Third Party Rights

Published: 2021-06-29 06:57:59
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Category: Business

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Third Party Rights I.  Introductory comments Third parties generally have no rights or liabilities from agreements that contracting parties create. However, important exceptions exist: third party rights are particularly important in contracts for companies involved in finance, banking, retailing and wholesaling. Those businesses and others would be severely limited without third party rights. The success of the nation’s economy depends on recognizing and protecting third party rights. II. Assignment of Rights and Delegation of DutiesA. Assignment of Rights A party can assign or transfer their contractual rights to third parties. For example, Kirk borrows $250,000 from First Finance to finance his expanding Specialty Music Company. He signs a note stipulating that he’ll make monthly payments for the next ten years. First Finance specializes in originating loans and assigns its right to Kirk’s payments to Credit USA, a large financial institution that specializes in managing installment loans.  First Finance, the assignor, assigns the note to Credit USA, the assignee. The assignment gives Credit USA the rights to Kirk’s monthly payments. First Finance is out of the picture. However, Kirk isn’t: as the obligor he’s obligated to make the payments to Credit USA. If Kirk refuses to pay Credit USA, it can enforce its rights against him since it has the same legal rights to payment that First Finance enjoyed: Credit stands in its stead. Some finance companies arrange loans, referred to as mortgages for homebuyers and installment loans for cars, boat and airplane buyers, among other major purchases. Many assign their rights to payments to larger finance companies. Homeowners who keep their home for twenty years might have their loan assigned to three, four and even five different companies. The right to the homeowner’s payments attends each assignment. Millions of dollars change hands daily by assignment or transfer of rights.[As an aside: Kirk signed a promissory note in his agreement with First Finance, which contained his promise to pay a specific amount at a specific rate of interest. A major difference exists between assigning contractual rights and transferring a promissory note by negotiation, but for purposes of this course, that difference is not at issue. Promissory notes are the subject matter in the chapter on commercial paper.] B. Delegation of Duties        Parties to a contract can delegate their duties to a third party. As it turns out, Kirk lost interest in his music business two years after securing his loan and jumped at the chance to work for a company that was developing a new line of Little League baseball bats. Fortuitously, Kirk’s new job opened the way for Gert, his assistant manager to realize her dream of buying his business. The two sealed the deal when Kirk delegated his duty to make monthly payments to Gert, a delegation that she welcomed. C. Assignment and Delegation Compared        In making the delegation, Kirk, the delegator transferred his contractual duties to Gert, the delegatee. As a result of First Finance assigning its right to Kirk’s payments to Credit USA and of Kirk’s delegating his duty to make payments, both of the parties to the original contract are out of the picture, with one difference. First Finance is completely out of the picture; once it assigned its right to payment, it extinguished its right to payments. However, Kirk will not be out of the picture until the debt owed Credit USA is fully paid.

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