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Transcript of CHAPTER 14 INTERPRETATION OF THE CONTRACT AND THE RIGHTS AND OBLIGATIONS OF THIRD PERSONS DAVIDSON,...
CHAPTER 14CHAPTER 14INTERPRETATION OF THE INTERPRETATION OF THE
CONTRACTCONTRACT AND THE RIGHTS AND AND THE RIGHTS AND OBLIGATIONS OF THIRD OBLIGATIONS OF THIRD
PERSONSPERSONS
CHAPTER 14CHAPTER 14INTERPRETATION OF THE INTERPRETATION OF THE
CONTRACTCONTRACT AND THE RIGHTS AND AND THE RIGHTS AND OBLIGATIONS OF THIRD OBLIGATIONS OF THIRD
PERSONSPERSONS
DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles
in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)
2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
JUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONCourts must interpret what the contract
“really says.”Interpretation is used to determine the
meaning of the words and other manifestations of intent that the parties used.
Courts consider intentions of parties through a frame of reference known as “reasonable person.”
Courts must interpret what the contract “really says.”
Interpretation is used to determine the meaning of the words and other manifestations of intent that the parties used.
Courts consider intentions of parties through a frame of reference known as “reasonable person.”
3© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
JUDICIAL INTERPRETATIONJUDICIAL INTERPRETATION
Standards:– General usage: reasonable person who was
aware of all operative uses and who was acquainted with the circumstances involved would attach to the agreement.
– Limited usage: refers to the way words are interpreted in a specific locale.
Standards:– General usage: reasonable person who was
aware of all operative uses and who was acquainted with the circumstances involved would attach to the agreement.
– Limited usage: refers to the way words are interpreted in a specific locale.
4© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
JUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATION Rules of Interpretation.
– Courts attempt to enforce the intentions of the contracting parties.
– Circumstances surrounding a transaction should be taken into account.
– Courts examine the contract as a whole in determining the intentions.
– Ordinary and technical words will be given ordinary or technical meaning, unless circumstances indicate otherwise.
Rules of Interpretation.– Courts attempt to enforce the intentions of the
contracting parties.– Circumstances surrounding a transaction should
be taken into account.– Courts examine the contract as a whole in
determining the intentions.– Ordinary and technical words will be given
ordinary or technical meaning, unless circumstances indicate otherwise.
5© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
JUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATIONJUDICIAL INTERPRETATION
Conduct and Usage of Trade.– Course of conduct or the conduct of the parties
and usage of trade involved in the agreement will also influence interpretation.
Conduct and Usage of Trade.– Course of conduct or the conduct of the parties
and usage of trade involved in the agreement will also influence interpretation.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THE PAROL THE PAROL EVIDENCE RULEEVIDENCE RULE
THE PAROL THE PAROL EVIDENCE RULEEVIDENCE RULE
Parties have signed a complete, written contract, oral agreements made prior to or at the same time as the writing are not admissible.
An important part of substantive law.– Substantive law: portion of the law that
regulates rights, in contrast to law that grants remedies or enforces rights.
Parties have signed a complete, written contract, oral agreements made prior to or at the same time as the writing are not admissible.
An important part of substantive law.– Substantive law: portion of the law that
regulates rights, in contrast to law that grants remedies or enforces rights.
7© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THE PAROL EVIDENCE THE PAROL EVIDENCE RULERULE
Rules of Integration.– “Face-of-instrument” test, courts examine the
“four corners of the writing” to determine if parties intended for document to be integrated.
– “All relevant-evidence” test, courts review the document and extrinsic evidence to determine if parties intended integration.
– Integration or merger clause, parties declare that the writing is the full and final expression of all the terms in the agreement.
Rules of Integration.– “Face-of-instrument” test, courts examine the
“four corners of the writing” to determine if parties intended for document to be integrated.
– “All relevant-evidence” test, courts review the document and extrinsic evidence to determine if parties intended integration.
– Integration or merger clause, parties declare that the writing is the full and final expression of all the terms in the agreement.
8© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THE PAROL EVIDENCE THE PAROL EVIDENCE RULERULE
Total Integration.– Contracts representing the parties’ final and
complete statement of their agreement.
Partial Integration.– Contract that is intended to be the final
statement but is incomplete.
Total Integration.– Contracts representing the parties’ final and
complete statement of their agreement.
Partial Integration.– Contract that is intended to be the final
statement but is incomplete.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ADDITION OF THIRD ADDITION OF THIRD PARTIES TO THE PARTIES TO THE
CONTRACTCONTRACT
ADDITION OF THIRD ADDITION OF THIRD PARTIES TO THE PARTIES TO THE
CONTRACTCONTRACT Contract only affects the rights of parties who
directly enter into the agreement. Contracts may influence the rights of third parties. Third party is significant when the contract is
initially formed. Third party is added later to the contract. Third party has legal rights and can file a lawsuit
to enforce a contract.
Contract only affects the rights of parties who directly enter into the agreement.
Contracts may influence the rights of third parties. Third party is significant when the contract is
initially formed. Third party is added later to the contract. Third party has legal rights and can file a lawsuit
to enforce a contract.
10© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
Third party beneficiary contract typically involve agreement to perform an act for a third party, known as a beneficiary.
Two people who enter into a contract are called promisor (promises to perform) and promisee (whom the promise is made).
The additional person is not a party to the contract and the contract is valid.
Third party beneficiary contract typically involve agreement to perform an act for a third party, known as a beneficiary.
Two people who enter into a contract are called promisor (promises to perform) and promisee (whom the promise is made).
The additional person is not a party to the contract and the contract is valid.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
An Incidental Beneficiary.– Third party one who may receive a benefit
merely by accident or chance.– Has no right to enforce a contract as it was
never intended by maker that incidental beneficiary directly benefit from the agreement.
An Incidental Beneficiary.– Third party one who may receive a benefit
merely by accident or chance.– Has no right to enforce a contract as it was
never intended by maker that incidental beneficiary directly benefit from the agreement.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
An Intended Beneficiary.– Third party whom one or both of the
contracting parties clearly intended or meant to benefit from the agreement.
– Intended beneficiary has same right to enforce the contract as does the original contracting parties.
An Intended Beneficiary.– Third party whom one or both of the
contracting parties clearly intended or meant to benefit from the agreement.
– Intended beneficiary has same right to enforce the contract as does the original contracting parties.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
A Donee Beneficiary.– Third party intended beneficiary whose benefit
is intended as a gift from one of the contracting parties.
– In some states, donee’s interests are vested once contract is made.
– In other states the donee’s rights vest only if donee has accepted the contract, either expressly or by reliance.
A Donee Beneficiary.– Third party intended beneficiary whose benefit
is intended as a gift from one of the contracting parties.
– In some states, donee’s interests are vested once contract is made.
– In other states the donee’s rights vest only if donee has accepted the contract, either expressly or by reliance.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
A Creditor Beneficiary.– Third party intended beneficiary.– Benefit is intended as payment of a debt that is
owed by one of the contracting parties to the beneficiary.
– Not much difference between donee and creditor beneficiaries, and both have basically the same rights against the promisor.
A Creditor Beneficiary.– Third party intended beneficiary.– Benefit is intended as payment of a debt that is
owed by one of the contracting parties to the beneficiary.
– Not much difference between donee and creditor beneficiaries, and both have basically the same rights against the promisor.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
THIRD-PARTY BENEFICIARY THIRD-PARTY BENEFICIARY CONTRACTSCONTRACTS
Analysis of Third-Party Beneficiary Contracts.– Questions to determine potential third party:
1) Was the additional person involved from the beginning, or was that person added later?
2) Did the promise intend to benefit the third party, or was it an accident?
3) Was the promise making a gift to the third party, or was the promisee fulfilling a contract obligation to the third party?
Analysis of Third-Party Beneficiary Contracts.– Questions to determine potential third party:
1) Was the additional person involved from the beginning, or was that person added later?
2) Did the promise intend to benefit the third party, or was it an accident?
3) Was the promise making a gift to the third party, or was the promisee fulfilling a contract obligation to the third party?
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
If third party is granted contractual rights or duties after the contract was created.
Third party is not a beneficiary of the contract.Instead, relationship may be either an
assignment or delegation.Distinction between assignment and
delegation rests on definition of contractual rights and contractual duties.
If third party is granted contractual rights or duties after the contract was created.
Third party is not a beneficiary of the contract.Instead, relationship may be either an
assignment or delegation.Distinction between assignment and
delegation rests on definition of contractual rights and contractual duties.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
Contractual Rights are the parts of the contract a person is entitled to receive.
Examples include delivery of or payment for goods, payment for work completed, payments owed to car dealers, mortgage companies, finance companies, and collection agencies.
All are rights which are commonly assigned.
Contractual Rights are the parts of the contract a person is entitled to receive.
Examples include delivery of or payment for goods, payment for work completed, payments owed to car dealers, mortgage companies, finance companies, and collection agencies.
All are rights which are commonly assigned.
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DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
DEFINING ASSIGNMENTS DEFINING ASSIGNMENTS AND DELEGATIONSAND DELEGATIONS
Contractual Duties are the parts of the contract a person is obligated to give.
Examples include working an eight-hour day, paying 15% interest on credit card charges, and providing repair services.
All duties are commonly delegated.Rights can be assigned and duties can be
delegated.
Contractual Duties are the parts of the contract a person is obligated to give.
Examples include working an eight-hour day, paying 15% interest on credit card charges, and providing repair services.
All duties are commonly delegated.Rights can be assigned and duties can be
delegated.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ASSIGNMENTSASSIGNMENTSASSIGNMENTSASSIGNMENTSPerson transfers a contractual right to
another.Transferor called assignor, and recipient
called the assignee.Assignor loses contractual right to the
assignee when the right is transferred to another party.
Assignor’s right has been extinguished.
Person transfers a contractual right to another.
Transferor called assignor, and recipient called the assignee.
Assignor loses contractual right to the assignee when the right is transferred to another party.
Assignor’s right has been extinguished.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ASSIGNMENTSASSIGNMENTSASSIGNMENTSASSIGNMENTSFormalities Required for Assignments
– Assignor must indicate an intent to vest a present right in the contract to the assignee.
– A writing is not required unless Statute of Fraud applies.
– Consideration is not required to make a valid assignment.
Notice of the Assignment– Notice of assignment is not required.
Formalities Required for Assignments– Assignor must indicate an intent to vest a
present right in the contract to the assignee. – A writing is not required unless Statute of
Fraud applies. – Consideration is not required to make a valid
assignment.
Notice of the Assignment– Notice of assignment is not required.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ASSIGNMENTSASSIGNMENTSASSIGNMENTSASSIGNMENTSAssignable Rights
– Courts generally favor and enforce assignments.– Prevent the assignment, promissor must prove
one of the following: 1) Materially change the promissor’s duty. 2) Materially impair the chance of return
performance or reduce its value. 3) Materially increase the burden or risk imposed by
the contract.
Assignable Rights– Courts generally favor and enforce assignments.– Prevent the assignment, promissor must prove
one of the following: 1) Materially change the promissor’s duty. 2) Materially impair the chance of return
performance or reduce its value. 3) Materially increase the burden or risk imposed by
the contract.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ASSIGNMENTSASSIGNMENTSASSIGNMENTSASSIGNMENTSContract Clauses Restricting Assignments
– Strong contractual language restricting assignment typically enforced by courts.
Warranties Implied by the Assignor– Warranties include:
1) An assigned right is valid and actually exists. 2) The right is not subject to any defenses or
limitations not stated or apparent. 3) Assignor will not interfere to defeat or impair the
value of the assignment.
Contract Clauses Restricting Assignments– Strong contractual language restricting
assignment typically enforced by courts.Warranties Implied by the Assignor
– Warranties include: 1) An assigned right is valid and actually exists. 2) The right is not subject to any defenses or
limitations not stated or apparent. 3) Assignor will not interfere to defeat or impair the
value of the assignment.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ASSIGNMENTSASSIGNMENTSASSIGNMENTSASSIGNMENTSRights Created by Assignment.
– Assignee receives the same rights the assignor possessed.
Waiver of Defenses Clause.– Attempts to give the assignee better legal rights
than the assignor had. – Promisor agrees not to exert defenses.– Reduces the promisor’s bargaining power.
Rights Created by Assignment.– Assignee receives the same rights the assignor
possessed.
Waiver of Defenses Clause.– Attempts to give the assignee better legal rights
than the assignor had. – Promisor agrees not to exert defenses.– Reduces the promisor’s bargaining power.
24© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning
BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
DELEGATIONSDELEGATIONSDELEGATIONSDELEGATIONSTransfer of contractual duties to third party.Promisor (delegator) appoints a new party
(delegatee) to perform contractual duties.Relationship between delegator and
delegatee may be by contract or gift.– Relationship by gift is enforceable by
promissory estoppel: doctrine used to enforce a gift promise because of the justifiable reliance of the promise.
Transfer of contractual duties to third party.Promisor (delegator) appoints a new party
(delegatee) to perform contractual duties.Relationship between delegator and
delegatee may be by contract or gift.– Relationship by gift is enforceable by
promissory estoppel: doctrine used to enforce a gift promise because of the justifiable reliance of the promise.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
DELEGATIONSDELEGATIONSDELEGATIONSDELEGATIONS
Delegations do not occur unless the delegatee assumes the contract duties.
In general, the delegator remains liable for proper performance of delegated duty.
Whether delegatee can be held liable depends on if the delegatee contractually agreed to perform the duty.
Delegations do not occur unless the delegatee assumes the contract duties.
In general, the delegator remains liable for proper performance of delegated duty.
Whether delegatee can be held liable depends on if the delegatee contractually agreed to perform the duty.
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
ANALYSISANALYSIS To characterize an assignment or delegation ask:
– 1) Was additional person involved from the beginning or added later?
– 2) Did additional person undertake to perform a contract duty or become entitled to a contract right? Or both?
– 3) Did language of the original contract prevent this transfer to an additional person?
– 4) Did type of right or duties prevent this transfer to an additional person, because the transfer materially changes the rights or duties of a party?
– 5) Is this transfer forbidden by state statute?
To characterize an assignment or delegation ask:– 1) Was additional person involved from the beginning or added
later?– 2) Did additional person undertake to perform a contract duty or
become entitled to a contract right? Or both?– 3) Did language of the original contract prevent this transfer to
an additional person?– 4) Did type of right or duties prevent this transfer to an
additional person, because the transfer materially changes the rights or duties of a party?
– 5) Is this transfer forbidden by state statute?
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BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.
UNIFORM COMMERCIAL UNIFORM COMMERCIAL CODE PROVISIONSCODE PROVISIONS
UNIFORM COMMERCIAL UNIFORM COMMERCIAL CODE PROVISIONSCODE PROVISIONS
Businesspeople need to review its Businesspeople need to review its assignment and delegation provisions.assignment and delegation provisions.
Covers assignments and delegations for Covers assignments and delegations for contracts involving the sale of goods.contracts involving the sale of goods.