Third-Party Rights and Obligations

• Author: Val Ricks
• Pages: 365-410

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Further, it was by no means certain, at the time of the contract, that lessee would peacefully

return the trucks to the lessor after lessee had breached the contract. * * * *

[¶13] We attach no significance to the fact that the liquidated damages clause appears on

the preprinted form portion of the agreement. The agreement was fully negotiated and the

provisions of the form, in many other respects, were amended. * * * *

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Question: Would this case be a correct application of UCC § 2-718(1)?

IV. Third-Party Rights and Obligations

Conceptually, people who are not parties to a contract obtain interests in them in

three ways:

(1) Duties might be delegated to them to do. For example, a general contractor

delegates many of its construction duties to subcontractors.

(2) Rights might be assigned. Your mortgage originator usually will transfer its

rights to your payments to someone else.

(3) The parties might agree that one of them is contracting for the benefit of

someone else, so that that third party will have the benefit (which is why we call

that person a third-party beneficiary). A parent might buy life insurance and name

a child as a beneficiary, for instance.

Though, conceptually, there are three primary ways to involve third parties, courts

do not keep the vocabulary tidy. For instance, they often talk of “assigning a contract”

which contains both rights and duties. See if you can distinguish between duties and rights

and determine which the court is talking about when.

Third-party beneficiary law can also be tricky because so many contracts are

arguably for the benefit of others, and each situation is to some extent unique. Moreover,

courts have offered a couple of tests for whether legal rights arise. Using the court’s rule

language as a guide in combination with examples like life insurance and a couple of cases,

can you tell from the materials why a court did and when a court would grant legal rights

under a contract to a third party?

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A. Assignment

FITZROY v. CAVE

Court of Appeal (1905), 2 K.B. 364

[¶1] Appeal from the judgment of Lawrance J. in an action tried before him without a

jury.

[¶2] The action was brought by the plaintiff as the assignee of certain debts.

[¶3] It appeared that the defendant was at the date of the after-mentioned deed indebted

to five tradesmen in Ireland in various sums, amounting in all to 90l. 11s. 5d., in respect of

goods sold and delivered by them respectively to him. By a deed dated October 13, 1904,

and made between these tradesmen of the one part and the plaintiff of the other part, after

reciting that the parties of the first part had agreed to assign the said debts to the plaintiff

upon the terms and for the consideration thereinafter set forth, it was witnessed that, in

pursuance of such agreement, and for and in consideration of the covenant and agreement

on the part of the plaintiff thereinafter contained, the parties of the first part thereby

respectively assigned to the plaintiff the said debts to hold the same respectively to the

plaintiff absolutely. The deed then proceeded: “And the assignee hereby covenants with

the assignors, and with each of them, that, in case he shall be able to recover and realize

the amount of the said debts from the said Arthur Oriel Singer Cave, he will immediately

thereupon pay over to them, the assignors, their executors, administrators, and assigns, the

said respective amounts, or so much thereof as he may be able to recover or realize, after

payment of all costs necessarily incurred by him.” Notice in writing of this assignment had

been given to the defendant.

[¶4] It appeared in evidence that the plaintiff was interested in, and a director of, a

company called the Cork Mineral Development Company. The defendant was a co-director

and the local manager of the company. The plaintiff, being dissatisfied with the action of

the defendant as a director of the company, had, acting under the advice of a solicitor, taken

the assignment of the before-mentioned debts with the view of procuring an adjudication

in bankruptcy against the defendant, and so getting him removed from the directorate of

the company.

[¶5] Lawrance J. held, with some doubt, that, under these circumstances, the assignment

was invalid as savouring of maintenance or otherwise against public policy, and therefore

gave judgment for the defendant.

[¶6] May 25. Roskill, K.C., and Raymond Asquith, for the plaintiff. Maintenance is

where a person maintains a litigation, having no interest in the subject-matter of it, nor any

relation to the litigant which justifies him in doing so * * * . The plaintiff in this case being

the assignee for good consideration, and legal owner of these debts, cannot possibly be said

to have had no interest in the subject-matter of the litigation. * * * * It is submitted that the

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law cannot inquire into the motives with which an assignment of debts prima facie lawful

is procured. A lawful transaction cannot be made unlawful on account of the inner motives

of the person entering into it * * * . The present case stands on the same footing legally as

if the plaintiff had purchased these debts for cash. * * * *

[¶7] Holman Gregory, for the defendant. On the assumption that the assignment of the

debts to the plaintiff was valid in law, it no doubt easily follows that there is nothing in the

nature of maintenance in the transaction. But this assumption really begs the whole

question. It may be admitted that there was a good legal assignment of the debts in point

of form, but a transaction in which substance contravenes public policy, or savours of

maintenance, cannot be made good by being clothed in a legal dress. It is submitted that to

purchase a right of action with such a collateral and indirect motive as actuated the plaintiff

in this case savours of maintenance, even if it does not come exactly within the definition

of it; and the authorities shew that the law will not recognise such a purchase as valid. It is

a transaction which brings about litigation, which would never have been initiated by the

creditors themselves, and that not by way of a bona fide commercial speculation, but with

a sinister and malicious purpose. Moreover, there was not in this case, in substance, a

purchase of these debts. The plaintiff had really no interest in the debts themselves, and his

only interest in the litigation was of a collateral and indirect character. * * * *

[¶8] Cozens-Hardy L.J. read the following judgment: –This is an appeal from the

judgment of Lawrance J. in favour of defendant. The plaintiff is the assignee of five debts

amounting together to over 50l. due from the defendant to five creditors resident in Ireland.

The assignment is effected by a deed dated October 13, 1904. It is in the common form of

an absolute assignment, but there is no pecuniary consideration, and the assignee takes no

beneficial interest, for he covenants that, in case he is able to recover the amount of the

debts from the defendant, he will pay over to the assignors the respective amounts or so

much thereof as he may be able to recover or realize after payment of all costs necessarily

incurred by him. Now the existence of the debts is not disputed, and unless the plaintiff can

recover the amounts the defendant has been relieved from all responsibility. It has,

however, been strenuously contended by Mr. Gregory in his very able argument that the

plaintiff’s action is open to the objection of maintenance, or is otherwise such that on

grounds of public policy the Court ought to refuse its assistance. This view was adopted

by the learned judge.

[¶9] It is desirable to consider the limits of the doctrine of maintenance as applied to

choses in action. There are undoubtedly many choses in action which are not and never

were assignable either at law or in equity. * * * *

[¶10] There are, however, other choses in action which, though not assignable at common

law, were always regarded as assignable in equity. A debt presently due and payable is an

instance. At common law such a debt was looked upon as a strictly personal obligation,

and an assignment of it was regarded as a mere assignment of a right to bring an action at

law against the debtor. Hence an assignment was, with some exceptions which need not be