Third Party Issues

Question 1

Third-Party Beneficiaries (TPB)

Answer 1

Nonparties who benefit from a contract.

Question 2

Intended Beneficiaries

Answer 2

Intended – who receive a direct benefit from the contract because the contracting parties so intended (eg, the contract provides that payment will go directly to a third party)

*Only intended beneficiaries—not incidental beneficiaries—have contractual rights and may sue to enforce them.

Question 3

Incidental Benficiaries

Answer 3

Incidental – who receive some indirect benefit from the contract even though there was no contractual intent to benefit them (ie, all third-party beneficiaries who are not intended beneficiaries)

*Does not have rights under the K

Question 4

Assignment v. Delegation

Answer 4

Assignment = Transfer of contractual rights to another (I.e., assignee)

Delegation = Transfer of contractual duties to another (I.e., delegatee)

Question 5

Exculpatory clause

Answer 5

An exculpatory clause releases a party from liability for damages caused during the execution of the contract. This would include damages caused by a delegatee, so the party to be released cannot delegate his/her duties without the other party’s consent.

Question 6

Intended third-party beneficiaries’ recovery for breach vs. Party obligated to pay for benefit

Answer 6

Type of Beneficiary:

Donee (recipient of gift): Cannot recover unless detrimental reliance satisfied.

Creditor (satisfaction of debt): Can recover.

Question 7

Intended third-party beneficiaries’ recovery for breach vs. Party obligated to confer benefit

Answer 7

Can recover if rights vested through:

1. detrimental reliance
2. manifestation of assent OR
3. lawsuit

Question 8

Determining TPB status

Answer 8

whether a TPB is an intended bene under the K is a question of fact, courts look at the following factors:

a) is TPB expressly designated in the K?
b) does TPB directly benefit from some performance under the K?
c) does TPB have rights under the K?
d) does TPB stand in such a relationship to the promisee under the K that an intent to benefit the 3rd party can be inferred?

*if answer to ANY of the above is YES, more likely that TPB is intended.

Question 9

Rights of TPBs

Answer 9

In order to enforce rights under a K, a TPB;s rights must vest.

Question 10

Vesting of Rights - Occurs when the TPB either:

Answer 10

1. accepts the benefits of the K in a manner requested by the parties to the K,
2. Sues to enforce the K, or
3. Detrimentally relies on the K (I.e., materially changes position in justifiable reliance on the K)

Question 11

TPB - Enforcing the K

Answer 11

• TPB can sue promisor (Promisor can assert any of his own defenses
• Promisee can sue promisor at law and in equity for specific performance
• TPB can only sue promisor if TPB is a creditor beneficiary

Question 12

Assignment

Answer 12

is a transfer of rights under a K to a 3rd party after the K is formed

*consideration is not required, but w/out consideration the assignment is considered gratuitous.

Question 13

Assignment - Parties

Answer 13

A party (assignor) can assign rights under a K to a 3rd party (assignee), who is now in a K with the remaining party (obligor)

*assignor can only transfer the rights they have in a K at the time of the assignment.

Question 14

Assignment - CL limitations

Answer 14

CL 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 15

K limitations on Assignment

Answer 15

Ks may contain non-assignment clauses:

a) non-assignment of K - bars delegation of assignor’s duties only (I.e., does not prohibit assignment of rights)
b) non-assignment of rights - bars right to assign, but not the power to assign (I.e., upon assignment, obligor may sue assignor for breach)
c) assignment as void - assignment will be ineffective (I.e., assignor has neither power nor right to assign)

Question 16

Revocability of Assignments

Answer 16

If no consideration supports an assignment of contractual rights (a gratuitous assignment), the assignment is generally revocable, unless the obligor has already performed or promissory estoppel applies.

Assignments made for consideration are irrevocable.

Exception: Gratuitous assignment is irrevocable if either:

a) obligor has already performed,
b) assignee has received written claim or tangible object signifying a right to collect (e.g., stock certificate), OR
c) detrimental reliance by assignee (I.e., estoppel)

Question 17

Enforcement of Assignments: Assignee right to sue

Answer 17

Assignee can sue:

1. obligor for non-performance (obligor can raise any defense to the K that he could have raised against the assignor) AND
2. 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 18

Delegation - Parties

Answer 18

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 3rd party (the delegatee)

*Obligee must generally accept performance from delegatee

*only duties may be delegated, whereas rights may be transferred to a 3rd party via assignment

Question 19

Delegation - Liability

Answer 19

Delegator remains liable for delegatee’s performance…unless the promisee agrees to release the promisor and substitute a new one through a novation.

*obligee may sue delegator for non-performance by delegatee

*Obligee may only sue delegatee if the delegatee has assumed duties of the entire K.

Question 20

Delegation - Exceptions: Duties are non-delegable if:

Answer 20

a) duties involve personal judgment and skill,
b) delegation materially changes the obligee’s expectancy under the K,
c) a party has placed special trust in the delegator, OR
d) a contractual provision restricts delegation

Question 21

Delegation vs. Novation

Answer 21

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 3rd party.

Question 22

Delegation Example

Answer 22

Here, the company (promisor) delegated its duty to build the pool to an independent contractor (delegatee). After the delegation, the homeowner (promisee) did not expressly or impliedly release the company from liability under the original contract. As a result, there was no novation and the company remained liable on the contract. And since the independent contractor did not perform, the homeowner can sue the company for that breach.

Question 23

Delegation - Liability cont.

Answer 23

When a promisor delegates a contractual obligation to a nonparty (delegatee), the promisor is not released from liability unless there is a novation.

This requires (1) that the promisor repudiate liability and (2) that the promisee accept performance from the delegatee without reserving rights against the promisor.

Question 24

When is a gratuitous assignment automatically revoked?

Answer 24

A gratuitous assignment—i.e., an assignment that is not supported by consideration—is automatically revoked upon the death, incapacity, or bankruptcy of the assignor.

Question 25

Delegation is NOT permitted when:

Answer 25

1) other contracting party has substantial interest in having delegating party perform (eg, in personal-services contract involving taste or special skill), OR
2) delegation is prohibited by contract.

Otherwise, delegation is permitted, and the other party to the contract must accept performance by the delegatee.

Question 26

When is a delegator released from liability for his contractual duties?

Answer 26

The delegator is not released from liability unless the other party to the contract expressly or impliedly agrees to a novation—i.e., to release the delegator from his/her promises under the original contract and substitute a new party.

When contractual obligations or duties are delegated, the delegator remains liable under the contract unless the other party to the contract expressly or impliedly agrees to release that party and substitute a new one (i.e., novation).

Merely consenting to a delegation does not create a novation.

Question 27

Is delegation permitted when the other party to the contract has a substantial interest in having the delegating individual perform, such as in a personal services contract involving taste or a special skill?

Answer 27

NO. For example, when an artist is engaged to create an original work, delegation is not permitted.

With regard to the creation of a work of art where the other party has a substantial interest in having a certain artist himself complete the work of art, delegation is NOT permiutted even if the delegate would do so in the same style as the artist.