2. 3 Contracts Introduction to Contracts The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 3 Contracts Capacity to Contract Illegality Writing
Rights of Third Parties
Performance & Remedies
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Rights of Third Parties17 C H A P T E R
Rights of Third Parties
“The best minute I spend is the one I invest in people.”
Kenneth Blanchard, The One Minute Manager (1993)

5. Learning Objectives Assignment of Contracts Delegation of Duties
Third-Party Beneficiaries
17 - 5

6. Overview
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
17 - 6

7. Overview
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
17 - 7

8. Assignment of Contracts
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
17 - 8

9. Assignment Process
17 - 9

10. Details of Assignment
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

11. Limitations on Assignment
Assignment will not be effective if it:
Is contrary to public policy
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
But see Managed Health Care Associates v. Kethan
With regard to adversely affecting the obligor in some way, any assignment will change an obligor’s duty to some extent. For example, a right to receive money or goods or land is generally assignable, though it will burden an obligor. In addition, covenants not to compete are generally considered to be assignable to buyers of businesses. However, an assignment could be ineffective because of its variation of the obligor’s duty. For example, if the contract right involved a personal relationship or an element of personal skill, judgment, or character, the assignment may be ineffective. See Managed Health Care Associates v. Kethan.

12. Managed Health Care Associates v. Kethan
Facts & Procedural History:
Kethan signed an employment agreement with MedEcon that contained a non-compete clause and requirement that modifications be in writing
MHA purchased MedEcon and Kethan left to join First Choice, a customer with whom Kethan had developed a sales relationship
MHA sought an injunction to prohibit Kethan from working for First Choice, but the district court denied the suit and MHA appealed
Kethan signed an employment agreement with MedEcon, a group purchasing organization (GPO) for hospitals. GPOs contract for the purchase of products for use by member healthcare facilities. The contract contained a noncompetition clause preventing Kethan from competing or working for a competitor for two years within a specified geographic area, as well as some other restrictions. It also contained a provision requiring that any modifications be in writing and signed by both parties and one providing that any disputes were to be governed by Kentucky law. No clause in the contract directly addressed the issue of whether Kethan’s contract could be assigned.
Kethan worked as a salesman and an agreement administrator for MedEcon from 1992 through Kethan’s job responsibilities included meeting with various representatives. During this period, Kethan had the opportunity to develop strong business relationships with MedEcon’s customers, including First Choice. Kethan eventually became the agreement administrator for the First Choice account. In 1998, MHA, which is also a GPO, purchased most of MedEcon’s assets, including Kethan’s employment agreement. Neither MedEcon nor MHA obtained Kethan’s written consent to the assignment. Following the transaction, Kethan continued to be an at-will employee, performing the same job, receiving the same salary and benefits, and reporting to the same supervisor.
Twenty days after the sale of MedEcon’s assets to MHA, Kethan gave 30-days’ notice of his resignation. Two days after Kethan tendered his resignation notice, First Choice stopped using MHA/MedEcon for group purchasing services. When the 30 days had passed from Kethan’s resignation notice, he went to work for First Choice. Shortly thereafter, MHA brought suit seeking to enforce Kethan’s noncompetition agreement with MedEcon. MHA moved for preliminary injunction. The district court denied the request on the ground that the assignment was a modification of the contract. MHA appealed.

13. Managed Health Care Associates v. Kethan
Issue and Legal Reasoning:
First issue is whether MedEcon’s assignment of Kethan’s employment agreement modified the terms of his contract
An assignment does not modify the terms of the underlying contract, thus did not modify Kethan’s employment agreement
Second issue is whether a non-competition clause is assignable under Kentucky law
Yes
Court: “The policy behind enforcing noncompetition clauses is to protect businesses against employees resigning and taking valued clients with them. In this case, while working for MedEcon, Kethan had access to MedEcon’s customer lists. He eventually became First Choice’s primary advisor. Because of that, Kethan developed a special business relationship with First Choice.

14. Managed Health Care Associates v. Kethan
Holding:
Kethan was able to develop his business relationship with First Choice because MedEcon employed him and placed him in charge of the First Choice account
Kethan is precisely the type of employee for whom noncompetition clauses were designed
Reversed and remanded in favor of MHA

15. Delegation of Duties
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

16. Delegation of Duties
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

17. Delegation Process
*Delegator retains duty to obligee until performance is rendered by delegatee

18. Effective Delegation
In an effective delegation, performance by the delegatee will discharge the delegator
The reason why you should understand the delegatee’s abilities and limitations

19. Non-delegable Duties 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 probably could not delegate concert obligation to an opera star

20. Details of Delegation
Delegation may be made in any way that shows the delegator’s intent to delegate
Delegator may be discharged from contract 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 and obligee looks to the new obligor for performance
A novation requires more than the obligee’s consent to having the delegatee perform the duties. The mere fact that an obligee accepts performance from a delegatee does not create a novation. Rather, there must be some evidence that the obligee agrees to discharge the old obligor and substitute a new obligor. In the Perry Drug Stores v. CSK Auto Corporation case, the agreement to discharge the old obligor can be inferred from the language of a contract or such other factors as the obligee’s conduct or the surrounding circumstances.

21. Third-Party Beneficiaries
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.
Note that Son is a donee beneficiary. While Son and/or Father could sue Homes, Inc. for breach of contract, Son could not sue Father.

22. Third-Party Beneficiary Diagram

23. Incidental Beneficiaries
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

24. 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 Board and Locke appealed
Locke, a physical education teacher employed by the Dale County Department of Education, served as an umpire for high school baseball games. On March 30, 1999, Locke was serving as the head umpire in a baseball game between Carroll High School and George W. Long High School. The game was being played at Carroll High School and Carroll High School did not provide police protection or other security personnel for the game. After the baseball game, Mixon Cook, the parent of one of the baseball players for Carroll High School, attacked Locke, punching him three times in the face—in his right eye, on the right side of his face, and on the left side of his neck. As a result, Locke sustained severe physical injuries.
Locke sued the Ozark City Board of Education, alleging breach of contract. Locke specifically alleged that Carroll High School is required to follow the rules and regulations of the Alabama High School Athletic Association, which requires that all school principals have the duty to “insure good game administration and supervision by providing for the following: Adequate police protection” at athletic events. Locke alleged that, by not fulfilling its duty under the Directory, the Board breached its contract with the ASHAA by failing to provide police protection at the baseball game, that he was an intended third-party beneficiary of the contract, and that he was injured as a result of the Board’s breach of the contract.
The trial court entered a summary judgment in favor of the Board, and Locke appealed.

25. Locke v. Ozark City Board of Ed.
Issue:
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.”
Court:
“To recover under a third-party beneficiary theory, the complainant must show: 1) that the contracting parties intended, at the time the contract was created, to bestow a direct benefit upon a third party; 2) that the complainant was the intended beneficiary of the contract; and 3) that the contract was breached. Further, it has long been the rule in Alabama that one who seeks recovery as a third-party beneficiary of a contract must establish that the contract was intended for his direct, as opposed to incidental, benefit.
In Zeigler v. Blount Bros. Construction Co., this court held that because the contract directly benefited the power company and would not necessarily benefit the customer, Zeigler was an incidental, rather than an intended direct, beneficiary of the contract between the power company and the contractor On the other hand, in H.R.H. Metals, Inc. v. Miller, Vulcan Materials Company contracted with H.R.H Metals, Inc., to purchase and remove three buildings located on property belonging to Vulcan This court held that the language reflects an intention on the part of the contracting parties to bestow a direct benefit on [the plaintiff].
The contract before us between the Board and the AHSAA, like the one in H.R.H. and unlike the one in Zeigler, anticipates the existence of a third party The contract states that the purpose of “adequate police protection” is to “provide good game administration and supervision.” Game administration and supervision necessarily involve umpires….”

26. 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
Court: “We hold, based on the plain language of the contract and on the surrounding circumstances, that the contract anticipates third-party umpires, that the contract was intended to directly benefit umpires like Locke, and that Locke has presented substantial evidence creating a genuine issue of fact as to whether he was an intended direct beneficiary of the contract between the Board and the AHSAA.”

27. Test Your Knowledge A person who assigns a right is an obligee
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
True. The person is also an assignor.
False. Duties may not be delegated if delegation of the duty is contrary to public policy, prohibited by contract, or the duty is unique to the obligor based upon individual traits, skill, or judgment of the person who owes the duty to perform.
True. In general, non-assignment clauses are enforceable if reasonable in scope and time. In other words, non-assignment clauses will be interpreted narrowly by courts because public policy favors assignability.
True. Under common law and UCC 2–210(2), general language prohibiting assignment of “the contract” or “all my rights under the contract” is interpreted as forbidding only the delegation of duties, unless the circumstances indicate to the contrary.

28. 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.
False. Sheila is the assignor and the charity is the assignee.
True. The neighbor will derive benefit from Joshua’s home as an incidental beneficiary, but could not sue Joshua or Bigg Homes if either party to the contract breaches the contract. Note that if the homebuilding caused damage to the neighbor’s house or devalued nearby homes, the neighbor may indeed have recourse under nuisance law or other property-based law.

29. Test Your Knowledge
Multiple Choice
James financed the purchase of a car with CarCo, then sold the car to Marsha. Marsha agreed to pay the remaining amount of the car loan, but failed to make the 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
The correct answer is (b). CarCo is a creditor beneficiary.

30. 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
The correct answer is (a). Note that Dept. Store could accept the substitution and agree to a novation (essentially, a new contract with Sarah).

31. Thought Question
If public policy favors freedom of contract, then should courts enforce non-assignment and non-competition clauses?
Opportunity to discuss ethical issues in non-competition and non-assignment clauses.