Overview
This lecture explains the legal concept of third party beneficiaries in contract law, outlining their rights, types, and the circumstances under which they can enforce a contract.
Third Party Beneficiaries in Contract Law
- A third party beneficiary is someone who benefits from a contract but is not a direct party to it.
- American courts have recognized third party beneficiary rights since at least 1806 (Lawrence v. Fox).
- Third party beneficiaries may have legal standing to enforce a contract if they are intended beneficiaries.
Types of Third Party Beneficiaries
- Donee beneficiary: Receives a benefit from a contract as a gift, not as compensation for service.
- Creditor beneficiary: Receives a benefit because the promisee owes them a legal obligation (debt repayment).
Identifying Intended Beneficiaries
- An intended beneficiary is typically named or specifically identified in the contract.
- The beneficiary receives performance directly or the contract circumstances show the benefit is for them.
- Life insurance policy beneficiaries are classic intended beneficiaries.
Enforcing Contract Rights
- Both donee and creditor intended beneficiaries can enforce contract rights.
- A third party's rights must "vest" before they can enforce the contract.
- Vesting occurs when: (1) the beneficiary assents as requested, (2) the beneficiary sues to enforce, or (3) the beneficiary materially changes position in reliance on the contract.
- Before rights vest, the original parties can modify the contract; after vesting, changes require the beneficiary's consent.
Case Examples
- Lawrence v. Fox: Recognized intended beneficiary rights in a debt repayment scenario.
- Snow shoveling example: Elderly neighbor Bob as a gratuitous donee beneficiary.
- Logan Baldwin v. LSM: Homeowners as intended third party beneficiaries due to contract circumstances.
- Adam, Bertha, and Carla: Carla’s rights vested after she assented via email.
- Sandy, Joan, and Jayne: Jayne's rights vested after she relied on the promise and changed her position.
Key Terms & Definitions
- Third party beneficiary — someone who is not a party to a contract but stands to benefit from its performance.
- Donee beneficiary — a person receiving a contract benefit as a gift, not repayment.
- Creditor beneficiary — a person who is owed a debt and benefits from a contract made to satisfy that debt.
- Intended beneficiary — a third party clearly identified and meant to benefit from a contract.
- Vesting — the moment when a beneficiary’s rights to enforce a contract become legally enforceable.
Action Items / Next Steps
- Review contract law cases involving third party beneficiaries.
- Prepare examples distinguishing donee and creditor beneficiaries for discussion.
- Read about vesting and its impact on modifying contractual rights.