Third-Party Problems

Question 1

Entrustment (Art. 2)

Answer 1

Owner who entrusts goods to a MERCHANT who DEALS IN GOODS OF THE KIND (DEALER) has no rights against a BFP

Michael Phelps takes watch to jewelry to be repaired. Jeweler sells his watch to Rafa Nadal.

• Michael Phelps CANNOT get the watch back from Rafa (BFP)
• He CAN sue the jeweler for conversion

Question 2

Third-Party Beneficiary

Answer 2

• 2 people enter into K intending to benefit a TP
• TPB is NOT a party to the K; but DOES have rights because K was intended to benefit her
• Promisor = the one who is due to perform for TPB
• Promisee = one who secures the promise
• ONLY intended B has legal rights (usually named in K)
• Intended TPB is either a DONEE (almost always) or a CREDITOR
• General rule = promisor/promisee can RESCIND/MODIFY the K until the rights of TPB have “vested”
• Liability
  (1) promisor is liable to TPB
  (2) promisee is liable to a creditor B (ONLY on the pre-existing debt) but not to a donee B
  (3) promisor is liable to promisee (like any K!)

Question 3

Delegation of Duties

Answer 3

General Rule = duties may be delegated WITHOUT CONSENT of the person to whom performance is owed (obligee)

• Delegating party remains liable! (unlike novation)… BUT obligee must look first to the delegate for performance of the duties, but if he fails to perform, then may look to the delegator as a surety for the delegate’s performance
• Delegate who gets consideration is liable

Exceptions:

(1) Not allowed if K language prohibits delegation or “assignment”
(2) No delegation where person to perform has special/unique skill or reputation

Question 4

Assignment of K Rights

Answer 4

2 parties enter into a K and then, later, a TP (assignee) is brought into the picture by one of the parties (the assignor)

• MUST have language of PRESENT transfer (“I assign…”)
• Consideration is NOT required (gift assignments are valid but very easily revoked!)
• You can ALWAYS assign the right to payment (anyone can accept a check!)
• Assignment of wages MUST be in writing

Restrictions on Assignment

• K language that prohibits assignment = assignment is valid (despite breach)
• K language that provides “assignments under this K are void” controls! NO assignment!
• CANNOT substantially change the duties of the obligor

Question 5

Multiple Assignments

Answer 5

• Gratuitous gift assignments are easily revoked, so the LAST gratuitous assignee prevails
• Assignments for consideration = generally the 1st assignee for consideration prevails over all subsequent assignees (whether for consideration or gratuitous)
• BUT a later assignee for consideration prevails IF he does not know of the earlier assignments AND is the first to get payment from or a judgment against the obligor

Question 6

Assignment: Liability

Answer 6

• Obligor is liable to assignee
• If assignor could not collect because of a material breach, neither can assignee
• No breach by paying party if they pay assignor instead of assignee when they didn’t know about the assignment (must pay when notified)

Question 7

Assignments that MUST Be in Writing

Answer 7

• wage assignments;
• assignments of an interest in land;
• assignments of choses in action worth more than $5,000; and
• assignments intended as security interests under Article 9 of the U.C.C.

Question 8

When do TPB’s Rights “Vest?”

Answer 8

• TPB brings suit to enforce the promise
• TPB agrees to accept performance by the promisor
• TPB learns of it and materially changes his position in reliance on the promise

Question 9

Novation

Answer 9

A novation substitutes a new party for the original party to the contract and completely releases the original party

Novation will be found when there is

(i) a previous valid contract;
(ii) an agreement among the parties, including the new party to the new contract;
(iii) the immediate extinguishment of contractual duties as between the original contracting parties; and
(iv) a valid and enforceable new contract.