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
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
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