Rights and Duties of 3rd Parties

Question 1

Power of person other than owner to transfer good title to a purchaser - entrusting

Answer 1

Entrusting goods to a merchant who deals in goods of that kind gives them the power, but not the right, to transfer all rights of the interest to a buyer in the ordinary course of business. Remember, the merchant must be one who ordinarily deals in goods of the kind.

Entrusting includes both delivering goods to the merchant and leaving purchased goods with the merchant for pick up or delivery

Buying in the ordinary course means buying in good faith from a person who deals in goods of the kind without knowledge of the sale is in violation of the ownership rights of third parties.

Question 2

Power of person other than owner to transfer good title to a purchaser - voidable title concept

Answer 2

Generally, if a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer, meaning it is a voidable title. However, the defrauded seller may not recover the goods from a good faith purchaser for value bought from the fraudulent buyer. The rights of a defrauded seller are cut off both by a good faith buyer and a person who takes a security interest in the goods.

Question 3

Power of person other than owner to transfer good title to a purchaser - thief generally cannot pass title

Answer 3

If a thief steals goods from the true owner and then sells them to a buyer, the thief is unable to pass title to the buyer because their title is void. A seller can transfer only the title they have or the power to transfer. Therefore, even a good faith purchaser for value generally cannot cut off the right of the true owner, if the seller’s title was void.

An exception may apply, however, if the buyer has made ascensions (valuable improvements to the goods) or the true owner is stopped from asserting title, such as the owner expressly or impliedly represented the thief had title.

Question 4

Third-party beneficiaries - who is the third-party beneficiary? - intended vs. incidental beneficiary

Answer 4

In a typical third-party beneficiary situation, one person contracts with another, and the promisor will render some performance to a third-party.

Only intended beneficiaries have contractual rights, not incidental beneficiaries. In determining if a beneficiary is intended, consider whether the beneficiary: is identified in the contract, receives performance directly from the promisor, or has some relationship with the promisee indicating an intent to benefit. 

Question 5

Third-party beneficiaries - who is the third-party beneficiary? - creditor vs. donee beneficiary

Answer 5

There are two types of intended beneficiaries: 1) a creditor beneficiary: a person whom debt is owed by the promisee, and 2) donee beneficiary: a person whom the promisee intends to benefit gratuitously. 

Question 6

Third-party beneficiaries - what are the rights of the 3rd party beneficiary and the promisee? - 3rd party ben vs promisor

Answer 6

Beneficiary may sue the promisor on the contract. The promisor may raise against the third-party beneficiary, any defense that the promissee had against the promisor. Whether the promisor may use the defenses, the promisee had against the third-party beneficiary depends on whether the promisor made an absolute promise to pay or only a promise to pay what the promisee owes the beneficiary. If the promise is absolute, the promisor cannot the promisee’s defenses. If the promise is not absolute, the promisor can assert the promisee’s defenses. 

Question 7

Third-party beneficiaries - what are the rights of the 3rd party beneficiary and the promisee? - 3rd party ben vs promisee

Answer 7

The creditor beneficiary can sue the promisee on the existing obligation between them. They may also sue the promissor, but may obtain only one satisfaction. A donee beneficiary has no right to sue the promisee unless grounds for a detrimental reliance remedy exist. 

Question 8

Third-party beneficiaries - what are the rights of the 3rd party beneficiary and the promisee? - promisee vs. promisor

Answer 8

A promisee may sue the promisor both at law and in equity for specific performance if the promisor isn’t performing for the third person.

Question 9

Third-party beneficiaries - when do the rights of the beneficiary vest? - generally

Answer 9

A third-party can enforce a contract only if their rights have vested. This occurs when they:

Manifest assent to a promise in the manner requested by the parties

Bring a suit to enforce the promise

OR

Material changed position in justifiable reliance on the promise.

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

Question 10

Third-party beneficiaries - when do the rights of the beneficiary vest? - significance of vesting

Answer 10

Before the intended third-party beneficiary’s rights vest, the promisor and promisee are freedom to modify their contract, including removing the third-party beneficiary altogether, without consulting the third party. However, once the third-party’s right vests, they can no longer vary his rights without consent.

If the question says the third-party beneficiary is the one bringing suit, any answer choice that states the third-party beneficiaries’ rights have not yet vested is incorrect because the act of bringing the suit, in and of itself, vests their rights

Question 11

Assignment of rights - what rights may be assigned?

Answer 11

In an assignment, an original party to the contract assigns his rights under the contract to the other party’s performance to someone who is not originally part of the contract.

Generally, all contractual rights may be assigned.

Exceptions: 1) an assignment that would substantially change the obligor’s duty or risk, for example, personal service contracts where the service is unique 2) an assignment of future rights to arise from future contracts, not future rights in already existing contract contracts 3) an assignment, prohibited by law, including wage assignments in some states.

Question 12

Assignment of rights - effect of assignment

Answer 12

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor. Once the obligor has knowledge of the assignment, they must render performance to or pay the assignee. If the obligor renders performance to or pays the assignor, they do so at their own risk. Typically, one of the parties, usually the assignee will notify the obligor of the assignment. 

Question 13

Assignment of rights - what is necessary for an effective assignment

Answer 13

For an assignment to be effective, the assignor must manifest an intent to immediately and completely transfer their rights. A writing is usually not required to have an effective assignment. The right being assigned must be adequately described. It is not necessary to use the word assign, any accepted words of transfer will suffice. Gratuitous assignment is effective, consideration is not required. 

Question 14

Assignment of rights - is the assignment revocable or irrevocable?

Answer 14

Assignments are divided into two categories: assignments for value and gratuitous assignments.

An assignment is for value if it is: for consideration or taking a security for or payment of a pre-existing debt. Assignments for value cannot be revoked.

A gratuitous assignment is generally revocable and is one not for value.

Question 15

Assignment of rights - is the assignment revocable or irrevocable? - exceptions to revocability

Answer 15

A gratuitous assignment is irrevocable if: 1) the obligor has already performed 2) token chose (that is, a tangible claim, such as a stock certificate) is delivered 3) an assignment of a simple chose (that is, an intangible claim such as a contract rate) is put in writing, or 4) the assignee can show detrimental reliance on the gratuitous assignment.

Question 16

Assignment of rights - is the assignment revocable or irrevocable? - methods of revocation

Answer 16

A revocable gratuitous assignment may be terminated by: 1) the death or bankruptcy of the assignor 2) notice or revocation by the assignor to the assignee or the obligor 3) the assignor taking performance directly from the obligor, or 4) subsequent assignment of the same right by the assignor to another.

Question 17

Assignment of rights - is the assignment revocable or irrevocable? - effect of revocation

Answer 17

Once an assignment is revoked, the privity between the assignor and the obligor is restored, and the assignor is once again, the real party in interest. 

Question 18

Assignment of rights - express contractual provision against assignment

Answer 18

A clause prohibiting assignment of the contract will be construed as barring only delegation of the assignor’s duty. A clause prohibiting assignment of contractual rights generally doesn’t bar assignment, but rather merely gives the obligor the right to sue for damages. However, if the contract provides that attempts to assign will be void, the parties can bar assignment. Also, if the assignee has notice of the non-assignment clause, the assignment will be ineffective. 

Question 19

Assignment of rights - what are the rights and liabilities of the various parties? - assignee vs. obligor

Answer 19

The assignee can sue the obligor, as the assignee is the real party in interest. It is the assignee, not the assignor, who is entitled to performance under the contract. The obligor cannot raise by way of defense, any defenses the assignor might’ve had against the assignee.

Question 20

Assignment of rights - what are the rights and liabilities of the various parties? - assignee vs. assignor

Answer 20

In every assignment for value, the assignor warrants that: 1) they have not made a prior assignment of the same right 2) the right exists and is not subject to any undisclosed defenses and 3) they won’t interfere with the assigned right. The assignee may sue the assignor for breach of any of these warranties. However, the assignor won’t be liable to the assignee if the obligor is incapable of performing.

Question 21

Assignment of rights - multiple assignment - who gets to collect? - generally

Answer 21

If the first assignment is revocable, a subsequent assignment revokes it.

If it is irrevocable, the first assignment will usually prevail over a subsequent assignment.

Question 22

Assignment of rights - multiple assignment - who gets to collect? - gratuitous assignments

Answer 22

The last gratuitous assignee prevails over the earlier gratuitous assignee because a later gift assignment revokes an earlier one. 

Question 23

Assignment of rights - multiple assignment - who gets to collect? - assignments for consideration

Answer 23

If a second assignee has paid value and taken without notice of the first assignment: the subsequent assignee gets the first judgment against the obligor the subsequent, the subsequent assignee gets the first payment of claim from the obligor, the subsequent assignee gets delivery of a token chose, the subsequent assignee is the party to a novation releasing the assignor, the subsequent assignee can proceed against the first assignee on an estoppel theory.

Question 24

Delegation - what duties may be delegated

Answer 24

In the typical delegation situation, the obligor promises to perform for the obligee. The obligor delegates their duty to the delegate.

Generally, all duties may be delegated. Exceptions: 1) the duties involve personal judgment and skill, 2) delegation would change the obligees expectancy, for example, requirements and output contracts 3) a special trust was proposed in the delegator by the other party to the contract, and 4) there’s a contractual restriction on delegation.

Question 25

Delegation - what is necessary for effective delegation?

Answer 25

The delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral. 

Question 26

Delegation - what are the rights and liabilities of the parties?

Answer 26

The obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract. Thus, the obligee may sue the delegator for non-performance by the delegate. The obligee may require the delegate to perform only if there has been an assumption, meaning the delegate expressly or implied promises that they will perform a duty delegated and this promises supported by consideration or equivalent. The promise creates a contract between the delegator and the delegate, in which the obligate is a third-party beneficiary.

Question 27

Delegation - terminology

Answer 27

Today, words assigning “the contract” or “all of my rights under the contract” are usually construed as including an assumption of the duties by the assignee unless a contrary intention appears. 

Question 28

Novation distinguished from assignment or delegation

Answer 28

A novation substitutes a new party for the original party to the contract. It requires assent of all the parties and completely releases the original party that is substituted.