Contracts 8: Third-Party Problems
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What is the rule of ENTRUSTMENT?
In an Article 2 SOG, an owner who entrusts goods to a merchant who deals in GOODS OF THE KIND (i.e., a dealer) has NO rights against a BONA FIDE PURCHASER.
What is a THIRD-PARTY BENEFICIARY?
a person who is not party to a contract but has RIGHTS because the contract was intended to benefit him
What is the difference between an INTENDED beneficiary and an INCIDENTAL beneficiary?
- INTENDED: the person to whom performance is to be given under the contract (almost always named in the agreement). He has legal RIGHTS.
- INCIDENTAL: a person who just happens to benefit. He does NOT have legal rights.
What is the difference between a DONEE beneficiary and a CREDITOR beneficiary?
- DONEE: a person who is getting the performance as a GIFT.
- CREDITOR: a person who is getting the performance to repay a DEBT.
When a THIRD PARTY BENEFICIARY is involved, until when can the promisor/promisee RESCIND or MODIFY the contract?
until the rights of the THIRD PARTY BENEFICIARY have VESTED (when TPB learns about the agreement and has RELIED on it)
EXCEPTION: contrarylanguage in the contract controls
When is a PROMISOR liable to a THIRD PARTY BENEFICIARY?
if promisor has breached AND promisee is able to recover (TPB subject to the same defenses as the promisee), then an INTENDED beneficiary can sue despite the lack of privity of contract
When is a PROMISEE liable to a THIRD PARTY BENEFICIARY?
Only when TPB is a CREDITOR beneficiary
How is the PROMISEE'S rights as against a breaching PROMISOR affected if the TPB is a DONEE beneficiary?
Promisee may still sue breaching promissor, but if the TPB is a DONEE beneficiary, the damage would probably be small
What is the rule for DELEGATION of duties?
Generally, contractual duties may be delegated WITHOUT THE CONSENT of the person to whom performance is owed (the "obligee"). Obligee MUST pay as long as the delegate did a good job.
- - Contract language controls
- - Special skill or reputation
In a DELEGATION, against WHOM does an obligee have rights?
- DELEGATING party: remains liable
- DELEGATE receiving CONSIDERATION: obligee would now be a TPB to the contract between delegator and delegate
How can a party (assignor) assign his rights to a third party (assignee)?
He must use language of PRESENT transfer (i.e., "I assign..." or "I hereby assign...").
Language of FUTURE transfer (i.e., "I will assign..." or "I promise to assign...") is NO GOOD.
Is CONSIDERATION required in a valid assignment?
NO--gift assignments are valid (but are very easily revoked).
What are TWO RESTRICTIONS on assignment?
- Contract language controls
- Cannot substantially change duties of obligor
What is the difference between a clause that PROHIBITS assignment ("rights are not assignable") versus one that INVALIDATES assignment
("all assignments are void")?
- PROHIBITS assignment: assignment remains VALID. However, assignor is liable to obligor for breach of contract.
- INVALIDATES assignment: assignment is INVALID and INEFFECTIVE.
What are the assignee's rights as against the obligor?
the assignee steps into the shoes of the assignor and has exactly the SAME rights as an assignor would have
HOWEVER: the obligor is NOT liable to assignee until it learns about the assignment
What results when assignor assigns the same right to multiple parties?
- GIFT assignments: the LAST gratuitous assignee prevails over earlier gratuitous assignees (NY: gift assignment is IRREVOCABLE if in a SIGNED writing)
- Assignments for CONSIDERATION: the FIRST assignee for consideration prevails over all subsequent assignees AND prior gratuitous assignees (EXCEPTION: a LATER assignee for consideration prevails is he DOES NOT KNOW of the earlier assignments AND is the FIRST to get PAYMENT from or a JUDGMENT against the obligor--notification to obligor is NOT enough!)
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