CHAPTER 14 INTERPRETATION OF THE CONTRACT AND THE RIGHTS AND OBLIGATIONS OF THIRD PERSONS

1. CHAPTER 14INTERPRETATION OF THE CONTRACT AND THE RIGHTS AND OBLIGATIONS OF THIRD PERSONS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

2. JUDICIAL INTERPRETATION • Courts must interpret what the contract “really says.” • Interpretation is used to determine the meaning of the words and other manifestations of intent that the parties used. • Courts consider intentions of parties through a frame of reference known as “reasonable person.”

3. JUDICIAL INTERPRETATION • Standards: • General usage: reasonable person who was aware of all operative uses and who was acquainted with the circumstances involved would attach to the agreement. • Limited usage: refers to the way words are interpreted in a specific locale.

4. JUDICIAL INTERPRETATION • Rules of Interpretation. • Courts attempt to enforce the intentions of the contracting parties. • Circumstances surrounding a transaction should be taken into account. • Courts examine the contract as a whole in determining the intentions. • Ordinary and technical words will be given ordinary or technical meaning, unless circumstances indicate otherwise.

5. JUDICIAL INTERPRETATION • Conduct and Usage of Trade. • Course of conduct or the conduct of the parties and usage of trade involved in the agreement will also influence interpretation.

6. THE PAROL EVIDENCE RULE • Parties have signed a complete, written contract, oral agreements made prior to or at the same time as the writing are not admissible. • An important part of substantive law. • Substantive law: portion of the law that regulates rights, in contrast to law that grants remedies or enforces rights.

7. THE PAROL EVIDENCE RULE • Rules of Integration. • “Face-of-instrument” test, courts examine the “four corners of the writing” to determine if parties intended for document to be integrated. • “All relevant-evidence” test, courts review the document and extrinsic evidence to determine if parties intended integration. • Integration or merger clause, parties declare that the writing is the full and final expression of all the terms in the agreement.

8. THE PAROL EVIDENCE RULE • Total Integration. • Contracts representing the parties’ final and complete statement of their agreement. • Partial Integration. • Contract that is intended to be the final statement but is incomplete.

9. ADDITION OF THIRD PARTIES TO THE CONTRACT • Contract only affects the rights of parties who directly enter into the agreement. • Contracts may influence the rights of third parties. • Third party is significant when the contract is initially formed. • Third party is added later to the contract. • Third party has legal rights and can file a lawsuit to enforce a contract.

10. THIRD-PARTY BENEFICIARY CONTRACTS • Third party beneficiary contract typically involve agreement to perform an act for a third party, known as a beneficiary. • Two people who enter into a contract are called promisor (promises to perform) and promisee (whom the promise is made). • The additional person is not a party to the contract and the contract is valid.

11. THIRD-PARTY BENEFICIARY CONTRACTS • An Incidental Beneficiary. • Third party one who may receive a benefit merely by accident or chance. • Has no right to enforce a contract as it was never intended by maker that incidental beneficiary directly benefit from the agreement.

12. THIRD-PARTY BENEFICIARY CONTRACTS • An Intended Beneficiary. • Third party whom one or both of the contracting parties clearly intended or meant to benefit from the agreement. • Intended beneficiary has same right to enforce the contract as does the original contracting parties.

13. THIRD-PARTY BENEFICIARY CONTRACTS • A Donee Beneficiary. • Third party intended beneficiary whose benefit is intended as a gift from one of the contracting parties. • In some states, donee’s interests are vested once contract is made. • In other states the donee’s rights vest only if donee has accepted the contract, either expressly or by reliance.

14. THIRD-PARTY BENEFICIARY CONTRACTS • A Creditor Beneficiary. • Third party intended beneficiary. • Benefit is intended as payment of a debt that is owed by one of the contracting parties to the beneficiary. • Not much difference between donee and creditor beneficiaries, and both have basically the same rights against the promisor.

15. THIRD-PARTY BENEFICIARY CONTRACTS • Analysis of Third-Party Beneficiary Contracts. • Questions to determine potential third party: • 1) Was the additional person involved from the beginning, or was that person added later? • 2) Did the promise intend to benefit the third party, or was it an accident? • 3) Was the promise making a gift to the third party, or was the promisee fulfilling a contract obligation to the third party?

16. DEFINING ASSIGNMENTS AND DELEGATIONS • If third party is granted contractual rights or duties after the contract was created. • Third party is not a beneficiary of the contract. • Instead, relationship may be either an assignment or delegation. • Distinction between assignment and delegation rests on definition of contractual rights and contractual duties.

17. DEFINING ASSIGNMENTS AND DELEGATIONS • Contractual Rights are the parts of the contract a person is entitled to receive. • Examples include delivery of or payment for goods, payment for work completed, payments owed to car dealers, mortgage companies, finance companies, and collection agencies. • All are rights which are commonly assigned.

18. DEFINING ASSIGNMENTS AND DELEGATIONS • Contractual Duties are the parts of the contract a person is obligated to give. • Examples include working an eight-hour day, paying 15% interest on credit card charges, and providing repair services. • All duties are commonly delegated. • Rights can be assigned and duties can be delegated.

19. ASSIGNMENTS • Person transfers a contractual right to another. • Transferor called assignor, and recipient called the assignee. • Assignor loses contractual right to the assignee when the right is transferred to another party. • Assignor’s right has been extinguished.

20. ASSIGNMENTS • Formalities Required for Assignments • Assignor must indicate an intent to vest a present right in the contract to the assignee. • A writing is not required unless Statute of Fraud applies. • Consideration is not required to make a valid assignment. • Notice of the Assignment • Notice of assignment is not required.

21. ASSIGNMENTS • Assignable Rights • Courts generally favor and enforce assignments. • Prevent the assignment, promissor must prove one of the following: • 1) Materially change the promissor’s duty. • 2) Materially impair the chance of return performance or reduce its value. • 3) Materially increase the burden or risk imposed by the contract.

22. ASSIGNMENTS • Contract Clauses Restricting Assignments • Strong contractual language restricting assignment typically enforced by courts. • Warranties Implied by the Assignor • Warranties include: • 1) An assigned right is valid and actually exists. • 2) The right is not subject to any defenses or limitations not stated or apparent. • 3) Assignor will not interfere to defeat or impair the value of the assignment.

23. ASSIGNMENTS • Rights Created by Assignment. • Assignee receives the same rights the assignor possessed. • Waiver of Defenses Clause. • Attempts to give the assignee better legal rights than the assignor had. • Promisor agrees not to exert defenses. • Reduces the promisor’s bargaining power.

24. DELEGATIONS • Transfer of contractual duties to third party. • Promisor (delegator) appoints a new party (delegatee) to perform contractual duties. • Relationship between delegator and delegatee may be by contract or gift. • Relationship by gift is enforceable by promissory estoppel: doctrine used to enforce a gift promise because of the justifiable reliance of the promise.

25. DELEGATIONS • Delegations do not occur unless the delegatee assumes the contract duties. • In general, the delegator remains liable for proper performance of delegated duty. • Whether delegatee can be held liable depends on if the delegatee contractually agreed to perform the duty.

26. ANALYSIS • To characterize an assignment or delegation ask: • 1) Was additional person involved from the beginning or added later? • 2) Did additional person undertake to perform a contract duty or become entitled to a contract right? Or both? • 3) Did language of the original contract prevent this transfer to an additional person? • 4) Did type of right or duties prevent this transfer to an additional person, because the transfer materially changes the rights or duties of a party? • 5) Is this transfer forbidden by state statute?

27. UNIFORM COMMERCIAL CODE PROVISIONS • Businesspeople need to review its assignment and delegation provisions. • Covers assignments and delegations for contracts involving the sale of goods.