3rd Party Beneficiaries

Question 1

What is the critical issue in third-party beneficiary law?

Answer 1

Whether the third-party beneficiary has standing to enforce the contract (can they sue)

Question 2

When is there a creditor beneficiary?

Answer 2

When a promisee seeks performance from the promisor that will satisfy an obligation owed to a third party.

Question 3

When is there a donee beneficiary?

Answer 3

When a promisee seeks performance from the promisor in order to make a gift of it to the third party

Question 4

When is there an incidental beneficiary?

Answer 4

When a third party will benefit from a party’s performance as a practical matter but are not a creditor, donee, or intended beneficiaries

Question 5

What are the incidental beneficiary’s rights under the contract?

Answer 5

They do not have any rights to seek enforcement of the contract.

Question 6

When is there an intended beneficiary?

Answer 6

When a contracting party intends to benefit the third party

Question 7

What are the intended beneficiary’s rights under a contract against the promisor?

Answer 7

They have a right to secure the enforcement of an agreement from a breaching promisor (the performer)

Question 8

What are the intended beneficiary’s rights under a contract against the promisee?

Answer 8

A third-party beneficiary will only have rights against the promisee if there is a prior obligation between the promisee and the third party beneficiary.

Question 9

The parties to a contract may rescind a third-party beneficiary provision without the beneficiary’s consent; what is the exception to this rule?

Answer 9

The intended beneficiary’s rights under the contract have vested

Question 10

When does an intended beneficiary’s interest vest?

Answer 10

1. The beneficiary brings suit on the matter
2. The beneficiary changes his position in justifiable reliance on the contract
3. The beneficiary manifests assent to the contract at the request of the promisor or promisee
4. The rights of the beneficiary have vested under the express terms of the contract
   * More Info:* Vesting of Interest

Question 11

What defenses are available to promisors in third party actions?

Answer 11

Any valid defenses the promisor has against the promisee are also effective against the third party beneficiary.

Question 12

What defenses are unavailable to promisors in third party actions?

Answer 12

The promisor may not assert defenses based upon separate transactions with the promisee.

Question 13

What is the promisee’s right against the promisor in third party beneficiary situations?

What about if the beneficiary is a donee beneficiary?

What about if the beneficiary is a creditor beneficiary?

Answer 13

1) When the promisor does not perform, the promisee has a claim for breach of contract against the promisor.
2) If the promisor’s performance is intended to benefit a donee beneficiary: then the promisee has suffered no economic loss and cannot obtain damages but specific performance may be appropriate.
3. If the promisor’s performance is intended to benefit a creditor beneficiary, then the promisee may seek enforcement of the promisor’s obligation.

Question 14

What is an assignment?

Answer 14

A transfer of a right to receive a performance under a contract.

More Info: Assignment

Question 15

What is required to make an effective assignment of a contract right?

Answer 15

1. The owner of right manifests an intention to transfer

And

2. The owner of right makes a present transfer of an existing right

Question 16

What contract rights are not assignable?

Answer 16

1) Assignments that would materially alter the risks or the obligations of the other party
2) Assignments when the obligor has a personal interest in rendering the performance to the obligee and not a third party
3) Assignments that would violate applicable law or public policy
4) Assignment prohibited by contract

Question 17

What happens when an anti-assignment clause is breached?

Answer 17

There is a breach of contract by the assignor but it is not a basis for nullifying the obligee’s rights.

Question 18

What are the legal effects of assignment of value between the assignee and the obligor or between the assignor and the assignee?

Answer 18

1) Between the assignee and the obligor, the assignment is valid against the obligor
2) Between the assignor and the assignee, it cannot be revoked by the assignor

Question 19

What are the effects of gratuitous assignments between the assignee and the obligor and between the assignor and the assignee?

Answer 19

1) The assignment is valid against the obligor, who cannot claim lack of consideration as a defense.

And

2. Under the law of gifts, an executory gift is revocable but an executed gift is not.

Question 20

What are the rights of an assignee against the obligor?

Answer 20

The assignee has whatever rights to the contract his assignor had. The assignee steps into the shoes of the assignor and is subject to whatever defenses the obligor has against the assignor.

Question 21

What is the obligor’s payment obligation in the event of an assignment?

Answer 21

The obligor’s payment to the assignor is a defense to non-payment, unless the obligor has been notified that the payments are now owed to the assignee.

Question 22

An assignor who assigns or purports to make an assignment for value impliedly warrants what two things to the assignee?

Answer 22

1) He will do nothing to defeat the value of the assignment and has no knowledge of any fact that would do so.

And

2. His right to assign actually exists and is subject to no defenses.

Question 23

When does a delegation occur?

Answer 23

When a third party agrees to satisfy a performance obligation owed by one of the parties to a contract

More Info: Delegation

Question 24

Does a delegation relieve a delegator from his obligations?

Answer 24

Absent novation (when all parties agree to a new contract to replace the old one), a delegation does not relieve a delegator from his obligation. The obligee can still sue the delegator.

Question 25

What is the liability of the delegatee to the delegator and to the obligee?

Answer 25

If the delegation was for consideration, then:

1) The delegator has a breach of contract action against the non-performing delegatee

And

2. The obligee can sue the delegatee as a third-party intended beneficiary

Question 26

What duties are delegable?

Answer 26

Generally all contractual duties are delegable.

Question 27

What duties are not delegable?

Answer 27

1) When the performance in question is for personal services (services expertly unique to that person)

And

2) When the contract prohibits delegation
* More Info:* Non-Delegable Duties

Question 28

Who is an intended beneficiary?

Answer 28

A creditor or donee

Generally, they will not be anyone else.