Third Party Rights
Privity of Contract
The doctrine of privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. This seems to make adequate sense, in that only parties to contracts should be able to sue to enforce their rights or claim damages as such. However the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
Privity of contract occurs only between the parties to the contract, most commonly contract of sale of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company.
If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer. This, however, does not mean that the parties do not have another form of action. For example, a friend of A bought her a bottle of cola which was defective. Since the contract was between her friend and the shop owner, there was no privity of contract, but it was established that the manufacturer has a duty of care owed to their consumers and she was awarded damages in tort.
Third Party Beneficiary
A third party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract, despite not having originally been a party to the contract. This right arises where the third party is the intended beneficiary of the contract, as opposed to an incidental beneficiary. It vests when the third party relies on or assents to the relationship, and gives the third party the right to sue either the promisor or the promisee of the contract, depending on the circumstances under which the relationship was created. In order for a third party beneficiary to have any rights under the contract, he must be an intended beneficiary, as opposed to an incidental beneficiary. The burden is on the third party to plead and prove that he was indeed an intended beneficiary.
An incidental beneficiary is a party who stands to benefit from the execution of the contract, although that was not the intent of either contracting party. For example, if party A hires party B to renovate party A's house, and insists that party B use a particular house painter—party C—because that house painter has an excellent reputation, then the house painter is an incidental beneficiary. Neither party A nor party B is entering into the contract with the particular intent to benefit party C. Party A simply wants his house properly renovated; party B simply wants to be paid to do the renovation. If the contract is breached by either party in a way that results in party C never being hired for the job, party C nonetheless has no rights to recover anything under the contract. Similarly, if party A were to promise to buy party B a Cadillac, and were to later go back on that promise, General Motors would have no grounds upon which to recover for the lost sale.
The distinction that creates an intended beneficiary is that one party - called the promisee - makes an agreement to provide some consideration to a second party - called the promisor - in exchange for the promisor's agreement to provide some product, service, or support to the third party beneficiary named in the contract. The promisee must have an intention to benefit the third party - but this requirement has an unusual meaning under the law. Although there is a presumption that the promisor intends to promote the interests of the third party in this way, if party A contracts with party B to have a thousand killer bees delivered to the home of Party A's worst enemy, party C, then C is still considered to be the intended beneficiary of that contract.
There are two common situations in which the intended beneficiary relationship is created. One is the creditor beneficiary, which is created where party A owes some debt to party C, and party A agrees to provide some consideration to party B in exchange for party B's promise to pay party C some part of the amount owed.
The other is the donee beneficiary, which is created where party A wishes to make a gift to party C, and party A agrees to provide some consideration to party B in exchange for party B's promise to pay party C the amount of the gift. Under old common law principles, the donee beneficiary actually had a greater claim to the benefits this created; however, such distinctions have since been abolished.
Assignment
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party - the assignor - to another party - the assignee. The legal nature of the assignment determines some additional rights and liabilities that accompany the act.
Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if party A contracts with Party B to sell his car to him for $10, party A can later assign the benefits of the contract - the right to be paid $10 - to party C. In this scenario, party A is the obligee/assignor, party B is an obligor, and party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting party C. However an Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner.
The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, if party A contracts to hire an attorney to represent her in a civil case for a fee of $1000, she cannot then assign her contractual right to legal representation to another party. Note however, that party A can assign her right to sue under the same claim she contracted with the attorney to pursue.
For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.
A contract may contain a non-assignment clause, which prohibits the assignment of specific rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignement. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".
Two other techniques to prevent the assignment of contracts are recission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.
Delegation
Delegation is a term used in the law of contracts to describe the act of giving another person the responsibility of carrying out the performance agreed to in a contract. Three parties are concerned with this act - the party who had incurred the obligation to perform under the contract is called the delegator; the party who assumes the responsibility of performing this duty is called the delegatee; and the party to whom this performance is owed is called the obligee.
A delegation will be null and void if it poses any threat to the commercially reasonable expectations of the obligee. For example, a task requiring specialized skills or based on the unique characteristics of the promisee can not be delegated. If George W. Bush were hired to make a speech, he could not delegate the task to another person, even if the other person would give the same speech, word for word. However, a delegation of performance that does not pose such a threat will be held to be valid. In such a case, the obligee will under an affirmative duty to cooperate with the delegatee to the extent necessary for the fulfillment of the delegator's obligations
If the delegatee fails to perform satisfactorily, the obligee may elect to treat this failure as a breach of the original contract by the delegator or may assert himself as a third party beneficiary of the contract between the delegator and the delegatee, and can claim all remedies due to a third party beneficiary. If the delegation is without consideration, the delegator remains liable for nonperformance, while the delegatee will not be liable to anyone for anything. Unlike an assignment, a delegation is virtually always for consideration, and never donative - few people are going to accept the charitable offer to perform a task contracted to someone else.
Novation
Novation is a term used in contract law to describe the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an Assignment , a novation must be agreed upon by all the parties to the original agreement. The obligee, the person receiving the benefit of the bargain, must only be given notice. The obligor, the party making the novation, must only make the new obligor aware and receive consent from the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.
For example, if I had a contract with you to cut my lawn and if John had a contract with me to cut his lawn, we could novate both contracts and replace it with a single contract wherein you agree to cut John's lawn. Contrary to assignment, novation requires the consent of all parties. Consideration is still required for the new contract but it is usually assumed to be the discharge of the former contract.
The criteria for a successful novation is the complete acceptance of the liability by the new debtor, the acceptance of the new debtor by the creditor, and the acceptance by the outgoing creditor of the new contract as full performance of the old contract.
Novation is also used in futures and options trading markets to describe a special situation where the clearing house takes all positions with all the brokers, buying all the brokers sell, and selling all that the brokers buy. In business, novation is typically the process by which a newly formed corporation assumes the pre-incorporation liabilities incurred by its founders. Novation is also used in transactions through electronic exchanges.
<< Previous 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 Next >>
