Third-Party Beneficiaries Flashcards
Creditor Beneficiary (First Restatement)
(Considered an intended beneficiary)
Promisee seeks performance form promisor that will benefit a third party, and the promisee’s purpose is to satisfy a debt or other obligation owed by the promisee to the third party.
Can elect to sue either the promisee on the prior obligation between the beneficiary and the promisee or the promisor on the third-party beneficiary contract. However, satisfaction of the claim by one releases the other’s obligation.
Donee Beneficiary (First Restatement)
(Considered an intended beneficiary)
A promisee seeks a performance from the promisor that will benefit a third party, and the promisee’s purpose is to make a gift of that performance to the third party.
Incidental Beneficiaries (First and Second Restatement)
Third parties who will benefit from a promisor’s performance as a practical matter, but who may not meet the test for creditor/donee/intended beneficiary.
Do NOT enjoy any right to seek enforcement of the K from either the promisor or promisee to the original agreement.
Intended Beneficiaries (Second Restatement)
Broadly fall into same categories as Creditor and Donee Beneficiaries, where the promised performance will satisfy an obligation of the promisee to pay money to the beneficiary (creditor beneficiaries) and where the promisee intends to give the beneficiary the benefit of the promised performance (donee beneficiaries).
Can only sue the promisee if the beneficiary would have fallen into the First Restatement’s definition of a creditor beneficiary. Intended beneficiary can only sue the promisor on the third-party beneficiary contract or the promisee if the promisee owes a separate obligation to the beneficiary, which the third-party beneficiary K was intended to satisfy.
3rd Party’s Rights Against Promisor
Any third-party beneficiary has the right to secure enforcement of the agreement from a breaching promisor. Applies to creditor and donee beneficiaries under the First Restatement and intended beneficiaries under the Second Restatement.
3rd Party’s rights Against Promisee
Third-party beneficiary will only have rights against the promisee resulting from the promisor’s failure to perform based on whether or not there is an independent obligation between the promisee and the third-party beneficiary.
Vesting of the right to sue
The parties to a K are free to modify or rescind it by mutual consent, and they may modify or rescind a third-party beneficiary provision without the beneficiary’s consent unless and until the beneficiary’s rights under the K have vested. Once the third party beneficiary’s rights vest, the ability of the original parties to make any future rescissions or modifications will be terminated.
Vesting occurs with regard to an intended beneficiary when:
(1) the beneficiary brings suit on the matter;
(2) the beneficiary changes his position in justifiable reliance on the contractual promise;
(3) the beneficiary manifests his assent to the K at the request of either the promisee or the promisor; OR
(4) the rights of the beneficiary have vested under an express term of the K providing for such vesting.
Defenses Available to Promisor against Third Parties
Any valid defense the reneging promisor would have to the enforcement of the K would be effective against the beneficiary (third party beneficiary’s rights are entirely dependent on underlying K).
Promisor may not assert defenses based on separate transactions with promisee.
Promisee’s Rights against the promisor (third party beneficiaries)
When the promisor does not perform, the promisee has a claim for breach of K against the promisor.
If promisor’s performance is intended to benefit a donee beneficiary, the promisee ordinarily will not have suffered any economic loss for the nonperformance and, therefore, may be unable to recover more than nominal damages. However, some courts consider the damage remedy inadequate as a result and will order specific performance.
If promisor’s performance is intended to benefit a creditor beneficiary, the promisee may secure specific performance of the promisor’s obligation.
