III. DELEGATION OF DUTIES

A. Definition: Recall that "delegation" refers to duties under a contract, not to rights. If a party to a contract wishes to have another person perform his duties, he delegates them.

B. Continued liability of delegator: When the performance of a duty is delegated, the delegator remains liable. (Example: Owner contracts with Contractor for Contractor to paint Owner's house for $10,000. Contractor delegates his duties to Painter. If Painter fails to perform in the manner required by the original Owner-Contractor contract, Owner may sue Contractor for breach, just as if Contractor had improperly performed the work himself.)

1. Novation: But the obligee may expressly agree to accept the delegatee's performance in place of that of the delegator. If he does so, he has given what is called a novation.

C. Non-delegable duties: In general, a duty or performance is delegable, unless the obligee has a substantial interest in having the delegator perform.

1. Particular skills: Contracts which call for the promisor's use of his own particular skills are normally not delegable. Thus contracts involving artistic performances, the professional services of a lawyer or doctor, etc., are not delegable. Similarly, contracts in which there are duties of close personal supervision may not be delegated.

2. Construction and repair contracts: Construction contracts, and contracts for the repair of buildings or machinery, are normally delegable.

3. Agreement of parties: The parties have complete freedom to determine whether duties may be delegated. This cuts both ways: they may agree that duties which would otherwise be delegable may not be delegated, or conversely that duties normally thought to be too personal may in fact be delegated.

D. Delegatee's liability:

1. Two forms: A delegation agreement between delegator and delegatee may be in one of two forms: (1) the delegator may simply give the delegatee the option to perform, with the delegatee making no promise that he will perform; or (2) the delegatee may promise that he will perform.

a. Option: If the delegatee is given the option to perform, the delegatee is not liable to either the delegator or the obligee.

b. Promise: If the delegatee has promised to perform, the delegatee may or may not be liable to the obligee. That is, the obligee may or may not be a third party beneficiary of the delegatee's promise. This is normally a question of intent of the parties — if delegator and delegatee intend that the obligee get the benefit of the delegatee's promise, then the obligee may sue the delegatee. (Example: Contractor promises Owner that Contractor will paint Owner's house for $10,000. Contractor gets too busy to perform, but wants to make sure that Owner is not inconvenienced by a bad or tardy performance. Contractor, therefore, delegates performance to Painter, under terms that permit Painter to keep the $10,000 fee when earned. Painter expressly promises to perform the work. A court would probably hold that Owner was an intended third party beneficiary of Painter's promise, so that Owner may sue Painter (not just Contractor) if Painter fails to perform.)

2. "Assumption": If a delegatee is held to have undertaken liability to the obligee as well as to the delegator, he is said to have assumed the delegator's liability.

3. Assignment of "the contract": If a party purports to "assign the contract" to a third person, this language will normally be interpreted to constitute a promise by the assignee to perform, and the obligee will normally be interpreted to be an intended beneficiary of this promise.

a. Exception for land sales: But an assignment of "the contract" made by a vendee under a land contract will not usually be found to follow this rule. That is, the assignee under a land sale contract usually does not incur liability to the original seller.

b. UCC: The UCC, in §2-210(4), follows the common-law rule: "An assignment of 'the contract' or of 'all my rights under the contract'…is an assignment of rights and unless the languages or circumstances…indicate the contrary, it is a delegation of performance of the duties of the assignor and its acceptance by the assignee constitutes a promise by him to perform those duties. This promise is enforceable by either the assignor or the other party to the original contract."

i. Security: But if a general assignment is made for the purpose of giving collateral to the assignee in return for a loan, the lender will not normally be deemed to have undertaken to perform the assignor's duties. (Example: On fact of the above examples, if Contractor assigns "the contract" to Bank, in return for a loan of $9,000, Bank has not promised to paint the house, and may not be sued by Owner if the house does not get painted.)

IV. THIRD PARTY BENEFICIARIES

A. Introduction: A third party beneficiary is a person whom both of the original parties to a contract intend to benefit. (Example: Contractor agrees to paint Owner's house for $10,000. Contractor wants to pay off a debt he owes Creditor, so he provides that upon completion, payment should be made not to Contractor but to Creditor. Creditor is a third party beneficiary of the Owner-Contractor contract.)

B. When beneficiary may sue: The most important question about third party beneficiaries is: When may the third party beneficiary sue the promisor on the contract? The modern rule, exemplified by the Second Restatement, is that "intended" beneficiaries may sue, but "incidental" beneficiaries may not sue.

1. Intended beneficiaries may sue: "Intended beneficiaries" fall into two categories:

a. Payment of money: First, a person is an intended beneficiary if the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary. This is sometimes called a "creditor beneficiary." (Example: Contractor agrees to paint Owner's house for $10,000. The contract provides that payment should be made to Creditor, to satisfy a debt previously owed by Contractor to Creditor. Since Owner's fulfillment of his side of the contract will cause money to be paid to Creditor, Creditor is an intended beneficiary, of the "creditor beneficiary" variety.)

b. Intended beneficiary: Second, a person will be an intended beneficiary if the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. A person may fall into this class even if the purpose of the promisee is to give a gift to the beneficiary (in which case the beneficiary is sometimes called a "donee beneficiary"). But intent to make a gift is not necessary — a beneficiary may fall into this "intended beneficiary" class even if the promisee's purpose is not to make a gift, but rather to fulfill some other business objective. (Example: Tycoon contracts with Painter for Painter to paint a portrait of Magnate, a businessman friend of Tycoon, and to deliver the portrait to Magnate. Since Tycoon intends for Magnate to get the benefit of Painter's performance, Magnate is an intended beneficiary who may sue Painter for non-performance; this is true even though Tycoon's motive is to butter up Magnate so that Magnate will do business with Tycoon.)

2. Incidental beneficiaries: A beneficiary who does not fall into the above two classes is called an "incidental" beneficiary. An incidental beneficiary may not sue the promisor. (Example: Developer contracts with Contractor to have Contractor put up an expensive building on developer's land. Neighbor, who owns the adjoining parcel, would benefit enormously because his land would increase in value if the building were built. However, since the parties don't intend to benefit Neighbor, and aren't paying money to him, Neighbor is an incidental beneficiary, not an intended one. Therefore, Neighbor cannot sue Contractor, if Contractor fails to perform as agreed.)

3. Public contracts: When government makes a contract with a private company for the performance of a service, a member of the public who is injured by the contractor's non-performance generally may not sue. (Example: City contracts with Water Co. to supply water for fire hydrants. P's house burns down when Water Co. does not give adequate hydrant pressure. Held, P is not an intended beneficiary of the City-Water Co. contract, and therefore may not recover. [H.R. Moch & Co. v. Rensselaer])

a. Exceptions: But there are two exceptions — a member of the public may sue: (1) if the party contracting with the government has explicitly promised to undertake liability to members of the public for breach of the contract; or (2) if the government has a duty of its own to provide the service which it has contracted for. (Example: City contracts to have its street-repair duty picked up by Contractor. A member of the public injured when the street is improperly maintained may sue Contractor).

4. Mortgage assumptions: In a fact pattern involving one party taking over another's mortgage payments, distinguish between two situations: (1) the mortgagor sells the property "subject to" the mortgage, in which case the purchaser does not promise to pay off the mortgage, though he bears the risk of losing the property if the mortgage payments are not made; and (2) the purchaser "assumes" the mortgage, in which case he makes himself personally liable for repayment (so that the mortgagee may not only foreclose but also obtain a deficiency judgment against the purchaser). These two scenarios have different third party beneficiary consequences:

a. Assumption: If the purchaser has assumed the mortgage, the mortgagee (i.e., the lender) is a creditor beneficiary of the assumption agreement between seller and buyer. The mortgagee may therefore sue the purchaser to compel him to make the mortgage payments. If the purchaser then sells to a sub-purchaser who also assumes, the lender may sue either the purchaser or the sub-purchaser if payments are not made.

b. Subject to: Where the mortgagor sells to a purchaser who takes "subject to" the mortgage, the mortgagee cannot sue that purchaser, since the purchaser has incurred no liability. But if this non-assuming purchaser sells to a sub-purchaser who does assume, courts are split on whether the mortgagee can recover personally against the assuming sub-purchaser.

5. Surety bonds: In cases involving surety bonds, distinguish among several types of bonds: (1) a performance bond, which provides that the surety (e.g., an insurance company) will pay damages to the owner if the contractor fails to perform the contract; (2) a payment bond, which provides that the surety will pay off the sub-contractors, laborers and suppliers if the contractor fails to pay them; and (3) a performance-payment bond, which provides for payments to both the owner and sub-contractors. Each has a different third party beneficiary consequence:

a. Performance bond: If the bond is a performance bond, the sub-contractors and other third parties will almost certainly not be allowed to recover as third party beneficiaries.

b. Payment bond: If the bond is a payment bond, most courts allow the sub-contractors and other third parties to sue the surety company as third party beneficiaries.

c. Performance-payment bond: Where the bond is a combined performance-payment bond, courts are split about whether and when suppliers and other third parties may recover under it.

C. Discharge or modification by the original parties: The modern view is that the original parties' power to modify the contract terminates if the beneficiary, before he receives notification of the discharge or modification, does any of three things: (1) materially changes his position in justifiable reliance on the promise; (2) brings suit on it; or (3) manifests assent to it at the request of either of the original parties.

1. Clause preventing modification: The original parties may themselves agree at the time of contracting that no subsequent modification may occur without the beneficiary's consent. Such a clause will be honored.

D. Defenses against the beneficiary: The promisor-defendant may assert against the beneficiary any defenses which he could have asserted had he been sued by the promisee. For instance, the promisor-defendant may defend on the ground that the promisee never rendered the performance which he promised under the contract, i.e., that the promisee breached. (Example: Contractor agrees to paint Owner's house for $10,000, with payment to be made to Friend, in repayment of a debt owed by Contractor to Friend. If Owner does not make payment and Friend sues Owner as a third party beneficiary, Owner may defend on the grounds that Contractor did not perform the painting work as promised.)

1. Set-offs not allowed: But this principle that the beneficiary "stands in the shoes" of the promisee is limited — only defenses relating to the main contract may be asserted by the promisor-defendant. The promisor-defendant may not assert against the beneficiary defenses or claims from unrelated transactions with the promisee. (Example: Same facts as above example. Contractor performs the painting work correctly. However, Contractor also owes Owner $2,000 in damages from work previously done incorrectly by Contractor for Owner on a different contract. If Friend sues Owner for the $10,000 fee, Owner may not reduce the payment by the $2,000 owed on the unrelated contract.)

E. Other suits in beneficiary contracts:

1. Beneficiary v. promisee: When the beneficiary sues the promisor, the beneficiary does not waive his right to later sue the promisee. (Example: Same facts as above example. Friend sues Owner, but recovers only $4,000 because Owner shows that Contractor did not perform the work correctly. Friend may now sue Contractor for the remaining $4,000 due.)

2. Promisee vs. promisor: Most courts allow the promisee to bring his own suit against the promisor for benefit of the third party beneficiary, if the promisor breaches.

a. Creditor beneficiary: This is most important where the third party is a creditor beneficiary. Here, most courts let the promisee-debtor recover from the promisor the amount which the promisor promised that he would pay the creditor (at least where the promisee has already paid the debt to the creditor).