Dealing with third party interests in contracts: Assignment & third-party beneficiaries [No. 86]
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Dealing with third party interests in contracts: Assignment & third-party beneficiaries [No. 86]


There are two ways in which you can create
third-party interest. One is by assignment and one is by third-party
beneficiaries. Starting with the assignment situation, suppose
it turns out that, um, A owes B a thousand dollars, but it turns out that B needs the
cash right now and A’s promise is only to be paid at a future time. It is perfectly respectable in most situations
ah, for B to take the particular right to receive the money, sell it to C and receive
in exchange eight hundred dollars today. He’s better off because he gets the money
when he needs it and C is better off because he gets a better loan. Do you think in effect under these circumstances
that the debtor is allowed to veto the transaction? And the answer generally speaking is no because
what happens is the obligation that you’re talking about is no more onerous if paid to
one party than the other. But if you want to assign only some part of
this particular debt, then the debtor has a legitimate beef because he doesn’t want
to have to do business with two creditors, it’s much more difficult to renegotiate
a loan for extensions and you have to deal with two enforcement actions. So the usual rule is given the surcharges
it’s called, the extra burden are from a partial assignment, those things are prohibited. And then there are also cases where it may
well be complicated because it’s a service obligation. I may agree to be your manservant and now
you want to assign the obligation to somebody else, to whom I don’t wish to work and so
the usual rule when you’re dealing with personal services, a free assignment is not
going to be allowed because of that surplus interest. Under the early common law rules of privity
of contract, it was generally thought to be impossible to have an obligation that was
enforced by a third party. So going back to the Roman rule on this point
it turned out that B as the promisor could discharge that obligation by making the payment
to C but that C could not enforce that right if B did not pay. Starting with the great case of Lawrence and
Fox in 1859, the rule was that the third party beneficiary could sue in order to collect
the debt. Generally speaking, allowing the third party
to sue is extremely important. The key thing to understand about these promises
is they are very narrow scope. The standard contract today will often have
the following clause in it; this agreement does not create any rights in any third parties,
the doctrine of third-party beneficiary is excluded. The explanation for this is most people wish
to have the right to modify contracts freely and if, in fact, you interpose a protected
right to a third party, it is widely understood today that third-party beneficiary rights
are generally inefficient. It’s not that you have to ban them as a
matter of law, it’s that these obligations tend to be excluded as a matter of explicit
agreement.

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