BLTC 11e SM-Ch18 - NACM



Chapter 18Third Party RightsAnswers to Learning Objectives/Learning Objectives Check Questionsat the Beginning and the End of the ChapterNote that your students can find the answers to the even-numbered Learning Objectives Check questions in Appendix E at the end of the text. We repeat these answers here as a convenience to you.1A.What is an assignment? What is the difference between an assignment and a delegation? The transfer of contract rights to a third person is an assignment. The transfer of contract duties is a delegation. When rights are assigned unconditionally, the rights of the assignor are extinguished, and the assignee can demand performance from the obligor. Normally, a delegation of duties does not relieve the delegator of the obligation to perform if the delegatee fails to do so.2A.What rights can be assigned despite a contract clause expressly prohibiting assignment? A contract cannot prevent an assignment of the right to receive money. The assignment of ownership rights in real estate may not be prohibited because it is contrary to public policy in most states. The assignment of negotiable instruments cannot be prohibited. In a contract for a sale of goods, the right to receive damages for breach or for payment of an account owed may be assigned even if the contract prohibits it.3A.In what situations is the delegation of duties prohibited? Delegation of duties is prohibited in the following situations.1.When the performance depends on the personal skill or talents of the obligor.2.When special trust has been placed in the obligor.3.When performance by a third party will vary materially from that expected by the obligee under the contract.4.When the contract expressly prohibits delegation.4A.What factors indicate that a third party beneficiary is an intended beneficiary? A beneficiary will be considered an intended beneficiary if a reasonable person in the position of the beneficiary would believe that the promisee intended to confer on the beneficiary the right to bring suit to enforce the contract. Other factors include whether performance is rendered directly to the third party, whether the third party has the right to control the details of performance, and whether the third party is expressly designated as a beneficiary in the contract.Answers to Critical Thinking Questionsin the CasesCase 18.1—Critical Thinking—Legal ConsiderationDo borrowers benefit from the fact that lenders may freely assign their rights under loan agreements? If so, how? Borrowers certainly benefit when lenders can freely assign their rights under loan agreements. Although a borrower may be inconvenienced by having to pay a new party, a lender will likely find a loan agreement more attractive if it can later assign its rights. If a lender finds the transaction more attractive, it is more likely to provide the loan; that certainly benefits the borrower.Case 18.2—Critical Thinking—Economic ConsiderationThe repairs to the bus cost $1,341.50. Who should pay this amount? Why? In the negotiations between Cipriani and Allie for the sale of the bus, the parties presumably offset the unpaid cost of the repairs against the market value of the bus to arrive at their agreed-on price. But in the course of the litigation among these parties and Bass-Fineberg, the trial court apparently did not consider the cost of the repairs to have been paid. Cipriani, who had defaulted on the cost for the repairs and the lease payments, was not likely to be able to make those payments. The court held that Bass-Fineberg should pay the amount of this cost to BVIP, and included this figure in the award of the refund to that defendant. The appellate court upheld this award.Case 18.3—Critical Thinking—Social ConsiderationWould the assignments in this case have been valid if Gold had not notified Ziff? Why or why not? Yes. To be valid, notice of an assignment does not have to be given to the obligor (Ziff, in this case). There are good reasons for providing such notice, however, as noted in the text.Answers to Questions in the Reviewing Featureat the End of the Chapter1A.DelegationJackson can delegate the duty to Dunn because she cannot perform all tasks related to her property, but that does not necessarily relieve her of liability.2A.LiabilityJackson had an obligation to McCall, and thereby his customers, to maintain the building. Her delegation to Dunn will not relieve her of possible liability. If Dunn is in the business of providing such maintenance, by contract, for Jackson, then Dunn could be liable; if Dunn is just an employee of Jackson, then Jackson retains primary liability.3A.BeneficiaryThe purpose of the contract was to have business premises that would be frequented by clients such as Faught. Hence, he is a third party beneficiary of the relationship and is due protection from such hazards.4A.AssignmentThe assignment of income that is owed from other parties to help satisfy a debt is a normal assignment. However, it could not interfere with the rights in the relationship between Jackson and her tenants.Answer to Debate This Question in the Reviewing Featureat the End of the ChapterAs a matter of public policy, personal injury tort claims cannot be assigned. ?This public policy is wrong and should be changed. If it’s not against public policy to allow attorneys to take cases in which, if won, the attorneys obtains contingency fees of, say, one third of the awards, then it should not be against public policy to allow the assignment of personal injury tort claims.? Sometimes, individuals do not have the knowledge or the mental state to pursue their own personal injury tort claims.? Third parties should be able to undertake the effort necessary, and that is what an assignment of the claims can do.The public policy against the assignment of personal injury tort claims is based on the notion that others should not be the beneficiaries of someone’s unfortunate situation. ?If such assignments were legal, unscrupulous individuals and companies would offer money up front—at steep discounts—to pursue individuals’ personal injury tort claims, thereby depriving the injured parties of their full compensation.Answers to Issue Spottersat the End of the Chapter1A.Eagle Company contracts to build a house for Frank. The contract states that “any assignment of this contract renders the contract void.” After Eagle builds the house, but before Frank pays, Eagle assigns its right to payment to Good Credit Company. Can Good Credit enforce the contract against Frank? Why or why not? Yes. Generally, if a contract clearly states that a right is not assignable, no assignment will be effective, but there are exceptions. Assignment of the right to receive monetary payment cannot be prohibited.2A.Brian owes Jeff $100. Ed tells Brian to give him the $100 and he will pay Jeff. Brian gives Ed the $100. Ed never pays Jeff. Can Jeff successfully sue Ed for the $100? Yes. When one person makes a promise with the intention of benefiting a third person, the third person can sue to enforce it. This is a third party beneficiary contract. The third party in this problem is an intended beneficiary.Answers to Questions and Case Problemsat the End of the ChapterBusiness Scenarios and Case Problems18–1A.Third party beneficiariesAn intended beneficiary is one who can sue the promisor directly for breach of a contract made for the beneficiary’s benefit. It must be clear from the contract that the parties intended the third party to benefit, the benefit in the agreement must be direct to the third party, and the liability of the promisor must arise from the language of the agreement. In this problem, Rivera is an intended beneficiary: it is clear from the contract that Howie and Wilken intended Rivera to benefit and that the benefit in the agreement is direct to Rivera (Howie is to pay Rivera directly). In this case, Rivera is a creditor beneficiary (one who benefits from a contract in which one party promises another party to pay a third party a debt owed by the promisee to the third party).18–2A.AssignmentAs a general rule, any rights flowing from a contract can be assigned. There are, however, exceptions, such as when the contract expressly prohibits or limits assignment. Under the principle of freedom of contract, such prohibitions are enforced—unless they are deemed contrary to public policy. For example, courts have held that a clause prohibiting assignment that restrains the alienation of property is invalid by virtue of being against public policy.Authorities differ on how a case like Aron’s should be decided. Some courts would enforce the prohibition and hold that Aron’s assignment to Erica is ineffective without the landlord’s consent. Others would permit the assignment to be effective and would limit the landlord’s remedies to the normal contract remedies ensuing from Aron’s breach.18–3A.Spotlight on Drug Testing—Third party beneficiariesIn most cases, it seems only fair that an employee who loses his or her job due to erroneous drug-testing results could successfully sue the drug-testing laboratory for negligence (where the lab’s negligence is the cause of those results). Unlike the requirements for recovery as an intended third party beneficiary, there need not be a contract between the employee and the laboratory for the latter to owe a tort duty. Note, however, that there is a difference between testing that yields false results caused by negligence and testing that yields false positives caused by something outside the control of the laboratory (as alleged in Devine’s case).In this case, the trial court granted summary judgment for Roche and NorDx, and Devine appealed. The Supreme Judicial Court of Maine (the state’s highest court) held that Devine was not a third party beneficiary of the contract between BIW and the laboratories. The court “search[ed] the contract language and the circumstances surrounding the formation of the contract for a clear indication that BIW intended to give Devine an enforceable benefit” and found none. The court explained that “[i]n assessing the relevant circumstances, courts must be careful to distinguish between the consequences to a third party of a contract breach and the intent of a promisee to give a third party who might be affected by that contract breach the right to enforce performance under the contract. If consequences become the focus of the analysis, the distinction between an incidental beneficiary and an intended beneficiary becomes obscured. Instead, the focus must be on the nature of the contract itself to determine if the contract necessarily implies an intent on the part of the promisee to give an enforceable benefit to a third party. The contract between BIW and NorDx does not meet that standard.” The reason for implementing the drug testing was an important factor “because it underscores why the nature of the contract itself does not imply an intent on the part of BIW to confer an enforceable benefit on an employee like Devine. BIW is not in the health care business. It engaged in drug testing of Devine and other employees to advance its economic objectives. Similarly, Devine did not submit to the drug testing at BIW to address his health concerns. He submitted only because the drug testing was a condition of employment. For both BIW and Devine, the drug testing was incidental to their employment relationship.”18–4A.Duties that cannot be delegatedNo. As a general rule, any duty can be delegated. Delegation is prohibited, however, when the contract expressly prohibits delegation. An attempted delegation will render the contract void. But the other party to the contract can consent to the delegation by accepting the delegatee’s performance, and the contract will remain valid. If so, that party cannot later object that the delegation breached the contract.An anti-delegation clause, as in the contract in this problem, must be enforced when the delegation is attempted, not after the delegatee’s performance is accepted. Because Albea consented to the delegation of APAC’s duties under the subcontract to Matthews, Albea is liable to APAC for the labor and materials expended before that delegation.In the actual case on which this problem is based, the court granted a judgment to APAC.18–5A.Notice of assignmentYes. When an assignment is made, the assignee should notify the obligor of the assignment. Notice is not necessary to establish the validity of the assignment—the assignment is effective immediately, whether or not notice is given. But until the obligor has notice of the assignment, the obligor can discharge his or her obligations by performance to the assignor. This performance constitutes a discharge to the assignee. Once the obligor receives proper notice, only performance to the assignee can discharge the obligor’s obligations.In this problem, Wilkinson (the obligor) was not notified that Arnold (the assignor) had assigned his interest in the property to Sam (the assignee). Sam should have provided the notice. His failure to do so caused him to lose the right to receive the rent and the notice of renewal from Wilkinson. Thus, although the assignment was valid, the lack of notice meant that Wilkinson could discharge his obligations under the lease to Arnold. And this is what Wilkinson did—he paid the rent to Arnold and renewed the lease by notice to Arnold. If Sam had given Wilkinson proper notice of the assignment, Wilkinson’s payment of rent and notice to Arnold would not have discharged the duties, and Sam could have successfully claimed that the lease was void.On this reasoning, in the actual case on which this problem is based, the court determined that Wilkinson’s renewal of the lease by notice to Arnold was sufficient.18–6A. Business Case Problem with Sample Answer—Third party beneficiaryYes, the Kincaids can bring an action against the Desses for breach of their contract with Sirva. A third person becomes an intended third party beneficiary of a contract when the original parties to the contract expressly agree that the performance should be rendered to or directly benefit a third person. As the intended beneficiary of a contract, a third party has legal rights and can sue the promisor directly for breach of the contract.Here, the Desses agreed in their contract with Sirva to disclose all information about their property. They further agreed that Sirva and “other prospective buyers” could rely on the Desses' disclosure in deciding “whether and on what terms to purchase the Property.” The Kincaids were not a direct party to the contract between Sirva and the Desses, but the Kincaids are “other prospective buyers.” Thus, the language of the contract indicated that the Kincaids were intended by Sirva and the Desses to be an intended third party beneficiary of it. As an intended beneficiary of the contract, the Kincaids could sue the Desses directly for its breach.In the actual case on which this problem is based, the Kincaids filed a suit in a Kansas state court against the Desses. From a judgment in the Desses’ favor (for lack of privity), the Kincaids’ appealed. A state intermediate appellate court reversed on the basis of the reasoning stated above and remanded the case for trial.18–7A.A Question of Ethics—Assignment and delegation1.Premier Building is not relieved of its contractual obligations. By its terms, the listing agreement said that it was binding on the parties and “their . . . assigns.” Nevertheless, duties are delegated, not assigned, and a delegation does not relieve a delegator of his or her contractual obligations. In this case, Premier Building could not avoid its obligation to pay Sunset Gold simply by delegating that duty to Cobblestone.2.Cobblestone probably did behave unethically. Premier Building and Cobblestone were closely related, and Premier Building even established Cobblestone solely to secure financing for the commercial property at issue. Moreover, Cobblestone explicitly acknowledged its obligation to pay Sunset Gold for finding a tenant. It seems unethical for Cobblestone to shirk its duty to pay a commission despite enjoying the benefits of Sunset Gold’s services.Critical Thinking and Writing Assignments18–8A.Critical Legal ThinkingAllowing a third party beneficiary to sue a promisor directly in effect circumvents the “middle person” (the promisee) and thus reduces the burden on the courts. If a third party beneficiary could not sue the promisor directly for a breach of the contract, the third party could most likely sue the promisee, who would then sue the promisor.18–9A.Business Law Critical Thinking Group Assignment1.Until the obligor has notice of an assignment, the obligor can discharge his or her obligation by performance to the assignor (the obligee). Performance by the obligor to the assignor (obligee) constitutes a discharge to the assignee. In this problem, the Smiths are not notified of ABC’s assignment of their mortgage payments to Citibank, and they continue to make the payments to ABC. Although the assignment was presumably valid, the Smiths’ payments to ABC can discharge the debt. The failure to notify the Smiths of the assignment causes Citibank to lose its right to collect the payments from the Smiths. (Citibank still has a claim against ABC for the amount, however.)2.When a borrower obtains a loan, he or she may later receive a notice from the lender stating that it has transferred (assigned) its rights to receive payments on the loan to another firm. When it is time to repay the loan, the borrower must make the payments to that other firm. This is common among financial institutions that make mortgage loans. Giving notice of the assignment is not legally necessary to establish its validity—an assignment is effective immediately, whether or not notice is given. But once the obligor receives proper notice, only performance to the assignee can discharge the obligor's obligations. Thus, in this problem, if ABC notified the Smiths of the assignment, but the Smiths continued to make payments on the loan to ABC, their payments to ABC would not discharge the debt, which is of course owed to Citibank.3.When a borrower obtains a loan, he or she must make the payments on the loan to discharge it. And once the obligor receives notice of an assignment of those payments, only performance to the assignee can discharge the obligor's obligations. In this problem, assuming that the Smiths were notified of ABC’s assignment of the payments on their loan to Citibank, the assignee would be entitled to enforce the payments in court. The Smiths’ failure to make payments on the loan would give the assignee the right to repossess their house. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download