6. Third Party Issues

Question 1

What is entrustment (UCC)?

Answer 1

Under Art. 2/UCC, with entrustment an owner who entrusts goods to a MERCHANT who deals in goods of the kind (e.g. a dealer) has NO rights against a bona fide puchaser (BFP) if the merchant wrongfully sells the good.

Question 2

What is a 3d party beneficiary AND what rights does she have?

Answer 2

3PB arises when TWO ppl enter into a K intending to benefit a 3d party. A 3PB is NOT a party to the K, but has RIGHTS b/c the K intended to benefit her. An intended beneficiary has legal rights, BUT an incidental beneficiary DOES NOT.

Two types of intended beneficiary:

(i) creditor beneficiary = is getting benefit to repay a debt owed to him; OR

(ii) donee beneficiary (more likely) = performance is given as a gift.

Rescission and modifictaion of a 3PB K

General rule = the promisor and promisee (orig parties to K) CAN rescind or modify the K UNTIL the rights of the 3PB have “vested”. Vested means the intended beneficiary has:

• (i) MANIFESTED ASSENT to the K;
• (ii) brought SUIT to enforce K; OR
• (iii) has RELIED on the K (i.e. you take an AFFRIMATIVE act).

Once the rights of the 3PB have “vested”, the original parties NEED the consent of the 3PB in order to modify/recind the K

• NOTE: contrary language in the K cntrls!

Liability

Promisor liable to 3PB

• The intended beneficiary CAN sue the original promisor for breach of K (privity is not necessary).
• NOTE: if the promisor (of benefit to 3PB) has breached K and can’t enforce performance (against promisee), NEITHER can 3PB.

Promisee liable to Creditor Beneficiary

• The original promisee is liable to a CREDITOR beneficiary (b/c the creditor is owed somethin); DONEE beneficiary has no rights against original promisee.

Promisor liable to promisee

• (Of course) the original promisor is liable to the original promisee (EVEN IF 3PB is a donee beneficiary)

Question 3

When can K duties be delegated AND what are the rights of the obligee?

Answer 3

General rule: K duties MAY be delegated W/O consent of the person to whom performance is owed (the “obligee”).

EXCEPTIONS:

• The K language cntrls (if delegation is prohibited, CANNOT delegate)
  
  • NOTE: If K prohibits assignment (this means NO delegation EITHER!)
• Special skill or reputation prevents delegation

Rights of the obligee

Delegating party REMAINS liable to obligee (COMPARE w/ novation)

A delegate WHO GETS CONSIDERATION is liable to the obligee (b/c this would make the obligee a 3d party) beneficiary)

Question 4

What is an assignment?

Answer 4

Assignment = after two ppl make a K; LATER one (assignor) transfers his rights to a 3d party (assignee).

The party who owes the duty to preform is the obligor. The obligor is liable to the assignee, BUT ONLY IF

(i) the assignor performs properly under K (no material breach); AND
(ii) the obligor is AWARE of the assignment E.g. Batman Ks to provide security for Gotham for $200k. Batman (assignor) assigns HIS RIGHT to pmt to Robin (assignee). NOW, Robin has the right to receive pmt from Gotham City (obligor)

NOTE: w/ an assignment, two parties K and a 3d person shows up LATER; with a 3d party beneficary, the 3d party is PRESENT at time of K

Question 5

What’s needed for a valid assignment AND what are the restrictions on assignment?

Answer 5

1) Must have language of PRESENT transfer

• YES: “I assign…”
• NO: “I promise to assign…”

2) Consideration or a writing is NOT required.

• Gift assignments are valid BUT easily revoked
• Oral assignments are valid

3) Restrictions on assignment

• K language cntrls BUT distingush b/t a clause that PROHIBITS assignment from one that completely INVALIDATES assignments
• EVEN IF assignments are prohibited (“Rights under this K are not assignable”), a VALID assignment can exist (i.e. the assignee can sue the obligor)
• If language states that assignments are INVALID (“All assignments under this K are void”), then any assignment is VOID
  
  • Cannot SUBSTANTIALLY change duties of the obligor
  • NOTE: you can basically always assign pmt b/c it’s easy enough

Question 6

With multiple assignments, which assignee has rights? NOTE: NY Distinction

Answer 6

1) Gratuitous (“gift”) assignments are EASILY revoked by assignor (UNLESS there is detrimental reliance by the assignee from the obligor’s performance). The LAST gratuitous assignee PREVAILS over earily gratuitous assignees b/c the later gift assignmnet revokes the earlier one

• NY DISTINCTION: a gift assignment is IRREVOCABLE if embodied in a signed writing by the ASSIGNOR

2) Assignments for consideration are more DURABLE

General rule: the FIRST assignee for consideration PREVAILS over all subsequent assignees (as well as gratuitous assignees)

• EXCEPTION: a later assignee for considertion prevails IF he:
  (i) does not know about the earlier assignments; AND
  (ii) is the first to get payment from or a judgment againt the obligor