Third-Party Interests

CHAPTER

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

Third-Party Interests

FIVE

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Objectives

Chapter Objectives:• Use vocabulary regarding third-party

beneficiaries, assignments, and delegations properly

• Differentiate among the various types of third-party beneficiaries

• Discuss the legal remedies available to the parties to a third-party contract, assignment, or delegation

• Determine whether the rights and/or obligations under the contract can be assigned and/or delegated

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Objectives

• This chapter will explore WHO, outside of the contracting parties, may have an interest in the agreement,

• HOW their interests are created and perfected, and

• WHAT effect they have on the performance obligations in the agreement

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Definitions

• Third-party beneficiary– A person, not a party to the contract,

who stands to receive the benefit of performance of the contract

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Definitions

• Privity– A relationship between the parties to

the contract who have rights and obligations to each other through the terms of the agreement

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Definitions

• Intent– Having the knowledge and desire that a

specific consequence will result from an action

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Definitions

• Promisor– The party who makes a promise to

perform under the contract• Promisee

– The party to whom the promise of performance is made

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Types of Third-Party Interests

• Examples of third-party contracts are wills and insurance policies

• Wills are contracts between the person writing the will and the state. The state, the promisor, agrees to dispose of the deceased person’s possessions, as the promisee, has directed and benefits from the certainty of having these assets divided among her loved ones—the third-party beneficiaries

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• The same logic follows with respect to insurance policies as third-party contracts

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In order to be considered valid third-party beneficiaries, the contract must have named them in the

formative stage. The parties must, at the time of contract, intend to

benefit the third party. This element is critical as it defines the third-party

beneficiary contract

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Types of Third-Party Interests • Incidental beneficiaries

− Persons who may derive some benefit from the performance of a contract but who were not intended to directly benefit from the performance

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• The third party has legally enforceable rights under the contract and, although not a party to the transaction, can sue for its enforcement

• Example: A beneficiary under a life insurance contract may sue to enforce the performance (payment) of the policy if the insurance company fails to pay a valid claim

Right To Sue

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Right To Sue

• In a third-party creditor beneficiary contract, the promisor agrees to pay a debt owed by the promisee

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Right To Sue

• The more common type of beneficiary is the donee– A donee receives a gift as a result of

the transaction. The promisor confers a benefit on the donee at the request of the promisee

– Again, it is easy to refer to wills: the donees are the heirs of the estate; they receive their inheritance as a gift from the testator (promisee) through the state’s probate system (promisor)

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• At the time the beneficiary learns of the agreement, her rights in the contract become vested

• If the third-party beneficiary knows of and consents to the contract, the parties cannot cancel or modify the agreement without the beneficiary’s consent

Right To Sue

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• Who can sue whom?– Based on privity, both the promisee and

promisor can sue each other – Both the beneficiary and the promisee

can sue the promisor if the promisor fails to bestow the benefit

Right To Sue

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• Who can sue whom?– However, the promisor cannot sue the

third-party beneficiary as that party has no obligations with regard to the original obligations under the contract. The third-party beneficiary is merely the recipient of the performance with no other duty to discharge

Right To Sue

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• Assertion of defenses– Either the original parties or a third-

party beneficiary has the right to claim any legal defenses or excuses that they may have as against each other. They are not extinguished by a third party

Right To Sue

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• Either party, the offeror or offeree, may assign their rights to receive performance and/or delegate their duties to perform under the original contract to a new third party

Assignment/Delegation Of Contractual Rights &

Obligations

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• Assignment– The transfer of the rights to receive the

benefit of contractual performance under the contract

• Delegation– The transfer of the duties/obligations to

perform under the contract


Obligations

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• Assignor– The party who assigns his rights away and

relinquishes his rights to collect the benefit of contractual performance

• Assignee– The party to whom the right to receive

contractual performance is transferred

• Obligor– The original party to the contract who remains

obligated to perform under the contract


Obligations

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• Delegant/Delegator– The party who transfers his obligation

to perform his contractual obligations• Delegate/Delegatee

– The party to whom the obligation to perform the contractual obligations is transferred


Obligations

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• If the contract is silent as to the ability of the parties to assign their rights, it is usually assumed that assignment is permissible if it is reasonable

• The assignment does not substantially alter the rights and obligations of the original parties to the contract


Obligations

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Summary

• If the parties to a contract intend to have the performance, the benefit of the contract, conferred on a person not in privity to the contract, they have created a third-party beneficiary contract

• The promisor is the person who will bestow the benefit upon the third party and the promisee is the person obligating himself to the promisor

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Summary

• There are two categories of third-party beneficiaries: creditors and donees

• At the time the beneficiary learns of the agreement, his rights in the contract become vested

• A third-party beneficiary can sue for enforcement of the contract and the defendant can assert any defenses that he would have if sued by the party in privity

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Summary• After making the contract, the parties

may assign their rights and/or delegate their duties under the contract to a third party

• The most important difference to remember between the two—assignment and delegation—is that an assignor usually is no longer liable under the contract, meaning that he is not party to a suit to enforce the assignment, whereas a delegant remains liable under the contract

Documents

Third-Party Interests