Third Party Rights and Duties

Question 1

Entrustment

Answer 1

Entrusting a merchant who deals in goods of that kind empowers the merchant to transfer the goods to a BFP in the ordinary course of business
-Owner has no rights against BFP
-i.e., A gives watch to jeweler for repair and jeweler wrongfully sells watch to BFP (A can only sue jeweler, not get back watch from BFP)

Question 2

Third party beneficiary

Answer 2

Intended beneficiary: a third party named in the contract that receives performance directly from the promisor or has some relationship with promisee to indicate intent to benefit
-1 step process (compared to assignment 2 step process)
-Has the right to enforce the contract directly
-In contrast, a third party that is only incidental to a contract has no contract rights

Types of intended beneficiaries:
1. Creditor (a person whom a debt is owed by the promisee)
2. Donee beneficiary

Question 3

Third party beneficiary vs. promisor

Answer 3

An intended beneficiary may sue the promisor of the contract
-But promisor may raise any defense against the TPB that he could use against the promisee

Question 4

Third party beneficiary vs. promisee

Answer 4

A creditor beneficiary can sue the promisee on the existing obligation between them, while a donee beneficiary has no right to sue the promisee unless he detrimentally rlied

Question 5

Promisee vs. Promisor

Answer 5

A promisee may sue the promisor if the promisor isn’t performing for the third party beneficiary

Question 6

When rights of the beneficiary vest

Answer 6

A third party beneficiary can only enforce a contract after its rights vest:
1. Manifest assent to a promise in the manner requested by the parties
2. TPB brings a suit to enforce the promise; or
3. Materially change position in justifiable reliance on the promise

Before vesting, the promisee and promisor can rescind or modify the beneficiary’s rights under contract

Question 7

Assignment of rights

Answer 7

Obligor contracts with assignor, who assigns his right to the obligor’s performance to the assignee
-Usually the right to be paid, but can be any right that does not substantially change the obligor’s duty, assign a future right to a future contract, or is not prohibited by law
-Assignee can enforce rights against the obligor

Two step process:
1. two parties contract
2. assignor assigns rights to third party (assignee)
-Present language transfer
-No consideration required

Question 8

Express contractual provision against assignment

Answer 8

Prohibition: assignment is not permitted
-Assignee without knowledge of provision can collect
-“Rights under this contract are not assignable”

Invalidation: assignment is null and void
-Assignee cannot collect
-“All assignments under this contract are void”

If it is a close call, presume prohibition

Question 9

Multiple assignments

Answer 9

If the assignment is revocable, a subsequent assignment revokes it
-Gift assignments are revocable

If the assignment is irrevocable, the first assignment with consideration prevails unless:
-Subsequent assignment by BFP + gets first judgment, first payment, detrimental reliance

*Examine whether each assignment is valid and then determine priority of multiple assignments

Question 10

Delegation

Answer 10

Obligor promises to perform for obligee. Obligor delegates their duty to the delegate
-All duties may be delegated except those involving personal judgment and skill, the delegation would change obligee’s expectancy, a special trust is involved, or the contract prohibits it (no assignment provision also includes delegations)
-Obligor does NOT need obligee’s consent to delegate
-Delegating party is liable to the obligee if delegate does not perform

*Delegation for consideration creates an intended third party beneficiary

Question 11

Novation

Answer 11

Substitutes a new party for an original party to contract
-Requires assent of all parties and completely releases the original party from liability