Assignment and delegation: putting a new party in

Portland, Maine, nineteen eighty eight. A man injured in a motorcycle accident hires two lawyers to sue. Then, in unrelated incidents, he dislocates his shoulder, twice. A doctor says he needs surgery. He cannot pay. So he signs a letter on the doctor's letterhead. I, Gary Jones, request that payment be made directly from settlement of a claim currently pending for an unrelated incident, to John Herzog, for treatment of a shoulder injury which occurred at a different time.
The doctor sends the letter to the lawyers. Their office tells him it is sufficient for the firm to pay his bills when the case ends. He operates, and treats the patient for a year. The motorcycle case settles for twenty thousand dollars. The client tells his lawyers not to pay the doctor. He will pay himself. The lawyers follow their client's instruction, send him ten thousand and twenty seven dollars, pay his other creditors, and tell the doctor.
The client's cheque to the doctor bounces. The doctor sues the lawyers.
So here is the question. The lawyers never promised the doctor anything. They held their client's money and did what their client said. Can they be liable to a man they had no contract with, for paying their own client? Think about it before I go on, because today the new party comes in from the other side. Not a beneficiary the parties intended, but a stranger to whom one party has handed over his rights, or his duties.
And now the question I keep asking. What exactly did these people promise each other? The lawyers promised the client to collect and pay over. The client promised the doctor his surgery would be paid from the settlement. The doctrines today are assignment, the transfer of a right, and delegation, the handing over of a duty. They are different things, and the cases are about what each does to the other party, who never agreed to any of it.
Here is the first line for the board. An assignment is an act or manifestation by the owner of a right, the assignor, indicating his intent to transfer that right to another person, the assignee. The assignor must make clear his intent to relinquish the right and must not retain any control over it or any power of revocation. The obligor need not accept the assignment.
Once he has notice of it, he must pay the assignee, and if he pays the assignor instead, he does so at his peril.
Second line. Ordinary rights, including future rights, are freely assignable unless the assignment would materially change the duty of the obligor, materially increase the burden or risk imposed upon the obligor by his contract, impair the obligor's chance of obtaining return performance, or materially reduce the value of the return performance to the obligor. A right to be paid can almost always be assigned. A right to receive personal services usually can too, because the obligor is paid, not served.
Third line. Duties are different. A party may perform his duty through a delegate unless otherwise agreed to or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. And delegation does not discharge. The delegating party remains liable if the delegate fails. Rare genius and extraordinary skill are not transferable, and contracts for their employment are therefore personal, and cannot be assigned.
Now the case. Herzog against Irace, Supreme Judicial Court of Maine, nineteen ninety one, Justice Brody. The lawyers said the letter was not an assignment at all. It said request. It named no sum. It did not give up control. The court disagreed. The June fourteenth letter gives no indication that Jones attempted to retain any control over the funds he assigned to Dr. Herzog.
Taken in context, the use of the word request did not give the court reason to question Jones's intent to complete the assignment.
Then the consequence for the obligor. Once the obligor has notice of the assignment, the fund is from that time forward impressed with a trust. It is impounded in the obligor's hands, and must be held by him not for the original creditor, the assignor, but for the substituted creditor, the assignee.
After receiving notice of the assignment, the obligor cannot lawfully pay the amount assigned either to the assignor or to his other creditors and if the obligor does make such a payment, he does so at his peril because the assignee may enforce his rights against the obligor directly.
The lawyers argued ethics. Their rules required them to pay the client what the client was entitled to receive. The court's answer was short. Because the client has the power to assign his right to funds held by his attorney, it follows that a valid assignment must be honored by the attorney in disbursing the funds on the client's behalf. The assignment does not create a conflict because the client is not entitled to receive funds once he has assigned them to a third party.
The lawyers paid the doctor, out of their own pockets, having already paid the client.
Now delegation, and pizza. Six pizza shops in the Maryland suburbs have cold drink vending machines installed by a small company, Virginia Coffee Service, under one year contracts that renew automatically. The company keeps the machines stocked and working and pays the shops thirty per cent of sales. At the end of nineteen sixty seven, Virginia sells its assets to the Macke Company, a large operator, and assigns the six contracts. The shops try to get out.
They had dealt with Macke before and preferred Virginia. Its president kept the machines working himself, paid commissions in cash, and let them keep keys to the machines.
The Court of Appeals of Maryland, in Macke Company against Pizza of Gaithersburg, nineteen seventy, held them to the contracts. In the absence of a contrary provision, and there was none here, rights and duties under an executory bilateral contract may be assigned and delegated, subject to the exception that duties under a contract to provide personal services may never be delegated, nor rights be assigned under a contract where delectus personae was an ingredient of the bargain. Choice of the person.
Was that in this bargain?
It was not. The agreements with Virginia were silent as to the details of the working arrangements and contained only a provision requiring Virginia to install the above listed equipment and maintain the equipment in good operating order and stocked with merchandise. The court quoted a California judge of a century before, on a contract to grade a street.
All painters do not paint portraits like Sir Joshua Reynolds, nor landscapes like Claude Lorraine, nor do all writers write dramas like Shakespeare or fiction like Dickens. Rare genius and extraordinary skill are not transferable, and contracts for their employment are therefore personal, and cannot be assigned.
But rare genius and extraordinary skill are not indispensable to the workmanlike digging down of a sand hill, and contracts for such work are not personal, and may be assigned. Nor to stocking a drinks machine. Modern authorities hold that, absent provision to the contrary, a duty may be delegated, as distinguished from a right which can be assigned, and that the promisee cannot rescind, if the quality of the performance remains materially the same.
The shops were in breach, and the case went back on damages.
Now the case on the other side of the line, and a split court. Texas, nineteen seventy nine. Nexxus, a new maker of hair care products sold only through salons, appoints Best Barber and Beauty Supply as its exclusive distributor for most of Texas, after its vice president spends several days with Best's president.
Two years later Best is bought by and merged into Sally Beauty, a distributor that is a wholly owned subsidiary of Alberto-Culver, a large manufacturer of hair care products and a competitor of Nexxus. Nexxus cancels. Sally Beauty sues for breach.
The Seventh Circuit, in Sally Beauty against Nexxus, nineteen eighty six, Judge Cudahy, first decided that a distributorship is a contract for goods, so the Code governs, and quoted section two two ten. A party may perform his duty through a delegate unless otherwise agreed to or unless the other party has a substantial interest in having his original promisor perform or control the acts required by the contract. Then it asked what Best had promised.
An exclusive dealer's duty of best efforts, implied by section two three oh six.
And it held that Nexxus had a substantial interest in not receiving that performance from a competitor's subsidiary. We hold merely that the duty of performance under an exclusive distributorship may not be delegated to a competitor in the market place, or the wholly-owned subsidiary of a competitor, without the obligee's consent. Nexxus should not be required to accept the best efforts of Sally Beauty when those efforts are subject to the control of Alberto-Culver.
It is entirely reasonable that Nexxus should conclude that this performance would be a different thing than what it had bargained for.
Judge Posner dissented, and his dissent is why this case is taught. My brethren have decided, with no better foundation than judicial intuition about what businessmen consider reasonable, that the Uniform Commercial Code gives a supplier an absolute right to cancel an exclusive-dealing contract if the dealer is acquired, directly or indirectly, by a competitor of the supplier. Sally Beauty carried products of many of Alberto-Culver's competitors. General Motors sells cars manufactured by a competitor, Isuzu.
What in law would be considered a fatal conflict of interest is in business a commonplace and legitimate practice.
His best line. Far from complaining about being squeezed out of the market by the acquisition, Nexxus is complaining in effect about Sally Beauty's refusal to boycott it. And his remedy, from Module Ten. At most Nexxus may have had grounds for insecurity regarding the performance by Sally Beauty of its obligation to use its best efforts to promote Nexxus products, but if so its remedy was not to cancel the contract but to demand assurances of due performance.
He would have sent the case to trial on whether the merger actually altered performance. He lost, two to one.
Last, the assignment of a right to receive personal services, which students confuse with delegating the duty to perform them. Washington, D.C., nineteen seventy eight. A television station is sold. Its news anchorman has a three year contract with the old owner, which is included in the bill of sale. He works for the new owner for over a year, is paid in full, and then resigns to join a competitor, saying his contract was personal to the old owner and could not be assigned.
He describes an almost family relationship with the old news director and producer, who left when the station was sold.
The District Court, in Evening News Association against Peterson, nineteen seventy nine, drew the distinction. The distinction between the assignment of a right to receive services and the obligation to provide them is critical in this proceeding. Duties under a personal services contract involving special skill or ability are generally not delegable by the one obligated to perform. The issue, however, is not whether the personal services Peterson is to perform are delegable but whether Post-Newsweek's right to receive them is assignable.
And it was. Contract rights as a general rule are assignable. The exceptions, a material change in the obligor's duty, burden or risk, or a relationship of special confidence, were not shown. Both before and after, he anchored the same news programs. The corporation's duties under the contract did not involve the rendition of personal services to defendant. Essentially they were to compensate him. Had he meant to work only with those two men, one would have expected the contract to reflect that condition.
The anchorman stayed.
Put the four cases side by side. A right to be paid from a settlement, assigned by a letter that said request. Valid, and the obligor who ignored it paid twice. A duty to stock a drinks machine, delegated to a bigger company. Valid, because the quality of performance stayed the same. A duty of best efforts under an exclusive distributorship, delegated by merger to a competitor's subsidiary. Not valid, because the obligee had a substantial interest in who performed.
A right to an anchorman's services, assigned with the station. Valid, because what the anchorman owed did not change. Rights move easily. Duties move unless the other side bargained for the person.
Now let's change one fact. The lawyers in Maine had paid the client before they ever heard of the letter to the doctor. Choose an answer before I go on.
Then the lawyers are safe and the doctor's claim is against the client alone. The Maine court's rule turned on notice. Once the obligor has notice of the assignment, the fund is impressed with a trust. Before notice, the obligor who pays the assignor is discharged, because he cannot honour a transfer he does not know about. The assignee's protection is to notify the obligor at once. The doctor did, which is why he won.
Change one fact again. The pizza shops' contracts had said, service to be performed personally by the president of Virginia Coffee Service, whose attention to the machines is a material inducement to this agreement. Choose.
Now the shops may refuse Macke. The Maryland court held for Macke because the agreements were silent as to the details of the working arrangements. Words like these make the person part of the bargain, delectus personae, and a duty so described may not be delegated without consent. Virginia could still assign its right to the commissions. It could not put another company's serviceman in its president's place.
Change one fact a third time. Sally Beauty had been an independent distributor with no manufacturer parent, and Nexxus had simply preferred the old president of Best. Choose.
Then the majority's per se rule does not apply, and the case is Macke, not Sally Beauty. The Seventh Circuit was careful. It refused to affirm on the district court's theory that a distributorship is a personal services contract, because whether the parties relied on a particular person is a question of fact, and the affidavits conflicted. Without the competitor problem, Nexxus would have to prove at trial that Best's president was bargained for. Mere preference for the old management is not enough.
Here is what people get wrong here, and why it is tempting. The first mistake is treating assignment and delegation as the same thing. A right moves freely. A duty moves only if the obligee has no substantial interest in who performs, and the delegating party stays liable either way. The second mistake is thinking a personal services contract cannot be assigned at all. The right to the services can be. It is the duty to perform them that is personal.
The third mistake is the obligor's. Paying the original creditor after notice of an assignment is paying at your peril. Read the letter, even if it says request.
Here is the rule, in one breath. A right under a contract may be assigned by a manifestation of intent to transfer it without retained control, and an obligor with notice must perform to the assignee, unless the assignment would materially change his duty, burden or risk, while a duty may be delegated unless the other party has a substantial interest in performance by the original promisor, who remains liable in any event.
The right to receive personal services is assignable; the duty to render them is not. Now, five questions.