Third Party Beneficiary Contracts or "Stipulation Pour Autrui"

Question 1

General Notion

Answer 1

Notion—“A contracting party may stipulate a benefit for a third person called a third party beneficiary.” (La. Civ. Code art. 1978) The stipulation pour autrui is therefore a contract that is a legally enforceable contract between two parties (A and B) that grants rights to a third person (C) who is not a party to the contract.

Question 2

Relation to “Object”

Answer 2

Third party beneficiary contracts are unique because at least one of the “objects” of the contract is a performance owed to a third person who is not a party to the contract.

Question 3

The Tripartite Relationship

Answer 3

Parties: A Tripartite Relationship—Third party beneficiary contracts involve three persons: the stipulator (A), the promisor (B), and the beneficiary (C).

(a) Stipulator—The stipulator requests or stipulates a benefit in favor of a third person. (This person is sometimes referred to as the “promisee.”)
(b) Promisor—The promisor promises to render performance in favor of the third person.
(c) Beneficiary—The beneficiary is the third person who receives the benefit of the performance.

Question 4

How is a Third-Party Beneficiary contract Identified?

Answer 4

Professor J. Densen Smith argued in his writing that that the most practical approach to determining whether a stipulation pour autrui has been established in favor of a third person is to examine the relationship between the stipulator and the beneficiary. An advantage in favor of the beneficiary would ordinarily not exist in the absence of some legal or factual relationship between the stipulator and the beneficiary that would justify its creation.

Question 5

Legal Relationship between the Stipulator and Beneficiary

Answer 5

First, a legal relationship might exist between the stipulator and the beneficiary that involves an obligation owed by the stipulator to the beneficiary that can be discharged by the performance of the promisor in the contract between the stipulator and the promisor.

						(i)    Illustration 1—A purchases a house from C for $200,000. A then enters into a contract with B in which A agrees to convey the home to B in return for B’s promise to pay $200,000 to C. In this illustration, A has a legal obligation to pay C, and this obligation will be discharged when B performs his promise to pay C.

Question 6

Factual Relationship Between Stipulatior and Beneficiary

Answer 6

A stipulation pour autrui may also exist when one of several certain factual relationships exists between the stipulator and the beneficiary. Professor Smith identifies three factual scenarios in which it is likely that a third party beneficiary arrangement is intended by the parties to a contract:

						(i) Protection Against Future Liability—A factual relationship might exist between the stipulator and the beneficiary such that, while a legal relationship does not presently exist between the parties, there is a possibility of future liability, which can be avoided or ultimately discharged by the performance of the promisor in the contract between the stipulator and the promisor.
								(a) Illustration—A hires B to construct a building on his land.  The contract provides that if through the construction of the building, any harm occurs to any person or neighboring property for which A might be found liable, B will be responsible to pay the damages resulting from that harm directly to the injured victim.  Later, C’s neighboring property is damaged during construction.  While no legal relationship existed between between A and C at the time the contract between A and B was  made, a factual relationship existed between C and A such that liability might arise. 
						(ii) Benefit to Stipulator—A factual relationship might exist in which securing an advantage for the beneficiary might potentially benefit the stipulator in a material way.  In other words, the stipulation pour autrui actually benefits the stipulator, although perhaps in an indirect manner.
								(a) Illustration—A is a contractor, and C is a primary supplier of raw materials for A’s business.  A finds out that C is involved in some financial trouble that could put C out of business.  This, in turn, would cause a great inconvenience or loss to A. A contracts with B and requires that B obtain supplies exclusively from C, which assists in keeping C financially afloat. 
						(iii) Gratuity to Beneficiary—A factual relationship might exist in which securing an advantage for the beneficiary allows the stipulator to make an indirect gift to the beneficiary.
								(a) Illustration—A purchases life insurance from insurer B and stipulates that C shall be the beneficiary of the life insurance policy.

Question 7

Additional Requirements - Joseph v. Hospital Service District

Answer 7

(a) Stipulation Manifestly Clear—What does it mean to say that the stipulation must be “manifestly clear”? Who bears the burden of proving the existence of the stipulation pour autrui? Does the court in Joseph find the stipulation alleged in this case “manifestly clear”? Why or why not?
(b) Certainty as to Benefit—What does it mean to say that the benefit must be certain? Can you tie this requirement to our discussion of the prerequisites for a valid “object” of contract? Does the court in Joseph find the benefit alleged in this case “certain”? Why or why not?
(c) Not an Incidental Beneficiary—What does it mean to say that the benefit must not be a “mere incident” of the contract? Does the court in Joseph find that the alleged benefit in this case is “incidental”? Why or why not?

Question 8

Effects of Stipulation Por Autrui

Answer 8

Effects—A stipulation pour autrui has some unique effects that distinguish it from a contract that does not stipulate a benefit in favor of a third person.

				(a) Dissolution of the Contract—Generally, contracts can be dissolved by the mutual agreement of the contracting parties.  However, in a stipulation pour autrui, “[o]nce the third party has manifested his intention to avail himself of the benefit, the parties may not dissolve the contract by mutual consent without the beneficiary’s agreement.” (La. Civ. Code art. 1978)
				(b) Revocation of the Stipulation—The stipulation may be revoked; meaning that performance will be rendered in favor of the stipulator instead of in favor of the third person.  However, some limitations apply to revocation of the stipulation: “A stipulation may be revoked only by the stipulator and only before the third party has manifested his intention of availing himself of the benefit.  If the promisor has an interest in performing, however, the stipulation may not be revoked without his consent.” (La. Civ. Code art. 1979)
				(c) Effect of Revocation or Refusal of Stipulation—“In case of revocation or refusal of the stipulation, the promisor shall render performance to the stipulator.” (La. Civ. Code art. 1980)
				(d) Rights to Demand Performance—“The stipulation gives the third party beneficiary the right to demand performance from the promisor.  Also the stipulator, for the benefit of the third party, may demand performance from the promisor.” (La. Civ. Code art. 1981) 
				(e) Defenses—“The promisor may raise against the beneficiary such defenses based on the contract as he may have raised against the stipulator.” (La. Civ. Code art. 1982)  These defenses might include (among others): lack of capacity, lack of consent, failure of cause, vice of consent, and the stipulator’s failure to perform.