Entrustment rule
An owner who entrusts goods to a merchant who deals in goods of the kind has no rights against a bona fide purchaser
Third-party beneficiary
Two people enter a contract intending to benefit a third party
Intended beneficiary
A person who is not party to a contract, but has rights under the contract because it was intended to benefit her.
Promisor
The party who promises to perform for the 3rd party.
Promisee
The party who secures the promise
Applicability of defenses against the promisee on the third party
Any defense against the promisee applies to the third party beneficiary
incidental beneficiary
people who benefit from k but promisee didn’t intend them to
rights of incidental beneficiary
cannot sue to enforce the contract
rights of the promisee and the intended beneficiary
Either can sue to enforce the contract
Recission/Modification in a third party contract
- The promisor and promisee can rescind or modify the contract until the rights of the third party have vested (3rd party learns about the k).
- Exception: Contrary language in the contract
Assignment of rights to a third party
- Two people make a contract, one (assignor) transfers his rights to a third party (assignee).
- The party who owes the duty (typically to pay money) is the obligor.
e.g. I will paint A’s house for 2k. I assign B to paint the house. B now has the right to collect from A. I am the assignor, B is the assignee, and A is the obligor.
Difference between assignment and third party beneficiary
- With assignment, 2 parties enter into a k and a third party appears later on.
- With third-party beneficiary, all 3 parties are there from the start
Language needed for valid assignment
Valid assignments must have language of present transfer
(no promises to assign)
Consideration for assignments
Consideration is not required to make a valid assignment
Effect of a prohibition clause on assignments
- If the contract has a prohibition clause, assignments are not permitted
- but assignee who didn’t know of prohibition can still collect
Effect of invalidation clause
- If k has an invalidation clause,
- e.g. all assignments are null and void
- assignee cannot collect on assignment
How to tell if a clause is a prohibition or invalidation clause
If you can’t tell between an invalidation and prohibition clause, it’s probably a prohibition clause
Effect of assignment on the contract’s duties
Assignments cannot substantially change the duties of the obligor
(e.g. assign a performance right when obligor previously only had to pay money)
Rights of assignee against obligor
If obligor breaches, the assignee may sue the obligor directly
Duty of obligor to pay assignee
Obligor can continue to pay assignor until he knows of or learns about the assignee.
Gratuitous assignment
- A later gift assignment revokes an earlier one.
- Last gratuitous assignee prevails.
- e.g. A owes me money under previous contract. I assign the right of payment to B. I then assign it to C. C prevails.
Assignment for consideration rule
- The first assignee for consideration prevails over all subsequent assignees as well as prior gratuitous assignees.
- Exception: a later assignee for consideration prevails if he does not know of the earlier assignments and is the first to get payment from or a judgement against the obligor.
Delegation
A transfer of contract duties to a third party (not rights)
Delegation rule
- contractual duties may be delegated to another party without the consent of the person to whom performance is owed (the obligee)
- exception: if the contract prohibits delegation, no delegation allowed
