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Dynamic business law 4e kubasek 4e CH19

Chapter 19
Third-Party Rights to Contracts

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.


• LO19-1: What is an assignment?
• LO19-2: What are the rights and duties of an assignor?
• LO19-3: What are the rights and duties of an assignee?
• LO19-4: What is a third-party beneficiary contract?
• LO19-5: What are the differences among donee beneficiaries, creditor
beneficiaries, and incidental beneficiaries?


Chapter 19 Hypothetical Case 1

Richard Oglethorpe owes Tammy Abramowitz $5,000 on a promissory note due and payable on November 1. On
November 5, Abramowitz contractually transfers the right to receive the $5,000 to Kevin Albee in payment for a car
Albee sold her. As part of the transaction, Abramowitz endorses the promissory note and transfers possession of the
note to Albee.

On November 7, Kevin notifies Oglethorpe that he is in lawful possession of the note, and demands payment from
Oglethorpe. Oglethorpe refuses to pay, claiming he owes no obligation to Albee, since he has never contracted with

Is Richard Oglethorpe obligated to pay Kevin Albee the $5,000?


Chapter 19 Hypothetical Case 2

Michael Angelo is renowned as the house painter to the stars. His craft is well-known throughout Hollywood, he is in high demand, and he has
limited his work to celebrity homes valued at $2 million or more.

Sandra Anderson, a film star, commands at least $20 million per film. Her net worth is rumored to be in excess of $100 million. Anderson has sought
and secured Angelo's services to paint her new home nestled in the Hollywood Hills. When completed, Sandra's new home will be worth an
estimated $2.25 million.

Angelo is extremely busy. He is currently painting three homes for three different movie stars: Damian Guilden, Tommy Davis, and Brad Dennis. He
would like to have his associates, Jim Bartholomew and Buddy Head, perform the painting of Sandra's house. Bartholomew is twenty-one years old
and has three years of house painting experience, while Head is twenty-seven and has four years of experience.

From a contractual standpoint, may Michael Angelo have his associates, Bartholomew and Head, paint Anderson's house? Would such an
arrangement require Anderson's approval?


Obligor and Obligee

• Obligor: Contractual party who agrees to do something for the other party
• Obligee: Contractual party who agrees to receive something from the
other party



• Assignment: Transfer of rights under a contract to a third party
• Assignor: Party to contract who transfers his/her rights to a third party
• Assignee: Party who receives transfer of rights to a contract


Contractual Rights That
Cannot Be Assigned

• Rights that are personal in nature
• Rights that would increase obligor's risks/duties
• Rights in a contract that, by its terms, expressly forbids assignments
• Rights whose assignment prohibited by law/public policy



• Delegation: Transfer of duty under a contract to a third party
• Delegator: Party to a contract who transfers his/her duty to a third party
• Delegatee: Party (not part of original contract) to whom duties to perform
are transferred by a contracted party


Contractual Duties That Cannot Be Assigned

• Duties personal in nature
• Duties resulting in performance substantially different from that which

obligee originally contracted (i.e., delegatee's performance will vary
significantly from delegator's)
Duties in a contract that expressly forbids delegation


Third-Party Beneficiary Contracts

Intended beneficiary: Third party to contract whom contracting parties intended to benefit directly from
contract. Intended beneficiaries can sue to enforce contract obligations
Promisor: Party to contract who made promise that benefits third party
Promisee: Party to contract who owes something to promisor in exchange for promise made to third-party
Creditor beneficiary: Third party who benefits from contract in which promisor agrees to pay promisee's
Donee beneficiary: Third party who benefits from contract in which promisor agrees to give a gift to third
Vesting: Maturing of rights, such that a party can legally act on the rights
Incidental beneficiary: Third party who unintentionally gains benefit from contract between other parties;
contracting parties do not intend to benefit incidental beneficiary; incidental beneficiaries cannot sue to
enforce contract obligations


Creditor Versus Donee Beneficiaries
Creditor Beneficiary

• Contractual performance fulfills
obligation to third party

• Beneficiary can enforce rights to

Donee Beneficiary

contract if contract valid and rights
have vested

• Contractual performance gives a gift

promisor or promisee

• Beneficiary has limited ability to

• Beneficiary can enforce rights against

to third party

enforce contract (depending on

• Beneficiary can enforce rights against


Intended Versus
Incidental Beneficiaries
Intended Beneficiary

• Contracting parties intended to

benefit third party with their contract

• Beneficiary has right to enforce

• Beneficiary benefits from direct
reception of contractual

Incidental Beneficiary

• Contracting parties did not intend to
benefit third party with contract

• Beneficiary does not have right to
enforce contract

• Beneficiary benefits from indirect

circumstances created by contractual


Chapter 19 Hypothetical Case 3

Barbara Hastings has no children of her own, but she does have a beloved niece named Ellen Laughridge. Attentive to the future financial needs of Laughridge, Hastings
secures a $500,000 life insurance contract from Chameleon Insurance Company, listing Laughridge as the sole beneficiary. Hastings has every intention to inform
Laughridge of her new life insurance policy, but life gets in the way, and she neglects to do so.

Hastings dies on January 15, 2011. As part of her estate distribution, Laughridge receives a chest of drawers from her dear aunt. On August 29, 2013, while rearranging
her clothing in the chest of drawers, Laughridge comes upon a secret compartment. In the secret compartment is an original copy of the life insurance contract.
Laughridge is overjoyed to see her name listed as beneficiary, and she contacts Chameleon Insurance Company immediately.

Upon review of the policy, Chameleon denies coverage. Chameleon's claims representative points to Section 15(b) of the policy, which specifically requires notification of
the insured's death no later than one year after death. It has been over two years and seven months since Barbara Hastings died.

Will Ellen recover the $500,000 in insurance proceeds? Is it ethical for an insurance company to deny a claim on the basis of a technicality?


Chapter 19 Hypothetical Case 4

Daniel Lim's parents, William Lim and Cheryl Stratford, divorced when he was only four years old. Theirs was an
unpleasant split, and Daniel Lim's parents barely spoke to one another throughout his childhood. Neither remarried
or had more children.

When Daniel Lim was twenty-two, his father died. William Lim's will stipulated that all of his assets, including any life
insurance policies, should go to his only son. When Lim filed the documentation for his father's life insurance policy,
he noted that his mother was still listed as the beneficiary. He mentioned this discrepancy to his mother, who
immediately sued William Lim's estate for the proceeds of the life insurance policy—in effect, she sued her own son
for the insurance money.

Who will prevail in this case?


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