rights and duties of third parties to the contract

Question 1

what is entrustment and what are the requirements

Answer 1

Entrustment means the dealer to whom you entrusted the goods has the power to transfer all rights of the entruster (you) to a buyer in the ordinary course of business

ex: you leave watch at jewelry store and jeweler sells it to someone else

REQUIREMENTS
(1) The merchant must be one who ordinarily deals/sells in goods of the kind
(for example, a television repair shop that only repairs televisions doesn’t qualify).

(2) The sale must be in the ordinary course of business
(for example, seizure by a creditor to satisfy a lien doesn’t qualify).

(3) Entrustment passes only the rights of the entruster (that is, if the entruster isn’t the owner, ownership cannot pass).

Question 2

what is the voidable title rule — when are defrauded sellers left with no remedy

Answer 2

if sale is induced by fraud, seller can rescind and recover the goods UNLESS the fraudulent buyer sold it to a good faith purchaser for value already

rights of defrauded sellers also cut off by a person who takes a security interest in the goods

Question 3

Void title rule (thieves) and exception

Answer 3

if a thief steals goods from the true owner and sells them to a buyer, thief is unable to pass title to the buyer because the thief-seller’s title was void and you can’t pass on void title

EXCEPTION
if buyer made accessions (valuable improvements) to the goods or the true owner is estopped from asserting title (if true owner represented that thief had title) then the new buyer can keep the goods

Question 4

what title can you transfer

Answer 4

seller can transfer only title they have or have power to transfer

Question 5

who is a third party beneficiary?

Answer 5

someone who is intended to be a beneficiary will have contractual rights

Consider whether beneficiary is
(1) identified in the K
(2) receives performance directly from the promisor,
or
(3) has some relationship with the promisee to indicate intent to benefit

Question 6

types of third party beneficiaries

Answer 6

creditor beneficiary – person to whom a debt is owed by promisee

donee beneficiary – a person whom the promisee intends to benefit gratuitously

Question 7

rights of third party beneficiary against the promisor [promisor is the one who is promising to do something for the third party]

Answer 7

3PB may sue promisor on the K

BUT

promisor may raise any defense against 3PB it has against the promisee

if promiser made absolute promise to pay, promisor cannot assert defenses

if promisor only made a promise to pay what promisee owes beneficiary, then promisor can assert defenses

Question 8

rights of third party Bs against promisees [the person who secures the promisor’s promise to the 3PB]

Answer 8

A creditor beneficiary can sue the promisee on the existing obligation between them
[OR they may sue the promisor… they may obtain only one satisfaction]

A donee beneficiary has no right to sue the promisee unless grounds for a detrimental reliance remedy exist.

Question 9

if there is a 3PB in the picture, what are the rights of the promisee against the promisor

Answer 9

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 10

what does a 3PB relationship look like

Answer 10

promisee contracts with promisor such that the promisor will render some performance to the 3PB

Question 11

when do rights of the beneficiary vest

Answer 11

when third party:
(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.

Question 12

prior to 3PB rights vesting, promisee and promisor can do what

Answer 12

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

Question 13

assignment terms

Answer 13

X (the obligor) contracts with Y (the assignor). Y assigns his right to X’s performance to Z (the assignee).

Batman contracts to provide security for Gotham City for $200,000. Batman (“assignor”) then assigns his right to the payment to Robin (“assignee”). Robin has the right to receive payment from Gotham City (“obligor”).

Question 14

what rights may be assigned

Answer 14

GENERAL RULE - 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 contracts);

(3) an assignment prohibited by law (like wage assignments in may states)

Question 15

effect of assignment

Answer 15

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. [privity between X and Z, but extinguish between X and Y]

Once the obligor (X) has knowledge of the assignment, they must render performance to or pay the assignee (Z).

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 16

requirements for assignment to be effective

Answer 16

REQUIRED:
(1) the assignor must manifest an intent to immediately and completely transfer their rights
[must be language of PRESENT transfer, cannot “promise to assign” rights, must be “I assign” ]

(2) The right being assigned must be adequately described

NOT REQUIRED
(1) A writing is usually not required to have an effective assignment.

(2) It is not necessary to use the word “assign”; any accepted words of transfer will suffice.

(3) no consideration is required.

Question 17

when are assignments revocable or irrevocable

Answer 17

REVOCABLE if gratuitous assignment
[unless exception applies]

EXCEPTION:
gratuitous assignment will become irrevocable IF:
(1) the obligor has already performed;
(2) a token chose (a tangible claim, such as a stock certificate) is delivered;
(3) an assignment of a simple chose (an intangible claim, such as a contract right) is put in writing;
OR
(4) the assignee can show detrimental reliance on the gratuitous assignment (estoppel).

IRREVOCABLE if assignment for value
(1) done for consideration
OR
(2) taken as security for or payment of a preexisting debt

Question 18

methods of revocation of assignment

Answer 18

A revocable gratuitous assignment may be terminated by:
(1) Death or bankruptcy of the assignor

(2) Notice of 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 assignor to another

Question 19

effect of revocation of assignment

Answer 19

privity between assignor and obligor is restored and assignor is once again real party in interest

Question 20

effectiveness of contractual provisions against assignment

Answer 20

EFFECTIVE AT BARRING ASSIGNMENT: “attempts to assign under this K will be void”
— assignee cannot collect

NOT EFFECTIVE AT BARRING ASSIGNMENT
“no assignment of the contract” = only bars delegation of assignor’s duties

“no assignment of contractual rights” =
(1) gives obligor right to sue for damages, but does not bar assignment
(2) assignee without knowledge of the prohibition can still collect

Question 21

rights and liabilities of assignee against the obligor

(Z against X)

Answer 21

assignee is the real party in interest who is entitled to performance, so it can sue obligor

obligor cannot raise defenses the assignor might have against the assignee, but can raise defenses against the assignee any defenses he has to the K

obligor has to know of the assignment to be required to pay to assignee though

Question 22

warranties guaranteed by assignor to assignee:

Answer 22

ONLY IN ASSIGNMENTS 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 23

who gets to collect when there are multiple assignees

Answer 23

If the first assignment is revocable/a gift, a subsequent assignment revokes it. = liability to subsequent assignee = last GRATUITIOUS assignee wins

-

If the first assignment is irrevocable [for value], the first assignment will usually prevail over all subsequent assignees for value and prior gift assignees. [first in time rule for assignments for consideration]

EXCEPTION:

If the second assignee has paid value and taken without notice of the first assignment, AND is there first to get payment or judgement against the obligor, the second assignee for value will prevail

-

CMR says that if the subsequent assignee for value did not have notice of prior assignment, the subsequent assignee is entitled to the following:

(1) subsequent assignee gets first judgment against the obligor

(2) The subsequent assignee gets the first payment of a claim from the obligor

(3) The subsequent assignee gets delivery of a token chose

(4) The subsequent assignee is the party to a novation releasing the assignor

(5) The subsequent assignee can proceed against the first assignee on an estoppel theory (estoppel could, of course, operate against the subsequent assignee as well)

Question 24

what is a delegation

Answer 24

In the typical delegation situation, Y (the obligor/delegator) promises to perform for X (the obligee). Y delegates their duty to Z (the delegate)

transfer of duty, not of rights

Question 25

what duties may be delegated

Answer 25

GENERAL RULE: ALL DUTIES MAY BE DELEGATED without consent of person who is owed performance

EXCEPTIONS:
* Duties involve personal judgment and skill

• Delegation would change the obligee’s expectancy (for example, requirements and output contracts)
• A special trust was reposed in the delegator by the other party to the contract
• There is a contractual restriction on delegation

Question 26

requirements for effective delegation

Answer 26

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

Question 27

prohibition against assignment is construed as being …

Answer 27

also a prohibition against delegation

Question 28

rights and liabilities of delegated parties

Answer 28

AGAINST OBLIGEE:
The obligee must accept performance from the delegate of all duties that may be delegated.

AGAINST DELEGATOR:
Delegator remains liable on the contract; thus, the obligee may sue the delegator for nonperformance by the delegate.

AGAINST DELEGATE:
The obligee or the Delegator may require the delegate to perform only if there has been an assumption, which means that there has been a delegation of consideration
(that is, the delegate expressly or impliedly promises they will perform the duty delegated and this promise is supported by consideration or its equivalent).
——-[words assigning “the contract” or “all my rights under the K” indicate assumption of duties by assignee/delegate ….. and there has to be consideration … gift delegations not enforceable]

This promise creates a contract between the delegator and the delegate in which the obligee is a third-party beneficiary.

Question 29

what happens when entruster entrusts goods to a bailee or whomever and then the bailee sells it to a BFV

Answer 29

original rights have no rights against Bona fide purchaser for value

Michael Phelps takes his watch to a jeweler to be repaired. The jeweler wrongfully sells the watch to Ryan Lochte. Can Phelps get his watch back from Lochte? NO

Question 30

after 3PB rights vest, promisee and promisor cannot do what

Answer 30

cannot rescind or modify the K

Question 31

Obligor and assignor contract for services such that assignor agrees to clean X for obligor. Let’s say that assignor assigns right to receive payment from cleaning to assignee. Assignor does not perform cleaning services. Obligor refuses to pay. Can assignee collect against obligor for nonpayment?

Answer 31

Yes but obligor can assert same defense against assignee that he has against assignor

assignee has same rights of assignor

Question 32

if assignor assigns rights to assignee without obligor’s knowledge, and obligor sends payment to assignor, is obligor liable to assignee?

Answer 32

no because no knowledge

Question 33

difference between delegation and novation

Answer 33

novation = parties to contract agree to substitute new party under the K

Ex: Gabby Douglas cannot delegate her duties to the olympics committee to Simone biles … if she gave her duties to Biles, that would be a novation

novation requires consent of all the parties

Question 34

when can you and can you not make assignments under a requirements contract?

Answer 34

Generally, the right to receive goods under a requirements K is not assignable because the obligor’s duties could change significantly

However, the UCC allows assignment of requirements contracts IF THE ASSIGNEE ACTS IN GOOD FAITH not to alter the terms of the K