3rd Party Problems

Question 1

T/F: An owner who entrusts goods to a merchant who deals in goods of the kind has no right against a BFP.

Answer 1

True. The owner should go for the merchant for damages, not the BFP.

Question 2

What is a third-party beneficiary?

Answer 2

When two people enter a contract intending to benefit a third-party, it creates a third-party (intended) beneficiary.

Question 3

What are the rights of an intended beneficiary?

Answer 3

An intended beneficiary is who will benefit from a contract that two other people entered. This person is not a party to the contract, but can sue the party who promised to perform but breached the contract (promisor) and must consent to contract modification or rescission if her rights have vested in the contract.

Question 4

The intended beneficiary learns of the contract and invites her friend. Can the two original contractors still modify or rescind their contract?

Answer 4

No, the original contractors cannot modify or rescind their contract without the intended beneficiary’s consent. The intended beneficiary’s rights have vested unless the contract has contrary language.

Question 5

D pays L to sing for M on her birthday. Can M recover from L for breach if L does not perform as promised?

Answer 5

Yes, M - the intended beneficiary - can sue the breaking promisor (L). A promisor is the party who promises to perform for the third-party beneficiary, M.

Question 6

D pays L to sing for M on her birthday. What if D’s check to L had bounced?

Answer 6

If D’s check bounced, M cannot sue L for not performing. Both the third-party beneficiary and the promisee (D), who secures the promise, do not have rights.

Question 7

D pays L to sing for M on her birthday. M invited I to hear L sing, but L did not show up. Can I recover from L for breach of contract?

Answer 7

I cannot sue L for breach of contract because I is an incidental beneficiary.

Question 8

D pays L to sing for M on her birthday. Can D recover damages from L if she doesn’t sing for M as promised?

Answer 8

Yes, D can recover.

Question 9

T/F: Contractual duties may be delegated without the consent of the person to whom performance is owed (the “obligee”).

Answer 9

True.

Question 10

What is the effect if a contract prohibits delegation?

Answer 10

If a contract prohibits delegation, then delegation is not allowed.

Question 11

What is the effect if the contract prohibits assignment?

Answer 11

If a contract prohibits assignment, then there is no assignment AND no delegation.

Question 12

O contracts to mow H’s lawn. O delegates the duty to G, who screws it up. Can H still sue O for breach of contract?

Can H sue G for breach of contract?

Answer 12

Yes, H can sue O for breach of contract. The delegating party (O) remains liable.

H can only sue G for breach of contract if G got consideration from O for mowing the land. If G got consideration, G can be liable.

Question 13

What is an assignment of rights?

Answer 13

An assignment of rights is when two people make a contract. Later, the assignor transfers his rights to a third party (assignee). The party who owes the duty is the obligor.

*Compare with third-party beneficiary: here, time passes. When it’s a third-party beneficiary, all the people are present at the start.

Question 14

January 1: B assigns the right to payment from City to R as a gift.

February 2: B promises to assign the same right to C.

March 3: B sells the same right to D, shortly before D killed himself.

April 4: B sells the same right to L.

On April 4, the City should pay who?

Answer 14

The City should pay D.

January 1: valid assignment

February 2: this is an invalid assignment because it is not present - a promise to assign isn’t sufficient

March 3: this is a valid assignment and beats the gift assignment because D paid (consideration here)

April 4: a later assignee for consideration prevails if he did not know of the earlier assignment is the first to get payment or a judgment. L didn’t get the payment or judgment, so D wins over L.

Question 15

B assigns the right to payment from City to R as a gift. B later assigns the same right to charity. Who should the City make payment?

Answer 15

The charity should get the payment. The last gratuitous assignee (charity) prevails over earlier gratuitous assignees because a later gift assignment revokes an earlier one.

Question 16

T/F: If the 3rd party beneficiary is bringing suit to enforce the contract, the suit vests his rights.

Answer 16

True. A 3rd party beneficiary vests when he (i) manifests assent to a promise in the manner requested by the parties; (ii) brings a suit to enforce the promise; or (iii) materially changes position in justifiable reliance on the promise. Prior to vesting, the promisor and promisee are free to modify or rescind the beneficiary’s rights under the contract.

Question 17

When does a third-party beneficiary vest?

Answer 17

A 3rd party beneficiary vests when he:

(i) manifests assent to a promise in the manner requested by the parties;
(ii) brings a suit to enforce the promise; or
(iii) materially changes position in justifiable reliance on the promise.

Prior to vesting, the promisor and promisee are free to modify or rescind the beneficiary’s rights under the contract.

Question 18

A gourmet food company entered into a long-term agreement with an airline, under which the food company would supply the airline with 5 million gourmet dinners over a 5-year period at $2/unit. The food company insisted as a term of the contract that the airline agree to buy a microwave supplier and to install the microwaves in its planes. The contract between the food company and the airline had a clause that authorized “oral modifications by the contracting parties.”

One month after the contract was signed but before any dinners were delivered, the airline informed the food company that it would have difficulty with the provision requiring the purchase of the supplier’s microwaves. Subsequent negotiations between the food company and the airline led to an oral agreement to increase the price per dinner to $2.08/unit and eliminate the supplier’s microwave requirement.

If the supplier sues the airline for enforcement of the contract, what will be the most likely result?

A - Judgment for the supplier because under the UCC oral modification is not valid and the supplier’s rights vested when it brought suit

B - Judgment for the airline because the contract was between the airline and the food company, and by its terms an oral modification was permissible

C - Judgment for the airline because the supplier’s rights had not vested when the modification took place

Answer 18

C. The airline will prevail because the supplier’s rights had not vested at the time of the modification. The rights of the 3rd party beneficiary do not vest until (i) it manifests assent in a manner invited or requested by parties, (ii) learns of the contract and detrimentally relies on it, or (iii) brings a lawsuit to enforce its rights. Until a 3rd party’s rights have vested, a modification of the contract can take place without the consent of the 3rd party.

3rd party being aware of the contract and being pleased with it =/= vested

Question 19

A grandfather told his granddaughter that she could have his house because he was moving to a retirement home, and entered into a valid contract to convey it to her. He promised her that he would have another wing added to the house in the back before turning it over to her, and entered into a written contract with a builder to construct the addition for his granddaughter. Before the grandfather had entered into the contract with the builder, the granddaughter had paid $5,000 for a 60-day option to purchase another house because she was not sure she would like the addition. However, when her grandfather showed her the plans for his house prepared by the builder, she liked it very much and decided to let her option to purchase the other house lapse. Shortly thereafter, the local zoning authority increased the minimum lot line setbacks, making it impracticable to put the addition on the back of the house. The builder offered to put an addition above the existing floor rather than in the back, and the grandfather agreed. After the granddaughter’s option had lapsed, she discovered that the addition was now going up rather than in the back. She angrily demanded that the builder either build the addition according to the original specifications that she approved or pay her damages. The builder refused and the granddaughter filed suit.

Who is more likely to prevail?

Answer 19

The builder will prevail because he may raise all defenses that he had against the grandfather against the granddaughter. The granddaughter is an intended third-party beneficiary of the contract between the grandfather and the builder. Generally, a third-party beneficiary has rights under the contract as soon as she does something to vest her rights (manifests assent to the promise, brings suit to enforce the promise, or materially changes position by justifiably relying on the promise). Here, the granddaughter materially changed her position by justifiably allowing her option on the other house to lapse.

Generally, once the third-party beneficiary’s rights have vested, the original contracting parties may not modify the contract without the assent of the third-party beneficiary. However, the third-party beneficiary is subject to any defenses that the promisor could have used against the original promisee, and here the builder could have used the defense of impracticability against the promisee. Therefore, he could use that defense against the granddaughter to avoid having to pay damages for not building the house as he originally agreed.

Question 20

A homeowner and a local builder entered into a written contract that called for the builder to build a second story onto the top of the homeowner’s one-story residence. When scheduling conflicts arose, the builder asked the homeowner if they could substitute his buddy, an out-of-town builder who had comparable experience and skills, to perform the local builder’s part of the contract. All of the parties agreed to the substitution. Unfortunately, the out-of-town builder made a major blunder that will be quite expensive to correct.

Is the local builder liable to the homeowner for the cost of correcting the defect?

A - Yes, because the substitution in and of itself does not relieve the local builder of liability on the underlying contract.

B - Yes, because the local builder did not give any consideration on which to base a release.

C - No, because the local builder transferred his duties to the out-of-town builder.

D - No, because the local builder was discharged through a novation

Answer 20

The agreement among all of the parties to substitute the out-of-town builder for the local builder operates as a novation which immediately discharged the local builder from any duties he had under the original contract. A novation arises when the parties enter into an agreement to substitute a third party for one of the parties in a contract, releasing the party who was substituted. All parties must agree to the substitution. Here, the facts say that all of the parties agreed that the out-of-town builder would substitute for the local builder. Thus, there was a novation and the local builder was released immediately and is not liable for the out-of-town builder’s blunder.

(A) states incorrectly that the substitution does not relieve the local builder of liability. If the parties had not all agreed to substitute the out-of-town builder for the local builder, or the facts said that there was merely an assignment of rights and delegation of duties, (A) would reflect the correct result. However, where the parties agree to substitute a new party for an old party, there is a novation that does release the old party.