Contract Law AMP - Third Party Beneficiaries; Assignments

Question 1

Which of the following is not a factor a court considers in determining whether a party is an intended third-party beneficiary?

A Whether the third party was designated in the contract

B Whether performance is to be made directly to the third party

C Whether the third party materially changed his position in justifiable reliance on the promise

D Whether the third party has any rights under the contract

Answer 1

C

Whether a third party materially changed his position in justifiable reliance on the promise is not a factor a court considers in determining whether a party is an intended third-party beneficiary. Rather this type of change of position is a method of vesting the beneficiary’s rights. The issue is whether the primary purpose of the promisee was to get the benefit for himself or to confer a right on another directly. If the purpose was to confer a right on another directly, that person is an intended third-party beneficiary The court looks at the following factors in resolving the question of intention: Whether the third party is expressly designated in the contract;Whether performance is to be made directly to the third party;Whether the third party has any rights under the contract; andWhether the third party stands in such a relationship to the promisee that one could infer that the promisee wished to make an agreement for the third party’s benefit. QUESTION ID: K0128 Additional Learning

Question 2

An important difference between the rights of a donee beneficiary and a creditor beneficiary is that __________.

A a creditor beneficiary’s rights are automatically vested, but a donee beneficiary’s rights are not automatically vested

B a creditor beneficiary can sue the promisee on the underlying obligation, but a donee beneficiary cannot

C a creditor beneficiary can sue the promisor for failure to perform, but a donee beneficiary cannot

D a promisee in a third-party beneficiary contract can sue the promisor for nonperformance if the beneficiary is a creditor beneficiary, but not if the beneficiary is a donee beneficiary

Answer 2

B

If the purpose in extracting the commitment from the promisor was to discharge an obligation owed to the third party, the third party is a creditor beneficiary. If the promisee’s purpose in extracting the promise was to confer a gift on the third party, the third party is a donee beneficiary. An important difference between the two types of beneficiary is that a creditor beneficiary can sue the promisee on the underlying obligation, but a donee beneficiary cannot. A donee beneficiary generally may not sue the promisee because generally there is no right to sue for nondelivery of a gift. A creditor beneficiary can sue the promisee on the underlying obligation that the promisor’s performance was meant to discharge. Neither a creditor beneficiary’s nor a donee beneficiary’s rights are automatically vested. Any third-party beneficiary must manifest assent, bring suit, or materially change his position to vest his rights. Both a creditor and donee beneficiary can sue the promisor for failure to perform. Similarly, a promisee in a third-party beneficiary contract can sue the promisor for nonperformance regardless of whether the third-party is a creditor or donee beneficiary. QUESTION ID: K0127 Additional Learning

Question 3

A agrees to sell widgets to B for $450. The contract provides that B is to pay the $450 to C. C is A’s niece, and the $450 is a birthday gift.
Which of the following statements is accurate?

A A is the obligee, B is the obligor, C is the delegate

B A is the promisor, B is the promisee, and C is the third-party beneficiary

C A is the promisee, B is the promisor, and C is a third-party beneficiary

D A is the obligor, B is the assignee, and C is a donee beneficiary

Answer 3

C

A is the promisee, B is the promisor, and C is a third-party beneficiary. The parties to the contract are the promisee and promisor. A promisor is the party who promised to perform and, thus, owes the duty to perform. The promisee is the party to whom that promise was made. Here, B promised A that he would pay $450 for widgets; so B is the promisor. A is the party to whom B made the promise; thus, A is the promisee. Since the contract expressly provides that B is to pay the money directly to C, C is a third-party beneficiary. Obligee, obligor, and delegate are terms used when, after the contract is made, one of the parties delegates his duties under the contract to another. That was not done here. Obligor and assignee are terms used when, after the contract is made, one of the parties assigns his rights under the contract to another. That was not done here. C is a donee beneficiary, but the other parties are not an obligor and assignee. QUESTION ID: K0130A Additional Learning

Question 4

Generally, when a sale of goods is induced by fraud and the fraudulent buyer then sells the item to a third-party purchaser, the title he passes to the purchaser is __________.

A Always voidable

B Void, unless the third-party purchaser is a good faith purchaser for value

C Always void

D Voidable, unless the third-party purchaser is a good faith purchaser for value

Answer 4

D

Under the U.C.C., if a sale is induced by fraud, the title that passes is voidable; the defrauded seller can rescind the sale and recover the goods from the fraudulent buyer. However, the defrauded seller may not recover the goods from a good faith purchaser for value who bought the goods from the fraudulent buyer. The rights of the defrauded seller are cut off both by a buyer and by a person who takes a security interest in the goods. Compare this to the case where a thief sells goods to a buyer. In that case, the transferred title of the stolen goods is generally void, even if the thief attempts to transfer title to a good faith purchaser for value. QUESTION ID: K0144A Additional Learning

Question 5

Which of the following is not an action that results in the vesting of a third-party beneficiary’s rights?

A The third-party beneficiary brings suit to enforce the promise

B The third-party beneficiary buys a house because the money from the contract will cover most of the mortgage payments

C The third party beneficiary agrees to accept performance by the promisor

D The third-party beneficiary assigns his rights under the contract

Answer 5

D

Assigning his rights under the contract will not cause the third-party beneficiary’s rights to vest. Bringing suit to enforce the promise vests the third-party beneficiary’s rights under the contract. By agreeing to accept performance by the promisor, the third party beneficiary is manifesting assent to the promise, which is a method of vesting his rights under the contract. Buying a house because the money from the contract will cover a portion of the mortgage payments is an example of a third-party beneficiary materially changing his position in reliance on the promise, which will result in the vesting of his rights under the contract. QUESTION ID: K0129 Additional Learning

Question 6

If an assignee for value discovers that the assignor had previously assigned the same contract rights to another party for value, the assignee may _________.

A recover from the prior assignee

B recover from the obligor

C sue the assignor for breach of warranty

D recover in quasi-contract

Answer 6

C

If an assignee for value discovers that the assignor had previously assigned the same contract rights to another party, the assignee may sue the assignor for breach of warranty. The assignor makes several implied warranties to the assignee, the breach of which gives rise to a cause of action. One of those warranties is the warranty that the assignor has the right to assign, which means he has made no prior assignment of that right. The assignee has no cause of action against the prior assignee. Quasi-contract is an action seeking restitution when a contract is unenforceable and unjust enrichment will result. It is not an appropriate remedy in this case. The assignee cannot recover from the obligor because the assignor had no right to assign. Thus, the assignee has no rights against the obligor. QUESTION ID: K0142 Additional Learning

Question 7

When a party assigns “the contract” to a third party, it results in __________.

A an assignment of rights to the third party, but not a delegation of duties

B the third party becoming a third-party beneficiary to the contract

C relieving the assignor of all rights and duties under the contract

D an assignment of rights and a delegation of duties to the third party

Answer 7

D

When a party assigns “the contract,” it results in an assignment of rights and a delegation of duties to the third party. Unless a contrary intention appears, words assigning “the contract” or “all my rights under the contract” are construed to include an assumption of duties. A promise by the assignee to assume the duties of performance is implied. The person to whom the contract is assigned is the assignee, not a third-party beneficiary. The assignor will be relieved of his rights, but not his duties under the contract. In this case, the assignor is also the delegator. A delegator remains liable on his contract. QUESTION ID: K0141 Additional Learning

Question 8

Which of the following cannot be assigned?

A A bakery’s contract with an orchard to purchase all the apples the bakery requires for the year

B An actor’s contract with his agent

C A right to receive payment under a contract containing a clause prohibiting assignment of the contract

D A third-party beneficiary’s unvested rights in a contract

Answer 8

B

An actor’s contract with his agent cannot be assigned because it is a personal services contract that involves unique services. An assignment of rights that would substantially change the obligor’s duty is barred. A bakery’s contract with an orchard to purchase all of the apples the bakery requires can be assigned. While this was prohibited at common law, Article 2 allows it - provided that the assignee does not disproportionately alter the contemplated quantity. A third-party beneficiary may assign his unvested rights in a contract. Future rights in existing contracts are assignable - even if the right has not yet vested. Assignment of right to receive payment despite a contract clause prohibiting assignment of the contract is valid. A clause prohibiting “assignment of the contract” is construed as barring only the delegation of the assignor’s duties, not the assignment of the assignor’s rights. Compare: Assignment of a right to receive payment under a contract containing a clause that prohibits the assignment of “contractual rights” would also be valid, but would give rise to a breach of contract action. QUESTION ID: K0131 Additional Learning

Question 9

Once an obligor delegates his duties under a contract to a delegate, the obligee __________.

A May refuse performance from the delegate and demand performance from the delegator if she did not expressly consent to the delegation

B Must look only to the delegate for performance of the duties, as the delegator is no longer liable

C May look to either the delegate or the delegator for performance at her discretion

D Must look first to the delegate for performance of the duties, but if
he fails to perform, then may look to the delegator as a surety for the delegate’s performance

Answer 9

D

Once an obligor delegates his duties under a contract to a delegate, the obligee must look first to the delegate for performance of the duties, but if he fails to perform, then may look to the delegator as a surety for the delegate’s performance. It is incorrect to state that the obligee must look only to the delegate for performance of the duties because the delegator is no longer liable. The delegator will remain liable on his contract, even if the delegate expressly assumes the duties. However, as between the delegator and the delegate, the delegation places the primary responsibility to perform on the delegate. The delegator becomes secondarily liable, as a surety, for performance of the duty. Thus, it is not within the obligee’s discretion to look to either party for performance. The obligee must accept performance from the delegate of all duties that may be delegated. She need not accept performance from the delegate of those duties that may not be delegated. If the duty is one that may be delegated, the obligee does not have the right to refuse performance from the delegate because she did not expressly consent to the delegation. Note that if the obligee has expressly consented to the transfer of duties, it could be construed as an offer of novation rather than a delegation. QUESTION ID: K0139A Additional Learning

Question 10

As a general rule, all contractual duties may be delegated to a third person.
Which of the following is not an exception to this general rule?

A A duty that is central to the fulfillment of the contract

B A duty involving special trust between the parties

C A duty involving personal judgment and skill

D A duty restricted from delegation by the terms of the contract

Answer 10

A

As a general rule, all contractual duties may be delegated to a third person. There are several exceptions to the general rule. However, simply because a duty is central to the fulfillment of the contract does not mean that such a duty cannot be delegated. If a duty involves personal judgment and skill, it may not be delegated. An actor’s performance would be an example of a duty involving personal judgment and skill. A duty involving a special trust between the parties may also not be delegated. For example, the duties of an attorney to her client, or a physician to his patient, may not be delegated. In addition to the above, the parties may agree to a contractual restriction on delegation. A provision that states that any certain duty is restricted from delegation will be given strict effect. QUESTION ID: K0138B Additional Learning

Question 11

If an assignor takes payment or performance directly from the obligor, __________.

A a gratuitous assignment is revoked, but an assignment for value is not

B both a gratuitous assignee and an assignee for value may recover from the assignor

C both a gratuitous assignment and an assignment for value are revoked

D neither a gratuitous assignment nor an assignment for value are revoked

Answer 11

A

If an assignor takes payment or performance directly from the obligor, a gratuitous assignment is revoked, but an assignment for value is not. Gratuitous assignments are generally revocable, whereas assignments for value are irrevocable. One method for revoking an assignment is for the assignor to accept performance directly from the obligor. Such an action manifests the assignor’s intent to revoke. A gratuitous assignee cannot recover from either the obligor or the assignor. An assignee for value may enforce her rights against the obligor directly if the obligor has notice of the assignment. Also, an assignee for value may bring an action against the assignor on any underlying obligation or for breach of assignment warranties. QUESTION ID: K0135 Additional Learning

Question 12

An assignor properly assigns his rights under a contract to an assignee. The obligor of the contract is subsequently incapable of performing under the contract due to insolvency.
Will the assignor be held liable to the assignee?

A Yes, an assignor is strictly liable to the assignee for the obligor’s failure to perform

B Yes, an assignor is secondarily liable as a surety of the obligor

C No, an assignor is not liable to the assignee if the obligor is incapable of performing

D Yes, an assignor is liable to the assignee for breach of warranty

Answer 12

C

An assignor is not liable to the assignee if the obligor is incapable of performing, such as in this case where the obligor subsequently becomes insolvent. Thus the assignor is NOT strictly liable for the obligor’s failure to perform. In every assignment for value, the assignor impliedly warrants that: (i) He has the right to make the assignment;(ii) The right exists and is not subject to limitations or defenses other than those stated or apparent at the time of the assignment; and (iii) He will do nothing to defeat or impair the assigned right. The assignor does not make a warranty that the obligor will actually perform, and he is not secondarily liable as a surety of the obligor’s performance. The assignee can look only to the obligor for his failure to perform. QUESTION ID: K0137B Additional Learning

Question 13

Assignments for value cannot be revoked.
An assignment is for value even if it is:

A Supported by moral consideration

B Taken as payment of a preexisting debt

C Given as a gift

Answer 13

B

An assignment is for value if it is: (i) done for consideration or (ii) taken as security for or a payment of a preexisting debt. An assignment supported by moral consideration would still be considered a gratuitous assignment and thus subject to the general rule of revocability. Moral consideration is generally not sufficient to support a simple contract and thus is not consideration for this purpose. A gift is not consideration and thus is not value for purposes of assignment. Assignments given as a gift are gratuitous and are subject to the revocability rules for gratuitous assignments. QUESTION ID: K0134A Additional Learning

Question 14

When a delegate assumes the duty to perform, the most important consequence is:

A The obligee can compel performance or bring suit against the delegate for nonperformance

B The delegate replaces the delegator as the real party in interest

C The delegate becomes secondarily liable on the contract

Answer 14

A

When a delegate assumes the duty to perform, this creates a third-party beneficiary situation in which the obligee can compel performance or bring suit for nonperformance. A delegate assumes the duty to perform if she promises to perform the duty and the promise is supported by consideration. The delegate does not replace the obligor as the real party in interest. In an assignment, privity between the obligor and the assignor is extinguished, and the assignee replaces the assignor as the real party in interest (one with the legal right to enforce the claim). The same is not true for a delegation of duties. The delegate becomes primarily liable on the contract. Thus, the delegate is not secondarily liable and it is not a consequence of her assumption of the duties. QUESTION ID: K0140A Additional Learning

Question 15

As a general rule, if the promisor fails to perform under a contract, a donee third-party beneficiary whose rights have vested can sue:

A The promisee and the promisor

B The promisor

C The promisee or the promisor

D The promisee

Answer 15

B

As a general rule, if a promisor fails to perform under a contract, a donee third-party beneficiary whose rights have vested can sue the promisor to enforce the contract. Absent detrimental reliance, a donee beneficiary cannot sue the promisee because generally there is no right to sue for nondelivery of a gift. QUESTION ID: K0127B Additional Learning

Question 16

The rights of a third-party beneficiary vest when he:

A Receives notice of the existence of the contract; is a creditor of the promisee; or is an intended, not incidental, beneficiary

B Signs the contract; makes an enforceable promise in the contract; or provides consideration for the promise in the contract

C Is named in the contract; is identifiable by the terms of the contract; or is identifiable at the time of performance

D Manifests assent to the promise; brings suit to enforce the promise; or materially changes position in justifiable reliance on the promise

Answer 16

D

The promisor and promisee are generally free to modify the contract, without consulting the third-party beneficiary, unless his rights have vested. Once the third-party beneficiary’s rights have vested, the promisor and promisee cannot vary his rights without his consent. A third-party beneficiary’s rights vest when the beneficiary: manifests assent to the promise in a manner invited or requested by the parties; brings suit to enforce the promise; or materially changes position in justifiable reliance on the promise. In determining the promisee’s intentions in a third-party beneficiary situation, courts will often look at whether the third party is expressly designated in the contract. If so, it is more likely that it is primarily for his benefit. But it is not necessary that the third-party beneficiary be named, or even identifiable, at the time the contract is made; he need only be identifiable at the time performance is due. Even if a third party is named or is otherwise identifiable, the promisor and promisee are free to modify the contract if the third party’s rights have not yet vested as discussed above. A party that signs the contract; makes an enforceable promise in the contract; or provides consideration for the promise in the contract would most likely be considered a party to the contract, not a third-party beneficiary to the contact. In any event, these are not the factors that cause a third-party beneficiary’s rights to vest. While it is true that only intended, not incidental, beneficiaries have rights under the contract, these rights must be vested to be enforceable. It is not enough that the third party has received notice of the existence of the contract. If his rights have not yet vested, as described above, the original parties are free to take actions, such as rescission or modification, which may affect the third-party beneficiary. These vesting rules apply to both creditor and donee beneficiaries. QUESTION ID: K0129A Additional Learning

Question 17

An intended beneficiary must be __________.

A Identifiable at the time performance is due

B Named at the time the contract is made

C Present at the time the performance is due

D Notified at the time the contract is made

Answer 17

A

An intended third-party beneficiary has certain rights under the contract. The best test for determining whether someone is an intended beneficiary is to pose the following question: “To whom is performance to be given according to the language of the contract?” In other words, was the purpose of the promisee, according to the language of the contract, to get the benefit for herself primarily or to confer a right on another directly? If the purpose was to confer a right on another directly, there is a third-party beneficiary situation. The third-party beneficiary must be identifiable at the time performance is due. Although it is true that a court will more likely find that a contract is primarily for the benefit of a third party if that third party is expressly designated in the contract, this is not always the case. It is not necessary that the third-party beneficiary be named, or even identifiable, at the time the contract is made; she need only be identifiable at the time performance is due. There is no requirement that an intended beneficiary be notified at the time the contract is made or be present at the time the performance is due. QUESTION ID: K0128B Additional Learning

Question 18

Which of the following best describes the elements required for an effective assignment?

A An adequate description of the right being assigned and present words of assignment

B A writing containing an adequate description of the right being assigned and present words of assignment

C Consideration and a writing containing an adequate description of the right being assigned and present words of assignment

D An adequate description of the right being assigned, consideration, and present words of assignment

Answer 18

A

For an assignment to be effective, there must be an adequate description of the right being assigned. In addition, there is a requirement that the assignment is expressed in present words of assignment. This means that the assignor must manifest an intent to transfer his rights under the contract completely and immediately to the assignee. Whether such intent is present will be determined by looking to the terms of the transfer itself; i.e., the test is objective, not subjective. It is not necessary to use the word “assign”; any generally accepted words of transfer will suffice (e.g., “convey,” “sell,” “transfer,” etc.). A writing is usually not required to have an effective assignment; an oral assignment is generally effective. Situations where an assignment must be in writing include wage assignments; assignments of an interest in land; assignments of choses in action worth more than $5,000; and assignments intended as security interests under Article 9 of the U.C.C. Consideration is not required; a gratuitous assignment is effective. QUESTION ID: K0133A Additional Learning

Question 19

A writing is __________.

A Usually not required for an effective assignment

B Required for an effective assignment only if the assignment is gratuitous

C Always required for an effective assignment

D Required for an effective assignment only if the assignment is backed by valid consideration

Answer 19

A

A writing is usually not required to have an effective assignment; an oral assignment is generally effective. Whether an oral assignment is effective is not determined by whether the assignment is gratuitous or backed by valid consideration. There are certain situations where an assignment must be in writing. These include: wage assignments; assignments of an interest in land; assignments of choses in action worth more than $5,000; and assignments intended as security interests under Article 9 of the U.C.C. Consideration is not required for an effective assignment; a gratuitous assignment is effective. It is important to remember, however, that even though neither a writing nor consideration is generally required, the lack thereof will affect revocability. QUESTION ID: K0132B Additional Learning

Question 20

If a person leaves an item of jewelry with a jeweler for repair, and the jeweler sells the item to an unsuspecting purchaser, __________.

A the purchaser has title to the item and the true owner cannot recover it

B the purchaser has good title to the item, and the original owner has no recourse under contract law against the jeweler

C the original owner retains title to the item, and the purchaser may not recover damages from the jeweler

D the original owner retains title to the item, and the purchaser may recover damages from the jeweler

Answer 20

A

If a person leaves an item of jewelry with a jeweler for repair and the jeweler sells the item to an unsuspecting purchaser, the purchaser has title to the item and the true owner cannot recover it. Entrusting goods to a merchant who deals in goods of that kind gives him the power (but not the right) to transfer all of the rights of the entruster to a buyer in the ordinary course of business. The original owner does have recourse under contract law; she may sue the jeweler for damages. QUESTION ID: K0143 Additional Learning

Question 21

Unless a contrary intention appears elsewhere, if a party to a contract assigns “all my rights under the contract” to a third party, that assignment __________.

A Will be construed to include an assumption of all duties as well

B Will only transfer the assignor’s rights under the contract and not the assignor’s duties

C Will serve as a novation

D Will be deemed void for vagueness

Answer 21

A

The majority of courts, the Restatement, and the U.C.C. hold that unless a contrary intention appears, words assigning “the contract” or “all my rights under the contract” are to be construed as including an assumption of the duties as well. Such language implies a promise by the assignee to assume the duties of performance, and thus does not limit the transfer to only the assignor’s rights under the contract and not the assignor’s duties. Such an assignment would not serve as a novation without the assent of the other party to the contract. A novation substitutes a new party for the original party to the contract and completely releases the original party. One party could not release himself from a contract by merely his own words, without the other party’s consent. This type of expression is not uncommon and will not be deemed void for vagueness. QUESTION ID: K0141A Additional Learning

Question 22

A buyer fraudulently induces a seller to sell his yacht to the buyer. The buyer then uses the yacht as collateral for a loan from a bank, which had no knowledge of Buyer’s fraud.
What are the seller’s rights with respect to the yacht?

A The seller can recover the yacht, but it will be subject to the bank’s security interest

B The seller can recover the yacht free of the bank’s claims

C The seller has no rights to the yacht because the bank is a good faith purchaser for value

Answer 22

A

The seller can recover the yacht, but it will be subject to the bank’s security interest. If a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer. However, the defrauded seller may not recover the goods from a good faith purchaser for value who bought from the fraudulent buyer. For this purpose, one who takes a security interest in the goods can be a good faith purchaser for value. Therefore, the bank’s rights in the yacht are superior to the defrauded seller’s. The seller does have ownership rights to the yacht. Despite the bank’s security interest, the seller may still recover the yacht from the buyer. However, if the buyer fails to pay the loan, the bank may still foreclose on the yacht. As noted above, the seller does not take free of the bank’s claims. The bank is a good faith purchaser for value; thus, its rights are superior to the seller’s. QUESTION ID: K0145B Additional Learning

Question 23

Seller and Buyer enter into a contract for the sale of widgets. The contract states that Buyer will pay the sales price to Seller’s child, Son. Seller wishes to give Son the money as a graduation gift. Son learns of the contract from a gossipy aunt. When Buyer pays the money to Seller, Son files a suit against Buyer.
Son’s rights with respect to the contract are best described as:

A Vested as of the time he learned of the contract

B Vested as of the time he brought suit against Buyer

C Not vested because he did not assent to the contract

D Not vested because he is a donee beneficiary

Answer 23

B

Son’s rights with respect to the contract vested when he brought suit against Buyer. A third-party beneficiary’s rights vest when the beneficiary manifests assent to the promise, brings suit to enforce the promise, or materially changes position in justifiable reliance on the promise. Merely learning of a third-party beneficiary contract will not vest the beneficiary’s rights. He must assent, sue, or rely. Thus, Son’s rights did not vest at the time he learned of the contract. The characterization of a beneficiary as a donee beneficiary or a creditor beneficiary does not affect vesting. It is true that Son did not assent to the contract, but that is only one method of vesting. Here, Son’s rights vested by bringing suit to enforce the promise. QUESTION ID: K0129B Additional Learning

Question 24

Which of the following is not an implied warranty given by an assignor to an assignee for value?

A Warranty against infringement

B Warranty that the assignor has the right to assign

C Warranty that right is not subject to defenses

D Warranty not to defeat an assigned right

Answer 24

A

The warranty against infringement is a warranty that arises automatically in certain sale of goods contracts; it is not an assignment warranty. Under a warranty against infringement, a merchant seller regularly dealing in goods of the kind sold warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims. The assignor warrants that he will do nothing in the future to defeat the assigned right; i.e., he will not wrongfully exercise his power to revoke. The assignor also warrants that the assigned right is not subject to any valid defenses of the obligor against the assignor. The assignor warrants that the assignor has the right to assign the right; i.e., that he has made no prior assignment of the same right. QUESTION ID: K0137 Additional Learning

Question 25

A agrees to purchase widgets from B for $300. The contract provides that A is to pay the $300 to C. B owes C $300.
Which of the following statements is accurate?

A A is the assignor, B is the obligor, and C is the assignee

B A is the promisee, B is the promisor, and C is a creditor beneficiary

C A is the obligor, B is the assignor, and C is the assignee

D A is the promisor, B is the promisee, and C is a third-party beneficiary

Answer 25

D

A is the promisor, B is the promisee, and C is a third-party beneficiary. The parties to the contract are the promisor and promisee. A promisor is the party who promised to perform and, thus, owes the duty to perform. The promisee is the party to whom that promise was made. Here A promised to pay $300 to B for widgets, so A is the promisor. B is the party to whom A made the promise; thus, B is the promisee. Since the contract expressly provides that A is to pay the money directly to C, C is a third-party beneficiary. While it is true that C is a creditor beneficiary, A is the promisor, not the promisee, and B is the promisee. Obligor, assignor, and assignee are terms used when an assignment of rights under a contract is made. The facts here do not involve an assignment or rights; this is a third-party beneficiary situation. QUESTION ID: K0130 Additional Learning

Question 26

When an owner of goods entrusts those goods to a merchant who deals in goods of that kind, the merchant has the power to transfer all of the owner’s rights in the goods to __________.

A A buyer in the ordinary course of business

B A buyer in the ordinary course of business or a person who takes a valid security interest in the goods

C The owner’s creditors

D No one, except the owner

Answer 26

A

When an owner of goods entrusts those goods to a merchant who deals in goods of that kind, the merchant has the power to transfer all of the owner’s rights in the goods to a buyer in the ordinary course of business. Buying in the ordinary course means buying in good faith from a person who deals in goods of the kind without knowledge that the sale is in violation of the ownership rights of third parties. Note that the merchant has only the power, not the right, to transfer the entrusted goods, and thus the owner may seek damages from the merchant for transferring the goods to a buyer. If this question had instead asked who the merchant has a right to transfer the goods to, then the correct answer would have been no one, except the owner. While it is true that the rights of a defrauded seller are cut off both by a good faith buyer and by a person who takes a valid security interest in the goods, this question deals with an entrustment situation, not a fraudulent sale. Entrusting goods to a merchant does not give the merchant the power to transfer the owner’s rights in the goods to the owner’s creditors. QUESTION ID: K0143B Additional Learning

Question 27

B owes A $100. A assigns his right to payment of the $100 to C and notifies B. B pays the $100 to A.
If C sues B for the $100:

A C will not prevail regardless of whether she gave value because the assignment was revoked

B C will not prevail regardless of whether she gave value because B owed the money to A

C C will prevail regardless of whether she gave value because A notified B of the assignment

D C will prevail if she gave value to A for the assignment because assignments for value are irrevocable

Answer 27

D

C will prevail if she gave value to A for the assignment. An assignment for value is irrevocable. Thus, C may recover from B. If C did not give value, the assignment is revocable and is in fact revoked by A accepting performance from B. Whether C will prevail depends on whether she gave value. The fact that A notified B of the assignment does not affect the revocability of a gratuitous assignment. Note, however, that if the assignment is irrevocable (or has not been revoked), once the obligor has knowledge of the assignment, he must render performance to the assignee. If, as here, the obligor renders performance to the assignor, he does so at his own risk. The fact that B owed the money to A has no effect on the enforceability of the assignment. The suit depends on whether C gave value. If C did not, the assignment is revoked by A taking payment from B. The assignment was not revoked if C gave value because, in that case, the assignment would be irrevocable. The assignor accepting performance from the obligor cannot revoke an irrevocable assignment. QUESTION ID: K0135B Additional Learning

Question 28

Owen owes Arthur $1,000 for a painting he bought from him. Arthur assigns his right to payment to Annie and notifies Owen of the assignment. Owen later performs work on Arthur’s home and bills Arthur $500. Arthur tells Owen to deduct it from the $1,000 he owes, which Owen does.
When Annie sues Owen for the remaining $500, which of the following is not a valid defense?

A The $500 was a valid setoff from the amount owed under the contract

B Owen was 17 years old when he entered into the contract with Arthur

C The painting was a forgery

D The contract between Owen and Arthur was oral

Answer 28

A

The $500 setoff is not a valid defense against Annie. An assignee’s rights against the obligor may be subject to any defenses the obligor had against the assignor. However, if the obligor’s defense is unrelated to the contract itself (e.g., a setoff or counterclaim), the defense is not available against the assignee if it arose after the obligor had notice of the assignment. The fact that the contract between Owen and Arthur was oral is a valid defense to Annie’s suit. Owen may raise any defenses he had against Arthur. The contract for the painting was a contract for the sale of goods priced at $500 or more. Thus, to be enforceable, that contract must be evidenced by a signed writing. Since Owen could raise the Statute of Frauds defense against Arthur, he may raise it against Annie. The fact that the painting is a forgery is also a valid defense that Owen could have raised against Arthur, and thus can raise against Annie. If the painting is a forgery, it is a material misrepresentation and the contract is voidable, by the innocent party. The fact that Owen was 17 years old when he entered into the contract is a valid defense that could have been raised by Owen against Arthur. If Owen was under age 18 when he entered into the contract, he would be considered an infant. Infants lack capacity to enter into contracts binding on themselves. Thus, the contract is voidable by Owen. QUESTION ID: K0136 Additional Learning

Question 29

When an obligor delegates his duties, the obligor is __________.

A no longer liable on the contract if the delegate promises to perform the duty delegated and that promise is supported by consideration

B liable on the contract only if the delegate does not assume the duties delegated

C secondarily liable as a surety on the contract

D no longer liable on the contract because the delegation extinguishes the privity between the obligor and obligee

Answer 29

C

When an obligor delegates his duties, he is secondarily liable as a surety on the contract. After a delegation, the delegator remains liable to perform, but the delegation places the primary responsibility to perform on the delegate. The obligor/delegator becomes secondarily liable. The obligor remains liable after the delegation, and the delegation does not extinguish the privity between the obligor and the obligee. If the delegate promises to perform the duty delegated and that promise is supported by consideration, an assumption of duties occurs. This does not relieve the obligor of liability; it merely creates a third-party beneficiary situation in which the obligee can bring an action against the delegate to enforce the promise. Hence, the obligor remains liable even if the delegate assumes the duties delegated. QUESTION ID: K0139 Additional Learning

Question 30

The right to receive services under a contract between ______________ may be assigned but the right to receive services under a contract between ________________ may not.

A A property owner and a contractor for construction of a home; a publisher and an author

B A property owner and an architect; a client and a lawyer

C A patron and an artist; a patient and a physician

D A lawn maintenance company and a property owner; a property owner and a contractor for remodeling a kitchen

Answer 30

A

The right to receive services under a contract between a property owner and a contractor for construction of a home may be assigned, but the right to receive services under a contract between a publisher and author may not. Generally all contractual rights may be assigned. However, there are exceptions to this rule when an assignment of rights would substantially change the obligor’s duty. If the assignment of rights would result in the obligor having to perform personal services for someone other than the original obligee, the attempted assignment is invalid. For this purpose, personal services include only those services that involve the personality or personal characteristics of the obligor. An author’s services involve the author’s personality or personal characteristics, but a contractor’s services are generally found not to involve his personality or personal characteristics. Of course, the assignment of the home construction contract would be valid only for construction of the same house on the same property; otherwise, the assignment would substantially change the contractor’s duty. The services of an architect, a lawyer, an artist, and a physician all fall within personal services involving the personality or personal characteristics of the obligor. Rights to these services may not be assigned. Lawn maintenance and kitchen remodeling are usually held not to involve this type of personal service, and contractual rights involving them may be assigned. QUESTION ID: K0131A Additional Learning

Question 31

Unless a contrary intention appears elsewhere, if a party to a contract assigns “all my rights under the contract” to a third party, that assignment __________.

A Will be construed to include an assumption of all duties as well

B Will only transfer the assignor’s rights under the contract and not the assignor’s duties

C Will serve as a novation

D Will be deemed void for vagueness

Answer 31

A

The majority of courts, the Restatement, and the U.C.C. hold that unless a contrary intention appears, words assigning “the contract” or “all my rights under the contract” are to be construed as including an assumption of the duties as well. Such language implies a promise by the assignee to assume the duties of performance, and thus does not limit the transfer to only the assignor’s rights under the contract and not the assignor’s duties. Such an assignment would not serve as a novation without the assent of the other party to the contract. A novation substitutes a new party for the original party to the contract and completely releases the original party. One party could not release himself from a contract by merely his own words, without the other party’s consent. This type of expression is not uncommon and will not be deemed void for vagueness. QUESTION ID: K0141A Additional Learning

Question 32

A buyer fraudulently induces a seller to sell his yacht to the buyer. The buyer then uses the yacht as collateral for a loan from a bank, which had no knowledge of Buyer’s fraud.
What are the seller’s rights with respect to the yacht?

A The seller can recover the yacht, but it will be subject to the bank’s security interest

B The seller can recover the yacht free of the bank’s claims

C The seller has no rights to the yacht because the bank is a good faith purchaser for value

Answer 32

A

The seller can recover the yacht, but it will be subject to the bank’s security interest. If a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer. However, the defrauded seller may not recover the goods from a good faith purchaser for value who bought from the fraudulent buyer. For this purpose, one who takes a security interest in the goods can be a good faith purchaser for value. Therefore, the bank’s rights in the yacht are superior to the defrauded seller’s. The seller does have ownership rights to the yacht. Despite the bank’s security interest, the seller may still recover the yacht from the buyer. However, if the buyer fails to pay the loan, the bank may still foreclose on the yacht. As noted above, the seller does not take free of the bank’s claims. The bank is a good faith purchaser for value; thus, its rights are superior to the seller’s. QUESTION ID: K0145B Additional Learning

Question 33

Seller and Buyer enter into a contract for the sale of widgets. The contract states that Buyer will pay the sales price to Seller’s child, Son. Seller wishes to give Son the money as a graduation gift. Son learns of the contract from a gossipy aunt. When Buyer pays the money to Seller, Son files a suit against Buyer.
Son’s rights with respect to the contract are best described as:

A Vested as of the time he learned of the contract

B Vested as of the time he brought suit against Buyer

C Not vested because he did not assent to the contract

D Not vested because he is a donee beneficiary

Answer 33

B

Son’s rights with respect to the contract vested when he brought suit against Buyer. A third-party beneficiary’s rights vest when the beneficiary manifests assent to the promise, brings suit to enforce the promise, or materially changes position in justifiable reliance on the promise. Merely learning of a third-party beneficiary contract will not vest the beneficiary’s rights. He must assent, sue, or rely. Thus, Son’s rights did not vest at the time he learned of the contract. The characterization of a beneficiary as a donee beneficiary or a creditor beneficiary does not affect vesting. It is true that Son did not assent to the contract, but that is only one method of vesting. Here, Son’s rights vested by bringing suit to enforce the promise. QUESTION ID: K0129B Additional Learning

Question 34

Which of the following is not an implied warranty given by an assignor to an assignee for value?

A Warranty against infringement

B Warranty that the assignor has the right to assign

C Warranty that right is not subject to defenses

D Warranty not to defeat an assigned right

Answer 34

A

The warranty against infringement is a warranty that arises automatically in certain sale of goods contracts; it is not an assignment warranty. Under a warranty against infringement, a merchant seller regularly dealing in goods of the kind sold warrants that the goods are delivered free of any patent, trademark, copyright, or similar claims. The assignor warrants that he will do nothing in the future to defeat the assigned right; i.e., he will not wrongfully exercise his power to revoke. The assignor also warrants that the assigned right is not subject to any valid defenses of the obligor against the assignor. The assignor warrants that the assignor has the right to assign the right; i.e., that he has made no prior assignment of the same right. QUESTION ID: K0137 Additional Learning

Question 35

A agrees to purchase widgets from B for $300. The contract provides that A is to pay the $300 to C. B owes C $300.
Which of the following statements is accurate?

A A is the assignor, B is the obligor, and C is the assignee

B A is the promisee, B is the promisor, and C is a creditor beneficiary

C A is the obligor, B is the assignor, and C is the assignee

D A is the promisor, B is the promisee, and C is a third-party beneficiary

Answer 35

D

A is the promisor, B is the promisee, and C is a third-party beneficiary. The parties to the contract are the promisor and promisee. A promisor is the party who promised to perform and, thus, owes the duty to perform. The promisee is the party to whom that promise was made. Here A promised to pay $300 to B for widgets, so A is the promisor. B is the party to whom A made the promise; thus, B is the promisee. Since the contract expressly provides that A is to pay the money directly to C, C is a third-party beneficiary. While it is true that C is a creditor beneficiary, A is the promisor, not the promisee, and B is the promisee. Obligor, assignor, and assignee are terms used when an assignment of rights under a contract is made. The facts here do not involve an assignment or rights; this is a third-party beneficiary situation. QUESTION ID: K0130 Additional Learning

Question 36

When an owner of goods entrusts those goods to a merchant who deals in goods of that kind, the merchant has the power to transfer all of the owner’s rights in the goods to __________.

A A buyer in the ordinary course of business

B A buyer in the ordinary course of business or a person who takes a valid security interest in the goods

C The owner’s creditors

D No one, except the owner

Answer 36

A

When an owner of goods entrusts those goods to a merchant who deals in goods of that kind, the merchant has the power to transfer all of the owner’s rights in the goods to a buyer in the ordinary course of business. Buying in the ordinary course means buying in good faith from a person who deals in goods of the kind without knowledge that the sale is in violation of the ownership rights of third parties. Note that the merchant has only the power, not the right, to transfer the entrusted goods, and thus the owner may seek damages from the merchant for transferring the goods to a buyer. If this question had instead asked who the merchant has a right to transfer the goods to, then the correct answer would have been no one, except the owner. While it is true that the rights of a defrauded seller are cut off both by a good faith buyer and by a person who takes a valid security interest in the goods, this question deals with an entrustment situation, not a fraudulent sale. Entrusting goods to a merchant does not give the merchant the power to transfer the owner’s rights in the goods to the owner’s creditors. QUESTION ID: K0143B Additional Learning

Question 37

B owes A $100. A assigns his right to payment of the $100 to C and notifies B. B pays the $100 to A.
If C sues B for the $100:

A C will not prevail regardless of whether she gave value because the assignment was revoked

B C will not prevail regardless of whether she gave value because B owed the money to A

C C will prevail regardless of whether she gave value because A notified B of the assignment

D C will prevail if she gave value to A for the assignment because assignments for value are irrevocable

Answer 37

D

C will prevail if she gave value to A for the assignment. An assignment for value is irrevocable. Thus, C may recover from B. If C did not give value, the assignment is revocable and is in fact revoked by A accepting performance from B. Whether C will prevail depends on whether she gave value. The fact that A notified B of the assignment does not affect the revocability of a gratuitous assignment. Note, however, that if the assignment is irrevocable (or has not been revoked), once the obligor has knowledge of the assignment, he must render performance to the assignee. If, as here, the obligor renders performance to the assignor, he does so at his own risk. The fact that B owed the money to A has no effect on the enforceability of the assignment. The suit depends on whether C gave value. If C did not, the assignment is revoked by A taking payment from B. The assignment was not revoked if C gave value because, in that case, the assignment would be irrevocable. The assignor accepting performance from the obligor cannot revoke an irrevocable assignment. QUESTION ID: K0135B Additional Learning

Question 38

Owen owes Arthur $1,000 for a painting he bought from him. Arthur assigns his right to payment to Annie and notifies Owen of the assignment. Owen later performs work on Arthur’s home and bills Arthur $500. Arthur tells Owen to deduct it from the $1,000 he owes, which Owen does.
When Annie sues Owen for the remaining $500, which of the following is not a valid defense?

A The $500 was a valid setoff from the amount owed under the contract

B Owen was 17 years old when he entered into the contract with Arthur

C The painting was a forgery

D The contract between Owen and Arthur was oral

Answer 38

A

The $500 setoff is not a valid defense against Annie. An assignee’s rights against the obligor may be subject to any defenses the obligor had against the assignor. However, if the obligor’s defense is unrelated to the contract itself (e.g., a setoff or counterclaim), the defense is not available against the assignee if it arose after the obligor had notice of the assignment. The fact that the contract between Owen and Arthur was oral is a valid defense to Annie’s suit. Owen may raise any defenses he had against Arthur. The contract for the painting was a contract for the sale of goods priced at $500 or more. Thus, to be enforceable, that contract must be evidenced by a signed writing. Since Owen could raise the Statute of Frauds defense against Arthur, he may raise it against Annie. The fact that the painting is a forgery is also a valid defense that Owen could have raised against Arthur, and thus can raise against Annie. If the painting is a forgery, it is a material misrepresentation and the contract is voidable, by the innocent party. The fact that Owen was 17 years old when he entered into the contract is a valid defense that could have been raised by Owen against Arthur. If Owen was under age 18 when he entered into the contract, he would be considered an infant. Infants lack capacity to enter into contracts binding on themselves. Thus, the contract is voidable by Owen. QUESTION ID: K0136 Additional Learning

Question 39

When an obligor delegates his duties, the obligor is __________.

A no longer liable on the contract if the delegate promises to perform the duty delegated and that promise is supported by consideration

B liable on the contract only if the delegate does not assume the duties delegated

C secondarily liable as a surety on the contract

D no longer liable on the contract because the delegation extinguishes the privity between the obligor and obligee

Answer 39

C

When an obligor delegates his duties, he is secondarily liable as a surety on the contract. After a delegation, the delegator remains liable to perform, but the delegation places the primary responsibility to perform on the delegate. The obligor/delegator becomes secondarily liable. The obligor remains liable after the delegation, and the delegation does not extinguish the privity between the obligor and the obligee. If the delegate promises to perform the duty delegated and that promise is supported by consideration, an assumption of duties occurs. This does not relieve the obligor of liability; it merely creates a third-party beneficiary situation in which the obligee can bring an action against the delegate to enforce the promise. Hence, the obligor remains liable even if the delegate assumes the duties delegated. QUESTION ID: K0139 Additional Learning

Question 40

The right to receive services under a contract between ______________ may be assigned but the right to receive services under a contract between ________________ may not.

A A property owner and a contractor for construction of a home; a publisher and an author

B A property owner and an architect; a client and a lawyer

C A patron and an artist; a patient and a physician

D A lawn maintenance company and a property owner; a property owner and a contractor for remodeling a kitchen

Answer 40

A

The right to receive services under a contract between a property owner and a contractor for construction of a home may be assigned, but the right to receive services under a contract between a publisher and author may not. Generally all contractual rights may be assigned. However, there are exceptions to this rule when an assignment of rights would substantially change the obligor’s duty. If the assignment of rights would result in the obligor having to perform personal services for someone other than the original obligee, the attempted assignment is invalid. For this purpose, personal services include only those services that involve the personality or personal characteristics of the obligor. An author’s services involve the author’s personality or personal characteristics, but a contractor’s services are generally found not to involve his personality or personal characteristics. Of course, the assignment of the home construction contract would be valid only for construction of the same house on the same property; otherwise, the assignment would substantially change the contractor’s duty. The services of an architect, a lawyer, an artist, and a physician all fall within personal services involving the personality or personal characteristics of the obligor. Rights to these services may not be assigned. Lawn maintenance and kitchen remodeling are usually held not to involve this type of personal service, and contractual rights involving them may be assigned. QUESTION ID: K0131A Additional Learning