Third Parties to Contracts

Question 1

Intended v. Incidental Beneficiaries

Answer 1

only intended beneficiaries have contractual rights

To determine whether a beneficiary is intended, consider whether the beneficiary is

1) identified in the contract
2) receives performance directly from the promisor
3) has some relationship with the promisee to indicate the intent to benefit

Question 2

GA Third Party Intended Beneficiary Determination

Answer 2

Under GA law, it must clearly appear that both parties to the contract intended that the third party should be a beneficiary of the contract for the third party to have standing.

The contract must expressly specify and identify the person as a third party beneficiary

– the mere fact that the third party would indirectly benefit is not sufficient

Question 3

Creditor v. Donee Beneficiary

Answer 3

A creditor beneficiary is a person to whom a debt is owed by the promisee

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

Question 4

Rights of Third Party Beneficiaries

Answer 4

A beneficiary may sue the promisor on the contract & the promisor may raise defenses that it could assert against the promisee

A creditor beneficiary can sue the promisee on the existing obligation between them or the promisor under the beneficiary contract, but they may obtain only one satisfaction

a donee beneficiary has no right t sue the promisee unless grounds for detrimental reliance exist

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

Question 5

When do third party rights vest

Answer 5

A third party beneficiary can only enforce a contract if their rights have vested

vesting occurs when
– with knowledge of the contract, they manifest their assent to the contract in the manner requested by the parties
– the third party brings suit to enforce the contract
– with knowledge of the contract, the third party materially changed position in justifiable reliance on the contract

Question 6

Significance of Vesting

Answer 6

prior to vesting, the contracting parties are free to modify, rescind, and remove the third party without consulting the third party

Once the rights have vested, the parties cannot modify or vary the rights of the third party without his consent

Question 7

When can you make an assignment

Answer 7

Generally, all contractual rights may be assigned

EXCEPTIONS
– An assignment that would substantially change the obligor’s duty or risk
– an assignment of future right to arise from future contracts
– an assignment that is prohibited by law

Question 8

GA Assignments

Answer 8

In GA, unless the contract is for personal services or requires particular skill or qualifications, once a party to a contract performs to that the contract is no longer executory, the right to enforce the contract may be assigned without the other party’s consent, even if the contract contains a non-assignment clause

Question 9

Effect of Assignment

Answer 9

An assignment establishes privity of contract between the obligor and assignee while extinguishing privity between the obligor and assignor

once the obligor has knowledge of the assignment, he must render performance or payment to the assignee

Question 10

What is necessary for an assignment

Answer 10

For an assignment to be effective, the assignor must manifest an intent to immediately and completely transfer their rights

– a writing is generally not required
– consideration is not required

Question 11

Is an assignment revocable or irrevocable

Answer 11

Assignment for Value - an assignment for value is (1) given for consideration or (2) taken as security or payment of a preexisting debt

– An assignment for value cannot be revoked

Gratuitous Assignment - This is an assignment not for value

– Gratuitous assignments are generally revocable

Question 12

Exceptions to Revocability for Gratuitous Assignments

Answer 12

A gratuitous assignment is irrevocable if:

1) the obligor has already performed
2) a token chose is delivered
3) an assignment of a simple chose is put into writing; or
4) the assignee can show detrimental reliance on the assignment

Question 13

How can a gratuitous assignment be revoked

Answer 13

A revocable gratuitous assignment may be revoked by

1) death or bankruptcy of the assignor
2) notice of revocation by the assignor to the assignee or obligor
3) the assignor taking performance directly from the obligor
4) subsequent assignment of the same right by the assignor to another

Question 14

Contractual Provisions Against Assignment

Answer 14

1) an clause prohibiting an assignment of “the contract” will be construed as baring only delegation of the assignor’s duties

2) a clause prohibiting assignment of “contractual rights” generally does not bar assignment, but rather gives the obligor the right to sue for damages

3) if the contract provides that attempts to assign “will be void” - the parties can bar assignments

4) If the assignee has notice of the non-assignment clause, an assignment will be ineffective

Question 15

Rights of Assignee

Answer 15

The assignee can sue the obligor because it its the assignee (not the assignor) who is owed performance under the contract

– the obligor has any defense inherent in the contract and any it has against the assignor

– the obligor cannot raise a defense the assignor may have against the assignee

Question 16

Assignment for Value Warranty

Answer 16

In every assignment for value, the assignor warrants:

1) they have not made a prior assignment of the same right
2) the right exists and is not subject to any undisclosed defenses
3) they won’t interfere with the assigned rights

– the assignee can sue the assignor for breach of any of these warranties

Question 17

Multiple Assignments

Answer 17

If the first assignment is revokable, a subsequent assignment revokes it

IF the first assignment is irrevocable, the first assignment usually prevails over subsequent assignments

– the first assignment for consideration will prevail over subsequent assigns and previous gift assignees

Question 18

Delegation in General

Answer 18

Generally all duties may be delegated

Exceptions:
1) the duties involve personal judgment and skill
2) delegation would change the obligee’s expectancy
3) a special trust was reposed in the delegator by the other party to the contract
4) there was a contractual restriction on delegation

NOTE - a non-assignment clause will prevent delegation

Question 19

What is necessary for effective delegation

Answer 19

the delegator must manifest a present intent to make a delegation (oral or written)

Question 20

Rights and Liabilities in delegation

Answer 20

the obligee must accept performance from the delegate of all duties that may be delegated

The delegator remains liable on the contract - 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

Question 21

Assumption

Answer 21

This is a contract (express or implied) supported by consideration between the delegator and the delegate in which the delegate promises to perform the duty delegated

this promise creates a separate contract in which the obligee is now a third party beneficiary