20. If the bank becomes aware of the contract between the seller and the buyer, and the buyer refuses to pay anything to the bank, is the bank likely to succeed in an action against the buyer for $5,000?

A contract generally only confers rights and imposes duties on the parties to the contract, not anyone else. However, two exceptions exist: (i) where the original contract confers rights and duties on a «third-party beneficiary»; and (ii) when a party seeks to transfer rights or duties under a contract to a third party, usually in the form of an assignment of rights or a delegation of duties.

Under the Second Restatement (Contracts) § 302, for a third party to be an intended beneficiary who can enforce his interest in a contract, there must first be a threshold determination: Allowing the third party to sue must have the effect of carrying out the intentions of the parties. Then, the third party must fall into one of two categories: (i) if the promise is performed, it will satisfy some obligation of money owed to the third party; or (ii) circumstantial facts indicate that one of the parties intends to give the third party the benefit of a promised performance.

Whether the beneficiary is «intended» is determined by examining several factors, including whether: (i) the beneficiary could have reasonably relied on the fact that a purpose of the contract was to confer a right to him; (ii) performance is supposed to run directly from a contracting party to the third party, rather than from the promisor to the promissee and only indirectly benefitting the third party; (iii) again, if part of the overall objective of the parties to the contract was to benefit the third party.

C is correct. The bank will succeed in recovering $5,000 from the buyer because the bank was an intended third-party beneficiary of the goods contract between the buyer and the seller. The buyer and the seller entered into a bargained-for exchange for the sale and purchase of goods for $5,000. And, their agreement provided that the buyer would pay the $5,000 directly to the bank that it had promised to pay for the goods. Performance was explicitly owed to the bank as a third party, and as such, the bank was an intended beneficiary of the enforceable agreement between the seller and the buyer, and the buyer is obligated to pay the bank.

A is incorrect. The buyer and the seller entered into a bargained-for exchange for the sale and purchase of goods. Thus, their agreement was supported by consideration. Moreover, a promisee (the seller) can intend that a third party be the beneficiary of the performance the promisee expects to receive from a promisor (the buyer). Because the parties' agreement provided that the buyer would pay to the bank the $5,000 that the buyer had promised to pay for the goods, the bank was an intended beneficiary of the enforceable agreement between the seller and the buyer.

B is incorrect. The prior discharge of the seller's debt in bankruptcy is a red herring fact. The issue here is whether the bank has any enforceable rights under the contract between the seller and the buyer such that it may recover the $5,000. As explained above, this contract clearly designated the bank as an intended third-party beneficiary, and on that basis, it will be able to recover the $5,000.

D is incorrect. This answer reaches the correct answer with the wrong reasoning. The bank will succeed in recovering the $5,000 from the buyer, but not because consideration is not required to support a promise to pay a debt discharged in bankruptcy. This is a true statement of the law — a promise by a debtor to pay a debt that has been discharged in bankruptcy requires no consideration to be enforceable. However, in this case, the discharge of the seller's debt is irrelevant. The seller and the buyer entered into a bargained-for exchange for the sale and purchase of goods. Because their agreement provided that the buyer would pay to the bank the $5,000 that the buyer had promised to pay for the goods, the bank was an intended beneficiary.