Third-Party Issues

Question 1

Third-Party Benficiaries

Answer 1

A third party that benefits from a K entered into between other parties is a third-party beneficiary (“TPBj”)
* 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

Determining TPB status - 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 is “yes,” more likely TPB is intended

TPB characteristics
* Not parties to the K; TPBs are merely beneficiaries
* 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 2

Rights of Third-Party Benficiaries

Answer 2

In order to enforce rights under a K, a TPB’s rights must vest
Vesting of rights - occurs when the TPB either:
a) Accepts benefits - accepts the benefits of the K in a manner requested by the parties to the K,
b) Sues to enforce - brings suit to enforce the K, or
c) Detrimental reliance - detrimentally relies on the K (i.e., materially changes position in justifiable reliance on the K)

Enforcing the K
* TPB can sue promisor and promisor can assert any of their defenses
* Promisee can sue promisor at law and in equity for specific performance
* TPB can only sue promisee if TPB is a creditor beneficiary

Question 3

Assignment

Answer 3

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 undera K to a third party unless the K prohibits assignments
* Consideration - not required, but assignment without consideration is considered gratuitous

Common law limitations - 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

K limitations on rights of assignments- Ks may contain clauses that either prohibit or invalidate assignment of rights:
* Prohibiting assignment of irghts - 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
* Invalidating assignments - takes away both the right and power to assign; i.e. any assignment is invalid and uneforceable

Question 4

Revocability & Enforcement of Assignments

Answer 4

Revocability - gratuitous assignments may be revocable, however assignments made for consideration are irrevocable
* Assignments for consideration - irrevocable
* Gratuitous assignments - revocable
* Exception - gratuitous assignment is irrevocable if either:
1) Obligor has already performed;
2) Assignee has received a written claim or tangible object signifying a right to collect (e.g., stock certificate); or
3) Deterimental reliance by assignee (i.e., estoppel)

Assignee right to sue - assignee can sue:
1) Obligor - for non-performance and Obligor can raise any defense that he could have raised against the assignor
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 5

Delegation

Answer 5

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 delegatee
* Only duties may be delegated, whereas rights may be transferred to a third-party via assignment

Liability - delegator remains liable for delegatee’s performance
* Obligee may sue delegator for non-performance by delegatee
* Obligee may only sue delegatee if the delegatee has assumed duties of the entire K

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