Third Party Beneficiary Clause in Delegation and Assignment

Key Takeaways

• A third party beneficiary clause identifies whether a person or entity not party to a contract has enforceable rights under that agreement.
• Express third-party beneficiaries are named in the contract and may enforce provisions directly.
• Incidental beneficiaries do not have rights under the agreement, even if they benefit from it.
• These clauses help limit or extend enforceability, especially in the context of assignments or delegations.
• Contracts may include anti-assignment or anti-delegation clauses, sometimes requiring third-party consent.
• Consent of the third party beneficiary may be required for amendments affecting their rights.

Delegation vs. assignment: What's the difference? Delegation occurs when a party to a contract transfers the authority and responsibility for fulfilling a particular contractual duty to another party. Delegation is not concerned with the transfer of contractual rights. An assignment occurs when the original party to a contract transfers the rights and duties of the contract to another party.

Delegation and Assignment Overview

The clause in an agreement that indicates a party's ability to designate their duties or rights is known as an assignment and delegation provision. This provision is most commonly seen in the general or miscellaneous sections of a contract. However, it should not be considered standard contract language that never changes.

A clause of transferability for an assignment should be carefully considered and precisely drafted. Please note that a party assigns their rights and delegates their duties.

Unless the contract states it, consent is not needed for assignment or delegation. Make sure to review the language in the contract to figure out if the other party's approval is needed before proceeding with assignment rights or delegation duties. The rules governing assignment and delegation will vary from state to state. Attorneys with experience in business contracts or contract law may be able to assist in determining whether an assignment or delegation is allowed in your current contract.

Understanding the Third Party Beneficiary Clause

A third party beneficiary clause is a provision in a contract that clarifies whether someone who is not a direct party to the contract—known as a third party—has legal standing to enforce its terms. These clauses serve a crucial function in delineating the rights of outside individuals or organizations, particularly when contract rights or duties are assigned or delegated.

There are typically two types of third party beneficiaries:

• Intended beneficiaries: These are explicitly named or clearly identifiable individuals or entities who the contract is designed to benefit. They may have the legal right to enforce the contract.
• Incidental beneficiaries: These parties might benefit from the contract indirectly but were not intended to be beneficiaries. They do not have any enforceable rights under the agreement.

A well-drafted third party beneficiary clause will often include:

• Designation of the third party who has enforceable rights
• Conditions under which those rights are granted
• Limitations on the ability to amend or terminate the agreement without that party’s consent

For instance, a typical clause might read:

"Except as otherwise provided, this Agreement is intended for the sole benefit of the Parties hereto and their permitted successors and assigns and is not for the benefit of any third party."

However, in contracts where the intention is to grant enforcement rights to a third party, the clause must clearly state so. For example:

"The Third Party Beneficiary shall be entitled to rely upon and enforce the provisions of this Agreement. The Agreement shall not be amended or terminated without their written consent."

Such clauses are especially relevant in complex commercial contracts, loan agreements, or service contracts where other entities—such as affiliates, subcontractors, or lenders—might need protections or guarantees provided by the agreement.

Assignment

The process of transferring accountability and responsibility is referred to as an assignment. There is no need to get a third party to approve a contact in an assignment. The rights within a contract are related to an assignment. All contracts contain rights, which are held by one of the involved parties.

A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee. 

For example, assume you're a plumber and have contracted with a homeowner to fix their plumbing for $100. As the plumber, you have the right to collect these funds from the homeowner. You also have the ability to transfer this right to collect to another party, which means you may assign contract rights. In an assignment, you may transfer the rights but not the obligations.

Remember, through the process of assignment, it is possible to transfer the benefits but not the obligations. You can prohibit an assignment from occurring by explicitly stating this in the contract.

The outcome from an assignment includes:

1. The assignee having the ability to sue the obligor. The obligor is the party that's culpable for carrying out the duties included in the contract.
2. The obligor has the same safeguards against the assignor as those with the assignee.
3. The obligor is required to pay the assignor until the assignment is known by the assignor.
4. Any modification agreements between the assignor and obligor are effective and in place until the obligor is notified of changes.
   • Determine if assignments should be allowed.
   • Determine whether the entire contract or only specific sections should be open for assignment.
   • When an assignment is permitted, specifically state what duties and rights are eligible to be assigned.
   • Will the assigning party need to get approval from the non-assigning party, or will a notice be sufficient?
   • State the resolution process for assignments that have occurred but are prohibited by an anti-assignment clause.
   • State the process for handling changes in control, such as:
     • Divested entities
     • Acquisitions
     • Mergers

Assignment and Third Party Beneficiaries

Assignments often raise questions about whether the assignee (the new party receiving the rights) is a third party beneficiary or merely steps into the shoes of the original party.

In most cases:

• An assignee is not a third party beneficiary. Instead, they gain the contractual rights previously held by the assignor.
• A third party beneficiary, on the other hand, is not assigned a right—they are granted one by the original contract between other parties.

A contract might include language that either prohibits or permits assignments that benefit a third party, with or without their consent. If a third party beneficiary clause is present, and the rights of that beneficiary are tied to the performance of the contract, then the third party may have to approve any assignment that alters their benefit or standing under the agreement.

Also, when drafting or reviewing an assignment provision, consider if the agreement:

• Restricts assignment unless the third party beneficiary consents
• Allows enforcement by the third party if the assignment affects their rights
• Terminates third party beneficiary rights upon assignment or novation

These considerations are crucial to prevent unintended consequences during the transfer of rights.

When Is Assignment Permissible?

Generally, parties are able to assign their rights, but some exceptions still apply:

• The assignment may not increase the obligations of another party
• Parties do have the ability to state in the contract that assignments are not allowed

Delegation

In contract law, delegation is the act of giving another party the responsibility of carrying out the performance agreed to in a contract. The party receiving the responsibility must accept the responsibility and authority. Some of the consequences of a delegation include:

• The liability is transferred to the delegator from the delegatee
• The delegatee is only liable to the obligee if the delegatee receives consideration from the delegator
  • Please note, the obligee is the party to whom an obligation is owed.

Delegation and Third Party Beneficiary Implications

Delegation of contractual duties does not inherently create or affect a third party beneficiary relationship, but it can intersect with such clauses in key ways.

• If a contract includes a third party beneficiary clause, the third party may have a right to object to a delegation that would impact their expected benefit.
• A delegation of duties to a subcontractor, for instance, might not relieve the original party from liability, but if the third party beneficiary clause states otherwise, this may change.

Key legal considerations include:

• Whether the delegatee’s performance will still fulfill the benefit expected by the third party
• Whether the third party’s rights are conditioned on performance by a specific party
• Whether the third party's consent is required before the delegation becomes effective

In some cases, third party beneficiaries may be explicitly empowered to enforce performance obligations under the original contract and resist delegation if it affects their rights. This is particularly relevant in high-stakes contracts involving financial institutions, health services, or infrastructure development where performance quality is critical.

Frequently Asked Questions

1. What is a third party beneficiary clause in a contract?
   A third party beneficiary clause states whether someone not directly involved in a contract has the right to enforce its terms or benefits.
2. How does a third party beneficiary differ from an assignee?
   A third party beneficiary gains rights directly from the contract's original intent, while an assignee receives rights transferred from another party.
3. Can a contract be assigned or delegated without affecting a third party beneficiary?
   Yes, but if the assignment or delegation changes the third party’s expected benefit, their consent may be required depending on the clause language.
4. Are third party beneficiary rights automatic?
   No, they must be expressly stated in the contract. Incidental beneficiaries do not have enforceable rights.
5. Can a third party beneficiary clause prevent contract modification?
   Yes, some clauses restrict amendments or termination unless the third party beneficiary consents, especially if their rights are impacted.

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