Contracts - Third-Party Problems

Question 1

How can you identify a third-party beneficiary problem?

Answer 1

Look for two parties contracting with the common intent to benefit a third party.

Question 2

What is a third party beneficiary?

Answer 2

Not a party to the contract. Able to enforce contracts others made for her benefit.

Question 3

What is a promisor?

Answer 3

Look for a person who is making the promise that benefits the third party.

Question 4

What is a promisee?

Answer 4

Look for a person who obtains the promise that benefits the third party.

Question 5

What is intended/incidental?

Answer 5

Only intended beneficiaries have contract law rights. Intent of two parties to contract determines whether intended or incidental.

Question 6

When can a contract that benefits a 3P be canceled or modified?

Answer 6

If the 3P knows of and relied on or assented as request, then her rights have vested and contract cannot be canceled or modified without her consent unless contract otherwise provides.

Question 7

Four Important Rule on Who can Sue Whom:

Answer 7

(1) Beneficiary can recover from promisor
(2) Promisee can recover from promisor.
(3) General Rule: Beneficiary cannot recover from the promisee.
(4) Limited exception: Creditor beneficiary can recover from promisee, but only on pre-existing debt.

Question 8

What defenses can a promisor raise if sued by a 3P beneficiary?

Answer 8

Promisor can assert any defense that he would have had if sued by the promisee.

Question 9

What is an assignment and what is the two step process?

Answer 9

Assignment is a transfer of rights under a contract.

First step: Contract between only two parties

Second step: One of the parties later transfers rights under that contract to a third party.

Question 10

What is an assignor, assignee, and obligor?

Answer 10

Assignor: Party to the contract who later transfers rights under the contract to another.

Assignee: Not a party to the contract. Able to enforce the contract because of the assignment.

Obligor: Other party to the contract.

Question 11

What are the two types of contract provision that can limit assignments?

Answer 11

(1) Prohibition on assignments

(2) Invalidation assignment clauses.

Question 12

What is a prohibition on assignments?

Answer 12

Language of prohibition takes away the right to assign, but not the power to assign, which means that the assignor is liable for breach of contract, but an assignee who does not know of the prohibition can still enforce the agreement.

“Rights hereunder are not assignable”

Question 13

What is an invalidation of assignment?

Answer 13

Language of invalidation takes away both the right to assign and the power to assign so that there is a breach by the assignor and no rights in the assignee.

“All assignments of rights under this contracts are void”

If you doubt prohibition vs. invalidation then its prohibition.

Question 14

What is the limitation on assignment if there is no contractual provision? (Common law)

Answer 14

Common law bars an assignment that substantially changes the duties of the obligor.

Assignment of right to payment –> never substantial change

Assignment of right to contract performance other than right of payment –> usually subtsantial change.

Question 15

What are the requirements for an assignment?

Answer 15

General Rule: General rule is that consideration is NOT required, but gratuitous assignment can be revoked.

Question 16

Who can sue whom if there is an assignment?

Answer 16

Assignee can recover from the obligor

Assignor for consideration cannot recover from obligor.

Obligor has the same defenses against assignee as it would have against assignor.

Question 17

What happens to payment send by obligor to assignor after an assignment if obligor doesn’t know about assignment?

Answer 17

Payment by obligor to assignor is effective until obligor knows of assignment.

Modification agreement between obligor and assignor are effective if the obligor did not know of the assignment.

Question 18

What are the three implied warranties of assignor in an assignment for consideration?

Answer 18

Assignor warrants that

(1) The rights assigned actually exists
(2) Right assigned is not subject to any then existing defense by the obligor
(3) Assignor will do nothing after the assignment to impair the value of the assignment.

**Assignor does not warrant what the obligor will do after the assignment.

Question 19

What is the rule for multiple gratuitous assignment?

Answer 19

General Rule: Last assignee generally win.

Question 20

What is the rule for multiple assignments for consideration? [And the exception]

Answer 20

General Rule: First assignee for consideration wins.

Very limited exception: A subsequent assignee take priority over an earlier assignee for value only if he both

(i) does not know of the earlier assignment and
(ii) is the first to obtain
(a) payment OR
(b) a judgement OR
(c) a novation OR
(d) indicia of ownership

Question 21

What is a delegation?

Answer 21

Parties to a contract transferring work under that contract to third party.

Question 22

Assignment vs. Delegation

Answer 22

Assignment transfers the rights or benefits to 3P

Delegation transfers duties or burdens under a contract.

Often a party assign and delegates to the same party.

Question 23

Which duties are delegable?

Answer 23

General contractual duties are delegable.

Delegation are permitted unless either

(1) Contract prohibits delegations or prohibits assignments or
(2) “Personal services contract” that calls for VERY SPECIAL skills

Question 24

What if, after delegation, the 3P delegatee does not perform?

Answer 24

(1) Delegating party always remains liable.

(2) Delegatee liable only if she receives consideration from delegating party.