Rights and Duties of Third Parties to the Contract Flashcards
What is entrusting? What is the legal effect of entrusting goods to a merchant?
Entrusting includes both delivering goods to a merchant and leaving purchased goods with the merchant for later pickup or delivery.
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 entruster to a buyer (bona fide purchaser, “BFP”) 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.
In short: Entrusting goods to a merchant who deals in goods of the kind that you entrusted them with gives them the power to sell your goods to someone else (the BFP), and any rights you had in the goods fully transfer to the BFP.
Generally, if a sale is induced by fraud, what may the seller do?
The seller can rescind the sale and recover the goods from the fraudulent buyer (i.e., it is a voidable title).
May a defrauded seller recover goods from a good faith purchaser for value (BFP) who bought from the fraudulent buyer? Why?
No. The rights of the defrauded seller are but off by the BFP, or by a person who takes a security interest in the goods.
May a thief pass title of stolen goods to a BFP? Why? Exceptions?
No. The thief cannot pass title to the buyer because the thief’s title is void. A seller can transfer only the title they have or have the power to transfer. The thief never had title at all, so he cannot pass title to the buyer.
EXCEPTION 1: If the buyer has made accessions (valuable improvements) to the goods, the buyer may gain title to the goods.
EXCEPTION 2: If the true owner expressly or impliedly represents that the thief had title, the true owner may be estopped from asserting title.
What is the difference between an intended and an incidental beneficiary? What is the legal significance?
An intended beneficiary is one who was intended to receive the benefits of a contract between 2 or more other parties. Intended beneficiaries are usually named in the contract, though they are not a party to the contract. An intended beneficiary has contractual rights.
An incidental beneficiary is one who was not intended to receive the benefits of a contract between 2 or more other parties, but who nevertheless benefits from it for some reason. An incidental beneficiary DOES NOT have contractual rights.
In determining if a beneficiary is intended, consider whether the beneficiary:
(1) is identified in the contract,
(2) receives performance directly from the promisor, OR
(3) has some relationship with the promisee to indicate intent to benefit
What are the two types of intended beneficiaries?
(1) a creditor beneficiary - a person to whom a debt is owed by the promisee
(2) a donee beneficiary - a person whom the promisee intends to benefit gratuitously
What are the rights of a third-party beneficiary against the promisor?
A beneficiary may sue the promisor on the contract if the promisor breaches
What are the rights of a third-party beneficiary against the promisee?
A creditor beneficiary can sue the promisee on the existing obligation between them. They may also sue the promisor, but may obtain only one satisfaction.
A donee beneficiary has no right to sue the promisee unless ground for detrimental reliance exist.
What are the rights of the promisee against the promisor?
A promisee may sue the promisor both at law and in equity for specific performance
When do the rights of a third-party beneficiary vest?
A third party can enforce a contract only if their rights have vested. This occurs when they:
(1) manifest assent to a promise in the manner requested by the parties;
(2) bring a suit to enforce the promise; or
(3) materially change position in justifiable reliance on the promise
What is the legal significance of vesting for third-party beneficiaries’ rights?
Before the intended third-party beneficiary’s rights vest, the promisor and promisee are free to modify their contract—including removing the third-party beneficiary altogether—without consulting the third party.
Once the third party’s rights have vested, the promisor and promisee cannot vary his rights without his consent.
What is assignment?
When one party (A, the obligor) contracts with another party (B, the obligee/assignor), and B assigns (transfers) his right to A’s performance to a third party (C, the assignee).
What rights may be assigned to a third party? Exceptions?
Generally, ALL contractual rights may be assigned.
EXCEPTIONS:
(1) an assignment that would substantially change the obligor’s duty or risk (e.g., 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 contracts); and
(3) an assignment prohibited by law (including wage assignments in some states)
What is the legal effect of assignment?
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.
