Third-Party Issues Flashcards
Third-Party Beneficiaries–In General
• Generally, a party who is not in privity of contract with another party cannot assert a claim for breach against that party. However, when the party asserting the claim is an intended third-party beneficiary, the party has the same rights as those in privity of contract, and can assert a claim for breach.
Third-Party Beneficiaries–Intended vs. Incidental Beneficiary
An intended third-party beneficiary is not a party to the contract, but has rights under the contract because the contracting parties contemplated that their respective performances were intended to benefit an identified third-party.
An incidental beneficiary is a person that just happens to benefit from the contract, but has NO legal rights because the purpose of the contract was not intended to benefit them.
Third-Party Beneficiaries–Enforcement of an Intended Third-Party Beneficiary’s Rights
An intended third-party beneficiary may enforce rights under a contract ONLY IF the rights have vested. Rights vest when the third-party beneficiary has: (a) manifests assent to the promise under the contract; (b) detrimentally relied on the contract; OR (c) brings suit to enforce the contract. Once rights have vested, a contract CANNOT be changed or modified without the third-party’s consent. A suit may only be brought against the promisor (when the third-party is a creditor, a suit may also be brought against the promise).
Delegable Duties
All contract duties are delegable UNLESS:
(a) the contract prohibits delegations or assignments;
(b) the delegation is against public policy;
(c) the contract is for personal services that calls for the exercise of personal skill or discretion; OR
(d) the delegation materially alters the expectancy of the obligee (the party to which the duty is owed).
An assignment generally includes a delegation of the unperformed duties under a contract. Generally, the obligor (the delegating/assigning party) remains liable for non- performance of the contract, UNLESS all the parties agree otherwise (known as a novation).
Assignment–In General
Rights and benefits under a contract may be transferred to a third-party if: (1) the assignor manifests his intent to transfer the rights; AND (2) the assignee assents to the assignment. Consideration is NOT required for an assignment, BUT if consideration is provided, the assignment becomes irrevocable. Gratuitous assignments may subsequently be revoked.
Assignment–Limitations
Limitations: An assignment is valid UNLESS: (a) it materially alters what is expected under the contract; (b) it is prohibited by law or public policy; OR (c) it is precluded by contract. Materially altering what is expected under the contract occurs when the assignment: (a) materially changes the duty of the obligor; (b) materially increases the burden or risk imposed on the obligor; (c) materially impairs the obligor’s chance of obtaining return performance; OR (d) materially reduces the value of the return performance.
• Parties may attempt to prevent assignments in the original contract through either: (a) Prohibitions: Terms in a contract that prohibit the transfer of rights. If the rights are assigned, the assignor is liable for damages, BUT the assignment is still valid and enforceable by the assignee; OR (b) Invalidations: Terms in a contract that void all assignments. If the rights are assigned in this case, the assignment is void.
Assignment–Rights of Assignee and Assignor
Rights of Assignee and Assignor: An assignee may sue the obligor for non-performance. Any defense to enforcement that could be used against the assignor may also be used against the assignee. An assignee may also sue the assignor for wrongful revocation of an assignment or for breach of an implied warranty.
Assignment–Multiple Assignments
Where there are multiple gratuitous assignments, the last assignee prevails. Where there are multiple assignments for consideration, the first assignment prevails UNLESS the later assignment: (1) has no notice of the earlier assignment; AND (2) is the first to obtain payment or indicia of ownership.
Novation
A novation occurs when (1) all parties to a contract, (2) agree to discharge an original party to the contract, and (3) substitute a third-party in the original party’s place.
