Up to now, we have devoted all of our efforts to analyzing the rights of the parties who make a contract (you know, often you and your neighbor, Alice). This chapter focuses on the rights of other parties, namely those who did not make the contract, called third parties. Part of the challenge of this topic is determining which third parties have rights under a contract made by others. In Chapter 1, I offered the example of a contract between a city and a manufacturer that regulated the amount of pollution emitted from the manufacturer’s plant.1 Third-party beneficiary law governs the issue of whether citizens, who were not a party to this contract, can sue the manufacturer directly if the manufacturer exceeds the pollution limits set in the contract. We will see that the answer depends on whether the city and manufacturer intended to give the citizens such a right.2 Part A of this chapter discusses this and other questions about third-party beneficiary law.
Part B of this chapter discusses assignment of rights and delegation of duties under a contract. Again, Chapter 1 offers an example of an assignment of rights. A small local hardware store sells to True-Value the hardware store’s contract right to the delivery of inventory from a wholesaler. In the terminology of assignment law, the hardware store has assigned its contract right to True-Value. Note that this is different from third-party beneficiary situations. True-Value’s rights, if any, come about because of the assignment to it of the hardware store’s rights under an existing contract between the hardware store and the wholesaler, not (as in third-party beneficiary law) because the hardware store and wholesaler made a contract to benefit True-Value. In assessing True-Value’s rights, we ask whether requiring the wholesaler to deliver to True-Value instead of to the hardware store materially changes the wholesaler’s duties, not whether the hardware store and wholesaler intended to benefit True-Value by making their contract. These distinctions are important and will become much clearer after reading the body of this chapter.
Suppose True-Value purchases the local hardware store in its entirety, but the hardware store owed the wholesaler money. As part of the purchase of the hardware store, True-Value agrees to pay the debt. In the terminology of contract law, the hardware store has delegated to True-Value the hardware store’s duty to pay the wholesaler. More on the respective rights and duties of the parties in this context in due time too.
A. THIRD-PARTY BENEFICIARIES
Suppose you owe your friend, Taylor Plantations, $40. You agree to mow Alice’s lawn. In exchange, she promises to pay Taylor directly the money you owe him, instead of paying you. Can Taylor sue Alice if you perform and Alice does not pay him?
A long time ago, the consensus was that Taylor could not sue. Taylor was not in “privity of contract” with Alice, meaning that he wasn’t a party to your contract with Alice, so how could he sue for breach of that contract? The main exception to the privity barrier was for beneficiaries of trusts, who were allowed to sue the trustee, even though the beneficiary was not a party to the trust arrangement.3 The last sentence is a lot to swallow if you are not familiar with trusts. Trusts are beyond the scope of this book (and first-year contracts courses), so a simple example will have to do. If parents set up a trust fund for their child at Perpetual Bank, the bank, as trustee, holds the money for the child, the beneficiary of the trust. Although the child was not a party to the contract between her parents and Perpetual Bank, the child can sue the bank for breach of the trust relationship, for example, if the bank breaches its fiduciary duty (duty of care) with respect to handling the trust fund.4
Apart from trusts, early contract law generally required a party to be in privity of contract in order to sue.5 Reluctance to extend the right to sue to non-parties was understandable because of the fear that over-extension of the right to sue on other people’s contracts could deter promisors from entering contracts. For example, the manufacturer in our earlier example who agreed to pollution limits in a contract with the city may have thought twice about contracting if each and every citizen could sue it for breach of the agreement.6 Further, over-extension could tax the courts. Think of the potential caseload if each citizen could sue over the pollution excesses of the manufacturer. Finally, contract law is supposed to be based on assent.7 To be consistent with this principle, the manufacturer should be liable to individual citizens only if the manufacturer agreed to accept such liability.8
We now proceed to investigate two categories of third parties whose rights to sue have been recognized, namely creditor and donee beneficiaries.9 We will see that contract law recognized rights in these parties because many of the above concerns do not apply to them.
In the opening problem in Section A, modern contract law allows Taylor to sue Alice for breach of her promise (made to you) to pay him. Taylor is a creditor beneficiary who can sue because you owed Taylor money and you made the contract with Alice in order to pay Taylor.
The court in the great case of Lawrence v. Fox10 helped create the creditor-beneficiary category.11 Holly owed Lawrence $300. Holly then loaned $300 to Fox in exchange for Fox’s promise to pay $300 to Lawrence. The court had to decide whether Lawrence could sue Fox directly to enforce Fox’s promise to pay Lawrence.
First, the court noted the close analogy between the facts of the case and an actual trust arrangement, where a beneficiary could sue. The money Holly loaned Fox was not a trust fund because the money became Fox’s property, meaning that Fox could use the money for whatever he wanted. Nevertheless, just as the nature of a trust implies a promise by the trustee to the beneficiary to pay the beneficiary, the arrangement between Holly and Fox implied a promise by Fox to Lawrence to pay him.12 The logical step taken in the trust cases, of allowing a beneficiary to sue when the trustee breaches its duties, the court reasoned, therefore should also be taken in cases such as Lawrence v. Fox.
You may believe that the court’s invocation of an implied promise from Fox to Lawrence was an unpersuasive legal fiction to avoid the problem of Lawrence’s lack of privity of contract. But I hope to convince you that the policy reasons for extending the right to sue to Lawrence are strong. None of the concerns raised above about extending the category of who can sue too far seem very strong in Lawrence.13 Creditor beneficiaries are a clear, finite category, minimizing the fear of overtaxing the courts or of discouraging promisors from contracting. Further, although finding an implied promise from Fox to Lawrence is a stretch, one can argue that Fox accepted the duty to pay Lawrence when Fox made his promise to Holly. After all, the contract specifically named Lawrence as the beneficiary. Not only do the policies against extending rights melt away, but strong positive policies in favor of extending rights exist. Contract law recognizes Lawrence’s right to sue in order to decrease the likelihood of multiple lawsuits to resolve the parties’ rights. (If Lawrence cannot sue Fox directly, Holly will have to sue Fox, then if Holly has second thoughts about paying Lawrence, Lawrence will have to sue Holly.) Contract law also recognizes Lawrence’s standing to sue in order to place management of the lawsuit against Fox in the hands of the party with the greatest interest in pursuing the claim.
The Lawrence court considered another vexing issue: After their agreement, Holly and Fox had the right to change their minds and to release Fox from his obligation to pay Lawrence. In other words, Lawrence’s rights are contingent on Holly and Fox not changing their minds. As a general matter, should the contingent nature of the third-party’s rights mean that the third party should not be able to sue?14 The court observed that Holly and Fox had not changed their minds, so the court did not have to resolve the issue.15 The court therefore left for later cases the question of when a third party’s rights should vest (become non-changeable). We’ll take up this issue shortly.16
As noted, third parties who can sue under the authority of Lawrence v. Fox became known as “creditor beneficiaries.” The Restatement (First) of Contracts, section 133, defined creditor beneficiaries:
(1)Where performance of a promise in a contract will benefit a person other than the promisee, that person is * * *
(b)a creditor beneficiary if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary * * *.17
Note that the Restatement’s definition of a creditor beneficiary encompassed a larger class than the one created by Lawrence v. Fox. Under the Restatement, the promisee did not have to owe the beneficiary a money debt. Further, the debt did not have to be real because a “supposed or asserted duty” would do.18 This further expansion also should not be worrisome. If Holly tells Fox that Holly owes Lawrence money and extracts Fox’s promise to pay Lawrence, what should it matter if Holly’s obligation to Lawrence is only in Holly’s mind? Fox should understand that, should Fox breach, Lawrence has the most to lose and that Holly intended to confer on Lawrence a right to performance. The class of potential plaintiffs still seems well within manageable bounds.
Donee beneficiaries also can sue. According to the first Restatement of Contracts, a party is a donee beneficiary if
it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary * * *.19
As you can see, the first Restatement followed an objective approach to the interpretation of which third parties could sue as donee beneficiaries. It allowed a third party to sue when a reasonable person would believe that the promisee’s “purpose” was to make a gift to the third party (“it appears” from the terms and context “that the purpose of the promisee”20). In just such a situation, a reasonable promisor would understand that, should the promisor breach, the third party will be the primary aggrieved party. After all, the third party was going to receive the gift. Some decisions have affirmed the view that a third party can sue when the promisor reasonably should know that the promisee’s intent was to benefit the third party.21
The challenge, of course, is determining in a given case what a reasonable promisor should understand about the promisee’s purpose in making a contract. In one early case, Seaver v. Ransom,22 the court held that the plaintiff-niece was a third-party donee beneficiary of a promise by a husband to his wife (the plaintiff’s aunt) to leave money to the niece in his will. The husband made the promise in exchange for his wife signing a will that gave the husband use of the wife’s house during his life. As you can guess, the caddish husband left nothing to the niece in his will. The court emphasized the close relationship of the wife and her niece and the lack of interest of the representatives of the wife’s estate in enforcing the husband’s promise.23 In just such a situation, a reasonable promisor should know the wife’s purpose was to give her niece a gift.
Third parties have not always been successful, however, in establishing donee beneficiary status.24 H.R. Moch Co. v. Rensselaer Water Co.25 helps us to understand appropriate line drawing, especially in the context of government contracts. The city of Rensselaer entered a contract with a water company for the supply of water, including at fire hydrants. The court held that a citizen could not sue the water company when it failed to supply sufficient water to a fire hydrant to extinguish a fire that spread to the citizen’s warehouse. Judge Cardozo reasoned that the citizen was not a creditor beneficiary because the city did not owe the citizen a duty to supply water at fire hydrants. Further, the citizen was not a donee beneficiary because, notwithstanding the citizen’s obvious interest in the water company’s performance, the contract did not evidence “an intention * * * that the promisor is to be answerable to individual members of the public as well as to the city for any loss ensuing from failure to fulfill the promise.”26 Judge Cardozo made no bones about the policy reason supporting his determination: “The field of obligation would be expanded beyond reasonable limits” if the citizen could sue under these circumstances.27 Further, Cardozo thought that the water company would suffer a “crushing burden” by allowing citizens to sue.28
Cardozo’s reasoning does not mean that a citizen can never sue as a third-party donee beneficiary of a contract between a governmental entity and a promisor. If a water company should know that the city contracted with the intention of granting the citizens a right to sue, the citizens would be donee beneficiaries.29 For example, if the contract names citizens as the beneficiaries of the contract, they likely constitute donee beneficiaries.30 Better still, if the contract expressly states that the parties intend to confer a cause of action on the citizens, they should be able to sue.
Cardozo’s approach places a lid on those who can sue, easing the concern about taxing the courts. Further, the approach extends rights only to those the water company should reasonably expect to have those rights. In case of any uncertainty, the water company can protect itself by refusing to contract unless the city agrees on a term barring third-party suits by citizens.
4.Restatement (Second) Approach
The Restatement (Second) of Contracts dispenses with the “creditor” and “donee” terminology. But the issues remain the same.
Intended and Incidental Beneficiaries
(1)Unless otherwise agreed between promisor and promisee, 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
(a)the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b)the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.31
Under the Restatement (Second), only intended beneficiaries can sue.32 A party is an intended beneficiary when (1) the parties intend to create “a right to performance in the beneficiary;” and (2) the promisee owes money to the beneficiary or the “circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”33 The new rule omits any reference to creditor and donee beneficiaries, a supposed advance due to the technicalities of those terms. Nevertheless, you can see the strong resemblance of the new law to the old.34 Parties heretofore called creditor beneficiaries can sue under section (1)(a) if the promisee owed the beneficiary money, and parties formerly known as donee beneficiaries can sue under (1)(b) if the circumstances indicate that the promisee intended to confer a benefit on the beneficiary.35 An indication of such an intent, for example, would be if the contract provides for performance directly to the third party.36 Section (1)(b) should also capture the first Restatement’s category of creditor beneficiaries whom the promisee wanted to benefit in satisfaction of an “actual or supposed or asserted duty.”37
What is a bit unclear under the second Restatement is whether the rule requires both parties to intend to create a third-party right to performance. That, of course, is the way the body of section 1 reads (“to effectuate the intentions of the parties”).38 But 1(b) focuses on the promisee (“the circumstances indicate that the promisee intends”). The first Restatement seems clearer. What was important was what a reasonable promisor should know about the promisee’s intentions, not what both parties actually intended.39 The objective test in the first Restatement is consistent with the general approach to contract formation and interpretation.40 For my taste, therefore, the first Restatement approach is the better one. For you, the best thing to know is that there is more than one approach to the issue of what constitutes a donee or intended beneficiary.
Although line drawing between intended and incidental beneficiaries may be difficult in some instances,41 a lawyer drafting a contract certainly can make the job easier by drafting appropriate language that reflects the parties’ intentions. For example, if the contract expressly states that it is made for the benefit of certain third parties, those parties should have the right to sue. Conversely, if the contract restricts potential plaintiffs to the contracting parties, third parties should be out of luck.42
Recall that one of the arguments against allowing any third parties to sue is based on the contingent nature of the third-party right.43 For example, in Lawrence v. Fox,44 Holly and Fox could have modified their agreement to require Fox to pay Holly instead of Lawrence. Should the contingent nature of Lawrence’s rights affect the court’s conclusion that Lawrence can sue?
Modern contract law has taken care of this concern. First, suppose at the time of contracting Holly and Fox expressly agreed not to change Lawrence’s rights. Contract law honors the parties’ intention not to discharge or modify the beneficiary’s rights.45 Second, the Restatement (Second) of Contracts enumerates several happenings that secure the third party’s rights. If the beneficiary “materially changes his position” in reliance on his third-party rights, or brings a lawsuit based on those rights, or otherwise “manifests assent” to the creation of his rights “at the request” of one of the contracting parties, the contracting parties can no longer modify or discharge the beneficiary’s rights.46 Once the third party’s rights have vested upon the happening of any of these events, a later modification or discharge by agreement of the contracting parties does not constitute a defense to a beneficiary’s claim. A modification or discharge before the third party’s rights have vested, of course, does constitute a defense.
The promisor can also assert defenses based on defects in the contract between the promisor and promisee. If the contract between Holly and Fox was invalid at the time of formation or becomes unenforceable because of “impracticability, public policy, non-occurrence of a condition,” or a breach by the promisee, Fox can assert these defenses against Lawrence.47
6.Third Parties Under the UCC
Suppose you purchase a lawnmower from Sears. The lawnmower is defective and you are injured while using it. We have learned that you can assert a breach of warranty claim against Sears.48 (You may also have a claim under tort law.) But what are the rights of family members or others who use the mower and are injured? After all, they are not in privity of contract with the seller.
Section 2–318 of the UCC answers the question. It resolves the issue, not on the basis of the contracting parties’ intentions, but on policy grounds. The drafters sought to create a balance between the protection of product users from shoddy products and the protection of sellers from unchecked liability. In fact, creating this balance proved so difficult and controversial that the drafters of the UCC offered three alternatives for the states. Alternative A is the most restrictive. Only “natural persons” (human beings, not the Terminator) who are in the buyer’s family or in the family’s household or are guests in the buyer’s home and who have personal injuries can sue, and only if “it is reasonable to expect that such person may use, consume or be affected by the goods.”49 Alternative B extends the class of beneficiaries to any natural person if “it is reasonable to expect that such person may use, consume or be affected by the goods.”50 In other words, under Alternative B, a plaintiff does not have to be a family member, household member, or guest in the home. Alternative C goes still further by allowing “any person” (including organizations) to sue for economic loss as well as personal injury.51
The UCC doesn’t expressly answer a related question—who can be sued for a defective product, meaning who are appropriate defendants? For example, can you (or a beneficiary under any of the alternatives to section 2–318) sue the manufacturer of the mower, Lawnboy, for breach of express warranty, instead of Sears? Remember you are not in privity of contract with the manufacturer and you are not suing for negligence or strict tort liability, tort theories that would not require privity of contract.52 Although the UCC does not expressly address the issue of who can be sued, commentary to section 2–318 invites courts to develop the issue.53 Some courts have done just that, often allowing plaintiffs to sue the manufacturer directly.54 Courts making this move often reason that a dealer such as Sears is an agent of the manufacturer or that express warranties on labels or in advertising create privity between the manufacturer and the purchaser.55 Courts rarely allow plaintiffs to sue a manufacturer on an implied warranty theory, however.56
B. ASSIGNMENT OF RIGHTS AND DELEGATION OF DUTIES
Now we turn to third-party rights and duties created after the formation of a contract. Third-party rights arise when a promisee assigns her rights under an existing contract to a third party, who acquires all of the rights that the assignor had under the contract.57 For example, one court wrote: “An assignment is a transfer vesting in the assignee all of the assignor’s rights in the property which is the subject of the assignment.”58 And the following is typical language of an assignment of royalties: “[T]he Assignor irrevocably sells, transfers, conveys and assigns . . . to the Assignee, and the Assignee irrevocably purchases from the Assignor, all Royalties.”59 Third-party duties arise when a promisor delegates her duties under an existing contract to a third party.
As always, illustrations help to clarify the meaning of assignment and delegation. Suppose you mow Alice’s lawn and she owes you $40 for the job. (This is the second half of our last chapter and I’m not about to abandon you and Alice at this point.) You can “assign” (transfer) your right to payment to Taylor Plantations, thereby conferring on Taylor the right to the money. You can do so as a gift,60 or because you are obligated to Taylor. For an example of the latter, you agree to assign your right to payment of the $40 to Taylor in return for Taylor selling you his $35 baseball glove. Why would you take a $35 item in exchange for a $40 expectancy? Because the $40 is only an expectancy. Although Alice has been pretty reliable in our series of examples in this book, there is always the chance that she might not pay fully or at all. Even if Alice does pay, Taylor has to wait for payment and thus loses the time-value of money. Taylor therefore can buy your $40 contract right at a discount to take into account the risk of non-payment or delay in payment.
The law of assignment of rights governs much more complex and important transactions in our economy than the simple example above. Consider the assignment of contract rights by merchants or wholesalers to financial institutions. Suppose you and other consumers purchase hammers on credit from the local hardware store. Such stores usually are not in the business of financing such transactions. Instead, the hardware store sells (assigns) its rights to these payments (called “accounts”) to a bank in exchange for immediate payment.61 Wholesalers that supply the hardware store with inventory on credit may also assign their accounts to a bank in order to get cash up front. The law regulating the assignment of such rights facilitates business transactions and, hence, our economy. But regulating these transactions can be complex. For example, suppose the local hardware store wrongfully assigns its accounts to two different banks. The law must devise a system to enable banks to learn in advance if the accounts are already encumbered (assigned to someone else) and to determine who has priority between competing banks. Article 9 of the UCC deals with such issues. These and other interesting Article 9 issues are beyond the scope of most first-year contracts courses and, hence, this book.
Parties assign contract rights in additional types of transactions. For example, a bank may finance a construction company’s building project in exchange for an assignment of the company’s right to payment for the construction. For another example, the local hardware store may sell its business to a larger national chain, such as True-Value Hardware. As part of the transaction, the local hardware store may assign all of its contract rights to True-Value.
Let’s stick with the latter example to illustrate the delegation of duties. The local hardware store may purchase inventory from a wholesaler on credit. As part of the sale of its business to True-Value, the latter may agree to pay all of the local hardware store’s debts. We say that the local store has delegated the duty to pay to True-Value. Now let’s look more closely at general contract law principles that apply to assignment and delegation (leaving for advanced courses the ins and outs of Article 9).
2.Assignment of Rights
At the outset, you must understand the terminology courts often employ. Recall the example involving you, Alice, and Taylor.62 You assign to Taylor your right to the $40 Alice owes you. You are the assignor, Alice is the obligor, and Taylor is the assignee.
As with third-party beneficiary law, a principle issue is whether Taylor can sue Alice directly if she doesn’t pay him. Third-party beneficiary law resolves the question of who can sue by looking at the intent of the contracting parties. Assignment law asks whether the assignment materially changes Alice’s obligation.63 This depends on what you and Alice intended to get out of your contract. In our example, Alice wanted her lawn mowed and she should not care very much whether she pays you or Taylor. So it is likely that the parties did not intend to prohibit the assignment of your right to payment. Alice must pay Taylor and Taylor can sue her if she does not. Further, once you assign your right, you cannot sue Alice.64 You have nothing left to sue on. The right belongs to Taylor.
A few more preliminaries. Suppose you have not yet secured your contract with Alice to mow her lawn. You cannot assign your future right to Taylor. You can make a contract promise to Taylor to assign your payment in the future (in exchange for Taylor’s consideration), but you cannot presently assign what you don’t yet have.65 The legal ramification of making a contract promise to Taylor instead of assigning a right is that Taylor may have a breach of contract claim against you if you don’t secure the mowing contract and assign the right to payment to Taylor, but Taylor has no rights against Alice before you secure the contract with Alice (and none after, unless you and Alice make Taylor a third-party beneficiary of your mowing contract or you then assign your right to payment to Taylor).66
Crane Ice Cream Co. v. Terminal Freezing & Heating Co.67 nicely illustrates a contract right that could not be assigned because it materially changed the obligor’s duty. Reduced to its essentials, Frederick, was a local Baltimore ice cream manufacturer with one plant. Terminal promised to supply up to 250 tons of ice to Frederick per week at a fixed price, according to Frederick’s requirements. Frederick promised to take the first 250 tons it needed from Terminal each week. Frederick sold its business to Crane, a large ice cream manufacturer doing business in Maryland and Pennsylvania. Did Terminal have to honor its commitment by delivering up to 250 tons of ice per week according to Crane’s requirements?
The court held that Frederick’s contract right to the ice was not assignable to Crane. The court pointed out that Terminal had already delivered ice to Frederick for three years before the parties made the current contract. Through its experience with Frederick and knowledge of the size and potential of Frederick’s business, Terminal could easily calculate the likely amount of ice Frederick would need in a given week. The court reasoned that Terminal was willing to agree to a fixed-price contract because it could predict the amount of ice that Frederick would demand. Supplying Crane, however, would be a totally different matter. For example, Crane, doing business in a large geographic area, could demand the full 250 tons of ice from Terminal when the market price elsewhere was higher than the contract price and take no ice from Terminal when the reverse was true. The court therefore found that supplying Crane would materially change Terminal’s duty, and held that Terminal did not have to supply Crane with ice.68
a.The Obligor’s Defenses and Claims
You assign to Taylor your right to the money Alice owes you for mowing her lawn. We have established that Taylor, as an assignee, has a cause of action against Alice if she does not pay him. But does Alice have any defenses against Taylor’s claim? Suppose, for example, that you have done a miserable job mowing Alice’s lawn and your performance constitutes a material breach. (Suppose you cut the lawn too low and Alice’s lawn burned out.) If you had not assigned your right to payment, Alice could assert this defense against you. Because an assignee receives only what the assignor has to transfer, Alice can also assert your material breach as a defense against Taylor.69 Similarly, if the contract between you and Alice is unenforceable because of impracticability (or another excuse doctrine70), the failure of a condition, or public policy (or another policing doctrine71), Alice can assert the defense against Taylor.72
Alice would not have a claim for an affirmative recovery of damages against Taylor, however, even if your performance constituted a material breach, and you destroyed Alice’s lawn. Remember, Taylor received the right to payment from you and nothing more. He made no commitment with respect to your work for Alice. Nor did Taylor promise Alice directly to guarantee your performance. Alice has no theory for suing Taylor for your breach. (We will see shortly that the result would be different if, at the time of the assignment, you had not yet mowed Alice’s lawn, and you not only assigned your right to payment, but also delegated your duty to Taylor. In this situation, Alice could sue Taylor if he did not mow Alice’s lawn or did so poorly.73)
Suppose after you mow Alice’s lawn and after your assignment of the $40 to Taylor, but before Alice pays anything to anyone, you accidentally hit Alice’s car while backing out of your driveway. Alice’s car sustains $40 of damage. (As you know, this is a highly unrealistic example. Car manufacturers make cars so that the slightest impact causes a minimum of $10,000 of damage.) Alice could have asserted your tort liability as a “set off” (a claim unrelated to the contract) if you had not already assigned your right to payment and you were suing her for your $40. But can she assert the set off against Taylor under the actual facts?
The answer depends on when Taylor notified Alice of the assignment and when her tort claim against you “accrued.”74 If Taylor notified Alice before the tort claim accrued, Alice can not assert the set off against Taylor.75 Conversely if the tort claim accrued first, Alice can assert the set off against Taylor.76 You’re probably wondering what “accrued” means. Basically, it is the time “when a cause of action comes into being.”77 This can be technical, but here the cause of action accrued when you hit Alice’s car. A breach of contract cause of action accrues, not when the parties make a contract, but when a party repudiates or breaches it.78 The moral of the story, of course, is that an assignee such as Taylor should notify the obligor of an assignment immediately to cut off potential set-off defenses.
There is another reason why an assignee should notify the obligor of the assignment immediately. Taylor’s notification cuts off the right of you and Alice to modify your contract, for example, so that Alice must pay you instead of Taylor.79 Without such a notification, Alice would be discharged from her obligation to Taylor if she pays you the $40.
The rules that cut off defenses of obligors (including set offs, modifications, and discharges) after notification reflect contract law’s attempt to protect obligors to the extent possible, without discouraging assignments. Taylor can accept the assignment with assurance that, after his notification to Alice, he is protected from new defenses Alice may accrue independent of her contract with you. After notification, Taylor also doesn’t have to worry about you discharging Alice wholly or in part. For Alice’s part, remember that she will have a cause of action against you for crashing into her car, she just can’t use the crash as a defense against Taylor.
Now suppose that at the time of your assignment of rights to Taylor the contract in which you promise to mow Alice’s lawn for $40 is executory (neither party has performed yet). Taylor notifies Alice of the assignment. If you and Alice later agree that Alice will pay you instead of Taylor, Alice can assert this defense against Taylor, even though Taylor has already notified Alice of the assignment.80 With executory contracts, contract law weighs Alice’s interest in being able to adjust her contract as circumstances dictate above Taylor’s interest in being able to rely on payment. For example, suppose your lawnmower breaks down and you are short of funds. You and Alice can agree that she will pay you in advance instead of Taylor so that you can buy new parts for the mower. Consider also illustration 5 of section 338 of the Restatement (Second) of Contracts, which involves A’s agreement to perform construction work for B.81 A assigns its right to payments to C. C notifies B. If A becomes financially unable to perform, B can pay A instead of C so that the construction work can proceed. B’s payment to A is a defense against C.
Finally, you may wonder whether contracting parties can prohibit an assignment of rights. With certain exceptions, especially under Article 9 of the UCC, the answer is yes.82 The contracting parties must do so clearly, however.83
3.Delegation of Duties
Again assume an executory contract in which you promise to mow Alice’s lawn for $40. Suppose you “assign the contract” to Taylor. Contract law treats the assignment of the contract as both an assignment of your rights under the contract to the $40, and a delegation of your duty to mow Alice’s lawn.84 (This rule is only a “default” rule, meaning that it only applies in the absence of proof of other intentions. For example, if your “assignment of the contract” to Taylor clearly stated that it constitutes only an assignment of rights to the $40, but not a delegation of your duties to Taylor, contract law would enforce those intentions.)85
A party can delegate a duty in other contexts too. For example, assume you have a contractual obligation to mow Alice’s lawn. Instead of assigning the contract to Taylor, you pay him $40 to mow the lawn instead of you. In each of these contexts, a delegation of duties means that Taylor, as delegatee, has agreed to perform your obligation, namely mowing Alice’s lawn. This creates several issues.
Does Alice have to accept Taylor as the party who will mow her lawn or can she insist that you do it? Alternatively, does Taylor have a duty to mow Alice’s lawn that Alice can enforce? Finally, after the delegation, do you still owe Alice a duty that she can enforce? Asked more generally, these questions are first, does an obligee (Alice) have to accept the delegatee’s (Taylor’s) performance; second, can the obligee enforce its rights against the delegatee; and third, does the obligee have a right against the delegator (you) even after the delegation?
a.Does an Obligee Have to Accept the Delegatee’s Performance?
Does Alice have to accept Taylor as the party mowing her lawn or can she insist that you do the job? Alice has to accept Taylor’s performance unless the contract is a “personal” one.86 Under the second Restatement (and UCC section 2–210(1)), the test is whether “the obligee [Alice] has a substantial interest in having” the delegator (you) perform.87 Another way of asking the same question is whether the delegation of performance would materially change Alice’s rights under the contract.88
Because you love freedom of contract, at first blush you may be surprised by this analysis. Alice contracted with you, why should she have to accept Taylor’s lawn mowing prowess, regardless of how well he can do the job? Calm down, calm down. Consider the following. Alice could have protected herself in her contract with you by specifying that the lawn-mowing duty could not be delegated.89 In the absence of such a term, contract law presumes that reasonable people in your and Alice’s shoes would agree to allow a delegation, except when it would materially change Alice’s rights. Again, this presumption is a “default” rule that applies when the parties have not contracted otherwise. Hence, no freedom-of-contract concern.
Some courts apply a rule that “personal services” contracts can never be delegated, thereby reversing the “substantial interest” default rule.90 The idea is that, when a contract involves personal services, an obligee would always have a substantial interest in performance by the delegator. The challenge under this approach is to determine exactly what constitutes a personal services contract.91 For example, perhaps your duty to mow Alice’s lawn constitutes “personal services,”92 but a court could also consider your work more akin to construction, which contract law typically finds can be delegated.93
Now let’s consider the guidance offered by some of the cases that have wrestled with the question of whether an obligee must accept a contract delegation. Recall that the court in Crane Ice Cream Co. v. Terminal Freezing & Heating Co.,94 held that Terminal’s duties would materially change if it was required to supply Crane with ice instead of Frederick, and therefore barred the assignment from Frederick to Crane of the right to ice. The court also found that Terminal’s rights would materially change if Frederick could substitute Crane as Terminal’s debtor.95 The court reasoned that Terminal had already tested the “character, credit, and resources” of Frederick.96 The court therefore barred the delegation of Frederick’s duties to Crane.
In Macke Co. v. Pizza of Gaithersburg, Inc.,97 on the other hand, the court held that the owner of certain restaurants had to accept the performance of delegatee Macke to install, service, and maintain certain vending machines and to pay the owner a fee, even though the owner had chosen to deal with a different company, Virginia Coffee Service, Inc., for those services. The restaurant argued to no avail that Virginia paid commissions to the owner in cash and provided more personalized services.
Courts often frame the issue in cases such as Crane and Macke as boiling down to whether a promised performance was more like the work of a famous painter or author that involves “rare genius and extraordinary skill,” which cannot be delegated, or was more like “digging down of a sand hill” or the “construction of brick sewers,” which can.98 The court in Macke concluded that Virginia’s duties were more like the latter, so the delegation by Virginia to Macke would stand. But the right to delegate a duty is not as broad as the reference to “rare genius and extraordinary” skill suggests. For example, the test of whether you can delegate your duty to mow Alice’s lawn should focus on whether you have special skills as a mower of lawns that Taylor lacks.99
In an interesting sale-of-goods context, Sally Beauty Co. v. Nexxus Products Co., Inc.100 applies UCC section 2–210(1)’s “substantial interest” test for determining whether an obligee must accept a delegated performance. Best Barber & Beauty Supply Company agreed to be the exclusive distributor of Nexxus’s hair care products. Sally purchased Best, but Nexxus refused to deal with Sally because Alberto-Culver Company, a major competitor of Nexxus, owned Sally. Sally sued Nexxus, but the court agreed with Nexxus. Nexxus had a substantial interest in avoiding having a competitor as its exclusive distributor.101
Judge Posner dissented because he believed that it was unlikely that Nexxus could be hurt by dealing with Sally. Alberto-Culver likely would not order Sally to “go slow” in distributing Nexxus’s products because Alberto-Culver had no guarantee that buyers would then purchase its products instead of other competitors’ products.102 Sally might also lose other manufacturers’ distribution contracts if it favored Alberto-Culver’s products at Nexxus’s expense, and this, of course, would be bad for Alberto-Culver. In addition, the distribution contract was only for one year, so it was unlikely that Sally could do much harm to Nexxus in that time. Finally, Sally would be liable to Nexxus for any harm caused by Sally’s failure to use best efforts, an obligation Sally owed under UCC section 2–306(2).103 Judge Posner concluded that “there is no principle of law that if something happens that trivially reduces the probability that a dealer will use his best efforts, the supplier can cancel the contract.”104
For my taste, the majority had the better argument in Sally Beauty Co. Judge Posner relies too heavily on market forces to deter Alberto-Culver from directing Sally not to use its best efforts in distributing Nexxus’s products. If I was a stockholder in Nexxus, I wouldn’t be too happy to learn that a major competitor controlled the distribution of my company’s product. More important for you to understand, as a future lawyer who may have to draft an exclusive distributorship, is the strategy for avoiding litigation (and Posner’s wrath) in the first place. It is simple. Draft a clause making the distributorship’s duties non-delegable.
b.Can the Obligee Enforce Its Rights Against the Delegatee?
Here we ask whether Alice has rights against Taylor if he doesn’t mow. The answer is yes. Recall that an “assignment of contract” means both an assignment of rights and a delegation of duties, in the absence of evidence otherwise.105 By an assignment of the contract, then, Taylor has promised you to mow Alice’s lawn, a duty you owe Alice. Alice therefore has rights against Taylor based on third-party beneficiary law. Alice is a creditor beneficiary under the first Restatement and an intended beneficiary under the second Restatement.106
c.Does the Obligee Have a Right Against the Delegator Even After the Delegation?
Does Alice have a cause of action against you for delegating your performance? Let’s assume first that your delegation to Taylor constitutes a material change in Alice’s rights. Alice doesn’t have to accept Taylor’s performance and your attempt to cast off your duty would be a breach of contract.107 Now let’s assume that Alice does not have a substantial interest in your performance. Taylor does not perform, however, or performs poorly. Alice has a cause of action against you as well as Taylor because she never released you from your obligation to mow.108 If she had released you, of course, she would have no rights against you.109 When all three parties agree to a substitution of one obligor (Taylor) for another (you) and to the release of the original obligor, the resulting contract is a special kind of contract, called a novation.110
1See Chapter 1, Section (A).
2See infra notes 19–42, and accompanying text; see also First Bank v. Brumitt, 519 S.W.3d 95, 102 (Tex. 2017) (“Absent a statutory or other legal rule to the contrary, a person’s status as a third-party beneficiary depends solely on the contracting parties’ intent.”).
3See, e.g., Wickwire-Spencer Steel Corp. v. United Spring Mfg. Co., 142 N.E. 758, 759 (Mass. 1924) (“One for whose benefit a trust is established may avail himself of its advantages by instituting proceedings to enforce its terms.”); Lawrence v. Fox, 20 N.Y. 268, 274 (1859) (“The principle * * * so frequently quoted * * * ‘that a promise made to one for the benefit of another, he for whose benefit it is made may bring an action for its breach,’ has been applied to trust cases * * *.”).
4Restatement (Second) of Trusts § 200 (1959) (“No one except a beneficiary or one suing on his behalf can maintain a suit against the trustee to enforce the trust or to enjoin redress for a breach of trust.”).
5See, e.g., Verosol B.V. v. Hunter Douglas, Inc., 806 F. Supp. 582, 586 (E.D. Va. 1992) (“Under well-settled principles of contract law, a stranger to a contract ordinarily has no rights under the contract and cannot sue to enforce it.”); Copiers Typewriters Calculators, Inc. v. Toshiba Corp., 576 F. Supp. 312, 322 (D. Md. 1983) (“Absent some recognized exception, it is hornbook law that only the parties to a contract can enforce it and that they may enforce it against only the parties to the contract.”).
6See, e.g., German Alliance Ins. Co. v. Home Water Supply Co., 226 U.S. 220, 231 (1912) (holding that allowing citizens to sue companies under contracts with the city “would unduly extend contract liability, would introduce new parties with new rights, and would subject those contracting with municipalities to suits by a multitude of persons for damages which were not, and * * * could not have been, in contemplation of the parties”); H.R. Moch Co. v. Rensselaer Water Co., 159 N.E. 896 (1928) (the promisor must assume the “duty to make reparation directly to the individual members of the public * * *. The field of obligation would be expanded beyond reasonable limits if less than this were to be demanded as a condition of liability”).
7See Chapter 2, Section (B)(1).
8See, e.g., H.R. Moch Co., 247 N.Y. at 164; Rigney v. New York Cent. & Hudson R.R. Co., 111 N.E. 226, 228 (N.Y. 1916) (railroad company’s contract with the city “can be read in no other light than as showing an intention on the part of the municipality that the railroad company should assume liability and pay the damage certain to accrue to the abutting owner from change of grade in the street.”); see also Becker v. Crispell-Snyder, Inc., 763 N.W.2d 192, 196 (Wis. Ct. App. 2009) (promisor must intend to benefit the third party directly).
9See, e.g., Neurology, P.A. v. Hartford Lloyd’s Ins. Co., 101 F. Supp. 3d 584, 592 (S.D. Tex. 2017) (“To demonstrate that it is a third-party beneficiary to a contract, a party must prove that it is either a donee or creditor beneficiary of the contract, and not someone who is benefitted only incidentally by performance of the contract.”); Ross Dress for Less, Inc. v. Makarios-Oregon, LLC, 2018 WL 2452957, at *4. (D. Or. 2018) (“ ‘Donee and creditor beneficiaries are entitled to enforce directly contractual promises intended to be for their benefit, even though they are strangers to the contract.’ ”) (quoting Stonecrest Properties, LLC v. City of Eugene, 280 Or. App. 550, 556–57 (2016)).
1020 N.Y. 268 (1859).
11For an in-depth look at Lawrence v. Fox, see Anthony Jon Waters, The Property in the Promise: A Study of the Third Party Beneficiary Rule, 98 Harv. L. Rev. 1109 (1985).
12Lawrence, 20 N.Y. at 274 (“[T]he consideration received and the promise to Holly made it as plainly his duty to pay [Lawrence] as if the money had been remitted to [Fox] for that purpose, and as well implied a promise to do so as if he had been made a trustee of property to be converted into cash with which to pay.”).
13See supra notes 6–8, and accompanying text.
1413 Samuel Williston, A Treatise on the Law of Contracts 332 (Richard A. Lord ed., 4th ed. 2000) (“Contracting parties inherently possess the right to alter or even terminate their relationship by agreement. This power posed analytical problems during the development of the third party beneficiary doctrine.”).
1520 N.Y. at 274 (“It is enough that the plaintiff did not release the defendant from his promise, and whether he could or not is a question not now necessarily involved * * *.”).
16See infra notes 45–46, and accompanying text.
17Restatement (First) of Contracts § 133(1)(b) (1932).
18See Hardware Ctr., Inc. v. Parkedge Corp., 618 S.W.2d 689, 693 (Mo. Ct. App. 1981) (“A person is a creditor beneficiary if performance of the promise will satisfy an actual, supposed, or asserted duty of the promisee to the beneficiary.”); Northwest Airlines, Inc. v. Crosetti Bros., Inc., 483 P.2d 70, 73 (Or. 1971) (“To be a creditor beneficiary the performance of indemnity by [the promisor] must be to ‘satisfy an actual or supposed or asserted duty of the promisee * * * to the beneficiary * * *.’ ”).
19Restatement (First) of Contracts § 133(1)(a).
20Id. (emphasis supplied).
21See, e.g., Lucas v. Hamm, 364 P.2d 685, 689 (Cal. 1961) (“Insofar as intent to benefit a third person is important in determining his right to bring an action under a contract, it is sufficient that the promisor must have understood that the promisee had such intent.”).
22120 N.E. 639 (N.Y. 1918).
23Id. at 641 (“The desire of the childless aunt to make provision for a beloved and favorite niece differs imperceptibly in law or in equity from the moral duty of the parent to make testamentary provision for a child * * *. The representatives of the wife’s estate have no interest in enforcing it specifically.”).
24See, e.g., Holland v. Levy Premium Foodservice Ltd. P’ship, 469 F. App’x 794 (11th Cir. 2012) (employees of seller of concessions not third party beneficiaries of a term extracting a 20% service charge on sales of concessions to patrons even though the term states that the service charge “is shared in the form of higher wages for all * * * employees.”); Davis v. Nelson-Deppe, Inc., 424 P.2d 733, 737 (Idaho 1967) (“Absent a manifested intent to the contrary, construction contracts between a contractor and a state or other public body for highway repair or construction of a new highway are generally not considered as being for the benefit of third persons * * *.”).
25159 N.E. 896 (N.Y. 1928).
26Id. at 897; see also Grunewald v. Metro. Mus. Of Art, 3 N.Y.S.3d 23 (N.Y. App. Div. 2015) (applying Restatement (Second) of Contracts § 313).
27159 N.E. at 897.
28Id. at 897–98.
29Id. at 897 (a member of the public can recover as a third party beneficiary under a contract between municipality and utility company when the benefit to the public is “primary and immediate in such a sense and to such a degree as to bespeak the assumption of a duty to make reparation directly to the individual members of the public if the benefit is lost.”); see also La Mourea v. Rhude, 295 N.W. 304, 306 (Minn. 1940) (“The city exacted from the [contractor] defendants a promise that they should be ‘liable for any damages done to * * * private property’ in connection with the work* * *. [Preventing injured citizens from suing as beneficiaries] would defeat obligation where obligation is not only intended but also expressed and paid for.”).
30See Keefer v. Lombardi, 102 A.2d 695, 696 (Pa. 1954) (holding that injured citizens could sue the contractor as third party beneficiary when the contract between the city and the contractor read, in part: “[Contractor] shall be alone liable and responsible for, and shall pay, any and all loss and damage sustained by any person or party either during the performance or subsequent to the completion of the work covered by this agreement * * *.”).
31Restatement (Second) of Contracts § 302 (1981).
32Id. § 304.
33Id. § 302; see also Grunewald v. Metro. Mus. Of Art, 3 N.Y.S.3d 23 (N.Y. App. Div. 2015) (applying Restatement (Second) of Contracts § 313).
34Harry G. Prince, Perfecting the Third Party Beneficiary Standing Rule Under Section 302 of the Restatement (Second) of Contracts, 25 B.C. L. Rev. 919, 990–97 (1984); cf. White v. General Motors Corp., 541 F. Supp. 190, 195 n.9 (D. Md. 1982). But see E. Allan Farnsworth, Contracts 657–58 (4th ed. 2004).
35See, e.g., ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, 847 F.3d 571, 578 (8th Cir. 2017) (benefit must be immediate, not incidental under (1)(b)); Grunewald v. Metro. Mus. Of Art, 3 N.Y.S.3d 23 (N.Y. App. Div. 2015) (applying Restatement (Second) of Contracts § 313).
36See, e.g., ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, 847 F.3d 571, 578 (8th Cir. 2017).
37The quoted language is from Restatement (First) § 133(1)(b). See supra note 17, and accompanying text.
38See Hibbs v. K-Mart Corp., 870 F.2d 435, 441 (8th Cir. 1989) (“In order to be a third-party beneficiary of a contract, the contracting parties must intend that the third party receive a direct or primary benefit.”); Grigerik v. Sharpe, 721 A.2d 526, 535 (Conn. 1998) (“[W]e conclude that the intent of both parties to a contract determines whether a third party has contract rights as a third party beneficiary.”).
39See supra notes 19–21, and accompanying text.
40See Chapter 2, Section (B)(1); Chapter 7, Section (B)(1).
41See, e.g., Kornblut v. Chevron Oil Co., 400 N.E.2d 368 (N.Y.1979) (finding that a motorist is not an intended beneficiary of a contract between the New York State Thruway Authority and Chevron Oil Co., in which Chevron promised to service cars on the thruway within thirty minutes).
42See, e.g., Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 499 (5th Cir. 2000) (“Where a clause provides that the contracted-for services will run directly to and for the benefit of the other contracting party, any relevant third parties will be considered incidental rather than intended and immediate.”); see also Prime Finish, LLC v. Cameo, LLC, 487 Fed. Appx. 956, 962 (6th Cir. 2012) (“Because of Cameo’s prominent involvement in the Supply Agreement negotiations and Prime Finish’s intent that Cameo directly benefit from and be secured by the ITW business created by the new paint line installed by Cameo, Cameo has standing to sue ITW as an intended creditor beneficiary under the Supply Agreement.”); Holland v. Levy Premium Foodservice Ltd. Partn., 469 Fed. Appx. 794, 797 (11th Cir. 2012) (Concessions servers at sports arenas not third party beneficiaries of a 20% service charge imposed on customers despite a contract that stated “that the service charge ‘is shared in the form of higher wages for all Suite employees’ ” because “the express purpose of higher wages is ultimately to benefit patrons, not employees.”).
43See supra notes 14–16, and accompanying text.
4420 N.Y. 268 (1859).
45Restatement (Second) of Contracts § 311(1).
46Id. § 311(3); see also Orth v. Wisconsin State Employees Union, Counsel 24, 546 F.3d 868, 873–74 (7th Cir. 2008) (“The prevailing although not unanimous view is that the signatory parties can alter the contract (unless it provides otherwise) even to the detriment of a third-party beneficiary unless the latter, learning that he is a third-party beneficiary, relies to his detriment on his rights under it.”); Karo v. San Diego Symphony Orchestra Ass’n, 762 F.2d 819, 822 (9th Cir. 1985) (“The power to modify terminates when the beneficiary materially changes position in justifiable reliance on the promise before receiving notification of the modification.”); Jardel Enters., Inc. v. Triconsultants, Inc., 770 P.2d 1301, 1303 (Colo. Ct. App. 1988) (“[E]ach ‘change of position’ [the third-party beneficiary owners] assert was part of the normal progression on the restaurant project and was not related to reliance on the subcontract [between the subcontractors and the contractor]. Therefore, the subcontractors and the contractor retained the power to discharge the duty to the owners.”).
47Restatement (Second) of Contracts § 309(2); see Rouse v. United States, 215 F.2d 872, 874 (D.C. Cir. 1954) (“[O]ne who promises to make a payment to the promisee’s creditor can assert against the creditor any defense that the promisor could assert against the promisee.”).
48See Chapter 3, Section (C).
49UCC § 2–318, Alternative A; see, e.g., Armijo v. Ed Black’s Chevrolet Ctr., Inc., 733 P.2d 870, 872 (N.M. Ct. App. 1987) (“[E]mployees of a purchaser are excluded from the manufacturer’s warranty protections offered by provisions comparable to [section 2–318].”).
50UCC § 2–318, Alternative B.
51UCC § 2–318, Alternative C. A “person” includes organizations. UCC § 1–201(b)(27).
52Restatement (Third) of Torts: Products Liability § 1 (1998) (“One engaged in the business of selling or otherwise distributing products who sells or distributes a defective product is subject to liability for harm to persons or property caused by the defect.”).
53UCC § 2–318, cmt. 3.
54See, e.g., Hadar v. Concordia Yacht Builders, Inc., 886 F. Supp. 1082, 1097 (S.D.N.Y. 1995) (“The doctrine of express and implied warranties, codified in the UCC, * * * allows buyers to recover from manufacturers and sellers for [personal] injuries caused by defective products* * *.”).
55See, e.g., Argabright v. Rheem Manu. Co., 258 F. Supp. 3d 470 (D. N.J. 2017) (agency); Beck v. FCA US LLC, 273 F. Supp. 3d 735 (E.D. Mich. 2017) (same); Veath Fish Farm, LLC v. Purina Animal Nutrition, LLC, 93 U.C.C. Rep Serv 2d 1203, 2017 WL 4472784 (S.D. Ill. 2017) (packaging and advertising).
56See, e.g., Stewart v. Electrolux Home Products, Inc., 2018 WL 339059 (E.D. Cal. 2018) (purchaser of defective oven from a retailer cannot bring an implied warranty of merchantability claim against the manufacturer because of lack of privity).
57ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, 847 F.3d 571, 578 (8th Cir. 2017).
58Midwest Renewable Energy v. American Engineering Testing, Inc., 894 N.W.2d 221, 234–235 (Neb. 2017).
59ACI Worldwide Corp. at 578.
60Restatement (Second) of Contracts § 332.
61UCC § 9–102(2).
62See supra note 60, and accompanying text.
63Restatement (Second) of Contracts § 317(2)(a).
64Id. § 317(1); see, e.g., Midwest Renewable Energy v. American Engineering Testing, Inc., 894 N.W.2d 221, 234–235 (Neb. 2017).
65See In re Richardson, 216 B.R. 206, 216–17 (Bankr. S.D. Ohio 1997) (“ ‘A contract to assign a right in the future is not a valid assignment. A valid assignment contemplates no further action * * * [by] the assignor to complete the * * * assignee[’s right]. A contract to assign involves a promise to do some future act in order to perfect * * * the assignee[’s right].’ ”) (quoting Morris v. George C. Banning, Inc., 77 N.E.2d 372, 375 (Ohio Ct. App. 1947) (Wiseman, J., dissenting); see also Becker v. Godfrey Co., 1982 WL 172328, at *2 (Wis. Ct. App. 1982) (“An agreement to make a future assignment is not an assignment.”).
66Restatement (Second) of Contracts § 330.
67128 A. 280 (Md.1925).
68Id. at 283 (“[I]t is clear that the rights and duties of the contract under consideration were of so personal a character that the rights of Frederick cannot be assigned nor his duties be delegated without defeating the intention of the parties to the original contract.”).
69Restatement (Second) of Contracts § 336(1) (“[A]ssignee acquires a right against the obligor only to the extent that the obligor is under a duty to the assignor* * *. ”); see also Midwest Renewable Energy v. American Engineering Testing, Inc., 894 N.W.2d 221, 234–235 (Neb. 2017); Dean Witter Reynolds, Inc. v. Variable Annuity Life Ins. Co., 373 F.3d 1100, 1110–11 (10th Cir. 2004); State v. Family Bank of Hallandale, 667 S.2d 257, 259 (Fla. Dist. Ct. App. 1995) (“The assignee steps into the shoes of the assignor and is subject to all equities and defenses that could have been asserted against the assignor had the assignment not been made.”); Independent Nat’l Bank v. Westmoor Elec., Inc., 795 P.2d 210, 214 (Ariz. Ct. App. 1990) (“[A]n assignee of a chose in action acquires by virtue of his assignment nothing more than the assignor had and all equities and defenses which could have been raised by the debtor against the assignor are available to the debtor against the assignee.”) (quoting Associates Loan Co. v. Walker, 416 P.2d 529, 531 (N.M. 1966)).
70See Chapter 9 for a discussion of the excuse doctrines.
71See Chapter 6 for a discussion of the policing doctrines.
72Restatement (Second) of Contracts § 336(3); see also Business Fin. Servs., Inc. v. Butler & Booth Dev. Co., Inc., 711 P.2d 649, 651 (Ariz. Ct. App. 1985) (“The assignee’s right depends on the validity and enforceability of the contract creating the right, and is subject to limitations imposed by the terms of that contract and to defenses which would have been available against the obligee had there been no assignment.”) (quoting Restatement (Second) of Contracts § 336, cmt. b).
73See infra notes 105–106, and accompanying text.
74Restatement (Second) of Contracts § 336(2) (“The right of an assignee is subject to any [set off] * * * which accrues before the obligor receives notification of the assignment* * *.”).
75See Heath v. Knutson, 698 P.2d 1015, 1017 (Or. Ct. App. 1985) (“[T]he evidence is undisputed that defendants received notice of the trustee’s assignment of accounts to plaintiff before they acquired the claim on which they rely. Accordingly, they may not set off that claim against plaintiff’s claims.”).
76Coplay Cement Co., Inc. v. Willis & Paul Group, 983 F.2d 1435, 1442 (7th Cir. 1993) (“The assignee * * * stands in the shoes of the assignor and therefore takes the assignment subject to any defenses against the assignor’s * * * claim that arose before the assignment was made, and often after, provided it was before the [obligor] was notified of the assignment.”); see also Bridgeport-City Trust Co. v. Niles-Bement-Pond Co., 20 A.2d 91, 94 (Conn. 1941) (“Ordinarily the assignee of a chose in action takes it subject to equities and defenses which could have been set up against it in the hands of the assignor, provided they have arisen before receipt of notice of the assignment.”).
77Seattle-First Nat’l Bank v. Oregon Pac. Indus., Inc., 500 P.2d 1033, 1035 (Or. 1972).
79Restatement (Second) of Contracts § 338(1); see ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, 847 F.3d 571, 578 (8th Cir. 2017).
80Id. § 338(2).
81Id. § 338, cmt. f, illus. 5.
82See Parkinson v. Caldwell, 272 P.2d 934, 937 (Cal. Ct. App. 1954) (“A contract right has its origin in the agreement of the parties and if the parties by their free agreement place a limitation on the right [of assignment] at the very time of its creation no good reason occurs to us why they may not do so.”); Allhusen v. Caristo Constr. Corp., 103 N.E.2d 891, 893 (N.Y. 1952) (“[W]hile the courts have striven to uphold freedom of assignability, they have not failed to recognize the concept of freedom to contract. In large measure they agree that, where appropriate language is used, assignments of money due under contracts may be prohibited.”).
83See, e.g., Shah v. State Farm Mut. Auto. Ins. Co., 2018 WL 2121787 (Ct. App. Mich. 2018) (clause stating that “[n]o assignment of benefits or other transfer of rights is binding upon [defendant] unless approved by [defendant]” is an unambiguous and enforceable anti-assignment clause); Carlile v. Harbour Homes, Inc., 194 P.3d 280, 288 (Wash. Ct. App. 2008) (“[G]eneral anti-assignment clauses in contracts, aimed at prohibiting the assignment of contractual performance, will not be construed to prohibit assignments of a breach of contract cause of action unless the contract contains specific language to the contrary.”); Owen v. CNA Ins./Cont’l Cas. Co., 771 A.2d 1208, 1214 (N.J. 2001) (“In the absence of such [clear] language, the provision limiting or prohibiting assignments will be interpreted merely as a covenant not to assign, [b]reach of [which] may render the [assignor] liable in damages to the [obligor], but the assignment, however, remains valid * * *.”).
84Restatement (Second) of Contracts § 328(1).
85See, e.g., Kunzman v. Thorsen, 740 P.2d 754, 760 (Or. 1987) (“Where the parties clearly intend otherwise (as evinced either by the terms of the assignment or by the surrounding circumstances * * *), the implication that the assignee assumed the vendor’s contractual duties is dispelled.”).
86See, e.g., Macke Co. v. Pizza of Gaithersburg, Inc., 270 A.2d 645 (Md. 1970); see also Precision Fran., LLC v. Gatej, 2012 WL 1895796, at *5 (E.D. Va. 2012) (“[T]he Agreement expressly provides that ‘[a]ll or a portion of the obligations to be performed by Franchisor may be performed on behalf of Franchisor by a third party.’ * * * This language, combined with the fact that the Franchisor is a corporation, weigh against construing the Agreement as a personal services contract.”); Burnison v. Johnston, 764 N.W.2d 96, 99 (Neb. 2009) (“[A] contractual right to the benefit of a promise cannot be assigned if the obligor reasonably intended for the right to be exercised only by the party with whom it contracted. The rule usually applies when a promise involves a relationship of personal trust or confidence or the obligor has expectations of counterperformance.”).
87Restatement (Second) of Contracts § 318(2).
88See, e.g., Crane Ice Cream Co. v. Terminal Freezing & Heating Co., 128 A. 280, 283 (Md. 1925) (“[O]ne who is bound so as to bear an inescapable liability may delegate the performance of his obligation to another, if the liability be of such a nature that its performance by another will be substantially the same thing as performance by the promisor himself.”); British Waggon Co. v. Lea & Co., 5 Q.B.D. 149, 153 (1880) (“[When p]ersonal performance is * * * of the essence of the contract, [delegation] * * * cannot * * * be enforced against an unwilling party. But * * * [a]ll that the hirers * * * cared for in this stipulation was that the waggons should be kept in repair; it was indifferent to them by whom the repairs should be done.”).
89Restatement (Second) of Contracts § 322(1); see also UCC § 2–210(5).
90See, e.g., Sally Beauty Co. v. Nexxus Prods. Co., Inc., 801 F.2d 1001, 1008 (7th Cir. 1986) (“When performance of personal services is delegated, the trier merely determines that it is a personal services contract. If so, the duty is per se nondelegable.”); In re Rooster, Inc., 100 B.R. 228, 232 (Bankr. E.D. Pa. 1989) (“A contract for ‘personal services’ contemplates performance of contracted-for duties involving the exercise of special knowledge, judgment, taste, skill, or ability. These services are not assignable by the party under obligation to perform without the consent of the other contracting party.”).
91See, e.g., Sally Beauty, 801 F.2d at 1004–05 (“Although it might be ‘reasonable to conclude’ that [the original parties] had based their agreement on ‘a relationship of personal trust and confidence,’ * * * this is a finding of fact.”); In re Health Plan of Redwoods, 286 B.R. 407, 409 (Bankr. N.D. Cal. 2002) (“Whether or not a contract is a personal services contract is a question of fact to be made under state law after all facts and circumstances are considered.”).
92Restatement (Second) of Contracts § 318, cmt. c, illus. 7.
93Id. § 318, cmt. a, illus. 3.
94128 A. 280 (Md. 1925).
95Id. at 282.
97270 A.2d 645 (Md. 1970).
98Id. at 648 (citing Taylor v. Palmer, 31 Cal. 240, 247–48 (1866)).
99See, e.g., In re Compass Van & Storage Corp., 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986) (“Ascertaining whether a contract is personal posits on close distinctions, e.g., the nature and subject matter of the contract, the circumstances of the case placed in juxtaposition with the intention of the parties.”) (citing In re Taylor Mfg., 6 B.R. 370 (Bankr. N.D. Ga.1980)); West Coast Cambridge, Inc. v. Rice, 584 S.E.2d 696, 699 (Ga. Ct. App. 2003) (“[D]uties may not be delegated where performance by the delegate would materially vary from the performance required by the original obligor.”); First Ill. Nat’l Bank v. Knapp, 615 N.E.2d 75, 78 (Ill. App. Ct. 1993) (“Where the party entitled to performance has placed trust and confidence in the performing party, the performing party cannot unilaterally delegate his or her responsibilities.”).
100801 F.2d 1001 (7th Cir. 1986).
101Id. at 1008 (“Nexxus has a substantial interest in not seeing this contract performed by Sally Beauty, which is sufficient to bar the delegation * * *.”).
102Id. at 1010.
103UCC § 2–306(2) (“A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes * * * an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”).
104Sally Beauty, 801 F.2d at 1011.
105See supra notes 84–85, and accompanying text.
106See supra notes 10–18, 31–42, and accompanying text.
107See, e.g., Beck v. Manufacturers Hanover Trust Co., 481 N.Y.S.2d 211, 217 (Sup. Ct. 1984) (“[A]ny transfer of contractual duty so as to discharge the original obligor, requires the obligee’s assent where such transfer alters the substance of the contract or otherwise materially affects the obligee’s rights.”).
108Restatement (Second) of Contracts § 318(3); see also Martinesi v. Tidmore, 760 P.2d 1102, 1104 (Ariz. Ct. App. 1988) (“Since Martinesi did not consent to release Tidmore from liability when he conveyed the property to Shallenberger, the court erred in determining as a matter of law that Tidmore had not breached the contract and in granting his motion to dismiss.”).
109See, e.g., F. Haag & Bro. v. Reichert, 134 S.W. 191, 193 (Ky. Ct. App. 1911) (“[I]n cases where the assignment is assented to by the other party to the contract, * * * there is, in effect, a new contract. It is an agreed rescission of the old contract, and the substitution of a new one in which the same acts are to be performed by different parties.”); see also Heaton v. Angier, 7 N.H. 397 (1835) (“The agreement of the plaintiff to take Chase as his debtor was clearly a discharge of the defendant.”).
110See Utica Mut. Ins. Co v. Vigo Coal Co., 393 F.3d 707 (7th Cir. 2004) (novation is a kind of contract modification); Security Benefit Life Ins. Co. v. F.D.I.C., 804 F. Supp. 217, 225 (D. Kan. 1992) (“An obligor is discharged by substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent to the substitution, forming a novation.”); Harrington-Wiard Co. v. Blomstrom Mfg. Co., 131 N.W. 559, 563 (Mich. 1911) (“[T]he necessary legal elements to establish novation are: (1) Parties capable of contracting; (2) a valid prior obligation to be displaced; (3) the consent of all parties to the substitution, based upon sufficient consideration; and, (4) lastly, the extinction of the old obligation and the creation of a valid new one.”). The court in 216 Jamaica Ave., LLC v. S & R Playhouse Realty Co., 540 F.3d 433, 437 (6th Cir. 2008) observed that the lease at issue prohibited assignment “unless it is a novation” in that it would release the original lessee.