At long last, we come to our last substantive lecture on contract law. So, thanks for making it that this far. Pat yourself on the back. Today, we're going to be discussing delegation, assignment, and third-party beneficiaries. We've almost exclusively talked so far in this course about contracts formed or not formed between two parties and performance or breach by those two parties. Once the contract is formed, to what extent may one of the parties delegate his or her duty to perform as a promisor or a sign his or her rights as a promisee under the contract to a third party without the consent of the other side of the contract? I find it helpful to remember the double d: delegation concerns duties, assignments concern contractual rights. You delegate duties. You assign rights. Don't ever ask whether you can delegate a right. You can only delegate duties. So the restatement "Second of contracts" provides the basic answer of how the law regulates delegation. In its section 318 that says that "Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised. Unless the obligee agrees otherwise, neither delegation or performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.'' So what does that mean? Under the restatement, by default, a promisor has the right to delegate her duties except where the promisee, obligee has a substantial interest in having the original promise or perform. But unless otherwise, but this, unless otherwise agreed proviso is important. Parties in the initial contract can make any duty non-delegable, or they can make what might have been deemed a non-delegable duty because courts might deem the promisee to have a substantial interest into a delegable duty by including a clause saying that the duty is delegable. So what's at stake here crucially is whether a promisor can delegate ex post without the promisee's permission. The promisor or promisee can always agree to modify the contract to allow the promisor to delegate the duty to someone else, even if the promisee has a substantial interest in performance by the original promisor. And even if the contract, the original contract included a non-delegation provision. So, in what scenarios might someone have this kind of substantial interests, such that delegation of a contractual duty would be by default impermissible? The typical scenarios involve contracts related to personal service or contracts that involve a unique skill or discretion. These contracts create duties that cannot be delegated unless the parties agree in advance or ex post. So, if you, for example, and a highly recommended French language tutor agree that the tutor will give you French lessons thrice a week, the tutor cannot delegate her duties to someone else. Similarly, the UCC Section 2-210 provides, "A party may perform his or her duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having the original promisor perform or control the acts required by the contract. No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.'' Because the UCC only covers sales of goods not the provision of personal services, exceptions to delegation under the UCC are less obvious, although parties can of course specify in their contracts that delegation is not permissible. Note that both the restatement and the UCC keep the delegator on the hook for breach of contract. So even when a promisor has a right to delegate, if the delegatee fails to perform, the promisee can sue the original delegating promisor on the basis of the original contract for breach. Assignment is the analogous situation where after an initial contract is formed, a promisee wants to assign her rights to the promisor's performance without seeking the original promisor's permission. Section 317 of the restatement creates an analogous default rule saying that, "Contractual rights are assignable by default unless the assignment would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reducing its value to him.'' Again, him being the obligor. If you promise to paint my house, I probably cannot assign my right to your performance to someone who has a much bigger house or a house that is far away. My right of assignment isn't the right to make your job or performance harder. At least I can't do it by default unless I secure your permission at the time of the initial contract or after the fact by modifying the contract. Delegation and assignment concern transfers of duties and rights to third parties after a contract is performed. Now, we turn to the question of ex ante assignment, where the parties to the initial contract agree that the promisor will perform for the benefit of third party and give that third party the right to sue for any breach that occur. This is a kind of ex ante assignment. This ex ante assignee is called a third-party beneficiary. Sometimes, this creation of a third-party beneficiary is quite explicit and intentional. Imagine, for instance, that you signed a contract with an insurance company by which terms the company will pay your daughter a substantial sum if you die. Your daughter was not a party to the contract but she is a beneficiary of it, a third-party beneficiary. In other cases, third parties are beneficiaries of an agreement even when this wasn't the contracting party's intention. Suppose that Brian and Carolyn own adjoining plots of land, and Brian contracts with Alpha Company for Alpha to build a luxury building on Brian's land. If the building is built, Carolyn might very well benefit because her land values will increase substantially by having the luxury building next door. But she is not an intended beneficiary. In what circumstances can a beneficiary who is not a party to a contract assert claims based upon that contract? Well, the restatement of contracts, differentiates between intended beneficiaries and incidental beneficiaries. Section 302 provides that; "Unless otherwise agreed between promisor and promise, a beneficiary of a promise is an intended beneficiary, if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary, or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. An incidental beneficiary is the beneficiary who is not an intended beneficiary." Section 304 then explains that, "A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the intended beneficiary may enforce the duty." So, in our life insurance contract example, the insurance company has a duty to pay your daughter the third party beneficiary, and your daughter as a third party beneficiary, can enforce the contract, even though she wasn't an original party to it. By contrast however, section 315 of the restatement explains that, "An incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee." Carolyn as your neighbor, then would have no rights under the contract between B and Alpha Company. Of course, the distinctions are not always easy to make, and indeed typically require examination on a case by case basis, if the parties didn't explicitly designate the daughter as a third party beneficiary. When the initial contract does not explicitly designate a third party beneficiary, courts typically look at a number of factors in determining whether the beneficiaries are intended or incidental. The language of the promise, which the third party seeks to enforce is one of the factors, the intention or purpose of the parties, or the promisee to be derived from it, the evidence in addition to the promise. Some vague notion of utility, that is why. And why not enforce the promise if the parties so intended and the promisee is not bringing suit. And some even less explicit notions about the needs of a commercial setting in which the promise was made. Interestingly, the third party beneficiary need not show reliance upon the promise to gain protected status. The primary source, then a third party beneficiary rights is agreement of the promisor and promisee. And enforcement turns on a judgment that the purpose of these parties, will or will not be effectuated. So, let's consider how courts have dealt with the question of whether a beneficiary was an intended beneficiary in some real cases. We can see an entertaining example in Warren vs Monohan beaches jewelry company. The plaintiff was Warren's fiance, the plaintiff gave her what he thought was a diamond ring which he had purchased from the defendant's jewelry store. Before purchasing the ring, the fiance had spoken to the employees of the company about the size, type, and style of ring he wanted for Warren. And the company suggested that Warren might like or dislike about the ring. It turned out that the ring though contained no diamond just glass and cubic zirconia. And so, the question was Warren an intended beneficiary of the contract between the jewelry company and Warren's fiance? A Florida court determined quote The Pre-contract dealings between Andersen and the appelli, and the subsequent dealings between the appellant and a appelli, clearly establish appellant as an intended third party beneficiary of the contract at issue. Now, consider a case with perhaps greater public interest implication, Zygos versus Superior Court. Their tenants of the San Francisco apartment building, that was financed with a federally insured mortgage pursuant to the National Housing Act, and regulations promulgated pursuant to that act. The financing agreement between the landlord and the Department of Housing and Urban Development, HUD, required that the landlords not charge more than HUD's approved rent schedule. But the plaintiffs alleged that the landlords were charging in excess of that schedule. Where the tenants intended beneficiaries of the financing agreement. And the court said yes, "Even the most cursory review of the statutes and regulations which resulted in the contract in the present case, leads to the conclusion that the tenants constitute the class which Congress intended to benefit." This has been just a very quick run through of delegation assignment and third party beneficiary law. There's much more we could discuss, but to recap, here's what we've learned. Number one, we've discussed delegation. And learned that generally, parties may delegate contractual duties, unless a party has a substantial interest in the particular party performing the contract. We also discussed cases that typically fall within this substantial interest exception, including contracts for service or those involving a unique skill. We also discussed the assignment, which is very analogous regulating whether you can assign your rights under a contract, and by default, you can unless that assignment is going to impose extra duties, burdens on the promisor. We talked about third party beneficiary law, and the difference between intended beneficiaries and incidental beneficiaries. The former can enforce contractual terms, the latter may not. To test our knowledge of this distinction, we ran through a couple of the cases. And in all three of these context delegation, assignment, and third party beneficiary law, you should be clear on the default nature of these legal rules that the parties in their initial agreement can explicitly designate people to be third party beneficiaries or not to be third party beneficiaries, they can explicitly allow delegation of duties, or not allow it, they can explicitly allow assignment or not allow it. And that, the crucial area of the law here is establishing default rules, in the absence of such agreements.
