Third Parties and Assignments

Ordinarily, only the parties to contracts have rights and duties with respect to the contracts.  However, exceptions are made in the case of third-party beneficiary contracts and assignments.

When a contract is intended to benefit a third person, this person is a third-party beneficiary and may enforce the contract.  A life insurance contract is a third-party beneficiary contract.  The insurance company promises the insured person to make payment to the beneficiary.  Suppose you have a life insurance policy with Metropolitan Life Insurance Company and your wife is the beneficiary.  If you die, Metropolitan Life will pay the insurance proceeds to your wife.  If the Company refuses to pay in accordance with the terms of the policy, your wife has the right to bring a lawsuit against the Company in her name. She may do this even though she was not a party to the contract.

The beneficiary does not have to be specifically named, but may be described as a class of people.  For example, a union contract is between the union and the employer.  However, an employee, one of the class of individuals covered by the union contract, can bring suit on the contract even though he is not specifically named in the contract.

Not everyone who benefits from the performance of a contract between other persons is entitled to sue as a third-party benefici­ary.  In order to be a third-party beneficiary, the contract must clearly show an intent to give direct benefits to the third person.  Anyone else who might benefit by the contract is called an inci­dental beneficiary and has no rights under the contract.  An incidental beneficiary may not sue to enforce the contract.  A Court would hold that such a beneficiary did not have “standing” to sue for breach of the contract.  For example, if a private employer makes a contract with the U. S. Government to employ and train disadvantaged unemployed persons, these unemployed persons are merely incidental beneficiaries of the contract.  They cannot sue for damages if the contract with the government is broken by the employer.

An assignment is a transfer of rights that a party has under a contract to another person, called an assignee.  The assigning party is called the assignor.  An assignee of a contract may generally sue directly on the contract rather than suing in the name of the assignor.  The other party to the original contract is called the obligor.  For example, suppose I sell my car to Larry for $10,000.00.  He does not have $10,000.00 in cash, but executes an agreement stating that he agrees to pay me $500.00 a month for 20 months.  I then assign this contract to Peggy.  Larry is the obligor, I am the assignor, and Peggy is the assignee.

Unless there is a statute that requires that certain language be used in an assignment or that the assignment be in writing, there are really no formal requirements for an assignment.  Any words which show the intent to transfer rights under a contract are sufficient to constitute an assignment.

If there is no considera­tion for the assignment, this does not affect the validity of an assignment.  This is so because an assignment is not a contract, but is the transfer of a property right.  An assignment may therefore be made as a gift, although it is usually part of a business transaction and does involve consideration.

Any right to money may be assigned.  This is true in cases where the assignor is entitled to the money at the time of the assignment or will be entitled to the money at some point in the future.  My assigning my contract with Larry to Peggy is an example of an assignment of future rights to money. Any contract may be assigned with permission of the obligor. Personal service contracts cannot be assigned without the permission of the parties, such as a contract between an employee and an employer.

A contract may prohibit the assignment of any rights arising under the contract.  Some Courts hold that this type of prohibition is binding, and any assignment in violation of the prohibition has no effect.  However, as far as an assignment of a right to money is concerned, any contract which would prohibit the assignment of a right to money is invalid and would not prevent the making of such an assignment.  This is the general rule.

A right to a performance may be assigned with certain exceptions.  For example, suppose I have my car repaired and the repairman guarantees the repairs for 30 days.  Unless the guarantee states that it will not apply to a purchaser of the car, if I do sell the car, the purchaser could also receive the guarantee.

If the assigning of a right would increase the burden of the obligor in performing the contract, an assignment is ordinarily not permitted.  Lee contracts to paint Sally’s two-story house for $1,000.  Sally realizes that she will not have sufficient money, so she transfers her rights under this agreement to her neighbor Karen, who has a three-story house.  Karen notifies Lee that Sally’s contract has been assigned to her and demands that Lee paint Karen’s house for $1,000.  Is Lee required to do so?  No.  The right called for the performance of personal services.  Such a right cannot be assigned without the consent of the person who is to render the personal services.  This is particularly true in this case, because this type of assignment, if allowed, would increase the burden of performance; it is a greater burden to paint a three-story house than a two-story house.

Contracts involving personal satisfaction cannot be assigned without the permission of the obligor.  For example, if a contract involves goods to be furnished that must be satisfactory to the buyer, this type of contract could not be assigned since the buyer’s judgment may be different than the assignee’s.

If a party to a contract has certain duties to perform under that contract and then transfers these duties to another person who is to perform them, there is a delegation of duties.  In such a case, the original person who is to perform the duties remains liable if the person to whom he transfers the duties fails to adequately perform the duties.  In other words, the party to the contract who delegated the duties remains liable in case of default of the person doing the work just as if no delegation had been made.

In some instances, a delegation of duties cannot be made unless consented to by the party entitled to the performance.  An example of this would be when a personal element of skill or judgment of the original contracting party is involved.  If I contract with a particular mechanic to repair my car because this mechanic is known for his expertise regarding the particular problem I am having, the mechanic would breach his contract with me if he delegated these duties to another mechanic without my permission.

An assignment does not relieve the assignor of any obligation under the contract. An assignor continues to be bound by the obligations of the original contract unless the other party to the contract releases him. For example, the fact that a buyer assigns the right to goods under a contract does not terminate the buyer’s liability to make payment to the seller.

An obligee is someone owed an act or deed, such as paying money on a promissory note or contract. Ordinarily, the assignee is not subject to a suit by the obligee by virtue of the fact that an assignment has been made.  For example, if someone assumes a loan in purchasing a house, the lender ordinarily cannot sue the assignee (i.e., purchaser and assumer of the loan) unless the assignee/assumer agreed, not only with the seller, but with the lender, to pay the loan.

The rights of the assignee regarding the assigned contract are no greater than those of the assignor.  If the other party to the contract could have successfully defended against a suit brought by the assignor, that party (the obligor) will also prevail against the assignee.

Mack did plastering work in Nick’s home.  He did not have a license to do the plastering work, and by statute, he was barred from suing for the contract price for this work.  Mack assigned his claim against Nick to Will, who then sued Nick for the amount due for Mack’s work.  The Court held in favor of Nick.  The Court ruled that by virtue of the statute, Mack’s lack of a license was a defense to the recovery on the contract from Nick.  Will, as assignee of Mack, had no greater right than Mack to sue.


Inside Third Parties and Assignments