THIRD PARTIES TO A K

Entrustment – General Rule

Entrusting goods to a merchant who deals in goods of that kind gives them the power, but not the right, to transfer the entrusted goods to a buyer in the ordinary course of business who has no knowledge that the sale is in violation of the ownership rights of a third party

Entrustment – If entrusted goods are sold to a BFP, can the original owner sue the BFP?

NO

Entrustment – If entrusted goods are sold to a BFP, who is the ONLY person the original owner can sue?

The merchant dealer

Can a thief pass title to a buyer if they steal goods from a true owner and then try to sell them?

NO

Third-Party Beneficiaries – General Situation

The promisee contracts with the promisor that the promisor will render some performance to the 3PB

Which type of beneficiary is entitled to contractual rights?

Intended beneficiaries

Do incidental beneficiaries have contractual rights?

NO

How do you determine whether a beneficiary is intended or incidental?

Whether the beneficiary (1) is identified in the contract, (2) receives performance directly from the promisor, or (3) has some relationship with the promisee to indicate intent to benefit

What are the two types of intended beneficiaries?

(1) A creditor beneficiary, which is a person to whom a debt is owed by the promisee, and (2) A donee beneficiary, which is a person whom the promisee intends to benefit gratuitously

Is the third party beneficiary a party to the contract at all?

NO

Can a 3PB sue the promisor (the party to render some performance to the 3PB) on the contract?

YES

What defenses can a promisor raise against a 3PB?

Any defense that the promisor has against the promisee

When can the promisor use the defenses that the promisee would have against the 3PB?

If the promise is NOT absolute, meaning the promisor only made a promise to pay what the promisee owes the 3PB and not an absolute promise to pay

When can a donee beneficiary sue the promisee?

Only if grounds for detrimental reliance exist

Can a creditor beneficiary sue the promisee on the existing obligation?

YES

Can the promisee sue the promisor if the promisor is not performing for the 3PB?

YES

WHEN can a third party enforce a contract?

Only if their rights have vested

WHEN do the rights of a 3PB vest?

When they (1) manifest assent to a promise in the manner requested by the parties, (2) bring a suit to enforce the promise, or (3) materially change position in justifiable reliance on the promise

When can a promisor and promisee modify or rescind a 3PB’s rights under a contract without their consent?

Prior to the 3PB’s rights vesting

Assignment – General Situation

The obligor contracts with the assignor, and the assignor assigns his rights to the obligor’s performance to the assignee

When can contractual rights NOT be assigned?

(1) The assignment would substantially change the obligor’s duty or risk, (2) The assignment is of future rights to arise from future contracts, or (3) The assignment is prohibited by law

What is the effect of an assignment?

Privity of contract is established between the obligor and the assignee, while privity is extinguished between the obligor and the assignor

What are the obligor’s duties once they have knowledge of the assignment?

They must render performance to or pay the assignee

What is necessary for an effective assignment?

The assignor must manifest an intent to immediately and completely transfer their rights to the assignee, the right assigned must be adequately described, and there must be words of transfer

Is a writing required to have an effective assignment?

NO

Is consideration required for a gratuitous assignment?

NO

What are the types of assignments?

Assignments for value and gratuitous assignments

When is an assignment for value?

If it is (1) done for consideration, or (2) taken as security for or payment of a preexisting debt

Can assignments for value be revoked?

NO

Can gratuitous assignments (not for value) generally be revoked?

YES

When are gratuitous assignments irrevocable?

If (1) the obligor has already performed, (2) a tangible claim is delivered, (3) an assignment of an intangible claim is put in writing, or (4) the assignee can show detrimental reliance on the gratuitous assignment

What are the methods of revoking a revocable gratuitous assignment?

(1) Death or bankruptcy of the assignor, (2) Notice of revocation by the assignor to the assignee or the obligor, (3) The assignor takes performance directly from the obligor, or (4) Subsequent assignment of the same right by the assignor to another

What is the effect of a revocation of an assignment?

The privity between the assignor and the obligor is restored, and the assignor is once again the real party in interest

What is the effect if a contract prohibits assignment of “the contract”?

Only DELEGATION of the assignor’s duties would be barred

What is the effect of a clause prohibiting assignment of “contractual rights”?

Assignment is NOT barred, but the obligor has the right to sue for damages, and the assignee still has the right to collect from the obligor if they did not know of the clause

What is the effect if the contract provides that attempts to assign will be void?

Assignment is barred and the assignee will NOT be able to collect damages

What is the effect if the assignee has notice of the nonassignment clause?

The assignment will be ineffective and the assignee will not recover

Can the assignee sue the obligor?

YES

What defenses does the obligor have against the assignee?

Any defense inherent in the contract

Can the obligor raise any defenses against the assignee that the assignor would have against the assignee?

NO

Can assignments substantially change the duties of the obligor?

NO

What are the warranties that the assignor makes in an assignment for value?

(1) they have not made a prior assignment of the same right, (2) the right exists and is not subject to any undisclosed defenses, and (3) they won’t interfere with the assigned right

Can the assignee sue the assignor for breach of a warranty under an assignment for value?

YES

Will the assignor be liable to the assignee if the obligor is incapable of performing?

NO

Multiple Assignments – General Rule

If the first assignment is revocable, then a subsequent assignment revokes it, but if the first assignment is irrevocable, then it will usually prevail over a subsequent assignment

Multiple Assignments – Gift Assignments

The last gratuitous assignee prevails over earlier gratuitous assignees because a later gift assignment revokes an earlier one

Multiple Assignments – Assignments for Consideration – General Rule

The first assignee for consideration will prevail over all subsequent assignees, as well as previous gift assignments

Multiple Assignments – Assignments for Consideration – Is it enough that the later assignee for value did not know of the previous assignment, but merely notified the obligor of their rights?

NO

Delegation – General Situation

The obligor/delegator promises to perform for the obligee, but then the obligor/delegator delegates their duty to the delegate

What duties may NOT be delegated?

(1) Duties that involve personal judgment and skill, (2) Delegation that would change the obligee’s expectancy, (3) A special trust was reposed in the delegator by the other party to the contract, or (4) There is a contractual restriction on delegation

Is consent from the obligee needed before delegating duties to the delegate?

NO

Does a clause prohibiting assignments also prohibit delegations?

YES

What is necessary for an effective delegation?

The delegator must manifest a present intention to make a delegation

Does a delegation need to be in writing?

NO

Must the obligee accept performance from the delegate of all duties that may be delegated?

YES

Does the delegator remain liable on the contract?

YES

May the obligee sue the delegator for nonperformance by the delegate?

YES

When may the obligee sue the delegate for breach of contract?

Only if the delegate expressly or impliedly promises they will perform the duty delegated, and this promise is supported by consideration, thereby creating a contract between the delegator and the delegate in which the obligee is a 3PB

Novation

A novation substitutes a new party for an original party to the contract and it requires the assent of all parties and completely releases the original party