RIGHTS OF THIRD PARTIES
Sec. 114. Nature of assignment. A contract creates both
rights and duties. It gives to the contracting parties certain rights
protected by law and at the same time imposes upon them pre-
scribed duties. An assignment consists of some act whereby one
party transfers his rights under a contract, or some portion of them,
to a third party. The transferor is known as the assignor, while
the one receiving the assignment is called the assignee.
Sec. 115. Requisites of assignment. No particular formality
is essential to an assignment. Consideration, although usually
present, is not required; however, an assignment without consid-
eration, where the right involved has not been realized through the
collection of money or receipt of other performance, may in most
states be rescinded by the assignor by notice to the debtor or ob-
In general an assignment may be either written or oral, although
it is best to have it in writing. Any contract, including the rights
arising therefrom, may be assigned provided both parties to the
agreement are willing. The more important question deals with
the effect of an assignment where the third party refuses to respect
it. In the sections immediately following, an attempt is made to
suggest the particular legal principles which are helpful in deter-
mining those rights and contracts that may be assigned even over
the protest of the other party.
Sec. 116. Personal rights. Contracts often grant rights which
are quite personal or confidential in character, the very nature of
which seems to forbid their transfer. Clearly such rights may not
be assigned effectively without the consent of the person against
whom the right is to be enforced. 1 Illustrative of such rights are:
(1) the right to work for a certain person; (2) the right to have a
portrait painted by a particular artist; and (3) the right to repre-
sent a manufacturer by selling his product in a certain territory.
Except as limited in later sections, all rights as distinguished from
contracts as a whole which are not personal in character may be
assigned without the consent of the other party.
Sec. 117. Purchases on credit. If the assignment of a con-
tract right places an additional burden or risk upon the third party
1 Marcelle, Inc. v. Marcus Co., 1931, 274 Mass. 469, 175 NJ3. 83; p. 681.
which was not contemplated at the time he made the agreement,
the assignment is not effective unless he assents to it. Such ap-
pears to be true of sales of merchandise on credit. One who has
agreed to purchase goods on credit may not assign his right to the
goods to a third party, since the latter's credit may not be as good
as that of the original buyer. Although, upon delivery of the goods
to the assignee and his failure to pay, the seller could look to the
assignor for payment nevertheless, the courts incline to the view
that an assignment of the right to buy on credit is not enforceable
by the assignee against the seller. In those contracts involving the
sale of real estate or personal property on installments secured by
a mortgage or retention of title, the seller is fairly well secured re-
gardless of the credit standing of the buyer. Consequently, the
right to buy in such cases is generally held to be assignable.
Sec. 118. Wages. An employee entitled to wages under a con-*
tract of employment can make a binding assignment of his wages,
In case the wages have been earned, the assignee has the right im-
mediately to collect them. If they have not been earned, the as-
signment is nevertheless valid ; the right to collect is deferred until
they are earned.
The power to assign wages is limited in one particular. A mere
expectancy cannot be assigned. Therefore, an assignment of fu-
ture wages to be earned at a certain profession or trade when the
assignor at the time is not employed is ineffective. Such an assign-
ment is valid, provided the assignor is employed, although the du-
ration of his employment depends upon the will of the employer. 2
Recently a tendency has been observed to enact legislation which
limits the portion of future wages that may be effectively assigned.
Many states now provide that an assignment of more than one
fourth of future wages shall not be enforceable, and have indicated
the method for determining the priority where various assignees are
involved. Other safeguards have been established to protect the
employee against unusual and unsuspected assignments being in-
cluded in ordinary contracts "of sale.
Sec. 119. Delegation of duties. Certain duties imposed by
contract are so personal and confidential in character that it is un-
reasonable to assume that any person can perform them except the
contracting party. If the duties are not of this type and may be
performed as well by one person as another, it is said that they can
be delegated. Contracts which call upon a party to perform such
nonpersonal duties may be assigned in such a way as to give the
assignee the privilege of performing the duties which are conditions
precedent to the right he seeks to enforce. To illustrate, a build-
"Rodijkeit v. Andrews, 1906, 74 Oh. St. 104, 77 N.E. 747; p. 531.
RIGHTS OF THIRD PARTIES 81
ing contractor is not expected to do all the work on any particular
building, it being understood that he will delegate responsibility for
certain portions of the structure. Consequently, his agreement to
build is assignable. It is presumed that all contractors are able to
follow specifications, and, since the duties are mechanical in nature,
the owner is bound to permit the assignee to build. When and
if the building is completed, the assignee also becomes entitled to
payment. In some respects two rights are assigned, the right to
build and the right to collect the contract price when the work has
Sec. 120. Responsibility for performance. Failure on the part
of the assignee to perform the duties gives rise to a cause of action
by the third party. In the majority of the states he can elect to sue
either the assignor or the assignee, provided the assignee has agreed,
expressly or by implication, to assume the burdens of the contract.
The mere assignment, without more, of a contract which calls for
the performance of affirmative duties by the assignor does not im-
pose those duties upon the assignee unless he undertakes to perform
as a condition precedent to his recovery. To illustrate, if a tenant
assigns a lease, the assignee is not liable for future rents, after he
vacates the property, unless he expressly assumes the burdens of
the lease at the time of the assignment. This is true even though
he vacates the property before the lease expires. To the extent
that an assignee accepts the benefits of a contract which are predi-
cated upon the performance of duties later to be undertaken, he
becomes obligated to perform those duties. However, if he merely
receives the assignment of a right to purchase or to lease, he is not
liable for the purchase price or the rental unless he demands title
to or possession of the realty.
The assignor, of course, is not released by an agreement on the
part of the assignee to assume the burdens of the contract. In such
a case, the third party has his choice of holding either the original
contracting party or the assignee. He cannot be denied his claim
against the assignor without his consent. 3
Sec. 121. Claims for money. All claims for money may be as-
signed, and it is generally held that a partial assignment of a claim
is enforceable against the debtor. A question often arises concern-
ing the liability of the assignor in case the assignee is unable to col-
lect from the debtor. If the assignee takes the assignment merely
as security for a debt owing from the assignor to the assignee, it is
clear that if the assigned claim is not collected, the assignor is still
liable to pay his debt. On the other hand, it should be equally
plain that if the assignee purchases a claim against a third party,
8 Martin y. Qrn4orff 1867, 22 Iowa 504; p. 532,
he should have no recourse against the assignor unless the claim
proves invalid for some reason. This view is accepted by most of
the courts, although a few have adopted the contrary view.
In any event the assignor warrants that the claim which he as-
signs is a genuine claim. In case there is a defense available to the
third party debtor ajid the claim cannot be collected, the assignor
must return the amount which he has received from the assignee.
Sec. 122. Notice. Immediately after the assignment, the as-
signee should notify the third party of his newly acquired right.
This notification is essential for two reasons:
1. In the absence of any notice of the assignment, the third party
is at liberty to perform pay the debt or do whatever else the con-
tract demands for the original contracting party. In fact, he has
no knowledge of the right of anyone else to require performance.
Thus, the right of the assignee to demand performance can be de-
feated by his failure to give notice. The assignor who receives per-
formance under such circumstances becomes in turn a trustee of
funds or of property received, and can be compelled to turn them
over to the assignee. As soon as notice is given, however, the third
party must perform for the assignee.
2. The notice of assignment protects innocent third parties.
The assignor has the power, although not the right, to make a sec-
ond assignment of the same subject matter. If notice of the as-
signment has been given, it has much the same effect as the record-
ing of a mortgage. It furnishes protection for the parties who may
later consider taking an assignment of the same right. One taking
an assignment should, therefore, always confirm the existence of
the right by communicating with the third party. If the third
party has not been notified of a previous assignment, and if the
assignee is aware of none, the latter can, in many states, feel free to
take the assignment, and should immediately give notice to the
third party. In other words, the first assignee to give notice, pro-
vided he has no knowledge of a prior assignment, has a superior
claim to the right assigned. 4
In many other states, it is held that the first party to receive an
assignment has a prior claim, regardless of which one gives notice
first. In all states, however, the party who is injured by reason of
the second assignment has a cause of action against the assignor to
recover the damages which he has sustained.
Sec. 123. Rights of the assignee. The assignee receives under
the assignment the identical rights of the assignor. Any defense
of the third party available against the assignor is available against
4 Adamson v. Paonessa et al., 1919, 180 Cal. 157, 179 Pac. 880; p. 533.
RIGHTS OF THIRD PARTIES 83
the assignee. 5 Thus, part payment, fraud, duress, or incapacity
can be set up against the assignee as well as against the assignor.
Under the common law the assignee has no right to bring suit in
his own name ; in case the third party fails or refuses to perform for
him, the action must be brought in the name of the assignor. The
legislatures of most states have altered the common-law rule by
conferring upon the assignee the right to bring suit in his own
It is customary for certain contracts to contain a provision that
they are nonassignable. The majority of the states strictly enforce
such a provision. A few hold an assignment of such a contract to
be valid, although allowing damages to be recovered for a breach of
Contracts for Benefit of Third Parties
Sec* 124. Nature of such contracts. Contracts are often made
with the express purpose of benefiting some third party. In such
cases, what are the rights of the third parties? The most typical
example of such agreements is the contract for lifejngurancp in
which the beneficiary is someone other than the insured. The in-
sured often never expects to benefit personally from the contract;
he is making provision for others who may have an interest in his
Another illustration may be taken from mortgages. Real prop-
erty is often conveyed with an outstanding mortgage against it, and
in such cases it is customary for the purchaser to assume and agree
to pay the mortgage debt. Indirectly, at least, the holder of the
mortgage stands in a position to benefit from this promise.
It should be noted that these examples illustrate two entirely dif-
ferent situations. In the first case the party to be benefited is a
pure donee ; in the second case he is a creditor of the party to whom
the promise is made.
Sec. 125, Donee beneficiary. Has a donee, who is to be ben-
efited by the terms of a contract, a right to succeed in a suit against
a promisor who fails to perform? The early canadian law limited recovery
to those instances in which the third party was a close relative of
the promisee. Recovery was denied in other cases, because no
privity of contract existed between the parties ; the third party had
no contractual relation with the promisor. Gradually the rule per-
mitting recovery was extended until, today, perhaps a slight ma-
jority of the states allow the third party donee, in all cases, to bring
6 American Bridge Co. et al. v. City of Boston, 1909, 202 Mass. 374, 88 NJE. 1089;
suit against the promisor for failure to perform. The chief reason
advanced for the extension of this doctrine is that to deny the third
party a recovery would be to bar substantial recovery by anyone.
The promisee could not recover substantial damages, because he
was not to benefit by performance, and, therefore, would not be
materially damaged by failure of performance. Nevertheless, a
considerable number of states deny recovery by the third party in
such cases, unless there is a close relationship. In all states, by
statute or otherwise, the beneficiary of a life insurance contract is
permitted to recover from the insurer.
Sec. 126. Benefit must be direct. A donee beneficiary is en-
titled to recover only where the contract is expressly made for his
benefit. If he is to benefit only indirectly, the contract gives him
no right. Thus, an action by an orphanage was not sustained,
where it was based on the breach of an agreement between several
parties to close their places of business on Sunday ; and, in case any
one or more of them kept open on Sunday, each one keeping open
was to pay one hundred dollars to the orphanage. The contract
was entered into primarily to benefit the contracting parties, and
the orphanage was only indirectly to be a beneficiary. Contracts
of guaranty which assure performance of construction contracts by
contractors have been held in many states to benefit the material
men and laborers. A few states have held otherwise, indicating
their belief that the agreement was made primarily to protect the
In many states a contract made for the express purpose of ben-
efiting a third party may not be rescinded without the consent of
the beneficiary. 6 The latter has a vested interest in the agreement
from the moment it is made. Thus, in these states an insurance
company has no right to rescind an agreement with the insured
without the consent of the beneficiary, unless the contract itself
gives this right.
Sec. 127. Creditor beneficiary. The example of the person
who buys mortgaged real estate and assumes the mortgage debt
furnishes an illustration of a contract made for the benefit of a third
party who is a creditor. It has been urged by the courts of several
states that the third party in such cases should not be allowed to
sue. The reasons given are the following: (1) A proper analysis of
the situation indicates that the contract is not made primarily for
the benefit of the creditor, but in reality it is expected to benefit the
debtor, in that it relieves him of the burden of performing. (2)
Failure to perform on the part of the promisor does materially
damage the promisee, and thus a suit by him would result in a
'Bassett et al. v. Hughes, 1877, 43 Wis. 319; p. 534.
RIGHTS OF THIRD PARTIES 85
judgment for substantial damages. Despite this rather sound rea-
soning, a slight majority of the states allow the third party creditor
beneficiary to recover. Certain states allow a donee to recover, but
not a creditor; other states allow a creditor to recover, but deny
the right to a donee ; and a considerable number of the states allow
recovery in both cases.
Review Questions and Problems
1. What is an assignment? What is the one making the assignment
2. A rented some wagons to B and agreed to keep them in repair per-
sonally during the period of the lease. A subsequently sold the wagons
to C and assigned the lease. B refused to carry out the terms of the
lease, claiming that he was released because of the assignment. Is it
possible to assign such an agreement?
3. C, a contractor with wide experience in organizing and building
canning factories, contracted with A and B to form a corporation and
construct a canning factory. He assigned the contract to H, who knew
nothing about canning factories. Are A and B bound to permit H to
carry out the agreement?
4. May wages be assigned? Is it possible to assign wages to be earned
at certain employment, although no definite period for employment has
been agreed upon between employer and employee?
5. Suppose A contracts to build a house for B at a certain contract
price. A later assigns the contract to C, who agrees to complete the
building. What right has B against A in case C fails to build the house?
6. M y who held a $30,000 interest in the estate of an uncle, made an
assignment of one half of his interest to his wife, without receiving any
consideration therefor. Later he assigned all of his interest to the X
Company. The company immediately notified the executor of the estate
of the assignment. M's wife had failed to give such notice until some
time after the second assignment. Whose claim is superior?
7. A sold to the X Company his used automobile on sixty days' credit
for $400. He later purchased, on credit, $200 worth of automobile tires
from the X Company. Sometime after the last transaction he assigned
to C his $400 claim against the X Company and received payment in full
therefor. C immediately notified the X Company of the assignment.
The X Company refuses to pay more than $200. How much is C entitled
8. Y Company contracted with A and B, partners, whereby the latter
were to represent it in a certain territory in selling automobile tires and
accessories in commission for a period of three years. Shortly thereafter
the partnership was dissolved and the contract was assigned to B. Is Y
Company obligated to permit B to represent it in the area?
9. A gave a mortgage to B to secure a loan of $10,000. Later A sold
the property to C, who assumed and agreed to pay the mortgage debt.
Does this give to B an action against C if he fails to pay the debt at
maturity? Does the agreement release A from further liability?
10. In what cases may the assignee, who fails to recover from the third
party, recover from the assignor?
11. A assigned to B a portion of a note and mortgage. At the maturity
of the debt, the debtor was unable to pay and later became a bankrupt.
Will A be able to share with B in the amount realized on the debt or will
B receive his portion first?
12. A was engaged by a milk producers' association for one year to
pick up and deliver milk of the members to a certain dairy company, the
compensation being an agreed amount for each hundred pounds delivered.
A assigned the contract to B. Was the association bound to permit B
to pick up and deliver the milk?