Rights and Duties of Third Parties to the K

Question 1

POWER OF PERSON OTHER THAN OWNER TO TRANSFER GOOD TITLE TO A PURCHASER:Entrusting

Answer 1

• Entrusting goods to a merchant who deals in goods of that kind gives them the power (but not the right) to transfer all rights of the entruster to buyer in the ordinary course of business.
• Entrusting includes both delivering goods to
  merchant & leaving purchased goods with merchant for later pickup/delivery.
• Buying in the ordinary course means buying in good faith from person who deals in goods of the kind w/o knowledge that sale is in violation of ownership rights of 3rd parties

Question 2

Tip

Answer 2

• Note that requirements for entrustment are very
  specific: The merchant must be one who ordinarily
  deals in goods of the kind (ex. a television
  repair shop that only repairs televisions doesn’t qualify).
• Sale must be in the ordinary course of business (ex. seizure by a creditor to satisfy a lien doesn’t qualify).
• Entrustment passes only the rights of entruster (if entruster isn’t towner, ownership cannot pass).

Question 3

Voidable Title Concept

Answer 3

• Generally, if sale is induced by fraud, seller can rescind sale & recover goods from fraudulent
  buyer (it is a voidable title).
• However, defrauded seller may not recover goods from a good faith purchaser for value who bought from fraudulent buyer.
• Rights of defrauded seller are cut off both by good faith buyer & by person who takes a security
  interest in the goods.

Question 4

Thief Generally Cannot Pass Title

Answer 4

• If thief steals goods from true owner & sells them to buyer, thief is unable to pass title to buyer (b/c title is void).
• Rationale: A seller can transfer only title they have/have power to transfer.
• Therefore, even a good faith purchaser for value generally cannot cut off rights of true owner if seller’s title was void.
• An exception to this rule may apply if buyer has made accessions (valuable improvements) to goods/
  true owner is estopped from asserting title (ex. if true owner expressly/impliedly represented that thief had title).

Question 5

THIRD-PARTY BENEFICIARIES

Answer 5

• In typical third-party beneficiary situation, A (promisee) Ks w/ B (promisor) that B will render
  some performance to C (3rd-party beneficiary)

Question 6

Intended vs. Incidental Beneficiary

Answer 6

• Only intended beneficiaries have contractual rights, not incidental beneficiaries.
• In determining if beneficiary is intended, consider whether beneficiary
  (1) is identified in K,
  (2) receives performance directly from promisor, or (3) has some relationship w/ promisee to indicate intent to benefit.

Question 7

Creditor vs. Donee Beneficiary

Answer 7

• 2 types of intended beneficiaries:
  (1) creditor beneficiary: person to whom a debt is owed by promisee, and
  (2) donee beneficiary: person whom promisee intends to benefit gratuitously.

Question 8

Rights of Third-Party Beneficiary vs. Promisor

Answer 8

• Beneficiary may sue promisor on K.
• Promisor may raise against 3rd-party beneficiary any defense that promisor has against promisee.
• Whether promisor may use defenses promisee would have against 3rd-party beneficiary depends on
  whether promisor made an absolute promise to pay/
  only a promise to pay what promisee owes beneficiary.
• If promise is absolute, promisor cannot assert promisee’s defenses; if promise is not absolute, promisor can assert promisee’s defenses

Question 9

Rights of Third-Party Beneficiary vs. Promisee

Answer 9

• Creditor beneficiary can sue promisee on existing
  obligation between them.
• They may also sue promisor, but may obtain only one satisfaction.
• A donee beneficiary has no right to sue promisee unless grounds for a detrimental reliance remedy exist.

Question 10

Rights of Promisee vs. Promisor

Answer 10

• Promisee may sue promisor both at law & in equity
  for specific performance if promisor isn’t performing for 3rd person

Question 11

When Do the Rights of the Beneficiary Vest?

Answer 11

• 3rd party can enforce K only if their rights have
  vested.
• This occurs when they:
  (1) manifest assent to a promise in manner requested by parties;
  (2) bring a suit to enforce promise; or
  (3) materially change position in justifiable reliance on promise.
• Prior to vesting, promisee & promisor are free to modify/rescind beneficiary’s rights under K

Question 12

Significance of Vesting

Answer 12

• Before intended 3rd-party beneficiary’s rights vest, promisor & promisee are free to modify their K (including removing 3rd-party beneficiary altogether)
  w/o consulting 3rd party.
• Once 3rd party’s rights vest, promisor & promisee cannot vary his rights w/o his consent

Question 13

Tip

Answer 13

On exam, look at call of the question to see who is bringing the suit. If 3rd-party beneficiary is bringing suit to enforce K, act of bringing suit vests their rights. - No other act is required.
- Accordingly, if 3rd-party beneficiary is suing, any answer choice that states 3rd-party beneficiary’s
rights have not yet vested is incorrect

Question 14

ASSIGNMENT OF RIGHTS AND
DELEGATION OF DUTIES.

Answer 14

Assignment
- In typical assignment situation, X (obligor) Ks w/ Y (assignor).
- Y assigns his right to X’s performance
to Z (assignee)

Question 15

What Rights May Be Assigned?

Answer 15

• Generally, all contractual rights may be assigned. Exceptions:
  (1) assignment that would substantially change obligor’s duty or risk (ex. personal service Ks
  where service is unique);
  (2) assignment of future rights to arise from future Ks (not future rights in already existing Ks); and
  (3) assignment prohibited by law (including wage assignments in some states).

Question 16

Effect of Assignment

Answer 16

• Effect of assignment is to establish privity of K
  between obligor & assignee while extinguishing
  privity between obligor &assignor.
• Once obligor has knowledge of assignment, they must render performance to/pay assignee.
• If obligor renders performance to/pays assignor, they do so at their own risk.
• Typically, one of parties (usually assignee) will notify obligor of assignment.

Question 17

What Is Necessary for an Effective Assignment?

Answer 17

• For assignment to be effective, assignor must manifest intent to immediately & completely transfer their rights.
• Writing is usually not required to have an effective
  assignment.
• The right being assigned must be adequately described.
• Not necessary to use “assign”; any accepted words of transfer will suffice.
• A gratuitous assignment is effective; consideration is not required

Question 18

Is Assignment Revocable or Irrevocable?

Answer 18

Assignments are divided into 2 categories:
assignments for value & gratuitous assignments.

Assignment for Value
- An assignment is for value if it is:
(1) done for consideration, or
(2) taken as security for/payment of preexisting debt.
- Assignments for value cannot be revoked.

Gratuitous Assignments
- An assignment not for value (a gratuitous assignment) generally revocable.

Question 19

Exceptions to Revocability

Answer 19

• A gratuitous assignment is irrevocable if:
  (1) obligor has already performed;
  (2) a token chose (tangible claim, such as a stock certificate) is delivered;
  (3) assignment of a simple chose (intangible claim, such as K right) is put in writing; or
  (4) assignee can show detrimental reliance on gratuitous assignment (estoppel).

Question 20

Methods of Revocation

Answer 20

• A revocable gratuitous assignment may be terminated by:
  (1) death/bankruptcy of assignor;
  (2) notice of revocation by assignor to assignee/ obligor;
  (3) assignor taking performance directly from obligor; or
  (4) subsequent assignment of same right by assignor to another

Question 21

Tip

Answer 21

This is where obligor’s peril comes in. Obligor does not necessarily know whether an assignment was gratuitous/for value. Suppose obligor, after notice of assignment, renders performance to/pays assignor. If assignment was revocable, it is revoked by assignor’s acceptance, and obligor is discharged. If assignment was for value, obligor is not discharged by his performance/payment to assignor. Obligor remains liable toassignee.

Question 22

Assignment: Effect of Revocation

Answer 22

• Once assignment is revoked, privity between assignor & obligor is restored, and assignor is once again real party in interest

Question 23

Express Contractual Provision Against Assignment

Answer 23

• Clause prohibiting assignment of “the K” will be construed as barring only delegation of assignor’s duties.
• Clause prohibiting assignment of “contractual rights”
  generally doesn’t bar assignment, but rather merely gives obligor right to sue for damages.
• However, if K provides that attempts to assign will be void, parties can bar assignment.
• Also, if assignee has notice of nonassignment clause, assignment will be ineffective.

Question 24

What Are the Rights and Liabilities of the Various
Parties? Assignee vs. Obligor

Answer 24

• Assignee can sue obligor, as assignee is the real party in interest interest b/c it is assignee (not assignor) is entitled to performance under K.
  (Obligor has as defense against assignee any defense inherent in K; for ex. failure of consideration & other defenses that came into existence before obligor had knowledge assignment.)
• Obligor cannot raise by way of defense any defenses assignor might have against assignee.

Question 25

What Are the Rights and Liabilities of the Various
Parties? Assignee vs. Assignor

Answer 25

• In every assignment for value, assignor warrants
  that:
  (1) they have not made a prior assignment of same right;
  (2) right exists & is not subject to any undisclosed defenses; and
  (3) they won’t interfere w/ assigned right.
• Assignee may sue assignor for breach of any of these warranties.
• However, assignor won’t be liable to assignee if obligor is incapable of performing.

Question 26

Multiple Assignments—Which Assignee Gets to
Collect?

Answer 26

• If first assignment is revocable, subsequent assignment revokes it.
• If it is irrevocable, first assignment will usually prevail over a subsequent assignment.
• Several exceptions exist (if 2nd assignee has paid value & taken w/o notice of 1st assignment):
  (1) subsequent assignee gets 1st judgment against obligor;
  (2) subsequent assignee gets 1st payment of a claim
  from obligor;
  (3) subsequent assignee gets delivery of a token chose;
  (4) subsequent assignee is party to a novation releasing assignor; or
  (5) subsequent assignee can proceed against 1st assignee on an estoppel theory (estoppel could operate against subsequent assignee as well).

Question 27

Delegation

Answer 27

-Typical delegation situation, Y (obligor/delegator)
promises to perform for X (obligee). Y delegates their
duty to Z (delegate).

Question 28

What Duties May Be Delegated?

Answer 28

• Generally, all duties may be delegated.
  Exceptions:
  (1) duties involve personal judgment & skill;
  (2) delegation would change obligee’s expectancy (ex. requirements & output Ks);
  (3) special trust was reposed in delegator by other party to K; and
  (4) there is a contractual restriction on delegation

Question 29

What Is Necessary for Effective Delegation?

Answer 29

• Delegator must manifest a present intention to make a delegation.
• No special formalities to be complied w/ to have a valid delegation.
• May be written or oral.

Question 30

Tip

Answer 30

Although “assignment” & “delegation” have
precise meanings (rights are assigned & duties
are delegated), on MBE terms are often
used loosely. Thus, a question might state initially that “Y assigned his rights in the K to X,” but facts later
show that duties were also delegated. Additionally, a prohibition against assignment is construed as a prohibition against delegation as well.

Question 31

What Are the Rights and Liabilities of the Parties?

Answer 31

• Obligee must accept performance from delegate of all duties that may be delegated.
• Delegator remains liable on K; thus, obligee may sue delegator for nonperformance by delegate.
• Obligee may require delegate to perform only if there has been an assumption (delegate expressly/ impliedly promises they will perform the duty delegated & promise is supported by consideration/its equivalent).
• This promise creates K between delegator & delegate in which obligee is a 3rd-party beneficiary.

Question 32

Terminology

Answer 32

Today, words assigning “the K” or “all my rights under
the K” are usually construed as including an assumption of the duties by assignee, unless a contrary intention appears.

Question 33

NOVATION DISTINGUISHED

Answer 33

• Novation substitutes a new party for original party to K.
• It requires assent of all parties & completely
  releases original party.