Rights and Duties of Third Parties to Contract Flashcards
(10 cards)
Entrustment
Entrusting goods to a merchant who deals in goods of that type gives the merchant the power to transfer all rights of the entruster to a bona fide purchaser.
I.e., I take my Rolex to a jeweler for repair. The jeweler sells my watch to a customer the next day, who had no idea the watch was mine. The result is that the bona fide purchaser now has the right to the watch; I can only sue the jeweler for damages.
Exam tip: BFP always wins.
Third-Party Beneficiary
Two people contracting with intent to benefit a third.
Intended beneficiaries have contractual rights (i.e., they can enforce a contract). Incidental beneficiaries do not have contractual rights.
Intended beneficiary Test: TO be an intended beneficiary, the beneficiary (1) is identified / named in the contract, (2) receives performance directly from the promisor, OR (3) has some relationship with the promise to indicate intent to the benefit.
Promisor: party who promises to perform for the benefit of the third party. Promisor has same defenses against third party beneficiary as against promisee.
Promisee: the party who secures the promise from promisor for benefit of intended beneficiary.
Promisor v. Promisee in Third-Party Beneficiary Contract
Either promisee or beneficiary can enforce legal rights against the promisor.
Rescission and Modification of Third-Party Contract
A contract can be rescinded or modified by the promisor and promisee until the third-party beneficiary’s rights vest.
A third-party beneficiary can enforce the contract only after rights have vested.
Rights vest when the beneficiary: (1) learns of the contract and relies on it, (2) assents to the contract at the request of one of the parties, or (3) sues to enforce it.
After vesting, the contract cannot be modified or canceled without the beneficiary’s consent—unless the contract provides otherwise.
Assignment of Rights and Delegation
Assignment occurs when two original parties make a contract, and then one of them (the assignor) transfers their rights under the contract to a third party (the assignee). The assignee can then enforce those rights directly against the party who owes the duty (often the right to receive payment). Typically, the assignor is the one entitled to be paid under the original contract.
Assignment involves two steps: first, formation of the original contract; second, the assignment of rights to the third party. This differs from a third-party beneficiary situation, which involves only one step—where the third party is included in the contract from the beginning.
Exam tip: The assignee usually doesn’t appear until after the original contract is formed. They are not an original party to the contract.
Valid Assignment
K must have language of present transfer (i.e., “I assign my rights to Bob”)
No consideration needed for valid assignment (gift assignments are okay)
Assignee can sue the Obligor directly.
Restrictions on Assignments
Contract language can limit or bar assignment. There are two main types of restrictions: prohibitions and invalidations. A prohibition (e.g., “assignments not permitted”) does not prevent the assignment itself from taking effect, and an assignee who lacks knowledge of the prohibition can still collect. However, the assignor will be liable for breaching the contract. An invalidation clause (e.g., “assignments are null and void”) completely negates the assignment, meaning the assignee cannot collect at all.
Exam tip: If the language is ambiguous and you’re unsure whether it’s a prohibition or an invalidation, treat it as a prohibition.
Additionally, assignments are not valid if they would substantially change the duties of the obligor. Assigning the right to receive payment is not considered a substantial change and is generally enforceable. However, assigning the obligation to perform personal services is a substantial change and not allowed. For example, if a player agrees to perform for LAFC, that contract can’t be assigned to a different team like KC without consent.
Multiple Assignments
Gift assignments are easily revoked. If an assignor makes multiple gratuitous assignments of the same right, the last gift assignee prevails, because each new gift assignment revokes the prior one. This rule often feels counterintuitive and is a favorite of bar examiners.
In contrast, assignments for consideration are more stable. The first assignee for consideration generally prevails over all subsequent assignees and any prior gift assignees.
However, there’s an exception: if a subsequent assignee for value takes without notice of the earlier assignment, they may prevail if one of the following applies: (1) the subsequent assignee is the first to obtain a judgment against the obligor, (2) the subsequent assignee is the first to receive payment from the obligor, (3) the subsequent assignee is the first to receive delivery of a token chose (a tangible symbol of the right), (4) the subsequent assignee enters into a novation with the obligor that releases the assignor, or (5) the subsequent assignee can assert estoppel against the first assignee (e.g., the first assignee said or did something to indicate no rights had been assigned).
Delegation
A party to a contract can transfer their contractual duties to a third party—this is called delegation. Generally, a party may delegate duties without the obligee’s consent, but the original (delegating) party remains liable to the obligee if the delegate fails to perform.
There are important exceptions to this rule. If the duty involves special skills or unique personal qualities, it cannot be delegated, even if the proposed delegate has equal or superior skills. Additionally, a contract can explicitly prohibit delegation. Language such as “no delegation” bars delegation, and on the MBE, even “no assignments” is treated as also prohibiting delegation.
Finally, if both original parties mutually agree to substitute a new party and release the original obligor from liability, that is called a novation. A novation discharges the original party and creates a new contract with the substituted party.
Delegation for Consideration
When a duty is delegated for consideration, the delegate becomes an intended third-party beneficiary of the arrangement and is liable to both the obligor (the party who delegated the duty) and the obligee (the party to whom the duty is owed).
In contrast, if the delegation is made without consideration—i.e., as a gratuitous promise—the delegate generally is not liable to the obligee if they fail to perform.
