Third Party Beneficiaries

Question 1

Definition

Answer 1

A contract between two or more parties that, at the time of contracting, is intended to benefit a 3rd party.

Question 2

Parties - Promisor

Answer 2

The party promising to perform to the 3rd party.

Question 3

Parties - Promisee

Answer 3

The party intending to give the 3rd party a benefit.

Question 4

Parties - 3rd Party

Answer 4

The party benefiting from the contract.

a) Intended
b) Creditor – Promisee intends to extinguish an obligation
c) Donee – Promisee intends to give a gift
d) Incidental – Unintentional beneficiary (has no rights)

Question 5

Vesting - Rule

Answer 5

Once a 3rd party’s rights have vested, the 3rd party has legal rights under the contract and original contracting parties cannot modify the contract to change/exclude those rights.

Question 6

Vesting - How to vest

Answer 6

a) At common law, 3rd party vested upon knowledge and assent.
b) Under Restatement 1st, donee vested immediately and creditor vested upon detrimental reliance.
c) Under Restatement 2nd, intended beneficiary vests upon detrimental reliance, assent, or bringing suit.

Question 7

Parties’ Rights - 3rd Party vs. Promisor

Answer 7

a) If promisor fails to perform to 3rd party, 3rd party can sue promisor.
b) Promisor can assert any defenses against 3rd party that he had against promisee

Question 8

Parties’ Rights - 3rd Party v. Promisee

Answer 8

a) If 3rd party is creditor beneficiary:
(1) If promisor fails to perform to 3rd party, 3rd party can sue promisee on the debt
b) If 3rd party is donee beneficiary:
(1) 3rd party cannot sue promisee on the contract because the law will not force someone to give a gift.
(2) However, 3rd party may still sue for reliance damages under detrimental reliance.

Question 9

Parties’ Rights - Promisee v. Promisor

Answer 9

a) If 3rd party is creditor beneficiary:
(1) If promisor fails to perform to 3rd party, and promisee has already paid 3rd party, promisee may sue promisor for breach of contract.
(2) If promisor fails to perform to 3rd party, and promisee has not paid 3rd party, promisee may sue promisor for specific performance.
b) If 3rd party is donee beneficiary:
(1) If promisor fails to perform to 3rd party, promisee may sue promisor for specific performance.