Essentials Of Business Law

Chapter 12

Operation Of Contracts

McGraw-Hill/Irwin Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Essentials of Business Law Chapter 12-2

Third Parties Involved In Contracts

Third parties to a contract are: In some way affected by the contract Not one of the parties to the contract

Third parties exist when:1. The purpose of a contract is to benefit a third

party

2. Rights or duties that arise from a contract are legally transferred to a third party

Essentials of Business Law Chapter 12-3

Third Parties Involved In Contracts

Two ways third parties can be affected by a contract1. Third-party beneficiary

– Has a legal right to the benefits from the contract when that is the intent of the contracting parties

2. Incidental beneficiary– Benefit as an indirect result of a contract, although

that was not the intent of the contracting parties– Have no legal rights in the contract

Essentials of Business Law Chapter 12-4

Assignment Of Rights

Permissible in most states to assign contract rights Transfer rights to a third party and permit the third

party to receive the benefits of the contract

Assignor The person who transfers his or her rights

Assignee The third party to whom the rights are transferred

Appointing a third person to perform contractual duties is by delegation

Essentials of Business Law Chapter 12-5

Essentials of Business Law Chapter 12-6

Assignment

Form of assignment Maybe be written or oral

Notice of assignment The assignee must notify the other party to

the contract of the assignment

The assignor of a contract right becomes a guarantor

Essentials of Business Law Chapter 12-7

Contracts That May Not Be Assigned

Contracts that include assignment restrictions

Contracts for which assignments are prohibited by law or public policy

Contracts that require personal services Unique skills, talents, or abilities that are

provided by a specific person

Essentials of Business Law Chapter 12-8

Assignment And Delegation By Law

Death of a contracting party All contractual rights are assigned to the

administrator or executor of the estate Does not include personal-service contracts

that require unique skills

Bankruptcy of a contracting party The assets and contracts of a bankrupt party

are assigned to the trustee in bankruptcy

Essentials of Business Law Chapter 12-9

Novation

Occurs when all parties to a contract agree to a significant change in the contract

Change creates a new contract that is based on the earlier one

A novation differs from an assignment in the following ways: Requires mutual consent of all parties Transfers all rights and obligations in a contract