Legal Environment of Business Exam 3 - CH 16

Vesting of Rights

- A contract for the benefit of an intended beneficiary confers rights that the beneficiary may enforce. Until the rights vest, however, the promisor and promisee may vary or completely discharge these rights. - There is considerable variation among the states as to when vesting takes place. - These views include: (1) immediately upon making the contract, (2) when the third party learns of the contract and assents to it, and (3) when the third party changes his position in reliance upon the promise made for his benefit.

Implied Warranties of Assignor

- Four implied warranties are imposed by law upon the transferor of contract rights for value. - The four warranties are (1) that he will do nothing to defeat or impair the assignment; (2) that the assigned right actually exists and is subject to no limitations or defenses other than those apparent or stated; (3) that any writing evidencing the right is genuine; and (4) that he has no knowledge of any fact that would impair the value of the assignment.

Rights of the Assignee

- Obtains Rights of Assignor - Notice

Obtains Rights of Assignor

- The assignee stands in the shoes of the assignor, but acquires no new rights. The assignee takes the assigned right with all of the defenses, defects, and infirmities that the obligor would have against the assignor. - The obligor may assert rights of setoff or counterclaim. Waivers of claims or defenses against assignees are valid under the Code, but the FTC has invalidated waivers of defenses in consumer credit transactions.

Duties of the Parties

- When there has been a delegation of duties and an assumption of the delegated duties, both the delegator and the delegatee are liable to the obligee for proper performance of the original contractual duty. - A delegator who desires to be discharged of the duty may enter into a novation, which is an agreement obtaining the consent of the obligee to substitute a third person in the delegator's place. - The delegator is then discharged and the third party is bound to the obligee.

Partial Assignments

A partial assignment is a transfer of a portion of the contractual rights to one or more assignees.

Donee Beneficiary

A third party is an intended donee beneficiary if the promisee's purpose in bargaining for the agreement is to make a gift of the promised performance to the beneficiary. An example is the beneficiary of a life insurance policy.

Creditor Beneficiary

A third person is an intended creditor beneficiary if the promisee intends the performance of the promise to satisfy a legal duty owed to the beneficiary, who is a creditor of the promisee.

Notice

A valid assignment does not require that notice be given to the obligor; however, such notice is advisable because an assignee will lose his rights against the obligor if the obligor pays the assignor without notice of the assignment.

Which of the following assignments of contract rights are not assignable? a. Assignments that would materially increase the risk or burden on the obligor b. Assignments which would transfer a personal contract right c. Assignments which are prohibited by law d. All of the above

All of the above a. Assignments that would materially increase the risk or burden on the obligor b. Assignments which would transfer a personal contract right c. Assignments which are prohibited by law

Assignments that Materially Increase the Duty, Risk, or Burden

An assignment is ineffective where performance by the obligor to the assignee would be materially different from performance to the assignor, such as an automobile liability insurance policy.

Which of the following involves an invalid assignment that a court would not enforce? a. An assignment of a savings account accompanied by the delivery of the passbook. b. An assignment lacking consideration. c. An assignment of an automobile liability insurance policy accompanied by the delivery of the policy. d. An assignment in writing signed by the assignor and delivered to the assignee.

An assignment of an automobile liability insurance policy accompanied by the delivery of the policy.

Distinguish between an assignment of rights and a delegation of duties. How does an assignor's rights after an assignment differ from a delegator's duties after a delegation?

An assignment of rights is the voluntary transfer to a third party (the assignee) of the rights arising from a contract. A delegation of duties, on the other hand, is a transfer to a third party (the delegatee) of the contractual duty to perform. An effective assignment extinguishes the assignor's right of performance by the obligor. Therefore, only the assignee has a right to the obligor's performance. A delegation of duty, however, does not extinguish the delegator's duty to perform. It only results in an additional party, the delegatee, being obligated as well.

Incidental Beneficiaries

An incidental beneficiary is one whom the parties to a contract did not intend to benefit, but who nevertheless would derive some benefit from its performance. Incidental beneficiaries have no rights under a contract.

Intended Beneficiary

An intended beneficiary is a third party intended by the two contracting parties to receive a benefit from their contract. - Donee Beneficiary - Creditor Beneficiary - Rights of Intended Beneficiary - Vesting of Rights

Rights of Intended Beneficiary

An intended donee beneficiary may enforce the contract against the promisor only. An intended creditor beneficiary may sue either or both parties. In an action by an intended beneficiary to enforce a promise, the promisor may raise any defense that would be available if the action had been brought by the promisee.

Which of the following duties would not be delegable? a. John has a contractual duty to pay Isaac $50. b. Karl has a contractual duty to deliver 50 bushels of corn to Michael by October 1. c. Jeffrey has a duty to mow Georgia's lawn at least once a week. d. Arthur has a duty to teach an accounting class at a community college during the fall semester.

Arthur has a duty to teach an accounting class at a community college during the fall semester.

Which of the following is NOT true concerning the requirements for an effective assignment? a. The assignment must be voluntary. b. Consideration is required. c. There must be an intention to make the assignee the owner of the right. d. The assignment may be either written or oral.

Consideration is required.

Delegable Duties

Contractual duties are generally delegable, however, a delegation will not be permitted if (1) the nature of the duties are personal; (2) the performance is expressly made nondelegable; or (3) the delegation is prohibited by statute or public policy.

Assignments Prohibited by Law

Federal and state statutes prohibit or regulate certain assignments, such as those of the right to future wages.

Delegation of Duties

Duties are not assignable, but their performance generally may be delegated to a third person. A delegation of duties is a transfer to a third party of a contractual obligation. It does not extinguish the delegator's obligation to perform. When the delegatee accepts the delegated duty, both the delegator and the delegatee are liable for performance of the contractual duty to the obligee. - Delegable Duties - Duties of the Parties

Assignment of Rights

Every contract creates both rights and duties. An assignment is the voluntary transfer to a third party of the rights arising from a contract. The assignor is the party making an assignment. The assignee is the party to whom the contract rights are assigned. An obligor is a party who owes a duty under a contract, while an obligee is a party to whom a duty is owed under a contract. The delegation of a duty is the transfer to a third party of a contractual obligation. The delegator is the party who delegates a duty to a third party. The delegatee is a third party to whom the delegator's duty is delegated. - Requirements of an Assignment - Rights that are Assignable - Rights that are Not Assignable - Rights of the Assignee - Implied Warranties of Assignor - Express Warranties of Assignor - Successive Assignments of the Same Right

After an effective assignment of rights, both the assignor and the assignee have a right to the obligor's performance. a. True b. False

Falsa

Although no special words or particular form are necessary to create an assignment, an assignment must be supported by consideration to be effective. a. True b. False

False

An implied warranty is an explicitly made contractual promise regarding contract rights transferred. a. True b. False

False

Assignments of all future wages to a specific creditor are legally permissible as long as the assignment is in writing. a. True b. False

False

Harold sells his used car to Tina and assigns his rights in his auto liability insurance policy to her. This is a valid assignment. a. True b. False

False

If successive assignments have taken place, the majority rule is that the first assignee to notify the obligor will prevail in a dispute among the successive assignees. a. True b. False

False

The Coastal Opera Company has a contract with a famous tenor to perform in its production of La Boheme. If the tenor chooses, he may delegate his duties under the contract to an equally well-known tenor. a. True b. False

False

The rights of an intended beneficiary vest at the time of the making of the contract or at the time he learns of its making, whichever is later. a. True b. False

False

Harold hired Blake Painters to paint his house. Blake decides he has too many jobs and delegates the duties to the Andrews Company. Andrews does a poor job, and drips paint on Harold's flowers and windows. a. Harold can sue both Blake and Andrews. b. Harold can sue Blake, but he cannot sue Andrews. c. Harold can sue Andrews, but he cannot sue Blake. d. Harold cannot sue, because he has accepted the benefits of the assignment.

Harold can sue both Blake and Andrews.

Arthur and Bob enter into a contract. Bob later delegates his duty of performance to Clark. Which of the following is true? a. If Clark fails to perform, Bob has a duty to perform. b. Arthur will always have to accept Clark's performance. c. The delegation is valid only if all three parties agree. d. Bob must compensate Clark for accepting the delegation.

If Clark fails to perform, Bob has a duty to perform.

Revocability of Assignments

If the assignee gives consideration in exchange for the assignment, then there is a contract and the assignor may not revoke the assignment without the assent of the assignee. If the assignment is gratuitous, it is revocable by the assignor and is terminated by the assignor's death, incapacity, or subsequent assignment, unless effective delivery has been made.

Courts will enforce contracts for the benefit of all but which of the following? a. Donee beneficiaries. b. Creditor beneficiaries. c. Incidental beneficiaries. d. Intended beneficiaries.

Incidental beneficiaries.

Which one of the following assignments would probably be prohibited by a court? a. Mary is in debt. A credit card company calls and threatens to sue. Mary orally assigns her next bimonthly paycheck to her creditor. b. John is a house painter. He is scheduled to paint Molly's home on Monday. John wakes up Monday morning with a stiff neck. He calls Ed, who is also a painter, to begin the job at Molly's. c. Ron has a contract with Bonett Bank to service their coffee machines. He assigns the remainder of his contract with Bonett to Michelle, who also owns a coffee service. d. All of the above.

Mary is in debt. A credit card company calls and threatens to sue. Mary orally assigns her next bimonthly paycheck to her creditor.

Rights that are Assignable

Most contract rights are assignable. The right to the payment of money is the most common contractual right that may be assigned.

CPA: Krieg was the owner of an office building encumbered by a mortgage securing Krieg's promissory note to Muni Bank. Park purchased the building that was subject to Muni's mortgage. As a result of the sale to Park: a. Muni is not a third party creditor beneficiary. b. Krieg is a third party creditor beneficiary. c. Park is liable for any deficiency resulting from a default note. d. Krieg was automatically released from any liability on the note.

Muni is not a third party creditor beneficiary.

In the case of a gratuitous assignment, which of the following would not be revocable? a. The donee-assignee receives payment of the claim from the obligor. b. The donee-assignee obtains a judgment against the obligor. c. The donee-assignee obtains a new contract with the obligor. d. None of the above would be revocable.

None of the above would be revocable. a. The donee-assignee receives payment of the claim from the obligor. b. The donee-assignee obtains a judgment against the obligor. c. The donee-assignee obtains a new contract with the obligor.

Identify the parties involved in an assignment / delegation.

Parties involved might be the assignor, the assignee, the delegator, the delegatee, the obligor, and the obligee. The assignor would be the party transferring her rights under a contract to some third party known as the assignee. Duties may sometimes be delegated and the delegator would be the person transferring her duty to perform to some third party known as the delegatee. The person who then must perform the obligations imposed by the contract would be the obligor and the person to whom that performance is owed would be the obligee.

The Student Center at ABC University contracts with Rocky Nelson, a famous rock singer, to perform at the university. Can Rocky assign his rights and delegate his duties under this contract? Explain.

Rocky's duty to perform at the university is a nondelegable duty because it is personal in nature; therefore his duty may not be delegated. However, his right to payment of money may be assigned.

Rights that are Not Assignable

Some contract rights, including the following, are not assignable. - Assignments that Materially Increase the Duty, Risk, or Burden - Assignments of Personal Rights - Express Prohibition Against Assignment - Assignments Prohibited by Law

Which of the following would not be assignable? a. A owes B $50. B assigns to C the right to collect the money. b. Pedro assigns a contract right to land to Chung. c. Teacher assigns to her best friend her contract right to teach. d. All of the above

Teacher assigns to her best friend her contract right to teach.

Express Prohibition Against Assignment

The Restatement and Article 2 of the Code say that unless circumstances indicate the contrary, a prohibition of assignment of the contract will be construed as barring only the delegation to the assignee of the assignor's duty of performance and not the assignment of rights.

Requirements of an Assignment

The Restatement defines an assignment as a manifestation of the assignor's intention to transfer a contract right so that the assignor's right to performance is extinguished and the assignee acquires a right to such performance. Although no special form or words are needed to create an assignment, the UCC imposes a writing requirement on all assignments beyond $5,000. No consideration is necessary to make an assignment effective. - Revocability of Assignments - Partial Assignments

Darrell owns a parcel of land that is encumbered by a mortgage held by the First National Bank. Darrell agrees to sell the land to Paul for $50,000. Darrell and Paul together go to the First National Bank to discuss the sale and purchase with the banker. Darrell, Paul, and the banker sign an agreement stating that Paul will assume the mortgage and that Darrell will be discharged from all further liability on the mortgage. a. The bank is a third party donee beneficiary. b. The bank can collect from Darrell if Paul defaults. c. Darrell is a third party beneficiary of the agreement between Paul and the bank. d. The agreement among the three is a novation.

The agreement among the three is a novation.

Express Warranties of Assignor

The assignor is bound by any explicitly made contractual promises regarding the contract rights transferred.

Successive Assignments of the Same Right

The majority rule in the United States is that the first assignee in point of time prevails over later assignees. In England and a minority of states, the first assignee to notify the obligor prevails. The Restatement adopts a third view.

Barbara owes Arthur $2,000. On July 1, Arthur assigns the right to the $2,000 to Carl. Thereafter, on July 15, Arthur assigns the same right to David, who in good faith gives value for it and knows nothing about the first assignee. a. Carl has the right to the payment of $2,000. b. David has the right to the $2,000. c. Neither Carl nor David can claim the $2,000. d. The rule differs by state.

The rule differs by state.

Third-Party Beneficiary Contracts

Third-party beneficiary contracts are contracts in which one party promises to render performance to a third person - Intended Beneficiary - Incidental Beneficiaries

A third party is an intended beneficiary if the promisee's purpose in bargaining for and obtaining the promisor's promise was to make a gift to the beneficiary. a. True b. False

True

After an effective delegation of duties, both the delegator and the delegatee are liable to the obligee for performance of the contractual duty. a. True b. False

True

An assignee 'stands in the shoes of the assignor' so he gets whatever rights the assignor was entitled to receive. a. True b. False

True

An assignment of rights is the voluntary transfer to a third party of the rights arising from the contract.. a. True b. False

True

Contract rights are generally assignable. a. True b. False

True

In a novation, the delegator will be discharged and the third party will become directly bound on her promise to the obligee. a. True b. False

True

In an action by the intended beneficiary of a third-party beneficiary contract, the promisor may assert any defense that would have been available to him had the action been brought by the promisee. a. True b. False

True

Most contract rights, including rights under an option contract, are assignable. a. True b. False

True

Sarah orders a microwave oven from Myriad's Department Store and requests that it be delivered to her sister Theresa. Theresa is a third-party intended beneficiary. a. True b. False

True

The general rule is that an assignee stands in the shoes of the assignor. He acquires the rights of the assignor but no new or additional rights. a. True b. False

True

The student government of Baylor University has a contract with a famous rock band to perform at the university on homecoming weekend. After finding out they would be performing the day after the awesome Pigskin performance, they decided to try to get out of their obligation to avoid being embarrassed. Legally, the band cannot assign its rights and delegate its duties under this contract. a. True b. False

True

Under the Restatement and the Code, unless the language or circumstances indicate otherwise, an assignment of "all my rights under the contract" is both an assignment of rights and a delegation of the assignor's duties under the contract. a. True b. False

True

When the rights under a contract are highly personal, they are not assignable. a. True b. False

True

Where the assignee gives consideration in exchange for an assignment, a contract exists between the assignor and the assignee and the assignor may not revoke the assignment. a. True b. False

True

Briefly explain the majority rule with regard to successive assignments of the same right.

Under the majority rule, the first assignee in point of time prevails over the later assignees. This is contrasted with the minority rule that the first assignee to notify the obligor will prevail.

Identify the classes of third party beneficiaries and discuss the relative enforcement rights of each.

Where contracts are made which benefit a third party, i.e. not a party to the contract, the third party may be classified as either an intended beneficiary or an incidental beneficiary. The intended beneficiary may be either a donee or creditor beneficiary and in either case the beneficiary may enforce the agreement against the obligor. The incidental beneficiary, however, does not have the right of enforcement.

Assignments of Personal Rights

Where the rights under a contract are of a highly personal nature, they cannot be assigned. An example would be an agreement of two persons to marry one another.

Annette entered into a contract with a local truck dealer to have a new truck delivered to her daughter, Sue, as a graduation present. In this contract, Sue is: a. an incidental beneficiary. b. a donee beneficiary. c. a creditor beneficiary. d. an assignor.

a donee beneficiary.

The delegator remains bound to perform her contractual duties even after a delegation unless the delegation is: a. a gratuitous delegation. b. a delegation for value. c. a novation. d. none of the above.

a novation.

An assignee of a contract right: a. acquires all of the rights of the assignor. b. acquires new, additional rights by virtue of the assignment. c. takes the assigned rights free of all of the defenses to which the rights would be subject in an action by the assignor against the obligor. d. all of the above

acquires all of the rights of the assignor.

Stark enters into a contract with a contractor to build a large shopping mall in River City. Donner will greatly benefit from this contract since his convenience store is adjacent to the mall. Donner in this instance is: a. an implied beneficiary. b. a partial beneficiary. c. a donee beneficiary. d. an incidental beneficiary.

an incidental beneficiary.

An intended creditor beneficiary of a third-party beneficiary contract has rights against: a. the promisee/debtor only. b. the promisor only. c. both the promisee and the promisor. d. neither the promisee nor the promisor.

both the promisee and the promisor.

Will wants to buy a new car. He goes to the bank to get a loan for the purchase, and signs an agreement to pay $10.00 per month in premiums on a term life insurance policy which names the bank as the recipient of the policy proceeds in the event of his death before the loan is repaid. The bank is a(n): a. incidental beneficiary. b. creditor beneficiary. c. donee beneficiary. d. assignee.

creditor beneficiary.

A transfer to a third party of a contractual obligation is known as a(n): a. assignment of rights. b. delegation of duties. c. revocability of assignment. d. partial assignment.

delegation of duties.

A(n) __________ is a third party who obtains possible benefits but no rights under a contract. a. incidental beneficiary b. intended beneficiary c. assignor d. donee beneficiary

incidental beneficiary

CPA: Graham contracted with the city of Harris to train and employ high school dropouts residing in Harris. Graham breached the contract. Long, a resident of Harris and a high school dropout, sued Graham for damages. Under the circumstances, Long will: a. win, because Long is a third-party beneficiary entitled to enforce the contract. b. win, because the intent of the contract was to confer a benefit on all high school dropouts residing in Harris. c. lose, because Long is merely an incidental beneficiary of the contract. d. lose, because Harris did not assign its contract rights to Long.

lose, because Long is merely an incidental beneficiary of the contract.

Clara sells her house to Donald. The house has a mortgage which is held by First Bank. As part of the transaction, First Bank agrees to discharge Clara from the mortgage and to allow Donald to assume the obligation. This is a(n): a. assignment of rights. b. novation. c. delegation of duties. d. third-party creditor beneficiary contract.

novation.

The privilege to play tennis and socialize at the Capital City Country Club (CCCC) is obtained through application, references, resumes, and fees. Steven and Chanel want to assign the remaining 4 years of their 5-year membership to Charles and Prissy so that Steven and Chanel may join the posh Silver Hawk Tennis and Polo Club. CCCC sues to enjoin Steven and Chanel from assigning their membership. CCCC will most probably: a. not prevail because all contract rights are assignable. b. prevail because the parties intended the contract to be personal and non-assignable. c. prevail because assigning the membership contract would violate public policy. d. None of the above.

prevail because the parties intended the contract to be personal and non-assignable.

In the absence of an expressed intention to the contrary, an assignor who receives value makes all of the following implied warranties to the assignee with respect to the assigned right EXCEPT: a. that he will do nothing to defeat or impair the assignment. b. that the obligor will pay the assigned debt. c. that the assigned right actually exists. d. that he has no knowledge of any fact that would impair the value of the assignment.

that the obligor will pay the assigned debt.

A delegation of contractual duties will not be permitted if: a. the duties are of a personal nature. b. the contract is silent with respect to the assignment. c. the delegation is for payment of money. d. None of the above will be permitted.

the duties are of a personal nature.

A contract in which the promisor agrees to render a certain performance to a third person is called: a. a third-party beneficiary contract. b. an assignment of rights. c. a delegation of duties. d. a novation.

third-party beneficiary contract.

A life insurance policy naming a spouse as a beneficiary is a common example of a(n): a. assignment. b. delegation of duties. c. third-party donee beneficiary contract. d. third-party incidental beneficiary contract.

third-party donee beneficiary contract.

A gratuitous assignment is: a. valid even though not supported by consideration. b. not revocable by the assignor. c. not terminated by the assignor's death. d. all of the above.

valid even though not supported by consideration.