Third Parties and Damages

Question 1

Who is a 3rd-Party Beneficiary?

Answer 1

A third party that benefits from a K entered into between other parties is a third-party beneficiary (‘‘3PB’’)

• Intended TPBs - parties to the K intend for TPB to benefit from the K; TPB has rights under the K
• Incidental TPBs - stands to benefit from K although not intended by parties to the K; has no rights under the K

Question 2

When a 3P is a 3PB?

Answer 2

Whether a TPB is an intended beneficiary under the K is a question of fact; courts look at the following factors:

1. Is TPB expressly designated in the K?
2. Does TPB directly benefit from some performance under the K?
3. Does TPB have rights under the K?
4. Does TPB stand in such a relationship to the promisee under the K that an intent to benefit the third party can be inferred?

• If answer to any of the above is ‘‘yes,” more likely that TPB is intended

Question 3

What are the 3PB types?

Answer 3

Types of TPB

• Incidental TPBs they have no right to sue
• Intended TPBs have a right to sue for breach of K even though they are not parties to the K
  
  • Creditor TPBs - benefit is conferred based on a debt owed by the promisee to the K
  • Donee TPBs - benefit is conferred gratuitously

Question 4

When the rights of 3p beneficiaries exist (vest)? What happen after they do?

Answer 4

In order to enforce rights under a K, a TPB’s rights must vest. However before that the parties can change the terms of his rights on the K

Vesting of rights - occurs when the TPB either:

1. Accepts benefits- accepts the benefits of the K in a manner requested by the parties to the K,
2. Sues to enforce- brings suit to enforce the K, or
3. Detrimental reliance- detrimentally relies on the K (i.e., materially changes position in justifiable reliance on the K)

Question 5

Enforcing the K by the TPB

Answer 5

• 3PB can sue promisor: Promiser can assert any of his own defenses, however the defenses would only work if there is no absolute promise by the promisor to the promisee
• 3PB can sue promisee: 3PB can only sue promisee if 3PB is a creditor beneficiary, a donee can’t unless a reliance remedy exist
• Promisee can sue promisor at law and in equity for specific performance when he is not performing for 3PB

Question 6

What is an Assignment? General Requirements?

Answer 6

An assignment is a transfer of rights under a K to a third party after the K is formed

• Generally, a party can assign rights and benefits under a K to a third party unless the K prohibits assignments
• Consideration- not required, but assignment without consideration is considered gratuitous

Question 7

What are the limitations on assignment applicable by law?

Answer 7

• If the assignment substantially changes the duty or risk of the obligor
• No assignments of rights arising from future contracts
• Common law bars any assignment that substantially changes the duties of the obligor
  
  • Assignment of payment is not a substantial change
  • Assignment of rights to performance is a substantial change

Question 8

K limitation on rights of assignment

Answer 8

Ks may contain clauses that either prohibit or invalidate assignment of rights:

• Prohibiting assignment of rights - takes away the right to assign, but not the power to assign
  
  • I.e., an assignee can still enforce the assignment if he was unaware of the provision. Here the assignor breached the agreement is assigned anyway
• Invalidating assignments - takes away both the right and power to assign
  
  • I.e., any assignment is invalid and unenforceable

Question 9

Revocability of assignments

Answer 9

Gratuitous assignments may be revocable, however assignments made for value are irrevocable

• Value: Consideration or as a security of payment of a preexistent debt
• Exception to gratuitous assignments is irrevocable if either:
  
  • Detrimental reliance by assignee (i.e., estoppel)
  • Assignee has received a written claim or tangible object (token) signifying a right to collect (e.g., stock certificate), or
  • Obligor has already performed,

Question 10

Enforcement of assignment

Answer 10

Assignee right to sue- assignee can sue:

• Obligor- for non-performance; and
  
  • Obligor can raise any defense to the K that he could have raised against the assignor
• Assignor- for wrongful revocation of assignment or breach of an implied warranty
  
  • Assignor makes assignment with implied warranty that the right to assign was not subject to defenses

Question 11

Delegation (general concept)

Answer 11

A delegation occurs when one party to a K (delegator) delegates the duties she owes to another party to the K (the obligee) to a third party (the delegatee)

• Obligee must generally accept performance from delegate (unless duty is not delegable)
• Only duties may be delegated, whereas rights may be transferred to a third-party via assignment

Question 12

Delegation and Liability of delegator and delegatee

Answer 12

Liability - delegator remains liable for delegatee’s performance

• Obligee (creditor) may sue delegator for non-performance by delegate
• Obligee may only sue delegatee if the delegatee has assumed duties of the entire K

Question 13

Delegation, duties Exception

Answer 13

Exceptions - duties are non-delegable if:

1. Duties involve personal judgment and skill,
2. Delegation materially changes the obligee’s expectancy under the K,
3. A party has placed special trust in the delegator, or
4. A contractual provision restricts delegation

Question 14

Delegation vs novation

Answer 14

• Novation: arises when both parties agree that a substitute person will take over duties under the K,
• whereas a delegation occurs when one party independently decides to delegate duties to a third party

Question 15

Standard Money Damages (List)

Answer 15

1. Expectation damages (Standard, on substituon of performance)
2. Reliance damages (everything back as if K never formed)
3. Consequential damages (foreseeable damages known to the parties)
4. Incidental damages (expenses caused by the breach)

Additional damages

1. Restitution damages
2. Liquidated damages

Question 16

Expectation damages

Answer 16

Expectation damages - standard measure of money damages

• Puts the parties in the economic position they would be in if the K had been performed (i.e., if the breach never occurred)
• Note - when in doubt, look for the answer that most closely gives P (i.e., non-breaching party) the money she would have received absent the breach

Question 17

Reliance damages

Answer 17

Reliance damages - alternative measure used when expectation damages are too speculative

• Designed to compensate P based on the value of her performance

Question 18

Consequential damages

Answer 18

Consequential damages - foreseeable losses indirectly resulting from a breach (e.g., lost profits); recoverable if:

1. Damages are a foreseeable result of the breach; and
2. When K was formed, D had reason to know P would suffer special, unpreventable, or unexpected damages in the event of a breach

>> UCC Ks- only buyers can recover

Question 19

Incidental Damages

Answer 19

Incidental damages - commercially reasonable expenses incurred by the non-breaching party in UCC Ks ( e.g., costs of inspecting, returning, storing, reselling goods)

Question 20

Non-monetary remedies list

Answer 20

In the event of a breach, certain non-monetary damages (i.e., equitable relief) may be available if money damages are unavailable or inadequate

1. Specific performance (not available for services, unless injunction)
2. Rescission
3. Reformation
4. Reclamation

Question 21

Specific performance remedy

Answer 21

Specific performance - usually only available for Ks involving real estate or unique goods (e.g., antiques, art)

• For service Ks, injunctions preventing breach may be available (e.g., injunction enforcing non­ compete clause)

Question 22

Rescission (Remedy)

Answer 22

Rescission - cancellation of a K

• Purpose is to restore parties to their positions before K was made
• Often arises where there is mistake, misrepresentation, duress, or some other defense to K enforcement or formation

Question 23

Reformation (remedies)

Answer 23

Reformation - remedy whereby a K is changed so that it reflects parties’ original intent

• Can arise where there is a mistake in K formation such that the final K varies from a prior written agreement of parties
• Can also arise where K is inaccurate due to some misrepresentation

Question 24

Reclamation (Remedy)

Answer 24

Reclamation - in UCC Ks, unpaid sellers may stop delivery or reclaim goods from an insolvent buyer

• Unpaid seller can never reclaim goods from subsequent buyers

Question 25

Restitution Damages

Answer 25

Restitution damages- arise in quasi-K situations

• Applies if there is no enforceable K, but a party has been unjustly enriched
• Awarded based on value of the benefit wrongfully conferred
• Party cannot recover both expectation damages and restitution damages

Question 26

Liquidated damages

Answer 26

Liquidated damages - agreed-upon K provisions that stipulate specified damages upon the occurrence of a breach

• Requirements- liquidated damages provisions are valid only if:

1. Damages are difficult to project at time of K formation; and
2. The provision is a reasonable estimate of actual damages

They are recoverable even if no breach occurred

Question 27

Duty to Mitigate Damage

Answer 27

Duty to mitigate - all parties must mitigate damages (i.e., avoid incurring excessive losses)

• A party may not recover for avoidable damages
• D bears the burden of showing P’s failure to mitigate

Question 28

UCC Contracts Damages

Answer 28

Breach by seller & buyer keeps goods:

>> Damages= fair market value (FMV) of perfectly­ delivered goods minus FMV of the goods actually delivered

>> Note- if seller breaches by delivering non­ conforming but superior goods, buyer is not responsible for value of superior goods (i.e., it does not reduce buyer’s damages)

Breach by seller & seller keeps or buyer returns goods:

>> Damages= whichever of the following is higher:

1. FMV of goods at the time of breach minus K price, or
2. Buyer’s costs of covering/replacing goods minus K price

Breach by buyer & buyer has goods:

• Damages = K price

Breach by buyer & seller has goods:

>> Damages= either:

• K price minus market price at the time of delivery, or
• K price minus resale price plus provable lost profits

Question 29

UCC Contracts Lost Profits

Answer 29

Lost profits - a seller can recover the lost profits from a buyer’s breach, even though she resold the item that was the subject of buyer’s breach, if she can prove that she would have made a sale to the second buyer regardless of the first buyer’s breach