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19. Whom can the bank sue for damages arising from the computer service company's defective performance?
The computer service company performed the monthly maintenance required under the service contract. Its performance was defective, however, and caused damage to the bank's operations.
A computer retail outlet contracted to service a bank's computer equipment for one year at a fixed monthly fee under a contract that was silent as to assignment or delegation by either party. Three months later, the retail outlet sold the service portion of its business to an experienced and well-financed computer service company. The only provision in the agreement between the retail outlet and the computer service company relating to the outlet's contract with the bank stated that the outlet «hereby assigns all of its computer service contracts to [the computer service company].»
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Whether a beneficiary is «intended» is determined by examining several factors, including whether: (i) the beneficiary could have reasonably relied on the fact that a purpose of the contract was to confer a right to him; (ii) performance is supposed to run directly from a contracting party to the third party, rather than from the promisor to the promissee and only indirectly benefitting the third party; (iii) again, if part of the overall objective of the parties to the contract was to benefit the third party.
When one person enters into a valid contract with a second person, this contract does not contemplate performance to or by a third party. However, if one of the parties seeks to transfer her rights and/or duties under the contract to a third party, this is called an «assignment.»
«Delegation» refers to duties under a contract, not rights. A party who wishes to have another person perform his duties under a contract delegates them. However, when the performance of a duty is delegated, the delegator remains liable for the duty. But the other party, the obligee, may expressly agree to accept the delegate's performance as a substitute for the delegator's. This is a «novation» and it does release the delegator from liability entirely. A novation requires explicit acceptance of the delegate's performance in place of the delegator and release of the delegator (rather than mere consent to delegation).
B is correct. The retail outlet effectively delegated to the computer service company the outlet's duty of performance owed to the bank under the original contract. However, absent a novation, which requires consent by the obligee (the bank) and release of liability for the delegator (the retail outlet), an effective delegation does not relieve the delegating party of its duty to the obligee. Thus, when the computer service company purchased the service contracts, the bank also became an intended third-party beneficiary of the computer service company's promise to the retail outlet. The computer service company expressly agreed with the retail outlet to perform the outlet's obligation to the bank, making the bank an intended beneficiary of that obligation. Thus, both the retail outlet and the computer service company remain liable to the bank.
A is incorrect. This is an incorrect statement of the facts. The computer service company expressly agreed to perform the retail outlet's service contract obligations, which included the bank's. The intention of the parties was clearly for the assignee/delegatee to give the benefit of performance directly to the bank, meaning the bank became an intended third-party beneficiary.
C is incorrect. This answer reaches the correct answer with the wrong reasoning. The bank can sue either the retail outlet or the computer service company, but not because of the rights of the retail outlet and the computer service company as to the bank's performance. Rather, it is because of the rights and duties owed to the bank. Assuming the assignment to the computer service company was effective, the right of the retail outlet to the bank's performance was extinguished. It is true that the bank can sue either the retail outlet or the computer service company, but this is because the bank has not released the outlet from liability and the bank is an intended beneficiary of the outlet's agreement with the computer service company.
D is incorrect. The competence and financial responsibility of the retail outlet's delegate, the computer service company, does not discharge the retail outlet's obligation to the bank. The retail outlet effectively delegated to the computer service company the outlet's duty of performance owed to the bank. However, absent a novation, an effective delegation does not relieve the delegating party (the retail outlet) of its duty to the obligee.