MBE Contract Law - Third Party Beneficiaries

Person who is not a party to K that K benefits

First Restatement (minority jurisdictions)

Second Restatement

First Restatement:

Creditor

Donee

Incidental

Second Restatement:

Intended (includes creditor and donee)

Unintended

A third-party beneficiary of the contract; the promisee seeks performance by the promisor to fulfill an obligation owed to the third party creditor beneficiary.

More info: Third Party Beneficiaries, First Restatement

A third party beneficiary to the contract; the promisee seeks performance from the promisor in order to make a gift to a third party donee beneficiary.

A third party who benefits from performance of the K, even though the benefit to them wasn’t the parties’ primary intent in forming the K

They do not have any rights to seek enforcement of the contract

Someone for whom the contracting party intended to benefit with the contract; can seek enforcement of K

Against the Promisor: always, because promisor is under an obligation to the beneficiary

Against the Promisee: never concerning enforcement of the promised performance under the new contract; a 3rd party beneficiary will only have rights against the promisee if there was a prior obligation between promisee and third party beneficiary

A third party intended beneficiary’s interest vests if:

Beneficiary sues;

Beneficiary justifiably changes her position of reliance on the K;

At the request of the parties, the beneficiary manifests assent to the contract; or

The contract’s express terms state that the rights have vested

Both parties are bound to the contract and must gain consent of the beneficiary to modify or rescind

Any valid defenses the promisor has against the promisee

What if the beneficiary is a donee beneficiary?

What if the beneficiary is a creditor beneficiary?

Answer: When the promisor does not perform, the promisee has a claim for breach of contract against the promisor, and may possibly seek specific performance or damages, BUT…

If the promisor’s performance is intended to benefit a donee beneficiary, then the promisee has no damages, but specific performance may be appropriate.

If the promisor’s performance is intended to benefit a creditor beneficiary, then the promisee may seek enforcement of the promisor’s obligation

Transfer of K rights; generally allowed

Owner of right manifests a present intent to transfer the existing right

Rights are not assignable when:

Assignment would materially alter the risks or obligations with respect to the other party to the contract;

Assignment would violate the law or public policy;

The obligor has a personal interest in providing their service to the obligee rather than a 3rd party; or

The contract specifies that assignments are prohibited

No, assignment of payment is allowed

The assignor has breached the contract, and is likely liable for damages to the obligor, but most courts would hold it is not a basis for nullifying the obligor’s obligation to perform to the benefit of the assignee.

Courts will generally interpret this to mean a prohibition of the delegation of duties, but not an assignment of rights

Revocable: all gratutious assignments unless assignee has detrimentally relied on the assignment.

Irrevocable: assignments made with consideration

An assignor impliedly warrants to the assignee that she:

Does not know any facts that would defeat the value of the assignment, and will not take any action that would do the same; and

Actually has the right she claims and said right is not subject to limitations or defenses that would undermine the assignee’s interests

When the obligor is in breach of their duties under the K; the assignee has the same rights as the assignor would have had, had the K not been assigned.

Breach of warranty or revocation

Transfer of K obligations

(vs. assignment, which is a transfer of rights)

Generally all contractual duties are delegable, unless:

Performance of the service is personal, and the beneficiary of the performance values the unique service (character, reputation, taste, discretion, skill) of the intended performing party; or

K specifies that delegation is prohibited

Yes, can be sued if the delegatee doesn't perform

⚠️ Exception: delegator isn't liable if there is a novation (when all parties agree to a new contract to replace the old one)