Third Party Problems Flashcards
What is entrustment?
Under Article 2, an owner who entrusts goods to a merchant who deals in goods of the kind (i.e. a dealer) has no rights against a bona fide purchaser (BFP). The owner may be able to sue the dealer/merchant for conversion.
On the bar exam, the fact pattern is always the same – an owner takes jewelry or a car to be repaired by a merchant who also sells that particular kind of good.
What is a third-party beneficiary contract and what are the different parties to this type of contract?
Definition: Two people enter a contract intending to benefit the third party.
Third-Party Beneficiary(TPB): A person who is not party to a contract, but has rights because the contract was intended to benefit her.
Promisor: The party who promises to perform for the TPB.
**Promisee: **The party who secures the promise.
Intended Beneficiary v. Incidental Beneficiary: intended is the person to whom performance is to be given under the contract; usually named under the contract. Where as an incidental just happens to benefit.
TIP: An intended beneficiary has legal rights; an incidental beneficiary does not.
What is a donee beneficiary? What is a creditor beneficiary?
Donee Beneficiary: A person who is getting the performance as a gift.
Creditor Beneficiary: A person who is getting the performance to repay a debt.
When can a TPB contract be resc inded or modified?
General Rule: The promisor and promisee can rescindor modify the contract until the rights of the TPB have “vested,” meaning that the TPB has learned of the contract and relied on it.
Exception: Contrary language in the contract controls (i.e. the contract allows the promisee to change the TPB).
Where does liability run in a TPB contract?
Promisor Liable to TPB: an intended beneficiary can sue the breaching promisor, even though there is no privity of contract.
However, TPB’s rights are limited to the rights of the promisee. If the promisee breaches (e.g. does not pay), then TPB cannot sue the promisor.
Promisee Liable to Creditor Beneficiary: only the creditor TPB can recover from the promisee. Donee beneficiary does not have rights against promisee because original contract performance was a gift.
Promisor Liable to Promisee: just as in a normal contract.
How are contractual duties delegated? What are the exceptions?
General Rule: Contractual duties may be delegated without the consent of the person to whom performance is owed (the “obligee”).
Exceptions:
a. ** Contract Language Controls:** if the contract prohibits delegation, duties cannot be delgated. If a contract prohibits assignment, then there can be no delegation either.
b. Special Skill or Reputation: if the contract is based on one party’s special skill or reputation, their duties cannot be delegated.
What are the rights of the obligee when contractual duties have been delegated?
Delegating Party Remains Liable: in this case, there is no novation, so the delegating party still remains liable for any breach that occurs.
A Delegate Who Gets Consideration Is Liable: a delegate can be liable if the delegating party received consideration - would be liable to the obligee, because this person is the TPB of the contract between the delegate and the delgating party.
What is an assignment of rights?
Definition: Two people make a contract; later, one (assignor) transfers his rights to a third party (assignee). The party who owes the duty is the obligor.
What is the different between an assignment and a TPB contract?
In an assignment, two parties enter into a contract and a third person appears later on. With TPB, all three persons are present from the beginning.
How does one assign rights in a contract?
The assignor must use language of present transfer (promises or hopes to transfer are not sufficient). Consideration is not required to make an assignment valid; though gift assignments are more easily revoked.
What are the restrictions on assignment?
Contract Language Controls: distinguish a clause that prohibits assignment from one that completely invalidates assignment.
a. A contract that states, “Rights under this contract are not assignable” does not make subsequent assignments void, but the assignor may be liable to the obligor for breach of contract.
b. A contract that states “All assignments under this contract is void,” will completely invalidate assignments.
Assignment Cannot Substantially Change Duties of Obligor
Is the obligor liable to the assignee?
Yes. However, if the assignor fails to perform, the assignee cannot recover from the obligor.
How are multiple assignments dealt with?
a. Gratuitious (“Gift”) assignments are easily revoked: The last gratuitous assignee prevails over earlier gratuitous assignees because a later gift assignment revokes an earlier one.
b. Assignments for consideration are more durable: The first assignee for consideration prevails over all subsequent assignees (as well as prior gratuitous assignees).
i. ** Exception: **A later assignee for consideration prevails if he does not know about the earlier assignments and is the first to get payment from or a judgment against the obligor.
