Third Party Issues

Question 1

3rd Party Beneficiaries - Overview

Answer 1

A 3rd party that benefits from a K entered into between other parties is a TPB

Intended: Parties to the K intend for TPB to benefit from the K (TPB has rights under the K)

Incidental: Stands to benefit from K although not intended by parties to the K; has no rights under the K

Question 2

3rd Party Beneficiaries - Determining TPB Status (Factors Courts Look At - 4)

Answer 2

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 promise 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

3rd Party Beneficiaries - TPB Characteristics

Answer 3

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

Question 4

3rd Party Beneficiaries - Creditor TPBs

Answer 4

Benefit is conferred based on a debt owed by the promisee to the K

Question 5

3rd Party Beneficiaries - Donee TPBs

Answer 5

Benefit is conferred gratuitously

Question 6

Rights of 3rd Party Beneficiaries - Vesting of Rights (3 Ways)

Answer 6

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)

Question 7

Rights of 3rd Party Beneficiaries - Enforcing the K

Answer 7

TPB can sue promisor
- Promisor can assert any of his own defenses

Promisee can sue promisor at law and in equity for specific performance

Creditor beneficiary can sue promises on existing obligation between them

Donee beneficiary may only sue promises if detrimental reliance exists

Question 8

Assignment - Overview

Answer 8

An assignment is a transfer of rights under a K to a 3rd Party after the K is formed

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

Consideration: Not required, but assignment without consideration is considered gratuitous

Assignor can only transfer the rights they have in a K at the time of assignment

Question 9

Assignment - Common Law Limitations

Answer 9

Common Law bars any assignment that substantially changes the duties of the obligor

– Assignment of payment is not a substantial change

– Assignment of rights fails if the obligor’s risk is substantially altered

Question 10

Assignment - K Limitations on Assignment (Clauses - Non-assignment of K)

Answer 10

Bars delegation of assignor’s duties only (i.e. does not prohibit assignment of rights)

Question 11

Assignment - K Limitations on Assignment (Clauses - Non-assignment of Rights)

Answer 11

Bars right to assign, but not the power to assign (i.e. assignment, obligor may assignor for breach)

Question 12

Assignment - K Limitations on Assignment (Clauses - Assignment as Void)

Answer 12

Assignment will be ineffective (i.e. assignor has neither power nor right to assign)

Question 13

Revocability - Definition

Answer 13

Gratuitous Assignments may be revocable however, assignments made for consideration are irrevocable

Question 14

Revocability - Assignments for Consideration

Answer 14

Irrevocable

Question 15

Revocability - Gratuitous Assignments

Answer 15

Revocable

Question 16

Revocability - Gratuitous Assignments (Exception)

Answer 16

Gratuitous Assignment is irrevocable if either:

a) Obligor has already performed

b) Assignee ha received a 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

Revocability - Assignee Right to Sue

Assignee can Sue: Obligor

Answer 17

For Non performance; and

obligor can raise any defense to the K that he could have raised against the assignor

Question 18

Revocability - Assignee Right to Sue

Assignee can Sue: Assignor

Answer 18

For breach of any of the following Assignor’s implied warranties

• No prior assignment of the same right
• The right to assign was not subject to defenses
• No interference with the assigned right

Question 19

Delegation - Overview

Answer 19

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 3rd party via assignment

Question 20

Delegation - Liability

Answer 20

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

Question 21

Delegation - Exceptions (4)

Answer 21

Duties are Non-delegable if:

a) Duties involve personal judgment and skill;

b) Delegation materially changes the obligee’s expectancy under the K

c) the K prohibits delegation, or

d) Prohibited by statute or public policy

Question 22

Delegation - Delegation vs. Novation

Answer 22

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