Chapter 19 Third-Party Rights to Contracts Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Overview • LO19-1: What is an assignment? • LO19-2: What are the rights and duties of an assignor? • LO19-3: What are the rights and duties of an assignee? • LO19-4: What is a third-party beneficiary contract? • LO19-5: What are the differences among donee beneficiaries, creditor beneficiaries, and incidental beneficiaries? 19-2 Chapter 19 Hypothetical Case • Richard Oglethorpe owes Tammy Abramowitz $5,000 on a promissory note due and payable on November On November 5, Abramowitz contractually transfers the right to receive the $5,000 to Kevin Albee in payment for a car Albee sold her As part of the transaction, Abramowitz endorses the promissory note and transfers possession of the note to Albee On November 7, Kevin notifies Oglethorpe that he is in lawful possession of the note, and demands payment from Oglethorpe Oglethorpe refuses to pay, claiming he owes no obligation to Albee, since he has never contracted with Albee • Is Richard Oglethorpe obligated to pay Kevin Albee the $5,000? 19-3 Chapter 19 Hypothetical Case • Michael Angelo is renowned as the house painter to the stars His craft is well-known throughout Hollywood, he is in high demand, and he has limited his work to celebrity homes valued at $2 million or more Sandra Anderson, a film star, commands at least $20 million per film Her net worth is rumored to be in excess of $100 million Anderson has sought and secured Angelo's services to paint her new home nestled in the Hollywood Hills When completed, Sandra's new home will be worth an estimated $2.25 million Angelo is extremely busy He is currently painting three homes for three different movie stars: Damian Guilden, Tommy Davis, and Brad Dennis He would like to have his associates, Jim Bartholomew and Buddy Head, perform the painting of Sandra's house Bartholomew is twenty-one years old and has three years of house painting experience, while Head is twenty-seven and has four years of experience • From a contractual standpoint, may Michael Angelo have his associates, Bartholomew and Head, paint Anderson's house? Would such an arrangement require Anderson's approval? 19-4 Obligor and Obligee • Obligor: Contractual party who agrees to something for the other party • Obligee: Contractual party who agrees to receive something from the other party 19-5 Assignment • Assignment: Transfer of rights under a contract to a third party • Assignor: Party to contract who transfers his/her rights to a third party • Assignee: Party who receives transfer of rights to a contract 19-6 Contractual Rights That Cannot Be Assigned • Rights that are personal in nature • Rights that would increase obligor's risks/duties • Rights in a contract that, by its terms, expressly forbids assignments • Rights whose assignment prohibited by law/public policy 19-7 Delegation • Delegation: Transfer of duty under a contract to a third party • Delegator: Party to a contract who transfers his/her duty to a third party • Delegatee: Party (not part of original contract) to whom duties to perform are transferred by a contracted party 19-8 Contractual Duties That Cannot Be Assigned • Duties personal in nature • Duties resulting in performance substantially different from that which • obligee originally contracted (i.e., delegatee's performance will vary significantly from delegator's) Duties in a contract that expressly forbids delegation 19-9 Third-Party Beneficiary Contracts • • • • • • • Intended beneficiary: Third party to contract whom contracting parties intended to benefit directly from contract Intended beneficiaries can sue to enforce contract obligations Promisor: Party to contract who made promise that benefits third party Promisee: Party to contract who owes something to promisor in exchange for promise made to third-party beneficiary Creditor beneficiary: Third party who benefits from contract in which promisor agrees to pay promisee's debt Donee beneficiary: Third party who benefits from contract in which promisor agrees to give a gift to third party Vesting: Maturing of rights, such that a party can legally act on the rights Incidental beneficiary: Third party who unintentionally gains benefit from contract between other parties; contracting parties not intend to benefit incidental beneficiary; incidental beneficiaries cannot sue to enforce contract obligations 19-10 Creditor Versus Donee Beneficiaries Creditor Beneficiary • Contractual performance fulfills obligation to third party • Beneficiary can enforce rights to Donee Beneficiary contract if contract valid and rights have vested • Contractual performance gives a gift promisor or promisee • Beneficiary has limited ability to • Beneficiary can enforce rights against to third party enforce contract (depending on jurisdiction) • Beneficiary can enforce rights against promisor 19-11 Intended Versus Incidental Beneficiaries Intended Beneficiary • Contracting parties intended to benefit third party with their contract • Beneficiary has right to enforce contract • Beneficiary benefits from direct reception of contractual performance Incidental Beneficiary • Contracting parties did not intend to benefit third party with contract • Beneficiary does not have right to enforce contract • Beneficiary benefits from indirect circumstances created by contractual performance 19-12 Chapter 19 Hypothetical Case • Barbara Hastings has no children of her own, but she does have a beloved niece named Ellen Laughridge Attentive to the future financial needs of Laughridge, Hastings secures a $500,000 life insurance contract from Chameleon Insurance Company, listing Laughridge as the sole beneficiary Hastings has every intention to inform Laughridge of her new life insurance policy, but life gets in the way, and she neglects to so Hastings dies on January 15, 2011 As part of her estate distribution, Laughridge receives a chest of drawers from her dear aunt On August 29, 2013, while rearranging her clothing in the chest of drawers, Laughridge comes upon a secret compartment In the secret compartment is an original copy of the life insurance contract Laughridge is overjoyed to see her name listed as beneficiary, and she contacts Chameleon Insurance Company immediately Upon review of the policy, Chameleon denies coverage Chameleon's claims representative points to Section 15(b) of the policy, which specifically requires notification of the insured's death no later than one year after death It has been over two years and seven months since Barbara Hastings died • Will Ellen recover the $500,000 in insurance proceeds? Is it ethical for an insurance company to deny a claim on the basis of a technicality? 19-13 Chapter 19 Hypothetical Case • Daniel Lim's parents, William Lim and Cheryl Stratford, divorced when he was only four years old Theirs was an unpleasant split, and Daniel Lim's parents barely spoke to one another throughout his childhood Neither remarried or had more children When Daniel Lim was twenty-two, his father died William Lim's will stipulated that all of his assets, including any life insurance policies, should go to his only son When Lim filed the documentation for his father's life insurance policy, he noted that his mother was still listed as the beneficiary He mentioned this discrepancy to his mother, who immediately sued William Lim's estate for the proceeds of the life insurance policy—in effect, she sued her own son for the insurance money • Who will prevail in this case? 19-14 ... transfers possession of the note to Albee On November 7, Kevin notifies Oglethorpe that he is in lawful possession of the note, and demands payment from Oglethorpe Oglethorpe refuses to pay, claiming... contract that, by its terms, expressly forbids assignments • Rights whose assignment prohibited by law/ public policy 19-7 Delegation • Delegation: Transfer of duty under a contract to a third party