Chapter 17

Question 1

Once a valid and legally enforceable contract exists…

Answer 1

we look at the rights and duties in the performance of the contract.

Question 2

Rule of Privity or Privity of Contract.

Answer 2

• A contract is a private agreement and traditionally only the parties to a contract have rights and duties under the contract.

Question 3

Third Parties or strangers to the private contract agreement, are not direct parties to the contract and thus…

Answer 3

do not ordinarily have any rights or duties under the contract.

Question 4

What are the 2 exceptions to the Rule of Privity?

Answer 4

1. Assignments/Delegations
2. Third-Party Beneficiary Contracts

Question 5

A party to the contract (assignor) assigns his rights under…

Answer 5

the contract to a third party (assignee).

Question 6

The assignor’s rights are extinguished upon…

Answer 6

assignment

Question 7

The assignee (third-party) may enforce…

Answer 7

the contract against the other original party (obligor)

Question 8

Effect of Assignments

Answer 8

1. An assignee takes only those rights that the assignor originally had. They “acquire rights”.
2. An assignee takes the claim subject to all defenses available against the assignor (the original obligee).

Question 9

Form of the Assignment

Answer 9

Consideration (don’t have to have between the Asignor and the Assignee) – past consideration is not consideration… but the assignment is still valid. You don’t have to have any special form.

Question 10

Rights that cannot be assigned

Answer 10

1. Statute expressly prohibits an assignment
2. Right to receive personal/confidential services may not be assigned without the consent of the person who is to perform them
3. A contract right cannot be assigned if the assignment will materially increase or alter the risk of the obligor.
4. Contract prohibits the assignment.

Question 11

Workers comp benefits. Military pension benefits. (Get the funds directly!) It’s for the worker and military member’s protection.

Answer 11

Statute expressly prohibits an assignment. Rights that cannot be assigned.

Question 12

Singer in a nightclub. The owner of the night club could not assign my services to sing to another night club without my consent.

Answer 12

If this was allowed it would make the singer almost an “indentured servant.”

Question 13

I have a restaurant. I need liability insurance. I have a liability policy with the insurance. The insurance company is the obligor. I am the obligee.

Answer 13

I cannot “assign” my insurance policy to a friend who also owns a restaurant.

Question 14

When the contract prohibits the assignment:

Answer 14

• Anti-assignment clauses
• must be reasonable
• 4 exceptions

Question 15

What are the 4 exceptions to enforceability of anti-assignment clauses:

Answer 15

1. can’t prevent the assignment of the right to receive funds
2. can’t restrict the assignment of the rights to real estate
3. can’t prohibit the assignment of negotiable instruments
4. can’t prohibit the assignment of the right to receive damages from a breach of sale of good contracts

Question 16

Is notice of assignment legally required?

Answer 16

No, but it is wise to do so

Question 17

Problems that arise if notice of the assignment is not given:

Answer 17

1. Priority issues
2. If notice of an assignment is not given, the obligor may continue to render his or her performance to the assignor (original obligee) and the original contract could be discharged by performance without the assignee getting performance.

Question 18

Duty: deliver the cows. Smithy is sick and can’t drive the cows, so he calls his friend Harve. Harve says he can drive the cows to Annie. Harve rolls over and falls asleep and doesn’t actually go drop the cows off. Annie’s cows sitting at the auction barn has liability. The cows could lose weight, get injured, etc.

Answer 18

With assignment law – every right that the assignor has the assignee has.
With delegation law – there is liability with nonperformance of a duty. Smithy can delegate the duty to deliver the cows, but Smithy cannot delegate the liability for nonperformance.

Question 19

Delegation of Duties

Answer 19

Delegation does not relieve the delegator (party making the delegation) of the obligation to perform in the event the delegatee (party to whom the duty has been delegated) fails to perform – meaning delegator is legally responsible if the delegatee does NOT perform.

Question 20

Is there special form to create a valid delegation of duties?

Answer 20

No, the delegator must only express an intention to make the delegation

Question 21

What are duties that cannot be delgated?

Answer 21

1. Personal duties that depend upon the skill or talents of the obligor without the assent of the party to whom performance is to be rendered.
2. When special trust has been placed in the obligor, the obligor may not delegate his duties.
3. When performance by a third party will materially vary from the performance expected by the obligee, duties may not be delegated.
4. When contracts expressly prohibits delegation - contract includes an anti-delegation clause

Question 22

What is the effect of delegation?

Answer 22

Delegator is not relieved of liability by delegation.
Obligee must accept performance from the delegatee unless the duty is one that cannot be delegated.

Question 23

If the delegatee fails to perform, the obligee may:

Answer 23

1. hold the delegatee liable if the delegatee has made a promise of performance that will directly benefit the obligee.
2. hold the delegator liable.

Question 24

Assignment of “All Rights”

Answer 24

“I assign all my rights in the contract” are usually interpreted to mean an assignment of rights and a delegation of duties.

Question 25

Anti-sublease Clause in Lease

Answer 25

actually an anti-assignment clause. “Without landlord consent.” – Attempt to be reasonable. Increases risk (may not pay, could damage, etc.)
Problem with subleases – delegation issue… You are not released from your liability by subleasing.

Question 26

What is the difference between assignment/delegation and third party beneficiary contracts?

Answer 26

The timing of the rights. If we are forming a contract now and as a part of that contract we design it to benefit a third party is very different from having a contract and later down the road having the third party be benefitted.

Question 27

Third Party Beneficiary Contracts

Answer 27

The third-party beneficiary is a stranger to the contractual relationship of the parties to the contract.
1. The third-party beneficiary makes no promises and gives no consideration to the promisor who is to render performance.
2. The intention of the parties to the contract is to confer a benefit upon the third-party beneficiary.

Question 28

In a third party beneficiary contract who is the promisor?

Answer 28

Courts must determine which party made the promise to the 3P so that the 3P can sue the Promisor directly.

Question 29

Jennifer Orr is suing her father, Mr. Orr, because when her parents got a divorce, in the divorce decree, the dad agreed to pay for the kids’ college. Jennifer is suing to enforce the contract and get money to pay for college.

Answer 29

The divorce decree has to be designed to benefit her. They are talking about “standing.” The court says that she is a third party beneficiary. She wins her case.

Question 30

What are two types of intended beneficiaries?

Answer 30

Creditors and Donees

Question 31

Intended Beneficiary

Answer 31

Has rights and therefore, may enforce contractual promises, even though not a party to the contract.

Question 32

Creditor Beneficiary

Answer 32

Promisor promises to pay a debt that promisee owes to a third party (creditor beneficiary). The creditor beneficiary can enforce the promisor’s promise.

Question 33

Donee Beneficiary

Answer 33

A contract is made for the express purpose of giving a gift to a third party (donee beneficiary). The donee beneficiary can enforce the promisee’s promise.

Question 34

The classic case that gave third party beneficiaries the right to bring a suit directly against a promisor was decided in 1859. The case involved three parties—Holly, Lawrence, and Fox. Holly had borrowed $300 from Lawrence. Shortly thereafter, Holly loaned $300 to Fox, who in return promised Holly that he would pay Holly’s debt to Lawrence on the following day. When Lawrence failed to obtain the $300 from Fox, he sued Fox to recover the funds. The court had to decide whether Lawrence could sue Fox directly (rather than suing Holly).

Answer 34

The court held that when “a promise [is] made for the benefit of another, he for whose benefit it is made may bring an action for its breach.”

Question 35

Ang (the promisee) pays premiums to Standard Life, a life insurance company. Standard Life (the promisor) promises to pay a certain amount upon Ang’s death to anyone Ang designates as a beneficiary.

Answer 35

The designated beneficiary is a donee beneficiary under the life insurance policy and can enforce the promise made by the insurance company to pay her or him on Ang’s death.

Question 36

When does the third-party have the right to sue?

Answer 36

An intended beneficiary has a legal right to enforce the contract against the promisor after the beneficiary’s rights vest.

Question 37

The third party intended beneficiary’s rights vest so that the original contracting parties cannot modify, alter, change, rescind, or terminate the contract when the beneficiary:

Answer 37

1. Demonstrates manifest assent to the contract;
2. Materially changes his or her position in detrimental reliance on the contract; or
3. When conditions for vesting are satisfied.

Question 38

the parties to the contract expressly reserve the right to cancel, rescind, or modify the contract, the intended third-party beneficiary is…

Answer 38

subject to any change, rescission, or cancellation.

Question 39

What is an example of third-parties expressley reserving the right to cancel, rescind, or modify the contract?

Answer 39

In most life insurance contracts, for instance, the policyholder reserves the right to change the designated beneficiary.

Question 40

Do indidental beneficiaries have the right to enforce the contract?

Answer 40

No if there was no intent to confer a benefit upon them

Question 41

What standard is applied to incidental beneficiaries?

Answer 41

The reasonable person standered

Question 42

What are other factors courts consider when assessing incidental beneficiaries?

Answer 42

1. Whether the performance is rendered directly to the third party.
2. Whether the third party has the right to control the details of the performance.
3. Whether the third party is expressly designated as the beneficiary of a contract.

Question 43

Building a house…I prefer a certain company who makes the brick I like and I write their name in my contract with the builder. If that company is not used to get the brick I like…

Answer 43

the company cannot sue to enforce the contract and get the business.

Seeing a name in a contract does not in itself give intent to benefit.

Question 44

Spectators at the infamous boxing match in which Mike Tyson was disqualified for biting his opponent’s ear sued Tyson and the fight’s promoters for a refund on the basis of breach of contract. The spectators claimed that they were third party beneficiaries of the contract between Tyson and the fight’s promoters.

Answer 44

The court, however, held that the spectators could not sue because they were not in contractual privity with the defendants. Any benefits they received from the contract were incidental to the contract. According to the court, the spectators got what they paid for: “the right to view whatever event transpired.

Question 45

5 years ago, Hensley purchased a house. At that time, she borrowed funds from Thrift Savings and Loan, which in turn took a mortgage at 6.5% interest on the house. The mortgage contract did not prohibit the assignment of the mortgage. Then Hensley secured a new job in another city and sold the house to Sylvia. The purchase price included payment to Hesley of the value of her equity.

Answer 45

Equity: the amount of house owned by Hensley
Assumption of the debt: the remainder of the debt to be paid has been delegated to Sylvia

Thrift’s rights if Sylvia fails to pay… sue both of them.

Question 46

Older couple moved from Caldwell to Kentucky. They sold their dream home to a Sylvia. For the last 4 months they have been getting default notices from their bank. Because of the nature of an assumption mortgage…

Answer 46

they are still liable for everything that wasn’t paid

Question 47

Alexander has been accepted as a freshman at a college 200 miles from his home for the fall semester. Alexander’s wealthy uncle, Michael, decides to give Alexander a car for Christmas. In November, Michael makes a contract with Jackson Auto Sales to purchase a new car for $28,000 to be delivered to Alexander just before the Christmas holidays, in mid-December. The title to the car is to be in Alexander’s name. Michael pays the full purchase price, calls Alexander and tells him about the gift, and takes off for a 6-month vacation in Europe. Is Alexander an intended third party beneficiary (donee beneficiary) of the contract between Michael and Jackson Auto Sales? Why or Why not?

Answer 47

The contract has been designed to benefit Alexander – Third Party Beneficiary.

What tells you we designed the contract for Alexander? title to the car is to be in Alexander’s name, calls Alexander and tells him about the gift

If Jackson Auto Sales never delivers the car to Alexander, Alexander has the right to sue for breaching the contract.