Rights and Duties of Third Parties to the Contract

Question 1

Entrusting

Answer 1

• if you entrust goods to a merchant who deals in goods of that kind, you give the merchant the power (but not the right) to transfer all rights of the entruster to a buyer in the ordinary course of business
• includes both delivering goods to the merchant AND leaving purchased goods w/ the merchant for later pickup or delivery
• buying in the ordinary course means buying in good faith from a person who deals in goods of the kind w/o knowledge that the sale is in violation of the ownership rights of third parties

Question 2

Exam Tip Re Entrustment

Answer 2

• reqs are very specific
  -> merchant must be one who ordinarily deals in goods of the kind
  -> sale must be in the ordinary course of business
  -> entrustment passes only the rights of the owner

Question 3

Voidable Title Concept

Answer 3

• generally, if sale induced by fraud, seller can rescind sale + recover goods from fraudulent buyer
• BUT defrauded seller can’t recover goods from a good faith purchaser for value who bought from the fraudulent buyer
• rights of defrauded seller are cut off:
  -> by good faith buyer
  -> by person who takes a security interest in the goods

Question 4

Thief + Passing Title

Answer 4

• thief generally can’t pass title
  -> b/c thief’s title is void
• even good faith purchaser for value generally can’t cut off rights of true owner if seller’s title was void
• exception may apply if buyer has made accessions (valuable improvements) to the goods or true owner is estopped from asserting title

Question 5

Third-Party Beneficiary - General Scenario

Answer 5

• A (promisee) contracts w/ B (promisor) that B will render some performance to C (3rd party beneficiary)

Question 6

Intended vs. Incidental Beneficiary

Answer 6

• only intended beneficiaries have contractual rights

Question 7

How to Determine Whether Beneficiary = Intended

Answer 7

Consider whether beneficiary is:
1) identified in the contract
2) receives performance directly from the promisor OR
3) has some relationship with promisee to indicate intent to benefit

Question 8

Creditor vs. Donee Beneficiary

Answer 8

Two types of intended beneficiaries:
- creditor beneficiary = person to whom a debt is owed by the promisee
- donee beneficiary = person whom promisee intends to benefit gratuitously

Question 9

Third-Party Beneficiary vs. Promisor

Answer 9

• beneficiary may sue promisor on K
• promisor may raise against 3rd party beneficiary any defense that promisor has against promisee
• whether promisor may use defenses the promisee would have against the third party beneficiary depends on whether promisor made an absolute promise to pay or only a promise to pay what promisee owes beneficiary
  -> if promise is absolute, promisor can’t assert promisee’s defenses
  -> if NOT absolute, CAN assert promisee’s defenses
• keep in mind 3rd party can only enforce if rights have vested

Question 10

Rights of Third-Party Beneficiary vs. Promisee

Answer 10

• creditor beneficiary can sue promisee on the existing ob between them
• can also sue promisor, but can only obtain one satisfaction
• donee beneficiary has no right to sue promisee unless grounds for detrimental reliance remedy exist
• keep in mind 3rd party can only enforce if rights have vested

Question 11

Rights of Promisee vs. Promisor

Answer 11

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

Question 12

Vesting - Significance

Answer 12

• third party can enforce K ONLY if their rights have vested
• prior to vesting, promisee + promisor are free to modify or rescind beneficiary’s rights under the contract
  -> even w/o consulting 3rd party
  -> includes removing beneficiary altogether
• vs. once rights vest, promisor + promisee can’t vary beneficiary’s rights w/o his consent

Question 13

Vesting - When Does This Occur

Answer 13

When 3rd party:
1) manifests assent to a promise in the manner requested by the parties
2) brings suit to enforce the promise OR
3) materially changes position in justifiable reliance on the promise

Question 14

Third-Party Beneficiaries - Exam Tip

Answer 14

• pay attention to who is bringing the suit -> b/c beneficiary rights vest when they bring suit to enforce K, act of bringing the suit vests their rights (nothing else required)
  -> means any answer choice saying their rights haven’t vested yet is incorrect

Question 15

Assignment - Typical Situation

Answer 15

• X (obligor) contracts w/ Y (assignee)
• Y assigns his rights to X’s performance to Z (assignee)

Question 16

What Rights May Be Assigned?

Answer 16

• generally, all contractual rights may be assigned

Question 17

Exceptions to General Rule Re Which Rights Can Be Assigned

Answer 17

• an assignment that would substantially change obligor’s duty or risk (ex: personal service Ks where service is unique)
• assignment of future rights to arise from future Ks (not future rights in already existing Ks
• assignment prohibited by law (includes wage assignments in some states)

Question 18

Effect of Assignment

Answer 18

• establishes privity of contract between obligor + assignee AND extinguishes privity between obligor + assignor
• once obligor has knowledge of the assignment, they MUST render performance to or pay assignee
  -> if does so to assignor instead, does so at own risk
  -> typically one of the parties (usually assignee) will notify obligor of the assignment

Question 19

What is Necessary for an Effective Assignment?

Answer 19

• assignor must manifest an intent to immediately and completely transfer their rights
• writing usually not required
• right being assigned must be adequately described
• not necessary to use the word “Assign” -> any accepted words of transfer will suffice
• no consideration required (gratuitous assignment is effective)

Question 20

Assignment for Value

Answer 20

An assignment that is:
1) done for consideration OR
2) taken as security for or payment of pre-existing debt

Question 21

Is Assignment Revocable or Irrevocable?

Answer 21

• irrevocable if assignment for value
• revocable if assignment not for value (gratuitous assignment)

Question 22

Gratuitous Assignments - Exceptions to Revocability

Answer 22

Gratuitous assignment irrevocable if:
1) obligor has already performed
2) a token chose (i.e. a tangible claim, like a stock certificate) is delivered
3) an assignment of a simple chose (intangible claim, such as a K right) is put in writing OR
4) assignee can show detrimental reliance on the gratuitous assignment (estoppel)

Question 23

Gratuitous Assignment - Methods of Revocation

Answer 23

Revocable gratuitous assignment can be terminated by:
1) death or bankruptcy of assignor
2) notice of revocation by assignor to assignee or obligor
3) assignor taking performance directly from obligor OR
4) subsequent assignment of same right by assignor to another

Question 24

Effect of Revocation of Assignment

Answer 24

• once assignment revoked, privity between assignor + obligor is restored, + assignor is once again the real party in interest

Question 25

Express Contractual Provision Against Assignment

Answer 25

• clause prohibiting assignment of “the contract” will be construed as barring only delegation of the assignor’s duties
• clause prohibiting assignment of “contractual rights” generally doesn’t bar assignment -> just gives obligor right to sue for damages
• if K provides that attempts to assign will be void, parties can bar assignment
• if assignee has notice of nonassignment clause, assignment will be ineffective

Question 26

Rights and Liabilities - Assignee vs. Obligor

Answer 26

• assignee can sue obligor as the real party in interest
  -> assignee is the one entitled to performance
• obligor can raise any defenses they’d have inherent in the K, but CAN’T raise any defenses assignor might have against assignee

Question 27

Rights and Liabilities - Assignee vs. Assignor

Answer 27

In every assignment for value, assignor warrants that:
1) they haven’t made proper assignment of the same right
2) the right exists + isn’t subject to any undisclosed defenses AND
3) they won’t interfere w/ the assigned right

• assignee may sue for breach of any of these warranties
• assignor won’t be liable to assignee if the obligor is incapable of performing

Question 28

Multiple Assignments - Which Assignee Gets to Collect?

Answer 28

• if first assignment is revocable, subsequent assignment revokes it
• if it is irrevocable, first assignment will usually prevail over a subsequent assignment

Question 29

Multiple Assignments - All Gratuitous

Answer 29

• last gratuitous assignee prevails over earlier gratuitous assignees b/c later gift assignment revokes earlier one

Question 30

Situations in Which Subsequent Assignee for Value Might Win

Answer 30

If has paid value + taken w/o notice of first assignment AND
- subsequent assignee gets 1st judgment against obligor
- subsequent assignee gets first payment of a claim from the obligor
- subsequent assignee gets delivery of a token chose
- subsequent assignee = party to a novation releasing the assignor
- subsequent assignee can proceed against first assignee on an estoppel theory

Question 31

Delegation - Typical Situation

Answer 31

• Y (obligor/delegator) promises to perform for X (obligee)
• Y delegates their duty to Z (delegate)

Question 31

What Duties May Be Delegated?

Answer 31

• generally, all duties may be delegated

Question 32

Exceptions to General Rule Re Duties That Can Be Delegated

Answer 32

Can’t delegate if:
1) duties involve personal judgment + skill
2) delegation would change the obligee’s expectancy (ex: requirements + output Ks)
3) special trust was reposed in delegator by the other party to the K AND
4) there’s a contractual restriction on delegation

Question 33

What Is Necessary for Effective Delegation?

Answer 33

• delegator must manifest a present intention to make a delegation
• no special formalities to be complied w/ to have a valid delegation
• may be written or oral

Question 34

Exam Tip Re Assignment + Delegation

Answer 34

• book says MBE often uses these terms a bit loosely (may see one mentioned but fact pattern shows other also occurred)
• prohibition against assignment usually construed as a prohibition against delegation too

Question 35

Delegation - Rights + Liabilities of the Parties

Answer 35

• obligee must accept performance from delegate of all duties that may be delegated
• delegator remains liable on the contract
  -> obligee may sue delegator for nonperformance by the delegate
• obligee may require the delegate to perform only if there’s been an assumption (i.e. delegate expressly or impliedly promises they will perform the duty delegated + this promise is supported by consideration or its equivalent
  -> promise creates K between delegator + delegate in which obligee = 3rd party beneficiary

Question 36

Distinguishing Novation from Delegation

Answer 36

• novation substitutes a new party for an original party to the K
• requires assent of ALL parties + completely releases the original party