Third-party beneficiaries, delegation and assignment under the UCC, and the scope of Article 2

Black-letter propositions

1. 01

   Unless the context otherwise requires, Article 2 applies to transactions in goods and does not apply to a transaction that, though in the form of a sale, is intended to operate only as a security transaction.

2. 02

   Goods means all things that are movable at the time of identification to the contract for sale other than the money in which the price is paid, investment securities, and things in action, and includes growing crops and the unborn young of animals.

3. 03

   A party may perform his duty through a delegate unless otherwise agreed or unless the other party has a substantial interest in having the original promisor perform or control the acts required, and delegation does not relieve the delegating party of any duty to perform or any liability for breach.

4. 04

   Unless otherwise agreed, all rights of a seller or buyer can be assigned except where the assignment would materially change the duty of the other party, materially increase the burden or risk imposed on him, or materially impair his chance of obtaining return performance.

5. 05

   A prohibition of assignment of the contract is construed, unless the circumstances indicate otherwise, as barring only the delegation to the assignee of the assignor's performance.

6. 06

   An assignment of the contract or of all rights under the contract is an assignment of rights and, unless the language or circumstances indicate otherwise, a delegation of the assignor's duties, and the assignee's acceptance is a promise to perform them that either the assignor or the other party can enforce.

7. 07

   The other party may treat an assignment that delegates performance as creating reasonable grounds for insecurity and may demand assurances from the assignee.

8. 08

   A seller's warranty, express or implied, extends under the state's chosen alternative to designated third parties, such as members of the buyer's family or household or guests in his home, or to any person reasonably expected to use, consume, or be affected by the goods, and the seller may not exclude or limit this extension.

9. 09

   A taxpayer or resident generally cannot sue a company for breach of its contract with a municipality to supply water, because for omissions and breaches of contract the company is responsible only to the municipality.

10. 10

    Third parties cannot sue as beneficiaries of a government agreement that simply incorporates statutory obligations, because such a suit is in essence a suit to enforce the statute, which the statute assigns to the agency.

Use this attack sequence under time

Common wrong turns

• Delegating performance does not relieve the delegating party of liability.
• A clause barring assignment of the contract usually bars only delegation.
• A sale of shares or of a right to payment is a sale of investment securities or things in action, which are not goods.
• A beneficiary of a government contract that merely restates a statute usually cannot sue for breach.

Worked example

A widget supplier agrees to sell 500 widgets and later assigns all of its rights under the contract to a distributor. The buyer says it never agreed to have the distributor perform.

Practice this topic

Scope of Article 2

Section 2-102 provides that, unless the context otherwise requires, Article 2 applies to transactions in goods, and it does not apply to a transaction that, although in the form of an unconditional contract to sell or present sale, is intended to operate only as a security transaction. Section 2-105 defines goods as all things that are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities, and things in action, and includes the unborn young of animals and growing crops.

Delegation and assignment

Section 2-210 provides that a party may perform through a delegate unless otherwise agreed or unless the other party has a substantial interest in having his original promisor perform or control the acts, that no delegation relieves the delegating party of duty or liability, that rights can be assigned unless the assignment would materially change the other party's duty, materially increase the burden or risk, or materially impair his chance of obtaining return performance, and that a prohibition of assignment of the contract is construed as barring only delegation.

Section 2-210(4) and (5) provide that an assignment of the contract or of all rights under it is an assignment of rights and, unless the language or circumstances indicate otherwise, a delegation of duties whose acceptance is a promise by the assignee that either the assignor or the other party can enforce, and that the other party may treat an assignment that delegates performance as creating reasonable grounds for insecurity and demand assurances.

Third-party beneficiaries

Section 2-318 has three alternatives on the reach of a seller's express or implied warranty: Alternative A extends to natural persons in the family or household of the buyer or guests in his home who are injured in person, Alternative B extends to natural persons who may reasonably be expected to use, consume, or be affected by the goods and are injured in person, and Alternative C extends to any person who may reasonably be expected to use, consume, or be affected and is injured, and under all three the seller may not exclude or limit the operation of the section as to injury to the person of an individual.

German Alliance Insurance Co. v. Home Water Supply Co. held that a taxpayer has no claim against a water company for damages resulting from its failure to perform its contract with the municipality, because for omissions and breaches of contract the company is responsible to the municipality alone. Astra USA v. Santa Clara County held that entities could not sue as third-party beneficiaries of agreements between drug manufacturers and a federal agency, because the agreements simply incorporated statutory obligations and a suit to enforce them is in essence a suit to enforce the statute.

Frequently asked questions