Third Party Beneficiaries

Question 1

Define

third party beneficiary

Answer 1

Person who is not a party to K that K benefits

Question 2

What are the types of beneficiaries in the:

1. First Restatement (minority jurisdictions)
2. Second Restatement

Answer 2

1. First Restatement:
   
   • Creditor
   • Donee
   • Incidental
2. Second Restatement:
   
   • Intended (includes creditor and donee)
   • Unintended

Question 3

Define

creditor beneficiary

Answer 3

A third-party beneficiary of the contract; the promisee seeks performance by the promisor to fulfill an obligation owed to the third party creditor beneficiary.

More info: Third Party Beneficiaries, First Restatement

Question 4

Define

donee beneficiary

Answer 4

A third party beneficiary to the contract; the promisee seeks performance from the promisor in order to make a gift to a third party donee beneficiary.

Question 5

Define

incidental beneficiary

Answer 5

A third party who benefits from performance of the K, even though the benefit to them wasn’t the parties’ primary intent in forming the K

Question 6

What are the incidental beneficiary’s rights under the contract?

Answer 6

They do not have any rights to seek enforcement of the contract

Question 7

Define

intended beneficiary

Answer 7

Someone for whom the contracting party intended to benefit with the contract; can seek enforcement of K

Question 8

When does an intended beneficiary have rights to seek enforcement of the contract against the:

1. Promisor?
2. Promisee?

Answer 8

1. Against the Promisor: always, because promisor is under an obligation to the beneficiary
2. Against the Promisee: never concerning enforcement of the promised performance under the new contract; a 3rd party beneficiary will only have rights against the promisee if there was a prior obligation between promisee and third party beneficiary

Question 9

When do the interests of an intended third party beneficiary vest?

Answer 9

A third party intended beneficiary’s interest vests if:

1. Beneficiary sues;
2. Beneficiary justifiably changes her position of reliance on the K;
3. At the request of the parties, the beneficiary manifests assent to the contract; or
4. The contract’s express terms state that the rights have vested

Question 10

What is the consequence of an intended third party beneficiary’s rights vesting?

Answer 10

Both parties are bound to the contract and must gain consent of the beneficiary to modify or rescind

Question 11

What defenses are available to promisors against the beneficiary?

Answer 11

Any valid defenses the promisor has against the promisee

Question 12

1. In a contract with intended third party beneficiaries, when the promisor breaches their duties, what right does the promisee have against the promissor?
2. What if the beneficiary is a donee beneficiary?
3. What if the beneficiary is a creditor beneficiary?

Answer 12

1. When the promisor does not perform, the promisee has a claim for breach of contract against the promisor, and may possibly seek specific performance or damages, BUT…
2. If the promisor’s performance is intended to benefit a donee beneficiary, then the promisee has no damages, but specific performance may be appropriate.
3. If the promisor’s performance is intended to benefit a creditor beneficiary, then the promisee may seek enforcement of the promisor’s obligation

Question 13

Define

assignment

Answer 13

Transfer of K rights; generally allowed

Question 14

What is required to make an effective assignment?

Answer 14

Owner of right manifests a present intent to transfer the existing right

Question 15

What are the 4 situations where contract rights are not assignable?

Answer 15

Rights are not assignable when:

1. Assignment would materially alter the risks or obligations with respect to the other party to the contract;
2. Assignment would violate the law or public policy;
3. The obligor has a personal interest in providing their service to the obligee rather than a 3rd party; or
4. The contract specifies that assignments are prohibited

Question 16

Can you prohibit someone from assigning their right to receive payment?

Answer 16

No, assignment of payment is allowed

Question 17

What happens if there is an assignment of rights but the K says “assignment of rights under this contract is prohibited”?

Answer 17

The assignor has breached the contract, and is likely liable for damages to the obligor, but most courts would hold it is not a basis for nullifying the obligor’s obligation to perform to the benefit of the assignee.

Question 18

What is the effect if the contract prohibits “assignment of the contract” but does not specify further?

Answer 18

Courts will generally interpret this to mean a prohibition of the delegation of duties, but not an assignment of rights

Question 19

When are assignments revocable and when are they irrevocable?

Answer 19

Revocable: all gratutious assignments unless assignee has detrimentally relied on the assignment.

Irrevocable: assignments made with consideration

Question 20

An assignor impliedly warrants what two things to the assignee?

Answer 20

An assignor impliedly warrants to the assignee that she:

1. Does not know any facts that would defeat the value of the assignment, and will not take any action that would do the same; and
2. Actually has the right she claims and said right is not subject to limitations or defenses that would undermine the assignee’s interests

Question 21

When can an assignee sue the obligor?

Answer 21

When the obligor is in breach of their duties under the K; the assignee has the same rights as the assignor would have had, had the K not been assigned.

Question 22

When can an assignee sue the assignor?

Answer 22

Breach of warranty or revocation

Question 23

Define

delegation

Answer 23

Transfer of K obligations

(vs. assignment, which is a transfer of rights)

Question 24

What are the two situations where duties are non-delegable?

Answer 24

Generally all contractual duties are delegable, unless:

1. Performance of the service is personal, and the beneficiary of the performance values the unique service (character, reputation, taste, discretion, skill) of the intended performing party; or
2. K specifies that delegation is prohibited

Question 25

Upon delegation, does the delegator remain liable for the delegatee’s performance?

Answer 25

Yes, can be sued if the delegatee doesn’t perform

⚠️ Exception: delegator isn’t liable if there is a novation (when all parties agree to a new contract to replace the old one)