Third-Party Problems

Question 1

Who is a third-party beneficiary?

Answer 1

Not a party to the contract. Able to enforce contract others made for her benefit.

Question 2

Who is a promisor?

Answer 2

Look for person who is making the promise that benefits the third party.

Question 3

Who is a promisee?

Answer 3

Look for person who obtains the promise that benefits the third party.

Question 4

What is the significance of an intended beneficiaries? How do you tell the difference between an intended or incidental beneficiary?

Answer 4

Only intended beneficiaries have contract law rights. Intent of the two parties to contract determines whether intended or incidental.

Question 5

Who is considered a creditor/donee?

Answer 5

Intended beneficiaries are either donees or creditors. Usually donees. Look at whether third-party beneficiary was a creditor of the promisee before the contract.

Question 6

What is the test for dealing with third-party efforts to cancel or modify a contract?

Answer 6

The test is whether the third party knows of and has relied on or assented as requested. If so, her rights have vested and the contract cannot be canceled or modified without her consent unless the contract otherwise provides.

Question 7

In regards to third-party beneficiary problems, who can sue whom? What is the general rule? are there any exceptions?

Answer 7

(1) Beneficiary can recover from promisor;
(2) Promisee can recover from promisor;
(3) General rule: Beneficiary cannot recover from promisee;
(4) Limited exception: Creditor beneficiary can recover from
promisee BUT ONLY on pre-existing debt

Question 8

What defenses are available if a third-party beneficiary sues the promisor?

Answer 8

If the third-party beneficiary sues the promisor, the promisor can assert any defense that he would have had if sued by the promisee.

Question 9

What is an assignment?

Answer 9

Assignment is a transfer of rights under a contract. Assignment involves two separate steps: first step – contract between only two parties; and second step – one of the parties later transfers rights under that contract to a third party. Need to see the difference between assignment of an offer and assignment of a contract. Need to see the difference between assignment of a contract and third-party beneficiary. (A PERSON TRYING TO ENFORCE A CONTRACT SHE DID NOT MAKE:
ASSIGNMENT OF RIGHTS)

Question 10

Who is an assignor?

Answer 10

Party to the contract who later transfers rights under the contract to another.

Question 11

Who is an assignee?

Answer 11

Not a party to the contract. Able to enforce the contract because of the assignment.

Question 12

Who is an obligor?

Answer 12

Other party to the contract.

Question 13

What are the limitations on an assignment?

Answer 13

(a) Prohibition: Language of prohibition takes away the right to assign but not the power to assign, which means that the assignor is liable for breach of contract, but an assignee who does not know of the prohibition can still enforce the assignment. (e.g. “rights hereunder are not assignable.”)
(b) Invalidation: Language of invalidation takes away both the right to assign and the power to assign so that there is a breach by the assignor and no rights in the assignee. (“all assignments of rights under this contract are void.”)

IF ANY DOUBT IN YOUR MIND AS TO WHETHER PROHIBITION OR INVALIDATION, THEN PROHIBITION.

Question 14

What is the general rule if there is nothing in fact pattern about contract language regarding assignability?

Answer 14

Even if a contract does not in any way limit the right to assign, common law bars an assignment that substantially changes the duties of the obligor.

(a) Assignment of right to payment (never substantial change);
(b) Assignment of right to contract performance other than right to payment (usually substantial change on bar)

Question 15

What is the general rule regarding the requirements for assignment?

Answer 15

General rule is that consideration is not required, but gratuitous assignments (and only gratuitous assignments) can be revoked.

Question 16

In regards to assignments, who can sue whom?What defenses are available?

Answer 16

(1) Assignee can recover from the obligor;
(2) Assignor for consideration cannot recover from obligor;
(3) Obligor has same defenses against assignee as it would have against assignor;

Question 17

When is payment by obligor to assignor effective?

Answer 17

Payment by obligor to assignor is effective until obligor knows of assignment. Similarly, modification agreements between obligor and assignor are effective if the obligor did not know of the assignment.

Question 18

In an assignment for consideratin, what are the implied warranties of assignor?

Answer 18

In an assignment for consideration, the assignor warrants (1) the right assigned actually exists, and (2) the right assigned is not subject to any then existing defenses by the obligor, and (3) the
assignor will do nothing after the assignment to impair the value of the assignment. Assignor, however, does not warrant what the obligor will do after the assignment.

Question 19

When there are multiple assignments, all of which are gratuitous assignment, what is the general rule?

Answer 19

General rule: Last assignee generally wins

Question 20

What is the general rule when there are multiple assignments for consideration? Any exceptions?

Answer 20

(a) General rule: First assignee for consideration wins.
(b) Very limited exception: A subsequent assignee takes priority over an earlier assignee for value only if he both (i) does not know of the earlier assignment and (ii) is the first to obtain (1) payment, (2) a judgment, (3) a novation, OR (4) indicia of ownership [“four horsemen” rule].

Question 21

What is delegation?

Answer 21

Party to a contract transferring work under that contract to third party. For example, P contracts to paint O's house for $1,000. P (delegating party)
and X (delegatee) agree that X will paint O's (obligee) house.

Question 22

What is the relationship of assignment and delegation?

Answer 22

A contract creates both rights and duties. For example, if P contracts to paint O’s house for $1,000, then P has a duty to paint and a right to payment, and O has a duty to pay and a right to the painting of her house. Assignment is the transfer by a party to a contract of his rights or benefits under the contract to a third party who was not a party to the contract. Delegation is the transfer by a party to a contract of his duties or burdens under the contract to a third party who was not a party to the contract. Often a contracting party makes both an assignment and a delegation of his rights and duties under the contract to a third party. Often multistate examiners use the term “assignment” in a problem involving an assignment and a delegation and even in a problem involving only a delegation.

Question 23

Which duties under a contract are delegable? What are the limitations?

Answer 23

Generally, contractual duties are delegable. The limitations on delegation are very limited. Delegations are permitted unless either (1) contract
prohibits delegations or prohibits assignments or (2) “personal services contract” that calls for VERY SPECIAL skills.

Question 24

What if, after delegation, the third-party delegatee does not perform (nonperformance by delegate)?

Answer 24

(1) Delegating party always remains liable.

(2) Delegatee liable only if she receives consideration from delegating party.