Chapter 17: Third Party Rights

Question 1

Privity of Contract:

Answer 1

a contract is a private agreement between the parties who have entered into it, and traditionally, these parties alone have rights and liabilities under the contract.

Question 2

Exceptions to the privity of contract:

Answer 2

1. Privity of contract is not required to recover damages under product liability laws.
2. The assignment or delegation of contractual rights/duties.
3. A third party beneficiary contract: where the parties intend to benefit a third party.

Question 3

Assignment:

Answer 3

the act of transferring all or part of one’s rights arising under a contract.

Question 4

Delegation:

Answer 4

the transfer of a contractual duty to a third party. The party delegating the duty (the delgator) to the third party (the delegatee) is still obligated to perform on the contract should the delegatee fail to perform.

Question 5

What rights does the assignor retain if the rights under a contract are assigned unconditionally.

Answer 5

The assignor’s rights are extinguished, but the assignee only retains the rights the assignor originally had. The assignee then has a right to demand performance from the original party to the contract.

Question 6

What are the requirements in form of the assignment?

Answer 6

It may be written or oral, but it is advised to be in writing. However, if it deals with items which have a formal writing requirement, it must be in writing.

Question 7

Rights that cannot be assigned:

Answer 7

1. The contract is prohibited by statute
2. The contract is personal in nature
3. The assignment significantly changes the risk or duties of the obligor.
4. The contract prohibits assignment

Question 8

Exceptions to the Rights that cannot be Assigned:

Answer 8

1. The assignment of the right to receive funds is always allowed.
2. The assignment of rights to real estate cannot be prohibited because prohibitions of this kind are called restraints against alienation.
3. the assignment of negotiable instruments cannot be prohibited.
4. In contracts for the sale of goods, the right to receive damages for breach of contract or payment of an account owed may be assigned even though the sales contract prohibits such an assignment.

Question 9

Assignee should notify obligor of the assignment because of two major problems when notice of assignment is not given to the obligor:

Answer 9

1. Priority Issues
2. Potential for Discharge by performance to the wrong party.

Question 10

Priority issues arise when:

Answer 10

the assignor assigns the same right to two different persons. Which one has the right to the performance by the obligor?

Question 11

In the case of priority issues, who has the right to the performance by the obligor?

Answer 11

In most states, the observed rule is that the first assignment in time is the first in law.

However, the English rule gives priority to the first assignee who gives notice.

Question 12

What is the special form requirement for delegation?

Answer 12

There is none - so long as the delegator expresses the intention to make the delegation, it is effective. It does not even have to use the word “delegate”

Question 13

Duties that cannot be delegated:

Answer 13

1. When special trust has been placed in the obligor or when performance depends on the personal skill or talents of the obligor.
2. When performance by a third party will vary materially from that expected by the obligee.
3. When the contract expressly prohibits delegation.

Question 14

Can the obligee reject performance from the delgatee?

Answer 14

If delegation of duties is deemed to be enforceable and allowed, they must accept. Only if it is a duty which cannot be delegated may the obligee reject.

Question 15

“assignment of all rights” can be read to mean:

Answer 15

the assignment of rights AND delegation of duties.

Question 16

third party beneficiary:

Answer 16

one for whose benefit a promise is made in a contract, but who is not a party to the contract. Also known as the intended beneficiary.

Question 17

2 types of 3rd party beneficiaries

Answer 17

1. creditor beneficiaries
2. donee beneficiaries

Question 18

Creditor Beneficiaries

Answer 18

promisor fulfills a duty owed to the beneficiary by the promisee

Question 19

Donee beneficiaries

Answer 19

A gift is owed to the beneficiary by the promisor.

Question 20

Can incidental beneficiaries sue?

Answer 20

No, only intended beneficiaries may sue.

Question 21

vested:

Answer 21

when the rights have taken effect and cannot be taken away. Until it has been vested, the original parties can modify or rescind the contract without the consent of the third party.

Question 22

When is a 3rd party beneficiaries rights vested?

Answer 22

When any one of the following is met:
1. 3rd party demonstrates express consent to the agreement, and knowledge of the agreement.
2. When the third party materially alters their position in detrimental reliance on the contract.
3. When the conditions for vesting are satisfied: example: the rights of a beneficiary under a life insurance policy vest when the insured person dies.

Question 23

The third party is the intended beneficiary if one or more of the following is met:

Answer 23

1. performance is rendered directly to the third party.
2. third party has the rights to control the details of performance.
3. The third party is expressly designated as a beneficiary in the contract.