Third Parties — Contracts

Dev owes Priya $8,000 for landscaping. Dev then sells his boat to Cal for $8,000, and their written contract says Cal will pay that $8,000 directly to Priya, to clear Dev's debt. Cal never pays. Priya never signed the boat contract. She never paid a cent for it. She was not in the room. Can she sue Cal?

Yes. And that is the whole point of this topic. Three different situations pull an outsider into somebody else's deal. In each one, a person who never signed ends up either able to sue on the contract, or obligated to perform it. Your job on exam day is to spot which of the three you are looking at.

Three parts, matching three fact patterns. First, a deal made for an outsider. That is a third-party beneficiary. Second, a right handed off after the contract is formed. That is an assignment. Third, a job handed off. That is a delegation. Then we finish with the UCC rules for a sale of goods.

Start with the players, because a mislabel here dooms the whole analysis. There are always three. The promisor promises to render the performance that benefits the outsider, and is the party the beneficiary wants to sue. The promisee obtained that promise, usually because it wanted the outsider taken care of. The beneficiary is the outsider who stands to gain.

Notice the trap in those labels. In the boat deal, who is the promisor? Not Priya, the one who benefits. Cal, the one who owes the promised performance. Get that backwards and everything after it collapses.

Now the great dividing line. Intended beneficiaries on one side, incidental beneficiaries on the other. An intended beneficiary is someone the parties actually meant to benefit. An incidental beneficiary would merely happen to gain, but was never in the parties' minds. The rule that decides every beneficiary problem is short. Only an intended beneficiary can sue. An incidental beneficiary gets nothing, however real the benefit.

Restatement (Second) § 302 puts a name on it. A beneficiary is intended if enforcement fits what the parties were trying to accomplish. And either the promise satisfies money the promisee owes the beneficiary, or the circumstances show the promisee meant to give the benefit. Anyone else is incidental.

So what are the clues? The intent that matters most is the promisee's. Is the third party named? Does the performance run directly to them? Do they have a relationship with the promisee that explains the deal? Priya ticks all three.

Now change the facts. Suppose Cal had merely promised to buy Dev's boat, and Priya was hoping Dev would use the cash to pay her. Intended, or incidental? Incidental. She is not named, no performance runs to her, and she can sue nobody.

Two flavors sit underneath. A creditor beneficiary is someone the promisee already owed. A donee beneficiary is someone the promisee wanted to make a gift to, owing them nothing. The life-insurance grandchild is the classic donee. Both can sue the promisor. The split matters for one question only. Can the beneficiary also reach the promisee?

A creditor beneficiary can. The original debt survives until it is actually paid, so Priya may pursue Cal on the new promise, or Dev on the old debt. One full recovery, never two. A donee beneficiary cannot. The promisee owed the donee nothing, so the donee's only target is the promisor.

There is a timing question hiding here. Before the beneficiary's rights vest, the two original parties stay free to modify their contract, or tear it up, and wipe out the outsider's benefit. Once the rights vest, they cannot touch that benefit without the beneficiary's consent.

So when do rights vest? Three triggers, under Restatement (Second) § 311. The beneficiary assents to the promise. The beneficiary materially changes position in justifiable reliance on it. Or the beneficiary sues to enforce it. Any one will do. The contract can also control this. An insurance policy that reserves the power to swap the named beneficiary can still swap them.

Last piece of part one. Defenses. A beneficiary's right is only as good as the contract it springs from. The promisor may raise any defense it could have raised against the promisee, so long as it arises out of the contract. No valid contract. The promisee's own material breach. A failed condition. The beneficiary takes the deal warts and all.

What the promisor generally cannot do is drag in an unrelated dispute. An old debt the promisee happens to owe from some other transaction will not defeat the beneficiary's claim, unless the contract says so.

Part two. Shift from deals made for outsiders to deals transferred to outsiders. An assignment is the owner of a contract right handing that right to someone new. Three players again, new names. The assignor owns the right and gives it away. The assignee receives it. The obligor is the other original party, who now owes performance to the assignee.

A contractor owed $10,000 by a homeowner assigns that right to its bank. Now the bank collects, not the contractor. A real assignment transfers the right immediately and completely. The assignor keeps nothing.

What does a valid assignment need? Present intent to transfer the right now. I assign. I transfer my right to be paid. It needs an existing, identifiable right. It needs no consideration, so a pure gift assignment works. And it generally needs no writing.

Try one. When the client pays me next month, I promise I will hand that money over to you. Assignment, or not? Not. A promise to assign in the future transfers nothing, and that is the classic trap.

Most rights are freely assignable. That is the default, because transferring rights keeps commerce moving. The exceptions turn on unfairness to the obligor. A right cannot be assigned where the transfer would materially change the obligor's duty, or materially increase its burden or risk, or materially impair the return performance it bargained for.

Rights turning on the identity of the recipient are out for the same reason. A careful driver cannot assign her personal auto liability coverage to a nephew with several speeding tickets. That materially increases the insurer's risk, so the insurer may refuse.

Now the effect, and it is one image. The assignee steps into the assignor's shoes. No more, no less. First, defenses ride along. The obligor may assert against the assignee every contract defense it had against the assignor. A roofer assigns a $12,000 payment right to a finance company, then the roof leaks from the roofer's defective work. The homeowner raises that against the finance company.

Second, notice controls payment. Until the obligor learns of the assignment, paying the assignor discharges the debt. Once notice arrives, it must pay the assignee. Pay the assignor anyway and it is not discharged, and may have to pay twice. That is why an assignee's first move is to notify the obligor.

Assignments split two ways. An assignment for value is irrevocable. A gratuitous assignment, a pure gift, is generally revocable, undone by the assignor's death, a later assignment of the same right, or notice of revocation. It locks in on a signed writing, a token standing for the right, or the assignee's collection or reliance.

Here is the exam's favorite trap in this whole topic. Contracts often say, this contract may not be assigned. You would think that ends it. It does not. A clause barring assignment of the contract is read, by default, to bar only the delegation of duties. Not the assignment of rights. So it usually does not stop the owner from assigning away the right to be paid.

And even a clause that does target the assignment of rights usually does not make the assignment void. It is treated as a mere promise not to assign. The assignment works, and the assignee gets the right. In the classic phrasing, the clause takes away the right to assign, not the power to assign.

The exception is a clause clearly saying an assignment is void, or that the assignor has no power to assign. Courts give those teeth. And two rights stay assignable whatever the contract says. Damages for breach of the whole contract, and a right already fully earned by complete performance.

What if a dishonest assignor sells the same right twice? The majority American rule is first in time, first in right. But a later assignee for value, in good faith and without notice, leaps ahead if it collects, wins a judgment, makes a novation, or takes the token first.

And an assignor for value impliedly promises the right exists and has not already been assigned away. It never promises the obligor is solvent. That credit risk is the assignee's.

Part three. Assignment moves a right. Delegation moves a job. When a party who owes a duty arranges for someone else to perform it, that is a delegation. The delegant owes the duty and hands it off. The delegatee agrees to perform. The obligee is the party entitled to receive the performance.

And now the single most important rule in this part. Handing off the job does not hand off the responsibility. The delegant stays on the hook. If the delegatee performs badly, or not at all, the obligee can still sue the original delegant for breach.

Which duties cannot be delegated? Those the obligee has a substantial interest in having the original party perform personally. Special skill, artistry, judgment, taste. A portrait painter, a trial lawyer, a surgeon. Routine, standardized work is freely delegable. Paving a road, hauling freight.

Here is an asymmetry worth memorizing. A clause forbidding delegation is generally given full effect. That is the opposite of a clause against assigning rights, which usually leaves the assignment standing. Delegation bars have teeth. Assignment bars mostly do not.

Watch what happens when the delegatee promises the delegant it will perform. That is an assumption, and it does real work. The obligee becomes an intended creditor beneficiary of that promise, and can sue the delegatee directly. So the obligee now has two targets. Notice how that ties straight back to part one.

If the delegatee merely accepts the delegation without promising to perform, the obligee cannot reach it. Only the delegant. The one escape is a novation, where the obligee agrees to release the delegant and accept the delegatee in its place. That takes the obligee's consent. The other two cannot swap the responsible party on their own.

Finally, goods. For a sale of goods, UCC Article 2 governs through § 2-210, and it largely tracks what you just learned. This topic is unstarred, so a goods question may simply hand you § 2-210 to apply. The tested skill is reading it correctly.

Two of its points repeat the common law exactly. Delegating never frees the delegant, and a ban on assigning the contract bars only delegation. Two others earn their own line. Rights are freely assignable unless the assignment materially changes the other side's duty, burden, risk, or expected return. And damages for breach of the whole contract, plus a right earned by full performance, are assignable even if the contract forbids it.

Then two defaults to memorize. Assigning the contract, or all my rights under the contract, both assigns the rights and delegates the duties, and the assignee is deemed to promise to perform them. And the other party may treat that delegation as reasonable grounds for insecurity. It may demand adequate assurance from the newcomer under § 2-609, and suspend its own performance until that assurance arrives.

A word on authorities, because this episode named no cases, and that was deliberate. This topic is unstarred, which means recognition-level. The exam may simply hand you the governing language, the Restatement or the UCC, and ask you to apply it. Nobody is going to ask you for a case name.

If you keep only three, keep these. Restatement (Second) § 302, because it sorts intended from incidental, and that sort decides every beneficiary problem. § 311, because vesting turns a revocable benefit into a locked-in right. And § 2-210, because every goods question in this topic runs through it.

Now the traps the examiners set. One. Promisor means the one who owes the promised performance, not the one who benefits. Two. Incidental beneficiaries get nothing. Do not let a sympathetic outsider who merely stood to gain talk you into giving them a claim. Three. A donee beneficiary can sue the promisor, never the promisee, because the promisee owed the donee nothing.

Four. Before vesting, the original parties can freely modify or cancel the benefit. Do not treat it as locked in until the beneficiary assented, relied, or sued. Five, the biggest assignment trap. A clause saying the contract may not be assigned bars only delegation of duties, and even a clause against assigning rights usually leaves the assignment effective.

Six. Delegation never releases the delegant. Only a novation, with the obligee's consent, does that. Seven. An assignee inherits nothing better than the assignor had. Eight. Assignment moves a right, delegation moves a duty, but assignment of the contract does both. Keep those two verbs straight.

Time for the quick check, and this one comes straight from the BARGO question bank. A three-year supply contract between Quillon Mills and Redland Bakery contains one boilerplate line. This contract may not be assigned. Redland owes Quillon $20,000 for flour already delivered. Quillon assigns its right to that $20,000 to a factoring company, then tells Redland to pay the factor. Redland refuses.

What is the effect of that clause on the assignment? Option one. The clause voids the assignment, so the factor acquired no right to payment. Option two. The clause bars only delegation of duties, so the payment right was assignable. Option three. The clause is unenforceable, because anti-assignment terms are always void. Pause here if you want a moment.

The answer is option two. By default, a clause barring assignment of the contract is construed to bar only delegation of the assignor's duties, not assignment of its rights. Quillon assigned a right, the right to be paid, not a duty. The clause does not touch it, and the factor takes the payment right.

Option one misreads the clause. Even a clause that did target the assignment of rights usually takes away only the right to assign, not the power to assign. Option three swings too far the other way. Anti-assignment clauses are not always void, and those clearly negating the power to assign are enforced. There are thirty plus more questions on this topic alone, each with every option explained like that.

Five things to take away. One. Only an intended beneficiary can enforce the contract. An incidental beneficiary gets nothing. Two. Those rights vest on assent, reliance, or suit, and until then the original parties may cancel the benefit at will.

Three. A creditor beneficiary has two targets, the promisor on the new promise and the promisee on the surviving debt, taking one satisfaction only. A donee beneficiary has one, the promisor.

Four. An assignee steps into the assignor's shoes, defenses and all, and notice to the obligor controls who gets paid. A clause banning assignment of the contract bars only delegation.

Five. Delegating a job never sheds the responsibility. The delegant stays liable unless the obligee consents to a novation. Under § 2-210, the goods rules track all of that.

Which brings us back to Priya, who never signed a thing and can still sue Cal for her $8,000. Named in the contract, paid directly, and owed a debt the deal was built to clear. That is an intended beneficiary. It is also the last stop in Contracts.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.