Third Party Rights

A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it. (Cal.Civ.Code § 1559) A third party who is not a promisee and who gave no consideration has an enforceable right by reason of a contract made by two others if (1) he is a creditor of the promisee or some other person and the contract calls for a performance by the promisor in satisfaction of the obligation; or (2) if the promised performance will be of pecuniary benefit to him and the contract is so expressed as to give the promisor reason to know that such benefit is contemplated by the promisee as one of the motivating causes of his making the contract. (Rest.2d § 302.)

Intended Beneficiaries

Only third parties who are "intended beneficiaries" have enforceable contract rights. In order to qualify as an intended beneficiary the third party must meet two requirements; (1) the third party must show that recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and (2) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. A classic illustration of the third party beneficiary principle is the case of Lawrence v. Fox, 20 N.Y. 268, (1859). There, Holly, the promisee, owed $300 to Lawrence. Holly loaned $300 to Fox in exchange for Fox's promise to pay the $300 to Lawrence. When Fox failed to pay, Lawrence sued to enforce Fox's promise to Holly. The issue the court was called upon to decide was whether Lawrence (the third-party) could enforce the promise. The court held that he could reasoning that a promise made to one for the benefit of another, he for whose benefit it is made, may bring an action for its breach.

Intent to Benefit May Be Implied

It is not necessary that the contract identify or refer to the beneficiary by name. The beneficiary may recover if he or she can show that he or she is one of a class of persons for whose benefit the contract was made.

Creditor, Donee and Incidental Beneficiaries

Intended beneficiaries may be either creditor or donee beneficiaries. One is a "donee beneficiary" if the promisee who buys the promise expresses an intention and purpose to confer a benefit upon the third person as a gift in the shape of the promised performance. One is a "creditor beneficiary" if the promisee is under an obligation to the third person and the contract is so made that the promised performance will discharge that obligation. "Incidental beneficiaries" are those who are not donees or creditors of the promisee. Incidental beneficiaries do not have enforceable contract rights.

Defenses and Vesting of Third Party Rights

The general rule is that the promisor may assert against the beneficiary any defense which he could assert against the promisee. (Rest.2d § 309.) The right to rescind or modify a third party beneficiary contract, without the assent of the beneficiary, ceases once the contract is accepted, adopted or acted upon by the third party. The rights of the third party "vest" when he learns of the initial contract and assents to it or materially changes his position in justifiable reliance on it or brings suit on it. (Rest.2d § 311(3).)

Assignment and Delegation

An assignment is a transfer of rights. A delegation is an appointment of another to perform one's duties. (Rest.2d §§ 317, 318; UCC 2-210) A right arising out of a contract may be transferred by the holder of the right to another person. Such a transfer is called an assignment. The person making the transfer is the assignor. The person receiving the transfer is the assignee. The general rule is that contract rights may be freely assigned. However, where the assignment would vary materially the duty of the obligor, increase materially the burden of risk imposed by the contract, or impair materially the obligor's chance of obtaining a return performance then the right may not be assigned. The right to delegate one's contractual duties to another is limited by the rule that where a person contracts with another to do work or perform a service and the person employed has been selected with reference to his individual skill a substitute performance by another party need not be accepted.

Assignment transfers the interest of the assignor. The assignee stands in the shoes of the assignor, taking his rights and remedies subject to any defenses which the obligor has against the assignor prior to notice of assignment. (Cal.Civ.Code § 1459) One way to get around this rule (that the obligor may assert against the assignee, any defense he could have asserted against the assignor) is to become a holder in due course. A holder in due course takes commercial paper free of any defenses that prior parties may have been able to assert.

Gift Assignments

There need be no consideration for the assignment. However, the making of a gift requires that it be completed by delivery.  Where the thing given is not capable of delivery the giving of the means of obtaining it is authorized as a substitute for the actual or symbolic delivery of the thing. (Cal.Civ.Code § 1147)

Assignment Need Not Be In Any Particular Form

The assignment itself nor the notice of the assignment need not be in any particular form.  I.e., there are no "magic words" that are necessary to create an effective assignment.  An assignment may be oral, written, or partly oral and partly written.

Effect of Notice of Assignment

Under UCC 9-406 the account debtor, upon receipt of notification, is duty-bound to pay the assignee and not the assignor. The account debtor's failure to pay the assignee after receiving due notification gives rise to an assignee's claim for wrongful payment. An assignee's rights are superior to those of general creditors of the assignor. An assignee will always prevail over a general creditor. Notice of assignment also cuts off the right to "setoff" claims against the assignor that do not arise out of the same transaction as the assignment. Claims against the assignor that do arise out of the same transaction may be "recouped" from the assignee regardless of when they arise. (Rest.2d ยง 336(2).)

Priority of Assignment

When an assignment is made for value (e.g., supported by consideration) the general rule is that the "first in time is the first in right."  I.e., subsequent assignments of the same right are ineffective on the theory that the subsequent assignee takes nothing by his assignment, because the assignor has nothing to give.  (Salem Trust Co. v. Manufacturers' Finance Co.,  264 U.S. 182 (1924).)  A minority of jurisdictions hold that the first assignee to give notice of the assignment to the obligor has preference over other purported assignees, even those that were earlier in time.  (Cal.Civ.Code § 955.1(b).)  Gratuitous or "gift" assignments are terminated by subsequent assignment of the same right.

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© 2015 by and Craig A. Smith