Contracts: Third Parties

Entrusting

Entrust 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 a buyer in the ordinary course of business. Entrusting includes both delivering goods to the merchant and leaving purchased goods with the merchants for later pickup or delivery. Buying in the ordinary course means buying in good faith from a person who deals in goods of the king without knowledge that the seller is violating the rights of third parties

Voidable Title Concept

If a sale is induced by fraud, the seller can rescind the sale and recover the goods from the fraudulent buyer (voidable title). However, the defrauded seller can’t recover the goods from a good faith purchaser for value who bought from the fraudulent buyer. The rights of a defrauded seller are cut off both by a good faith buyer and by a person who takes a security interest in the goods

Thieves and Passing Title

If a thief steals goods from the true owner and then sells them to a buyer, the thief is unable to pass title to the buyer because their title is void. However, an exception may apply if the buyer has made accessions (valuable improvements) to the goods or the true owner is estopped from asserting title

Third Party Beneficiaries (TPB) General Scenario

In a typical TPB situation, A (the promisee) contracts with B (the promisor) that B will render some performance to C (TPB)

Intended vs Incidental TPB

Only intended beneficiaries have contractual rights. In determining if a beneficiary is intended, consider 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

TPB: Creditor vs Donee Beneficiary

Two types of intended beneficiaries. A creditor beneficiary, to whom a debt is owed by the promisee; and a donee beneficiary, to whom the promisee intends to benefit gratuitously

TPB Rights vs Promisor

A beneficiary may sue the promisor on the contract. The promisor may raise against the TPB any defense the promisor had against the promisee. Whether the promisor may use the defense the promisee would have against TPB depends on whether the promisor made an absolute promise to pay or only a promise to pay what the promisee owes the TPB. If the promise is absolute, the promisor cannot assert the promisee’s defenses. If the promise is not absolute, the promisor can assert the promisee’s defenses

TPB vs Promisee

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

Promisee vs Promisor

A promisee may sue the promisor both at law and in equity for specific performance if the promisor isn’t performing for the third person

When do TPB Rights Vest

A TPB can enforce a contract only if their rights have vested. This occurs 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. Prior to vesting, the promisee and promisor are free to modify or rescind the beneficiary’s rights under the contract

Significance of TPB Rights Vesting

Before the intended TPB’s rights vest, the promisor and promisee are free to modify their contract, including removing TPB altogether, without consulting the third party. Once TPB rights vest, the promisor and promisee cannot vary his rights without consent.

Assignment of Rights, generally

In the typical assignment situation, X, the obligor, contracts with Y, the assignor. Y assigns his right to X’s performance to Z (the assignee)

What rights may be assigned

Generally, all contractual rights may be assigned, except: (1) an assignment that would substantially change the obligor’s duty or risk, such as personal service contracts where the service is unique; (2) an assignment of future rights to arise in future contracts; and (3) an assignment prohibited by law

Effect of Assignment

The effect of an assignment is to establish privity of contract between the obligor and the assignee while extinguishing privity between the obligor and the assignor. Once the obligor has knowledge of the assignment, they must render performance or pay the assignee. If the obligor renders performance to or pays the assignor, they do so at their own risk. Typically one of the parties, usually the assignee, will notify the obligor

Requirements for Effective Assignment

(1) The assigner must manifest an intent to immediately and completely transfer their rights; (2) while a writing is usually not required, the right being assigned must be adequately described; (3) accepted words of transfer will suffice to “assign”; and (4) consideration is not necessary

Assignment for Value

An assignment is for value if it is: (1) done for consideration; or (2) taken as security for or payment of a preexisting debt. Assignments for value cannot be revoked

Gratuitous Assignments

An assignment not for value (gratuitous assignment) generally is revocable

Exceptions to Gratuitous Assignment Revocability

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

Methods of Revoking a Gratuitous Assignment

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

Assignment Effect of Revocation

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

Contractual Provisions Against Assignment

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

Assignee vs Obligor rights

The assignee can sue the obligor since the assignee, not the assignor, is entitled to performance. The obligor has a defense against the assignee for any defense inherent in the contract. The obligor can’t raise by way of defense any defenses that assignor might have against the assignee

Assignee rights vs Assignor

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

Multiple Assignments: Who Collects

If the first assignment is revocable, a subsequent assignment revokes it. If the first assignment is unrevocable, the first assignment will prevail over a subsequent assignment

Assignment for Consideration: Who Collects

If the second assignee has paid value and taken without notice of the first assignment: (1) the subsequent assignee gets the first judgment against the obligor; (2) the subsequent assignee gets the first payment of a claim from the obligor; (3) the subsequent assignee gets delivery of a token chose; (4) the subsequent assignee is the party to a novation releasing the assignor; and (5) the subsequent assignee can proceed against the first assignee on an estoppel theory

Delegation, generally

Y, the obligor/delegator, promises to perform for X (the obligee.) Y delegates their duty to Z (the delegate)

Duties That Can Be Delegated

Generally, all duties can be delegated, except: (1) duties that involve personal judgment and skill; (2) when delegation would change the obligee’s expectancy, such as in requirement or output contracts; (3) when a special trust was reposed in the delegator by the other party; and (5) when there is a contractual restriction on delegation

Requirements for Effective Delegation

The delegator must manifest a present intention to make a delegation. There are no special formalities to be complied with to have a valid delegation. It may be written or oral

Delegation of Duties Involving Personal Judgment or Skill

Duties that involve personal judgment or skill cannot be delegated

Rights and Liabilities of Parties

Obligee must accept performance from the delegate of all duties that may be delegated. The delegator remains liable on the contract, so the obligee may sue the delegator for nonperformance by the delegate. The obligee may require the delegate to perform only if there has been an assumption (the delegate expressly or impliedly promised they will perform the duty delegated and this promise is supported by consideration). An assumption creates a contract between the delegator and the delegatee in which the obligee is a TPB

Delegation Terminology

Words assigning “the contract” or “all my rights under the contract” are usually construed as an assumption of the duties by the assignee unless a contrary intention appears

Novation:

Novation substitutes a new party for an original party to the contract. It requires assent of all parties and completely releases the original party