For every contract created, each party has at least one right and at least one duty. Rights are benefits that are expected to be received by fulfillment of the contract. Duties are the obligations to perform under contract terms. These rights and duties may be transferred to parties other than the original parties. The relationship of this transfer is outlined below.
- Rights – Can be assigned to third parties. In this instance, the third party has the ability to enforce the contract against another party. The original party no longer has the ability to enforce these rights (no longer being theirs). § 317.
- Duties – Can be delegated to third parties. Delegation results in the third party being required to perform according to the contract terms. However, the original party is still on the hook to ensure that performance is completed. § 318.
Ultimately, the process for analysis follows: First, determine what has been passed on. Was this a right, or a duty? Consequently, were these obligations assigned or delegated. Second, based on the nature of the transfer, consider the liability of the original parties. If the duty is delegated, the original party may still be liable for enforcement of the rights.
Assignment of Rights
Herzog v. Irace
594 A.2d 1106 (Me. 1991).
Irace is the defendant who lost at trial and appealed.
Are the attorneys required to honor the assignment to the doctor made by their client?
An assignment is a valid transfer of rights to a third party for benefits that are to be received. Once those rights are assigned, it cannot be revoked.
A proper assignment occurred thus binding the attorneys to pay the debt, affirmed.
Mr. Gary Jones was involved in a motorcycle accident resulting in injuries. Consequently, he obtained Irace as an attorney to represent him in his injuries.
Unrelated to the accident, Mr. Jones dislocated his shoulder and went to the doctor, Dr. Herzog for surgery. However, he had insufficient funds. Thus, Mr. Jones made an assignment agreement with Dr. Herzog, that any pending funds from the settlement involving the motorcycle incident would first go to the doctor.
Well, Mr. Jones obtained a settlement for the motorcycle accident. However, the attorneys did not pay Dr. Herzog directly, as outlined in the assignment agreement. Instead, they paid Mr. Jones and his other creditors (according to Mr. Jones’s instructions). Although Mr. Jones wrote a check to the doctor, the check bounced for insufficient funds and Dr. Herzog was never paid. Thus, he is suing Irace for enforcement of the rights assigned to him.
First, this is a valid assignment. The law allows a party to assign rights for pending proceedings resulting from legal action. Here, Dr. Herzog was expressly named as an intended party to receive rights from any pending settlement. Thus, a valid assignment of rights occurred.
Second, there are no ethical limitations preventing the attorneys from upholding the settlement. Although there is an obligation for the attorney’s to follow the instructions of their client, the assignment of rights no longer allowed the client to instruct regarding those rights which were assigned. Therefore, any instructions made by the client averse to the assignment would be invalid.
§ 317 Assignment of Rights
Assignor’s right to performance is extinguished in whole or in part and assignee acquires right to such performance. Typically these rights include the right to pay money. For example, debt collectors are often assigned the right to collect money (from the original party).
Rights are assignable unless the assignment would 1) materially change the duty of the obligor, 2) materially increase cost or risk, 3) materially impair return performance, 4) materially reduce value, or 5) is barred by law, public policy, or contract. Typically, when assigns concern money, this does not apply.
§ 322 When assignment cannot occur
The doctor was assigned the rights to payment. That means that the doctor had the right to recover in accordance with the settlement.
For an assignment, there is no need for the obligator to agree to it, they only need to be on notice of it. Unless there is a prohibition (materially affect, ect.), the assignment is going to be fine.
Sally Beauty Co. v. Nexxus Products Co.
801 F.2d 1001 (7th Cir. 1986).
Sally Beauty is the plaintiff who lost at the trial level and appealed.
Is this delegation of duties a proper transfer?
A party cannot delegate duties to a direct competitor of the other original party.
The delegation of duties is improper. Thus, the trial court is affirmed but fir different reasons.
Best and Nexxus entered into an agreement. Nexxus creates hair care products and Best distributes hair care products. Here, the agreement said that Best would be Nexxus’s sole distributor in most of Texas. Eventually, however, Best was bought out by Sally Beauty another distributor. However, Sally Beauty is also entirely owned by a parent company who also creates hair care products and is a direct competitor with Nexxus.
Because of this potential conflict of interest, Nexxus did not wish to continue working with Sally Beauty. Consequently, they cancelled the agreement at a time that was improper according to the agreement terms (can only cancel on the agreement anniversary or by providing 120 days notice).
As such, Sally Beauty sued for enforcement of the contract.
First, the court determines that this was a delegation of duties. Best promised to do something and then transferred that duty to Sally Beauty. Consequently, if valid, this transfer would be a delegation, not an assignment. However, this is not a proper delegation because there is a direct conflict of interest. Sally Beauty is owned by Nexxus’s direct competitor. As such, it is reasonable to infer that Sally may not exhibit their best efforts to fulfill the contract because their actions may be limited by the owner. After all, if forced to choose, when it comes to choosing between Nexxus and their owner, Sally Beauty would always choose the owner. Because Sally Beauty cannot be expected to fully perform the duties, no delegation can occur.
However, the dissent argues that this conflict of interest should not determine whether a valid delegation of duties has occurred. For instance, within several industries, distributors sell to competitors all the time. Barring some potential antitrust issues, there is nothing wrong with competitors utilizing the same distributor. As such, the dissent would argue that a valid delegation has occurred and Nexxus would be required to terminate in accordance with the contract terms.
§ 318 Delegation of Duties
Delegation can occur unless barred by public policy or contract. Additionally, performance by a particular party is required only if obligee has a substantial interest in having that person to perform. This situation is typically met when there is a personal service contracts. Further, the ability to delegate does not mean that the obligator no longer has a requirement to ensure the enforcement of the contract.
This was a delegation of duty to distribute.
Nexxus’s first argument was that this was a personal service contract requiring consent to delegate. However, this is not a personal service contract because this is a distribution agreement, not a service agreement.
Second Nexxus argues that they have a substantial interest in having his original promisor perform. They didn’t want a competitor to distribute their product.
A party may perform his duty thorough a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract.
Delegation should have some restrictions in the contract drafting. This could include language to approve delegation requests, outlining qualifications, or good faith requirements.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.