Contracts - THIRD PARTY PROBLEMS Flashcards
THIRD PARTY PROBLEMS
This section deals with rights and obligations of third parties under contracts
ENTRUSTMENT (article 2)
an owner who entrusts goods to a MERCHANT WHO DEALS IN GOODS OF THE KIND (i.e. a dealer) has no rights against a BONA FIDE PURCHASER (BFP)
e.g. Michael takes watch to jeweler to get it repaired. Jeweler sells the watch to John. Mike cannot get the watch back from John (only remedy is to sue Jeweler for conversion)
Third Party Beneficiary
Two people enter into a contract intending to benefit a THIRD PARTY
Third party Beneficiary is a person who is NOT a party to a contract, but has rights because the contract was intended to benefit him
e.g. Harry pays Lady Gaga $25k to sing for Pippa at Pippa’s bday – Pippa is TPB
VOCAB
PROMISOR = party who promises to perform for the TPB (Gaga here)
PROMISEE = party who secures the promise (harry here)
INTENDED BENEFICIARY= the person to whom performance is to be given under the contract. (in contrast, an INCIDENTAL beneficiary just happens to benefit but has no rights)
DONEE BENEFICIARY
A person who is getting the performance as a gift. In contrast, A CREDITOR beneficiary is getting it to repay a debt (rare)
–most TPDs are donee beneficiaries
Rescission and Modification of a Contract involving a Third Party Beneficiary
General Rule: the Promisor and Promisee can RESCIND or MODIFY the contract until the rights of the TPB have “Vested”
After TPB’s rights have “vested” can only rescind or modify with TPB’s consent
EXCEPTION: Contract language controls - e.g. if the contract lets Harry change who lady Gaga will sing for, he can still terminate pippa’s rights
Note: if TPB is a “Donee” beneficiary (aka receiving benefit as a gift) he generally cannot sue the promisee (guy who made the contract for your benefit) bc no right to sue for nondelivery of a gift
When do a Third Party Beneficiary’s Rights Vest?
TPB can only enforce a contract once his rights have vested
(I) TPB manifests ASSENT to the promise in a manner invited or requested by the parties
(ii) TPB brings SUIT
(iii) TPB materially CHANGES POSITION in justifiable reliance on the promise
TPB v. Promisor
Liability to Third Party Beneficiaries
If the promisor fails to perform, the TPB may sue the promisor on the contract (even though they are not in privity of contract), subject to the defenses as follows:
(1) Promisor’s defenses against promisee
- ——ie if Harry’s check bounced to lady gaga (aka he was in breach) Pippa would have no right. She has only the rights Harry would have
TPB v. PROMISEE
Liability to Third Party Beneficiary
TPB (e.g. Pippa) may recover from Promisee (eg. Harry) only if TPB is a CREDITOR BENEFICIARY, because promisor’s performance was meant to discharge the underlying obligation – but IF NOT A CREDITOR BENEFICIARY (ie he is a DONEE BENEFICIARY) promisee was just making her a gift so no recovery (no right to sue for nondelivery of a gift)
IE - if TPB is a “Donee” beneficiary (aka receiving benefit as a gift) he generally cannot sue the promisee (guy who made the contract for your benefit) bc no right to sue for nondelivery of a gift
(MBE book) - EXCEPTION*** - Detrimental Reliance - if the promisee tells the donee beneficiary of the contract and should “foresee reliance” by the beneficiary, and the beneficiary “reasonably relies” to her detriment, beneficiary can sue promisee directly under a promissory estoppel/detrimental reliance theory
—NOTE: this is really just the 3rd way to vest - chancing position in justifiable reliance on the promise
Promisor v. Promisee
Liability to Third Party Beneficiary
Promisee may recover under breach of contract (just your standard breach of contract),
however, if TPB is just a DONEE BENEFICIARY, probably won’t be more than nominal damages bc no real injury suffered
If promisor (gaga) fails to perform as to a creditor beneficiary and a promisee (harry) has had to pay the beneficiary on the existing debt, promisee MAY RECOVER against the PROMISOR
DELEGATION OF DUTIES
General Rule: Contractual Duties may be delegated without the consent of the person to whom performance is owed (the obligee)
Exceptions
(1) CONTRACT LANGUAGE CONTROLS - if the contract prohibits delegation, then duty cannot be delegated
**Note: if contract prohibits “ASSIGNMENTS” that means there are no DELEGATIONS EITHER - watch out for this on MBE!!!
(2) SPECIAL SKILLS AND REPUTATION - if the person hired was hired due to his special skill and/or reputation, he cannot delegate his duties under the contract
- e.g. Conan hired to host 2013 Academy Awards, can’t delegate this
Rights of the Obligee
- *The delegating party still remains liable to the OBLIGEE
- e.g. Opie contracts to mow Helen’s lawn. Opie delegates the duty to Goober and Goober doesn’t do it. Helen CAN SUE the delegating party (OPIE) for breach of contract
A Delegate who gets CONSIDERATION is LIABLE
-so if Goober got consideration from Opie, Helen can sue Goober *because she would be a THIRD PARTY BENEFICIARY! of the contract between Opie and Goober
Assignment of Rights
Two people make a contract; later one (the ASSIGNOR) transfers his rights to a third party (ASSIGNEE). The party who owes the duty is the OBLIGOR
-e.g. Batman contracts to provide security services to Gotham for $200k. Batman (assignor) assigns his right to payment to Robin (assignee). Robin has the right to receive payment from Gotham City (“obligor”)
BAR TIP: in an ASSIGNMENT, two parties enter a contract and a THIRD PERSON (assignee) appears later on (two-step process). With a Third-Party Beneficiary, all three persons are present from the beginning (one-step)
What must an assignment have to be effective?
Assignment MUST HAVE language of PRESENT TRANSFER - e.g. “I assign”
e.g. “I promise to assign” = no good, “I will assign” no good - needs to be PRESENT TRANSFER
Consideration is NOT required, gift assignments are valid, but they are very easily revoked
Restrictions on Assignment
(1) CONTRACT LANGUAGE CONTROLS - be able to distinguish a clause that PROHIBITS assignment from one that completely INVALIDATES assignments
e. g. Batman contract with Gotham says - “rights under this contract are not assignable” - if Batman assigns, he is liable for breach of contract but ASSIGNMENT STILL VALID
e. g. 2 - same facts but contract says “All assignments under this contract are VOID.” - this language invalidates the assignment
(2) CANNOT SUBSTANTIALLY CHANGE DUTIES OF OBLIGOR
- e.g. Batman assigning his RIGHT TO PAYMENT does not substantially change Gotham’s duties. They just write the check to Robin instead of Batman BUT Gotham may not assign their rights to Batman’s services to a different city like Metropolis, because this would SUBSTANTIALLY CHANGE Batman’s duties
**NOTE: you generally cannot assign personal service contracts
Is Obligor Liable to Assignee?
YES
Robin can sue Gotham City if he is not paid for Batman’s work
but if Batman fails to perform the services, Robin cannot collect from Gotham - Assignee steps into Assignor’s shoes and only has the rights to Assignor would have
