Contracts: Third Party Problems
- Third-Party Beneficiary Law – where 2 people enter a contract with the intent to benefit a third party.
- Third-party Beneficiary (TPB) can enforce the contract.
- Examples: Insurance contracts; other intended beneficiaries.
- Third-party beneficiary: a person who did not make a contract, but still has rights under it because the contract was intended to benefit him.
- Promisor: the person who promises to perform for the third party.
- Promisee: the person who secures the promise.
- Intended/incidental beneficiary: A third party named in the contract is an intended beneficiary; otherwise, he’s an incidental beneficiary.
- Only an intended beneficiary has legal rights. Not an incidental beneficiary.
- Creditor/donee beneficiary: If the promisee’s main reason for entering the contract is to discharge a debt owed to the third party, the third party is a creditor beneficiary; otherwise, he is a donee beneficiary. [Note: most TPB’s are donee beneficiaries.]
- The promisor and promisee can rescind or modify the contract until the rights of the third party beneficiary have vested.
- Vested: when TPB learns of the contract and relies on it. The contract cannot be rescinded or modified without the consent of TPB.
- Exception: where the language of the contract lets the promisee change beneficiaries.
- TPB can sue the breaching promisor even though there is no privity of contract between them
- Promisor can raise the same defenses against the TPB it could have raised against the promisee.
- Only a creditor beneficiary can sue the promisee, not a donee beneficiary.
- The promisee can recover from the breaching promisor.