Introduction to ContractsThe Agreement: Offer

The Agreement: AcceptanceConsideration

Reality of Consent

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Rights of Third Parties

The best minute I spend is the one I invest in people.

Kenneth Blanchard, The One Minute

Manager (1993)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Assignment of ContractsDelegation of DutiesThird-Party Beneficiaries

17 - 4

Sometimes a person who entered into a contract must transfer the contract rights or duties to another person (third party) Examples: sublease of your apartment, asking

another person take over work you agreed to do, or doing something to benefit a third person

Key to successful transfer: understand the third party’s abilities, limitations, and needs

Overview

17 - 5

A person who owes a duty to perform under a contract is called an obligor

The person to whom the duty is owed is called the obligee

Overview

17 - 6

Transfer of a right under a contract is called an assignment

Example: Jane arranges for her employer to transfer her next paycheck to her parents’ bank account Employer is the obligor (owes Jane money) Jane is the obligee and assignor Jane’s parents are the assignees

Assignment of Contracts

17 - 7

Assignment Process

17 - 8

Assignments may be made in any way sufficient to show assignor’s intent to assign

A writing is not necessary Unless statute of frauds applies

Assignee does not need to give consideration to assignor in exchange for the assignment

Details of Assignment

17 - 9

Assignment will not be effective if it: Is contrary to public policy

Example: PPG Industries, Inc. v. JMB/Houston Center Violates a non-assignment clause in a contract Adversely affects obligor in some significant way

Assignment may be ineffective if the contract right involved a personal relationship or element of personal skill or character

Limitations on Assignment

17 - 10

PPG Industries, Inc. v. JMB/Houston Center

Facts & Procedural History: PPG installed Twindows in Houston

skyscraper for Houston Center Corp. (HCC) HCC sold building to JMB “as is” (for

Twindow defects and PPG’s claim that warranties expired)

JMB waived claims against HCC under state statute for unfair trade practices Texas Deceptive Trade Practices Act (DTPA)

JMB sued PPG in 1991 under the DTPA for breaching warranties issued to HCC17 - 11

Supreme Court Appeal: Jury found for JMB, awarding over $14 million in

damages and appellate court affirmed Texas Supreme Court examined the legislative

purpose of the DTPA and determined that DTPA claims were limited to consumers (unlike JMB) to

remedy deceptive acts and has a “personal aspect” Assignment of the claims would “frustrate the clear

intent of the Legislature.” Reversed in favor of PPG

17 - 12

PPG Industries, Inc. v. JMB/Houston Center

Appointment of another person to perform a duty under a contract is called a delegation

Example: Mike mows Janet’s lawn weekly. Mike becomes ill and arranges for Sonny to mow Janet’s lawn Janet is the obligee Mike is the obligor and delegator Sonny is the delegatee

Delegation of Duties

17 - 13

Caution: an assignment extinguishes the assignor’s right and transfers it to the assignee, but the delegation of a duty does not extinguish the duty owed by delegator Delegator remains liable to the

obligee unless the obligee agrees to make a new contract substituting the delegatee’s for the delegator

Delegation of Duties

17 - 14

Delegation Process

17 - 15

In an effective delegation, performance by the delegatee will discharge the delegator The reason why you should understand the

delegatee’s abilities and limitations

Effective Delegation

17 - 16

Facts and Opinion: Watts (seller) and MW Development (buyer; MW)

entered into contract for sale of real estate Simpson loaned MW money and, as security, MW

assigned rights in real estate contract to Simpson MW defaulted and Watts sued Simpson alleging

that Simpson obligated under assignment Court: Simpson did not assume obligation to

purchase under the assignment contract with MW Affirmed in favor of Simpson

17 - 17

Watts v. Simpson

Duties are not delegable if the delegation: Is contrary to public policy Is prohibited by a contract clause

Also, duties that are dependent on the individual traits, skill, or judgment of the person who owes the duty to perform may not be delegable Example: a hip hop artist could not reasonably

delegate concert obligation to an opera star

Non-delegable Duties

17 - 18

Delegation may be made in any way that shows the delegator’s intent to delegate

Delegator may be discharged from performance by a substituted contract (novation) in which obligee agrees to discharge original obligor and substitute a new obligor Effect: Original obligor has no further

obligation

Details of Delegation

17 - 19

If parties to a contract intended to benefit a third party, courts give effect to their intent permitting third party to enforce the contract Referred to as third-party beneficiary

Example: Father contracts and pays for Homes, Inc. to build house as gift for Son Son (third-party beneficiary) may sue Homes,

Inc. if the company breaches the contract Father may also sue Homes, Inc.

Third-Party Beneficiaries

17 - 20

Third-Party Beneficiary Diagram

17 - 21

Incidental beneficiary is one obtaining a benefit as unintended by-product of a contract No rights under contract

In foregoing example, Son’s Wife would be an incidental beneficiary

Incidental Beneficiaries

17 - 22

Locke v. Ozark City Board of Ed.

Facts & Procedural History: Locke, a high school teacher and umpire at

high school games, was severely injured by a parent of a high school athlete after a game

Locke sued the Board because (a) it failed to provide “adequate police protection” as required by the Alabama High School Athletic Assoc., (b) such failure was a breach of contract between Board and AHSAA, and (c) Locke was an intended third-party beneficiary of the contract

Trial court entered summary judgment for Board17 - 23

Issue on Appeal: Was Locke a third-party beneficiary?

Law Applied to Facts: Locke must show: 1) contracting parties

intended direct benefit upon a third party; 2) Locke was an intended beneficiary of the contract; 3) contract was breached, and 4) contract was intended for his direct, as opposed to incidental, benefit

Contract states that the purpose of “adequate police protection” is to “provide good game administration and supervision.”17 - 24

Locke v. Ozark City Board of Ed.

Holding: Based on the plain language of the contract

and the surrounding circumstances, the contract anticipates third-party umpires, the contract was intended to directly benefit umpires like Locke

Reversed and remanded in favor of Locke

17 - 25

Locke v. Ozark City Board of Ed.

Test Your Knowledge

True=A, False = B A person who assigns a right is an

obligee All duties may be delegated Non-assignment clauses are enforceable If a contract contains a non-assignment

clause, the clause actually means that duties may not be delegated

17 - 26

Test Your Knowledge

True=A, False = B Sheila assigned her right to the proceeds

of a prize to a charity. Sheila is an assignee and the charity is the assignor.

Joshua contracted with Bigg Homes to build a two-story house that will improve the value of nearby homes. Joshua’s neighbor is an incidental beneficiary.

17 - 27

Test Your Knowledge

Multiple Choice James financed car purchase with CarCo,

then sold the car to Marsha. Marsha agreed to pay remaining amount of the car loan, but failed to make payments. CarCo may sue: (a) James only since he contracted with

CarCo(b) James and Marsha since CarCo is a

creditor beneficiary of the contract between James and Marsha

(c) Marsha only since Marsha was substituted for James 17 - 28

Test Your Knowledge

Multiple Choice Mack contracted with Dept. Store to play

piano and holiday songs in the store during December. The contract had a “non-assignment” clause. Mack got another job and delegated his duties under the contract to Sarah. Does Dept. Store have a valid claim against Mack? (a) Yes. Mack breached the non-assignment

clause by delegating his duties to Sarah(b) No. Mack found someone to replace him(c) No. The contract didn’t have a non-

delegation clause 17 - 29

Thought Question

If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses?

17 - 30