Contract Law and Third-Party Beneficiaries

Key Concepts

Contracts are generally assumed to involve two parties.
Third Party Beneficiaries: Individuals or entities that can benefit from a contract’s performance or be affected by its breach.

Historical Recognition: As early as 1806, American courts began recognizing third-party beneficiaries in contract law.
- Case Example: Lawrence v. Fox
  - Holly loaned $300 to Fox, who promised to pay Lawrence to settle Holly’s debt.
  - New York Court of Appeals ruled Lawrence as an intended third-party beneficiary who could enforce the contract.

Donee Beneficiary
- Benefits gratuitously (not in exchange for service).
- Example: John contracts Robert to shovel snow from Bob’s driveway. Bob, not party to the contract, benefits as a donee.
Creditor Beneficiary
- Obligation is owed to them by the promisee.
- Example: If Bob paid Robert to shovel but Robert hires John, Bob is a creditor beneficiary.

Both donee and creditor beneficiaries must be intended beneficiaries to enforce contract rights.
Typical example: Named beneficiary on a life insurance policy.

Named or identified in the contract.
Receives performance directly or circumstances show the promisee intends for them to benefit.
- Example: Logan Baldwin v. LSM General Contractors
  - Homeowners were considered intended beneficiaries of a subcontract, allowing them to sue for breach.

A third-party beneficiary’s rights must vest to enforce a contract. Rights vest when:
1. Beneficiary assents to the promise as requested by the parties.
2. Beneficiary sues to enforce the contract’s promise.
3. Beneficiary materially changes position in reliance on the contract’s promise.
Examples:
- Scenario 1: Carla agrees to a contract where Bertha pays her $200 on Adam's behalf, vesting her rights.
- Scenario 3: Jane cancels her usual landscaping after Sandy pays Joan to mow Jane’s lawn, vesting Jane’s rights.

More than mere outsiders; they hold legally protected rights and can enforce contracts when appropriately vested.