Deck 11: Third Party Rights and Discharge

Question 1

How are most contracts discharged?

Answer 1

Contracts Discharged : contracts are discharged when the contracts are terminated due to unlawfully acts. The ways to discharge a contract are impossibility or impracticability to execute personal services due to the death or illness etc.
The two major methods of discharge are satisfaction and accord. Accord deals with agreement to accept performance other than previously owed, where Satisfaction deals with the performance of the terms and conditions of the accord.
Other important reasons after contract discharged are:
1) Performance
2) Operation of law
3) Agreement
4) Frustration
5) Election after breach

Question 2

How are most contracts discharged?

Answer 2

Discharge of Contracts: A Contract can be discharged by several means and in the following ways such as Discharge by performance, discharge by agreement and discharge by operation of law.
Methods by through which contracts can be discharged:
1. Discharge by performance: In case one of the parties in a contract fails to perform the conditions of the contract then the contract is discharged based on performance.
2. Discharge by agreement: A contract can be discharged when both the parties agree to rescind the contract. An agreement can be rescinded when one of original parties is replaced by another one, when the parties fail to perform the terms and conditions to a satisfactory level.
3. Discharge by operation of law: A contract can be discharged by operation of law in conditions such as material alteration, statutes of limitation, bankruptcy, impossibility of performance, commercial impracticability and frustration of purpose.

Question 3

Assignment and Delegation. Bruce Albea Contracting, Inc., was the general contractor on a state highway project. Albea and its sureties (the companies that consented to guarantee the financial liabilities involved) agreed to be liable for all work on the project. Albea subcontracted with APAC-Southeast, Inc., an asphalt company. The contract stated that it could not be assigned without Albea's consent. Later, Albea and APAC got into a dispute because APAC wanted to be paid more for its asphalt. APAC then sold and assigned its assets, including the contract, to Matthews Contracting Co. Albea was informed of the assignment and did not approve it but allowed Matthews to work. Matthews demanded higher payments for asphalt, and Albea agreed because no other contractor would step in at the original price. Albea suffered a loss on the job and could not pay its bills, so Albea's sureties paid Matthews $2.7 million for work performed. APAC sued Albea and its sureties for $1.2 million for work it had performed before the contract was delegated to Matthews. The trial court granted APAC $1.2 million. On appeal, the defendants argued that APAC had breached the contract by assignment without consent. Did APAC breach the contract with Albea? Did Albea owe APAC anything? Explain your answers. [ Western Surety Co. v. APAC-Southeast, Inc., 302 Ga.App. 654, 691 S.E.2d 234 (2010)]

Answer 3

In a contract, both the parties have their respective rights and duties. As per the rule of Privity of Contract , no third party has any right or duty in a contract. However, there are certain exceptions to this law, such exceptions are assignment and delegation.
Assignment: When a party to a contract transfers his rights under the contract to someone. The transfer of contract rights to a third person is known as an assignment.
Delegations: Just like transferring the rights to a third person, a party can also transfer duties. Although duties are not assigned, they are delegated.
Facts:
Company BA was a contractor on a state highway project. Company BA and its sureties agreed to be liable for the completion of the project. Company BA subcontracted with Company AP and the agreement stated that the no assignment can be made without the consent of the other parties.
AP assigned the contract to Company M, BA was informed about the contract. BA did not approve but, allowed M to work. In the meantime, BA suffered a loss on the job and it paid $ 2.7 million to M for the work performed.
AP sued BA for $ 1.2 Million, BA argued that AP breached the contract and thus it is not liable for the payment.
Outcome:
The facts of the case show that, the contract demands prior consent of the parties before assigning the contract. When AP proposed to assign the contract to M, BA was notified. BA refuses the proposal of assignment but, allowed M to work.
Thus, it cannot be said that AP breached the terms of the contract. AP did take BA's consent before assigning the contract to M. Thus, it can be concluded that, BA cannot use the contention that AP breached the contract, as a defense.

Question 4

What is a contractual condition, and how might a condition affect contractual obligations?

Question 5

ISSUE SPOTTERS
Eagle Company contracts to build a house for Frank. The contract states that "any assignment of this contract renders the contract void." After Eagle builds the house, but before Frank pays, Eagle assigns its right to payment to Good Credit Company. Can Good Credit enforce the contract against Frank? Why or why not? (See pages 256-257.)

Question 6

What is a contractual condition, and how might a condition affect contractual obligations?

Question 7

What is the difference between an assignment and a delegation?

Question 8

Case Problem with Sample Answer Just Homes, LLC (JH), hired Mike Building Contracting, Inc., to do $1.35 million worth of renovation work on three homes. Community Preservation Corp. (CPC) supervised Mike's work on behalf of JH. The contract stated that in the event of a dispute, JH would have to obtain the project architect's certification to justify terminating Mike. As construction progressed, relations between Mike and CPC worsened. At a certain point in the project, Mike requested partial payment, and CPC recommended that JH not make it. Mike refused to continue work without further payment. JH evicted Mike from the project. Mike sued for breach of contract. JH contended that it had the right to terminate the contract due to CPC's negative reports and Mike's failure to agree with the project's engineer. Mike moved for summary judgment for the amounts owned for work performed, claiming that JH has not fulfilled the condition precedent-that is, JH never obtained the project architect's certofication for Mike's termination. Which of the two parties involved breached the contract? Explain your answer. [ Mike Building Contracting Inc. v. Just Homes , LLC, 27 Misc.3d 833, 901 N.Y.S.2d 458 (2010)]

Question 9

What is the difference between an assignment and a delegation?

Question 10

Conditions of Performance. James Maciel leased an apartment in Regent Village, a university-owned housing facility for Regent University (RU) students in Virginia Beach, Virginia. The lease ran until the end of the fall semester. Maciel had an option to renew the lease semester by semester as long as he maintained his status as an RU student. When Maciel completed his coursework for the spring semester, he told RU that he intended to withdraw. The university told him that he could stay in the apartment until May 31, the final day of the spring semester. Maciel asked for two additional weeks, but the university denied the request. On June 1, RU changed the locks on the apartment. Maciel entered through a window and e-mailed the university that he planned to stay "for another one or two weeks." When he was charged with trespassing, Maciel argued that he had "legal authority" to occupy the apartment. Was Maciel correct? Explain. [ Maciel v. Commonwealth, __ S.E.2d __ (Va.App. 2011)] (See Contract Discharge.)

Question 11

Intended Beneficiaries. Wilken owes Rivera $2,000. Howie promises Wilken that he will pay Rivera the $2,000 in return for Wilken's promise to give Howie's children guitar lessons. Is Rivera an intended beneficiary of the Howie-Wilken contract? Explain. (See Third Party Beneficiaries.)

Question 12

Assignment. Mary Kazery entered into a lease with Courtesy Inns, Inc. The initial term was one year, with a renewal option of twenty years and four subsequent options of ten years each. During the first renewal term, Courtesy assigned its interest in the lease to George Wilkinson. A year later, Kazery transferred her interest in the property to her son, Arnold. Less than a year later, Arnold transferred his interest to his son, Sam, who became the sole owner of the property. No one notified Wilkinson. For the next twenty years, Wilkinson paid the rent to Arnold and renewed the lease by notice to Arnold. At the end of the third term, Wilkinson wrote to Arnold that he was exercising the fourth option. More than ten months later, Sam filed a suit in a Mississippi state court against Wilkinson, claiming that the lease was void because Wilkinson had not given proper notice to renew. Who should have notified Wilkinson that Sam had been assigned Arnold's interest in the property? What effect does the lack of notice have on Wilkinson's discharge of his duties under the lease? Did he give proper notice to renew? Discuss. [ Kazery v. Wilkinson, 52 So.3d 1270 (Miss. App. 2011)]

Question 13

Myrtle Jackson owns several commercial buildings that she leases to businesses, one of which is a restaurant. The lease states that tenants are responsible for securing all necessary insurance policies but the landlord is obligated to keep the buildings in good repair. The owner of the restaurant, Joe McCall, tells his restaurant manager to purchase insurance, but the manager never does so. Jackson tells her son-in-law, Rob Dunn, to perform any necessary maintenance for the buildings. Dunn knows that the ceiling in the restaurant needs repair but fails to do anything about it. One day a customer, Ian Faught, is dining in the restaurant when a chunk of the ceiling falls on his head and fractures his skull. Faught files suit against the restaurant and discovers that there is no insurance policy in effect. Faught then files a suit against Jackson, arguing that he is an intended third party beneficiary of the lease provision requiring insurance and thus can sue Jackson for failing to enforce the lease (which requires the restaurant to carry insurance). Using the information presented in the chapter, answer the following questions.
Can Jackson delegate her duty to maintain the buildings to Dunn? Why or why not?

Question 14

A Question of Ethics King County, Washington, hired Frank Coluccio Construction Co. (FCCC) to act as general contractor for a public works project involving the construction of a small utility tunnel under the Duwamish Waterway. FCCC hired Donald B. Murphy Contractors, Inc. (DBM), as a subcontractor. DBM was responsible for constructing an access shaft at the eastern end of the tunnel. Problems arose during construction, including a "blow-in" of the access shaft that caused it to fill with water, soil, and debris. FCCC and DBM incurred substantial expenses from the repairs and delays. Under the project contract, King County was supposed to buy an insurance policy to "insure against physical loss or damage by perils included under an 'AllRisk' Builder's Risk policy." Any claim under this policy was to be filed through the insured. King County, which had general property damage insurance, did not obtain an all-risk builder's risk policy. For the losses attributable to the blow-in, FCCC and DBM submitted builder's risk claims, which the county denied. FCCC filed a suit in a Washington state court against King County, alleging, among other claims, breach of contract. [Frank Coluccio Construction Co., Inc. v. King County, 136 Wash.App. 751, 150 P3d 1147 ( Div. 1 2007 )]
1 King County's property damage policy specifically excluded, at the county's request, coverage of tunnels. The county drafted its contract with FCCC to require the all-risk builder's risk policy and authorize itself to "sponsor" claims. When FCCC and DBM filed their claims, the county secretly colluded with its property damage insurer to deny payment. What do these facts indicate about the county's ethics and legal liability in this situation?
2 Could DBM, as a third party to the contract between King County and FCCC, maintain an action on the contract against King County? Discuss.
3 All-risk insurance is a promise to pay on the "fortuitous" happening of a loss or damage from any cause except those that are specifically excluded. Payment usually is not made on a loss that, at the time the insurance was obtained, the claimant subjectively knew would occur. If a loss results from faulty workmanship on the part of a contractor, should the obligation to pay under an all-risk policy be discharged? Explain.

Question 15

-Check your answers to these questions against the answers provided in Appendix G.
Ready Foods contracts to buy from Speedy Distributors two hundred carloads of frozen pizzas. Before Ready or Speedy starts performing, can they call off the deal? What if Speedy has already shipped the pizzas? Explain your answers.

Question 16

Critical Thinking Legal Question If intended third party beneficiaries could not sue the promisor directly to enforce a contract, what would their legal remedy be?

Question 17

What rights can be assigned despite a contract clause expressly prohibiting assignment?

Question 18

Video Question To watch this chapter's video, Third Party Beneficiaries , go to www.cengagebrain.com. Register the access code that came with your new book or log in to your existing account. Select the link for the "Business Law Digital Video Library Online Access" or "Business Law CourseMate." Click on "Complete Video List," view Video 20, and then answer the following questions:
1 Discuss whether a valid contract was formed when Oscar and Vinny bet on the outcome of a football game. Would Vinny be able to enforce the contract in court? Discuss fully.
2 Is the Fresh Air Fund an incidental or an intended beneficiary? Explain your answer.
3 Can Maria sue to enforce Vinny's promise to donate Oscar's winnings to the Fresh Air Fund? Why or why not?

Question 19

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What rights can be assigned despite a contract clause expressly prohibiting assignment?

Question 20

Malone v. Flattery
Court of Appeals of Iowa, 797 N.W.2d 624 (2011).
www.iowacourts.gov/CourLof_Appeals/Opinions
FACTS Leo and Grace Flattery sold their farm to Stanek Cattle Company. The Flatterys, however, kept the acre of land on which their home was located. The contract gave Stanek an easement-which is a right to cross a piece of land-that was "binding on the Sellers' and Buyer's personal representatives, distributees, heirs, successors, transferees and assigns." Stanek also "shall have a right of first refusal to acquire the one-acre tract. In the event that the Sellers intend to sell the one-acre tract, the Sellers will notify the Buyer," who could then exercise the right to buy it. A year later, Stanek sold the farm to William and Sharon Malone. Seven years later, without notice to the Malones, the Flatterys transferred their interest in the acre to Timothy and Deann Crall. The Malones filed a suit in an Iowa state court against the Flatterys to rescind (cancel) the transfer to the Cralls and enforce the right of first refusal. The court issued a judgment in the Flatterys' favor. The Malones appealed.
ISSUE Was the right of first refusal granted by the Flatterys to Stanek assignable to a third party?
DECISION No. A state intermediate appellate court affirmed the lower court's judgment in favor of the Flatterys. Stanek's right of first refusal was personal and not assignable. Stanek did not exercise the right before selling the property to the Malones, and the right terminated with that sale.
REASON There is a presumption that a right of first refusal is personal and not assignable. This can be overcome by language in a contract that makes the right assignable or refers to the "successors" or "assigns" of the party to whom the right is transferred (as stated in the easement clause). The reason for this presumption is that a right of first refusal is a restraint on the transfer of land ownership that "can impede the marketability of real estate." Construing the right narrowly limits its duration. In this case, the contract between the Flatterys and Stanek did not state that the right was assignable, and the clause that granted it did not mention the buyer's "successors" or "assigns." Thus, Stanek's right of first refusal was personal and not assignable (to the Malones).
FOR CRITICAL ANALYSIS-Economic Consideration What underlies the policy against assignments of rights of first refusal and other restraints on the transfer of land ownership?

Question 21

Conditions of Performance. The Caplans own a real estate lot, and they contract with Faithful Construction, Inc., to build a house on it for $360,000. The specifications list "all plumbing bowls and fixtures... to be Crane brand." The Caplans leave on vacation, and during their absence Faithful is unable to buy and install Crane plumbing fixtures. Instead, Faithful installs Kohler brand fixtures, an equivalent in the industry. On completion of the building contract, the Caplans inspect the work, discover the substitution, and refuse to accept the house, claiming Faithful has breached the conditions set forth in the specifications. Discuss fully the Caplans' claim.

Question 22

Allan v.Nersesova
Court of Appeals of Texas, Dallas, 307 S.W.3d 564 (2010).
www.5thcoa.courts.state.tx.us
FACTS Autumn Allan and Aslan Koraev both owned units in the Boardwalk on the Parkway Condominiums. Allan's unit was directly beneath Koraev's. Between March 2005 and July 2007, Allan's unit suffered eight incidents of water and sewage incursion as a result of plumbing problems and misuse of appliances in Koraev's unit. Allan sued Koraev and others for breach of contract. The trial jury found for Allan on her claims for breach of contract against Koraev. Koraev moved for judgment notwithstanding the verdict, asserting that Allan had failed to prove as a matter of law the existence of a contract between her and Koraev. The trial court granted the motion, and Allan appealed.
ISSUE Was Allan an intended third party beneficiary of the contract between Koraev and the condominium association?
DECISION Yes. The Court of Appeals of Texas concluded that the governing documents made Allan an intended creditor beneficiary of the contract between Koraev and the association.
REASON Allan was a creditor beneficiary because she benefited from Koraev's contractual promises to comply with the condominium association's terms and to pay for damages that he caused to other units. Consequently, the trial court "erred by granting Koraev's motion for judgment notwithstanding the verdict on Allan's claim for breach of contract." The court reasoned that "A third party, such as Allan, may sue to enforce a contract as a third-party beneficiary... if the contracting parties entered into the contract directly and primarily for the third-party's benefit." Because the governing documents stated that each owner had to comply strictly with their provisions, failure to comply created grounds for an action by the condominium association or an aggrieved (wronged) owner. Clearly, Allan was an aggrieved owner. "Koraev's failure to perform the contract between himself and the Association was a breach of his duty not to cause damage to Allan's unit. As an intended creditor beneficiary, Allan had standing to bring suit against Koraev for his breach of the governing documents."
FOR CRITICAL ANALYSIS-Legal Consideration Why did the court use the term creditor beneficiary to describe Allan?

Question 23

What factors indicate that a third party beneficiary is an intended beneficiary?

Question 24

Pack 2000, Inc. v. Cushman
Appellate Court of Connecticut, 126 Conn.App. 339, 11 A.3d 181 (2011).
www.iud.state.ctus
FACTS Eugene Cushman agreed to transfer two Midas muffler shops to Pack 2000, Inc. The deal included leases for the real estate on which the shops were located. Each lease provided Pack with an option to buy the leased real estate subject to certain conditions. Pack was to pay rent by the first day of each month, make payments on the notes by the eighth day of each month, and pay utilities and other accounts on time. Pack, however, was often late in making these payments. The utility and phone companies threatened to cut off services, an insurance company canceled Pack's liability coverage, and other delinquencies prompted collection calls and letters. When Pack sought to exercise the options to buy the real estate, Cushman responded that Pack had not complied with the conditions. Pack filed a suit in a Connecticut state court against Cushman, seeking specific performance of the options. The court rendered a judgment in Pack's favor. Cushman appealed.
ISSUE Can Pack exercise its option to buy the leased real estate even though it did not strictly comply with the condition precedent that required it to make payments on time?
DECISION No. A state intermediate appellate court reversed the lower court's judgment and remanded the case for the entry of a judgment for Cushman. A party retains its right to exercise an option to buy real estate only by complying strictly with any conditions precedent to its exercise of the option.
REASON The leases provided Pack with the option to buy the leased real estate. But to take advantage of the options, Pack had to comply with the condition precedent of making periodic payments to Cushman and to certain third parties by specific dates. Pack was often late in making these payments and thus did not strictly comply with the condition. The court reasoned that because of this failure of strict compliance, Pack lost the right to exercise the options to buy the real estate.
WHAT IF THE FACTS WERE DIFFERENT? Suppose that Pack had not made any late payments. Would the result have been different? Explain.

Question 25

The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:
What factors indicate that a third party beneficiary is an intended beneficiary?

Question 26

Assignments. Hensley purchased a house but was unable to pay the full purchase price. She borrowed funds from Thrift Savings and Loan, which in turn took a mortgage at 6.5 percent interest on the house. The mortgage contract did not prohibit the assignment of the mortgage. Hensley secured a job in another city and sold the house to Sylvia. The purchase price included payment to Hensley of the value of her equity and the assumption of the mortgage debt still owed to Thrift. At the time the contract between Hensley and Sylvia was made, Thrift did not know about or consent to the sale. Based on these facts, if Sylvia defaults in making the house payments to Thrift, what are Thrift's rights? Discuss.