Third-Party Problems

Question 1

What is entrustment?

How does it work?

Answer 1

Entrustment is when an owner entrusts goods to a merchant who deals in goods of the kind.

Rule: An owner who has entrusted goods to a dealer has no rights against a bona fide purchaser (BFP).

Example: Mike takes watch to jeweler for repair. Jeweler wrongfully sells it to Ralph. Can Mike get his watch back from Ralph?

Answer: NO, not if Ralph is a BFP. He must sue the jeweeler for conversion.

Question 2

What is the definition of a third-party beneficiary (TPB)?

Answer 2

D: A person who is not party to a contract but has rights because the contract was intended to benefit her.

Ex: Harry pays Gaga $25,000 to sing for Pippa at Pippa’s birthday party.

Question 3

In a contract with a third-party beneficiary TPB, who are the promisor and the promisee?

Answer 3

Promisor: The party who promises to perform for the TPB. [Gaga].

Promisee: The party who secures the promise [Harry].

Question 4

What is the difference between an intended beneficiary and an incidental beneficiary?

Answer 4

An intended beneficiary is someone to whom performance is to be given under the contract.

An incidental beneficiary is someone who just happens to benefit (has no rights).

Question 5

What is a donee beneficiary?

Answer 5

A person who is getting the performance as a gift.

(A creditor beneficiary would be somone who is getting performance to repay a debt).

Question 6

May the promisor and promisee in a contract with a TPB modify or rescind the contract on their own?

Answer 6

General Rule: The promisor and promisee can rescind or modify the contract until the rights of the TPB have vested.

When do the TPB rights vest? :

1) When TPB learns about the contract, and relies on it.

Exception: Contrary language in the contract controls.

Example: If the contract allows Harry to change the TPB (change who Gaga sings for), Pippa cannot sue even if she has relied.

Question 7

When do TPB rights vest?

Answer 7

When the TPB finds out about the contract, and relies on it.

Question 8

When is a promisor liable to a third-party beneficiary?

(Define parties)

Answer 8

Promisor: Gaga. The performer of duty for TPB.

A promisor is liable to a TPB if promisor breaches. Simple [not talking about vesting, that exists in modification/recission].

(The promisee [Harry] can also sue Gaga for breach, just like in a regular contract. But the damages might be small. Might make more sense for TPB to sue].

Question 9

When is a promisor liable to a promisee?

(Define parties)

Answer 9

Promisor: Gaga. Party performing duty for TPB.

Promisee: Harry. Party who secures promise for the TPB.

Promisor is liable to promisee for breach just as in a regular contract. But look out because damages are probably small for promisee if TPB is donee, bigger for TPB.

Question 10

Can a promisee be liable to a creditor beneficiary?

Answer 10

Yes. A TPB only has rights against a promisee [Harry] if she is a creditor beneficiary.

Question 11

Example:

Does a TPB have rights against a promisor if the promisee’s check bounced to the promisor?

Answer 11

NO. A TPB has the same rights against a promisor as the promisee. She cannot recover because the promisee would not be able to recover.

Question 12

What is delegation of contract duties?

When may duties be delegated? Exceptions?

Answer 12

Delegation is when a party gets someone else to perform the obligation for them.

General Rule: Contractual duties may be delegated without the consent of the person to whom performance is owed.

Exceptions:

1) Express contract language can prohibit delegation

*2) A clause that says “No Assignment” means no delegation either!!!!**

3) Special Skill or Reputation: Can’t delegate a duty that is based on special skill or experience.

Question 13

What effect does a “no assignment” clause have?

Answer 13

It prohibits BOTH assignment AND delegation!!

Question 14

Is a party that delegates its rights to another party (delegate) still liable on the contract?

Example: Doug contracts to mow Bob’s lawn. Doug delegates duties to Kev, and Kev doesn’t do anything.

Can Bob sue Doug?

Answer 14

YES. An obligor is still liable after delegating his obligations.

(Makes sense, the obligee generally doesn’t have to consent to delegation).

NOTE: Contrast with a novation, where all 3 parties agree to substitute party, and thereby distinguish the obligor’s liability.

Question 15

Is a delegate liable to an obligee for not performing duties?

Example: Doug contracts to mow Bob’s lawn. Doug delegates the duty to Kev for consideration. Kev does nothing.

Can Bob sue Kev?

Answer 15

YES, because there was consideration for the delegation.

This is broad, remember this.

It happens because Bob is now a third party beneficiary (third-party creditor) of the deal between Doug and Kev.

Question 16

What is an assignment?

Who is the obligor?

Answer 16

An assignment occurs when:

1) Two parties make a contract.
2) One (assignor) transfers his rights to a third party (assignee).

The obligor is the party who owes the duty.

Question 17

What is the difference between an assignment and a contract with a TPB?

Answer 17

Timing.

If the third party is benefitted at the time of the contract, it is a contract with a TPB.

If the third party is benefitted later (the assignment occurs later), then it is an assignment.

Question 18

What type of contract language do you need for an assignment?

Answer 18

You must have language of present transfer.

(A promise to assign is not an assignment but just a regular contract.)

Example: Say “I assign…“

NOT: I shall assign, I will assign, etc.

Question 19

Is consideration necessary to make an assignment?

Answer 19

No, gift assignments are valid, but they are very easily revoked!

Question 20

What does the following contract language do;

“Assignments under this contract are not assignable.”

Answer 20

This makes a party that assigns a right liable for breach, but it does NOT invalidate the assignment!!

Need to state that “assignments are void” to invalidate an assignment!

Question 21

What does the following contract language do;

“Assignments under this contract are void.”

Answer 21

This language completely invalidates the assignment.

It is void as to other parties.

Contrast with language stating “rights under this contract are not assignable.”

^This makes assigning party in breach, but does not invalidate assignment.

Question 22

Can you assign a right of payment?

Answer 22

Yes. This does not substantially change the duties of the obligor.

It is easy to write a check to someone else. Must notify the obligor of the assignment though.

Question 23

When is an assignment invalid because of a change in the duties of the obligor?

(standard)

Answer 23

When the obligor’s duties are substantially changed.

Question 24

Can a right to purchase goods under a requirements contract be assigned?

Answer 24

Yes, as long as the assignee’s requirements are not out of line with the assignor’s.

(Still in the substantial change of obligee’s rights doctrine)

Question 25

Can an assignee sue an obligor?

Ex: Can a party who receives an assigned right of payment sue if the payor mistakenly pays the assignor (doesn’t change its performance after the assignment?)

Answer 25

YES. The assignee steps into the shoes of the assignor.

(Assuming obligor is notified of assignment).

Question 26

Why are gratuitous assignments fragile?

Answer 26

General Rule: The last gratuitous assignee prevails over earlier gratuitous assignees (because a later gift revokes an earlier one).

NEW YORK: In NY, a gift assignment is irrevocable if it’s embodied in a signed writing.

Question 27

Is a gratuitous assignment revocable?

Answer 27

Yes, on MBE.

NO in NY if the gift assignment is embodied in a signed writing.

Question 28

What happens when the same right is assigned to multiple parties?

Answer 28

General Rule: The first assignee for consideration prevails over all subsequent assignees (as well as previous gratuitous assignees).

*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.

***

Question 29

What is the important exception to remember about assignees for consideration when there are multiple assignees?

Answer 29

Even though first assignee for consideration normally prevails, a later assignee for consideration will prevail if

1) He didn’t know about the other assignees, AND
2) He was the first to receive a payment from the obligor or the first to receive a judgment against the obligor.