitled to damages.

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Contract Discharge Discharge by Performance.–Material Breach of Contract.• In a minor (non-material) breach, the

duty to perform is not excused and the non-breaching party must resume performance of the contractual obligations undertaken.

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Contract Discharge Discharge by Performance.– Anticipatory Repudiation. Occurs when

one party refuses to perform his contractual obligation, before performance is due.• Treated as a material breach, and nonbreaching

party may sue for damages immediately, even though performance is not due.

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Contract Discharge Discharge by Performance.– Anticipatory Repudiation.• Notice by repudiating party may restore

parties to original obligations. • Rational for Treating Repudiation as

Breach.• Anticipatory Repudiation and Market

Prices.

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Contract Discharge Discharge by Agreement.– Discharge by Mutual Rescission.• For an executory contract, parties must

make a new contract, oral or written. Under UCC, contracts must be in writing.

• If one party has performed, agreement to rescind must have additional consideration.

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Contract Discharge Discharge by Agreement.– Discharge by Novation: parties agree

to substitute a third party for an original party. • Requirements: previous valid obligation,

agreement by all parties, extinguishment of all old obligations, and new valid contract.

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Contract Discharge Discharge by Agreement.– Discharge by Accord and Satisfaction.• Accord: contract to perform existing

contractual duty not yet discharged.• Satisfaction: performance of the accord.

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Contract Discharge Discharge by Operation of Law.– Material Alteration of The Contract:

innocent party is discharged after material alteration.

– Statutes of Limitations.– Bankruptcy: generally bars

enforcement of non-exempt transactions.

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Contract Discharge Discharge by Operation of Law.– Objective Impossibility: the supervening

event was not foreseeable:• Death or incapacitation in personal

contract prior to performance, • Destruction of the subject matter; or• Change in law renders performance Illegal.

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Contract Discharge Discharge by Operation of Law.– Temporary Impossibility. – Commercial Impracticability.• Performance becomes extremely difficult

or costly, and must not have been known by parties when contract made.

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Contract Discharge Discharge by Operation of Law.– Frustration of Purpose.• Supervening event make it impossible to

attain purpose both parties had in mind.• Event must not have been reasonably

foreseeable, and decreases value of what a party receives under contract.

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Exhibit 11-5 Contract Discharge