1
Chapter 16
Third Party Rights
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank,
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. Privity of contract establishes the basic concept that third parties have no rights
in contracts to which they are not parties.
2. In an assignment, the party receiving the rights is known as the assignor.
3. Banks may not assign their loan contracts to other firms.
4. A transfer of contractual rights to a third party is an assignment.
5. When rights under a contract are assigned unconditionally, the rights of the
assignor are extinguished.
2 UNIT TWO: CONTRACTS
6. A transfer of contract rights to a third person is generally prohibited.
7. An assignee has a right to demand performance from the obligor.
8. An assignee’s rights are subject to the defenses that the obligor has against
the assignor.
9. In an assignment, the assignee obtains only those rights that the assignor had.
10. As long as a contract is personal in nature, all rights under the contract can be
assigned.
11. An insurance policy is an example of a right that can be assigned.
12. An assignment of rights in real estate often cannot be prohibited.
13. In most cases, a contract that prohibits its assignment cannot be assigned.
14. A right can be assigned even if the assignment will significantly alter the risks
or duties of the obligor.
15. Rights to receive funds can be assigned.
16. As long as a contract is personal in nature, all rights under the contract can be
assigned.
17. The assignment of the same contract right to two different parties automatically
cancels both assignments.
18. It is legally necessary to notify the obligor of any assignment of rights to a third
party.
19. A valid delegation of duties relieves the delegator of the obligation to perform
under the contract.
20. No contract can prohibit delegation of the duties of the contract.
21. A transfer of contract duties to a third party is an assignment.
22. A delegator is a party who transfers his or her obligation under a contract to
another party.
23. All that a delegator needs to do to make a delegation effective is to express an
intention to make the delegation.
24. There are no exceptions to the rule that any duty can be delegated.
25. No contract can prohibit delegation of the duties of the contract.
26. An “assignment of all rights” creates an assignment of rights but not a
delegation of duties.
27. Both intended and incidental beneficiaries acquire legal rights in a contract.
28. If a contract requires that performance be rendered directly to a third party, the
third party is an intended beneficiary.
29. Intended beneficiaries can sue to enforce a contract.
30. The rights of a third party beneficiary under a contract vest if the third party
materially changes his or her position in justifiable reliance on the promise.
31. Vested is the condition in which rights have taken effect and cannot be taken
away.
32. A life insurance contract involves an intended beneficiary.
33. An incidental beneficiary can sue directly to enforce a promisor’s promise.
34. Any beneficiary who is not deemed an intended beneficiary is considered
incidental.
35. If a contract does not require that performance be rendered directly to a third
party, the third party is an intended beneficiary.
MULTIPLE CHOICE QUESTIONS
1. Regional Steel, Inc., and Overland Transport Company enter into a contract.
Smooth Oil Corporation, which will indirectly benefit from the deal, is prevented
from having rights under the contract by the principle of
a. assignment.
b. delegation.
c. privity.
d. vesting.
2. Robert enters into a contract with Claire. Claire agrees to paint Robert’s living
room for $500. Claire is the
a. obligor.
b. obligee.
c. assignee.
d. assignor.
3. Jayson and MaryElise enter into a contract. Jayson agrees to mow MaryElise’s
yard every week for the summer. MaryElise is the
CHAPTER 16: THIRD PARTY RIGHTS 7
a. obligor.
b. obligee.
c. assignee.
d. assignor.
4. Stephanie’s sale of rights she has under a contract with Runway Retail, Inc., to
buy the retailer’s clothing overstock is
a. a delegation.
b. an assignment.
c. a third party beneficiary contract.
d. none of the choices.
5. Revenue & Sales Corporation and Software Solutions, Inc., enter into a
contract for the design of custom software for which Revenue & Sales agrees
to pay $4,500. Software Solutions transfers the right to payment under the
contract to Creditline Company. Creditline is
a. an assignor.
b. an assignee.
c. an obligee.
d. a delegate.
6. Will owes Jenny $1,000. Brad owes Will $1,000. Will unconditionally assigns
his rights to Jenny. Will’s right to the $1,000 is then
a. unchanged.
b. extinguished.
c. incidental.
d. assigned to a court.
7. Forrest makes and sells furniture. Forrest and Glenda enter into a contract for
the delivery of Forrest ’s products to Glenda’s Gear retail locations for which
she agrees to pay the invoiced price. Forrest transfers the right to payment
under the contract to Haulers Trucks & Trailers. This transfer is
a. a delegation.
b. an assignment.
c. a third party beneficiary contract.
d. prohibited.
8. Merry Music Inc. and Nayda enter into a contract for Nayda to write six songs
for which Merry Music agrees to pay her. Nayda transfers her right to payment
under the contract to Omni Artists Agency. In the transfer of rights, Nayda is
a. a delegator.
b. an assignor.
c. an obligor.
d. an alien.
9. Richly Merchandise, Inc., contracts with Stand-Rite Contractors to build a store.
Stand-Rite assigns the contract to Town Builders, which has a poor record of
completing projects. Richly could most successfully argue that the contract
cannot be assigned because
a. Richly did not consent to the assignment.
b. Richly did not receive adequate consideration for the assignment.
c. the assignment will materially increase the risk of nonperformance.
d. Town Builders was not an original party to the deal.
10. A contract between Slim and Goldie may not be assigned if it
a. does not expressly permit assignment.
b. involves a sale of goods.
c. involves personal services.
d. is oral.
11. Marco and Fred enter into a contract for the sale of Marco’s apartment for
which Fred agrees to pay him $100,000. Marco cannot prohibit Fred from
transferring his right to the ownership of the apartment because such a
prohibition is
a. against public policy.
b. immoral.
c. unconscionable.
d. a crime.
12. Michel, the owner of Nature’s Refuge Café, and Olin enter into a contract under
which Olin agrees to design an outdoor addition to the café for which Michel
agrees to pay $3,000. This contract may not be assigned if
a. the assignment will significantly change the risk of nonperformance.
b. the assignment is expressly prohibited by the terms of the contract.
c. the contract is uniquely personal in nature.
d. any of the choices.
13. Grady and Hannah contract with Isaac to transfer the ownership of Grady and
Hannah’s Mesa Ranch to Isaac. This is
a. a delegation.
b. an assignment.
c. a third party beneficiary contract.
d. an alienation.
14. A contract between Laser Maintenance, Inc., and Medical Vision Operation
Corporation contains a clause stating that any assignment is “void.” This
ordinarily prohibits
a. any assignment.
b. no assignment.
c. only an assignment of contract rights to personal services.
d. only an assignment that would change the obligor’s risk.
15. Eli owes Martin $10,000. Martin assigns the claim to Jack. Jack does not notify
Eli of the assignment. A week later, Martin assigns the same claim to Allen.
Allen immediately notifies Eli of the assignment. Jack
a. has priority to payment in all states.
b. has priority to payment in states that follow the English rule.
c. does not have priority to payment in any state.
d. has priority to payment in most states.
16. Phillip assigns his rights under a contract with Maria to his college roommate,
John. Neither Phillip nor John notifies Maria of the assignment. The assignment
a. will not be effective until notice is given to Maria.
b. will become effective after thirty days even if no notice is given to Maria.
c. is immediately effective.
d. can be circumvented.
17. Opportunity Market Company (OMC) and Pierce enter into a contract for Pierce
to cut and trim the landscaping around OMC’s building before a meeting of the
company’s sales staff. When Pierce’s schedule conflicts, he asks Rachel to do
the cutting and trimming. This transfer of duties is
a. a delegation.
b. an assignment.
c. a third party beneficiary contract.
d. prohibited.
18. Pat, a world famous musician and composer, agrees to give ten piano lessons
to Quinn in exchange for $1,000. Pat’s attempt to delegate his contract to Ruth,
an inexperienced pianist, will probably be
a. permitted because contracts may be freely delegated.
b. permitted because the contract is concerned with music lessons.
c. prohibited because contracts may not be freely delegated.
d. prohibited because Pat and Ruth have very different skill levels.
19. Bill and Charlene enter into a contract for the clearing, plowing, and preparing
of Charlene’s 100-acre tract for which she agrees to pay $1,000. Bill transfers
his duty under this contract to Dewey. Dewey is
a. a delegatee.
b. an assignee.
c. an obligee.
d. a delegator.
20. Animal Feed Corporation and Beneficial Trucking, Inc., enter into a contract for
Beneficial to transport a truckload of hay for which Animal Feed agrees to pay.
Due to schedule conflicts, Beneficial contacts Crop Transport Company, to
which Beneficial “assigns all rights under the contract.” This transfer is
a. an assignment and a delegation.
b. an alienation and a negotiation.
c. an obligation and a cancelation.
d. prohibited.
21. Devon and Edmond enter into a contract for the closing of a sale of Devon’s
recording studio. When Edmond’s schedule conflicts, he asks Ferdie to perform
his duties at the closing. This transfer of duties is
a. a delegation.
b. an assignment.
c. prohibited.
d. a negotiation.
22. Ilene and Jerry enter into a contract under which Ilene agrees to provide
groundskeeping services for Jerry’s Family Fun Center. Under an
antidelegation clause, the contract can prohibit and prevent the transfer of
a. only duties that are personal in nature.
b. only duties that are impersonal in nature.
c. no duties under the contract.
d. all duties under the contract.
23. Leonardo contracts to install automatic watering troughs in Kendall’s dairy
barn. Leonardo then becomes seriously ill and contracts with Jake to install the
troughs. Jake is unreliable and never shows up to install the troughs. Kendall
can sue
a. no one.
b. Jake only.
c. Leonardo only.
d. Jake or Leonardo.
24. Jack contracts to provide lawn-mowing services to Lee. Jack cannot delegate
this duty
a. because it is a personal service contract.
b. without continuing to be liable.
c. without Lee’s consent.
d. without providing lawn-mowing services to Kim.
25. Bonita and Chad enter into a contract for Chad to plant trees on Bonita’s
property for which she agrees to pay $500. When Chad’s schedule conflicts, he
contacts Dirk, to whom he “assigns all rights under the contract.” Chad is
a. absolved of any liability under the contract.
b. in breach of the contract with Bonita.
c. liable to Bonita if Dirk does not perform.
d. liable to Dirk for inducing a prohibited contract.
Fact Pattern 16-1 (Questions 26–28 apply)
Four-Square Construction Company enters into a contract with Ben to remodel
Carol’s Home Store, using products from Delta Building Supplies. Eatery Café is next
to Carol’s Home Store. The remodeling is a gift from Ben to Carol.
26. Refer to Fact Pattern 16-1. Carol is
a. a delegatee.
b. an assignee.
c. an incidental beneficiary.
d. an intended beneficiary.
27. Refer to Fact Pattern 16–1. The value of Eatery’s property will increase after
Carol’s store is remodeled. Eatery is
a. a delegatee.
b. an assignee.
c. an incidental beneficiary.
d. an intended beneficiary.
28. Refer to Fact Pattern 16-1. Delta will realize a profit from the sale of products to
Four-Square to remodel Carol’s store. Delta is
a. a delegatee.
b. an assignee.
c. an incidental beneficiary.
d. an intended beneficiary.
29. Tristan promises to paint Katy’s house in exchange for Lila’s promise to plant
trees on Tristan’s property. This is
a. a delegation.
b. an assignment.
c. a third party beneficiary contract.
d. none of the choices.
30. Hilda signs a contract with Indemnity Insurance Company that intentionally
confers a benefit on Hilda’s daughter Jackie as the designated beneficiary.
Jackie’s rights under the contract will vest
a. automatically.
b. if she demonstrates her consent to the promise at Hilda’s request.
c. if Indemnity attempts to modify the terms of the contract.
d. on the occurrence of the event for which the insurance was procured.
31. Ozzie contracts for the sale of 500 shares of stock in Premium Quality, Inc., to
Ray, with payment to go to Scholar University to pay Thalia’s tuition. The
contract reserves to Ozzie and Ray the right to modify its terms. Scholar’s right
to payment is
a. not affected by the reservation.
b. subject to any change that Ozzie and Ray make.
c. limited only if Thalia agrees to any changes.
d. terminated by the reservation.
32. Bea takes out a life insurance policy with Vida Insurance Corporation that
names her spouse Wendell as the beneficiary. This is
a. a delegation.
b. an assignment.
c. a third party incidental beneficiary contract.
d. a third party intended beneficiary contract.
33. Lyle and Miranda agree that Lyle will fix the refrigeration unit in Miranda’s Buns
n’ Burgers in exchange for her payment of a debt that Lyle owes to New Credit
Corporation. New Credit is
a. a delegate.
b. an intended beneficiary.
c. an incidental beneficiary.
d. an assignor.
34. Mai is a third party beneficiary under a contract between Novia and Otis. Novia
and Otis can modify or rescind their contract without Mai’s consent
a. at any time.
b. at no time.
c. after Mai’s rights have vested.
d. before Mai’s rights have vested.
35. App Developers, Inc. (ADI), enters into a contract with Carmen, the chief
executive officer of SalesCorp, to create an app for the firm. To fulfill the
contract, ADI hires Max and ten other student interns. With respect to the
contract, Max is
a. an intended beneficiary.
b. an incidental beneficiary.
c. a delegatee.
d. an assignee.
18 UNIT TWO: CONTRACTS
ESSAY QUESTIONS
1. Pam borrows $5,000 from Quality Auto Sales to buy a car. When Pam does
not pay the loan or return the car, Quality wants to transfers the right to the
payment to Rapid Collection Agency. Rapid agrees to pay Quality for this right,
but for a price that is less than the amount owed. Can Quality transfer this right
to Rapid without Pam’s consent? If so, and Quality committed fraud in the deal
with Pam, could Pam legitimately refuse to pay Rapid? Explain.
2. Delany & Sons, Inc., owes Evermore Bank $50,000. Delany enters into a
contract with Floyd under which Delany promises to manage and oversee
Floyd’s Seaside Marina. Under the contract, Floyd promises to pay Evermore
the amount that will be due Delany until his debt to Evermore is paid. Delany
performs as promised, but Floyd does not pay the bank. Can Evermore
succeed in a suit against Floyd? Why or why not?
