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A third
party beneficiary, in the law of
contracts, is a person who may have the right to
sue on a contract, despite not having originally
been a party to the contract. This right arises
where the third party is the intended beneficiary
of the contract, as opposed to an incidental
beneficiary. It vests when the third party relies
on or assents to the relationship, and gives the
third party the right to sue either the promisor
or the promisee of the contract, depending on the
circumstances under which the relationship was
created.
Intended
vs. incidental beneficiary
In order for a third party beneficiary to have
any rights under the contract, he must be an
intended beneficiary, as opposed to an incidental
beneficiary. The burden is on the third party to
plead and prove that he was indeed an intended
beneficiary.
Incidental beneficiary
An incidental beneficiary is a party who stands
to benefit from the execution of the contract,
although that was not the intent of either party.
For example, if party A hires party B to
rennovate party A's house, and insists that party
B use a particular house painter - party C -
because that house painter has an excellent
reputation, then the house painter is an
incidental beneficiary. Neither party A nor party
B is entering into the contract with the
particular intent to benefit party C. A simply
wants his house properly rennovated; B simply
wants to be paid to do the rennovation. If the
contract is breached by either party in a way
that results in party C never getting hired for
the job, party C nonetheless has no rights to
recover anything under the contract. Similarly,
if party A were to promise to buy party B a
Cadillac, and were to later go back on that
promise, General Motors would have no grounds
upon which to recover for the lost sale.
Intended beneficiary
The distinction that creates an intended
beneficiary is that one party - called the
promisee - makes an agreement to provide some
consideration to a second party - called the
promisor - in exchange for the promisor's
agreement to provide some product, service, or
support to the third party beneficiary named in
the contract. The promisee must have an intention
to benefit the third party - but this requirement
has an unusual meaning under the law. Although
there is a presumption that the promisor intends
to promote the interests of the third party in
this way, if party A contract with party B to
have a thousand killer bees delivered to the home
of Party A's worst enemy, party C, then C is
still considered to be the intended beneficiary
of that contract.
There are two common situations in which the
intended beneficiary relationship is created. One
is the creditor beneficiary, which is created
where party A owes some debt to party C, and
party A agrees to provide some consideration to
party B in exchange for party B's promise to pay
party C some part of the amount owed.
The other is the donee beneficiary, which is
created where party A wishes to make a gift to
party C, and party A agrees to provide some
consideration to party B in exchange for party
B's promise to pay party C the amount of the
gift. Under old common law principles, the donee
beneficiary actually had a greater claim to the
benefits this created; however, such distinctions
have since been abolished.
Vesting
of rights
Once the beneficiary's rights have vested, the
original parties to the contract are both bound
to perform the contract. Any effort by the
promisor or the promisee to rescind or modify the
contract at that point are void. Indeed, if the
promisee changed his mind and offered to pay the
promisor money not to perform, the third party
could sue the promisee for tortious interference
with the third party's contract rights.
There are three tests used to determine whether
the third party beneficiary's rights have vested:
1. if the beneficiary knows of and has
detrimentally relied on the rights created
2. if the beneficiary has expressly assented to
the contract at the request of one of the parties
3. if the beneficiary files a lawsuit to enforce
the contract
Breach
and defenses
Where a contract for the benefit of a third party
is breached by the non-performance of the
promisor, the beneficiary can sue the promisor
for the breach just as any party to a contract
can sue the other. Because the rights of the
third party are defined by the contract created
between the promisor and the promisee, the
promisor may assert against the beneficiary any
defenses to the contract that could be asserted
against the promisee. These include all of the
traditional basis by which the formation of a
contract may be challenged: lack of capacity,
lack of consideration, the Statute of Frauds,
etc.; and all of the traditional bases by which
non-performance on the contract may be excused:
failure of consideration, impossibility,
illegality, frustration of purpose, etc.
Because the promisor can assert any defenses that
could be asserted against the promisee, the
beneficiary also becomes liable for counterclaims
on the contract that the promisor could establish
against the promisee. This liability can never
exceed the amount that the promisor owes under
the contract. In other words, if the promisor is
owed money by the promisee, any award to the
third party for the promisor's failure to perform
can be reduced by the amount thus owed. If the
promisor is owed more than the value of the
contract, the beneficiary's recovery will be
reduced to nothing (but the third party can never
be made to assume an actual debt).
A creditor beneficiary can sue both the promisor
and the promisee, but the beneficiary can not
recover against both. If the suit is successful
against one party to the contract, the other
party will be dismissed. Because the creditor
beneficiary is receiving the performance of the
promisor in order to fulfill the promisee's debt,
the failure of the promisor to perform means that
the beneficiary can still sue the promisee to
recover the preexisting debt. The failure of
performance simply means that the debt has never
been paid.
A donee beneficiary can not sue the promisee,
because the promisee's act is gratuitous. Courts
simply will not allow a party who has been
promised a gift to sue to compel delivery of the
gift. However, if the beneficiary has relied to
his detriment on the promisee's assertion that
the promisor would perform, the beneficiary may
sue the promisee under a promissory estoppel
theory.
Rights
that accrue to the promisee
The promisee can also sue the promisor for
failing to pay the third party beneficiary. Under
the common law, such suits were barred, but
courts have since determined that the promisee
can sue for specific performance of the contract,
provided that the beneficiary has not already
sued the promisor. Furthermore, if the promisee
was in debt to a creditor beneficiary, and the
failure of the promisor to perform caused the
promisee to be held liable for that debt, the
promisee can sue to recover the amount of the
debt. |
This article is licensed
under the GNU Free Documentation License. It uses material from the
Wikipedia article "Third Party Beneficiary".
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