Part I

Midterm Postmortem

Part II

Review

Third-Party Beneficiaries

When a promisor and a promisee make an contractual agreement that the promisor will tender their performance (a benefit) to a party other than the promisee, we have a third party beneficiary situation.

Concepts

Promisor and Promisee

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Third Party

After Contracting

Promisor: owes a duty of performance to the third party

Promisee: is owed the performance to the third party

Third Party: not in privity of contract, but owed performance by promisor

Overall Analysis

Approach problems by asking the following:

Is the third party an intended beneficiary? If so, what kind?
Can the promisor and promisee change contract terms without the third party's consent?
- Alternatively, ask have the third party's rights vested?
What are the rights of the parties?

Can the Third Party Beneficiary Sue?

an intended third party beneficiary can sue
an incidental third party beneficiary has no contractual rights

The latter may benefit, but it is not the primary purpose of contract to benefit them

Intended Beneficiary?

Frequently the language of the contract will indicate if the promisee intended to confer a right of performance to the third party.

If it is not clear in the language of the contract, then the court will look at several factors to determine intent.

Factors to Determine Intent

Is the third party expressly designated in the contract?
Is performance to be made directly to the third party?
Does the third party have any rights defined in the contract?
Does the third party have a relationship with the promisee that would create an inference of intent to benefit?

Which Type of Intended Beneficiary?

Ask what the promisee's purpose was in inducing the promisor's performance to the third party.

Creditor Beneficiary: the promisee owed the third party an obligation
Donee Beneficiary: the promisee wanted to confer a gift on third party

Can the Contracting Parties Make Changes?

The promisor and promisee are free to modify, rescind, or discharge the contract as they see fit until the intended beneficiary's rights have vested.

Vesting of Rights

An intended beneficiary's rights vest when they…

justifiably rely to their detriment on the promise (change of position)
bring a suit to enforce the promise
manifest assent to the promise at the request of either party

Party Rights and Defenses

Third-Party Beneficiary v. Promisor

the beneficiary may sue the promisor for failure to perform
promisor's defenses
- any defenses that promisor had against promisee
- if the promise is not absolute, then promisor can assert the defenses the promisee would have against the beneficiary

Party Rights and Defenses

Third-Party Beneficiary v. Promisee

Donee Beneficiary: generally no right to sue promisee
- exception where there's been detrimental reliance (change of position)
  - in that case they are suing under promissory estoppel/detrimental reliance, not as a third-party beneficiary

Party Rights and Defenses

Third-Party Beneficiary v. Promisee

Creditor Beneficiary: can sue for the value of the pre-existing debt or obligation

Party Rights and Defenses

Promisee v. Promisor

promisee may sue for promisor's failure to tender performance to third-party beneficiary
- promisee and third-party beneficiary cannot both recover from promisor
- courts will sometimes order specific performance in circumstance where the promisor was to pay for an unpaid debt