Third-party beneficiary

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Contract law
Part of the common law series
THIRD PARTY BENEFICIARY
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 an active party
to the contract. This right, known as a ius quaesitum tertio,[1] arises where th
e third party (tertius or alteri) is the intended beneficiary of the contract, a
s opposed to a mere incidental beneficiary (penitus extraneus). It vests when th
e third party relies on or assents to the relationship, and gives the third part
y the right to sue either the promisor (promittens, or performing party) or the
promisee (stipulans, or anchor party) of the contract, depending on the circumst
ances under which the relationship was created.
A contract made in favor of a third party is known as a "third-party beneficiary
contract" or simply "third-party contract" (stipulatio alteri or pactum in favo
rem tertii), and any action to enforce a ius quaesitum tertio is known as a "thi
rd-party action".
Under traditional common law, the ius quaesitum tertio principle was not recogni
zed, instead relying on the doctrine of privity of contract, which restricts rig
hts, obligations, and liabilities arising from a contract to the contracting par
ties (said to be privy to the contract). However, the Contracts (Rights of Third
Parties) Act 1999 introduced a number of allowances and exceptions for ius quae
situm tertio in English law. Other common-law countries are also making reforms
in this area, though the United States is unique in abandoning privity early in
the mid-19th century.
Contents
1 Ius quaesitum tertio
1.1 Object to benefit
1.2 Irrevocability
1.3 Acceptance
2 Intended v. incidental beneficiary
2.1 Incidental beneficiary
2.2 Intended beneficiary
3 Vesting of rights
4 Breach and defenses
5 Rights that accrue to the promisee
6 Notes
7 See also
Ius quaesitum tertio
While the law on this subject varies, there is nonetheless a commonly accepted c
onstruction of third-party rights in the laws of most countries. A right of acti
on arises only where it appears the object of the contract was to benefit the th
ird party's interests and the third-party beneficiary has either relied on or ac
cepted the benefit. A promisee nominates a third party usually for one of two re
asons either the promisee owes something to the third party and the performance of
this new obligation will discharge it, or the promisee will somehow get a mater
ial benefit by giving something to the third party.

There are also two possible ways to explain the functioning of the contractual r
elationship: either,
The parties A (promisee) and B (promisor) contract each in his own name but
with the intention of creating an opportunity for C (third-party beneficiary) to
acquire a benefit, conditional upon acceptance, from B; or
C immediately acquires a conditional right, from which A is able to release
B until the moment of acceptance, when the right of A to release B is extinguish
ed.[2]
In either case, a third-party contract differs from agency in that the promisee
acts in his own name and for himself, whereas an agent or representative does no
t. It is also distinguishable from a promesse de porte-fort under which the thir
d party has a negative obligation to perform and, by expressing his consent, ini
tially substitutes himself for an intended party to a contract and therefore bin
ds himself. Also, as a somewhat distinct rule, the intended beneficiary of a thi
rd-party contract does not need to be in existence at the time the contract is c
oncluded. This means a contract may benefit an unborn person (usually a family m
ember) or secure benefits for a legal person, such as a company, still in the pr
ocess of forming or registering.
Object to benefit
For third-party rights to come into existence, certain contractual criteria must
be met to show an object to benefit:
A valid contract must exist between two contracting parties and not some oth
er relationship
The contracting parties must have intended to confer a benefit, and not a si
mple interest, to a third party, either expressly or impliedly
The third-party beneficiary must be named or referred to, or is a member of
a distinct class referred to
The intention to benefit must generally be irrevocable (though a life insura
nce policy is an exception)
Some intimation to the third party of the contract's existence
Irrevocability
To be enforceable, a ius quaesitum tertio must be irrevocable. This is establish
ed by any of the following:
Delivery of the contract to the third party
Registration for publication
Intimation to the third party
The third party coming under onerous obligations on the faith of having a iu
s quaesitum tertio
Evidence that the third party knew of the provision intended for his or her
benefit
Acceptance
A third-party beneficiary only acquires a right of action to enforce his benefit
once he has accepted the benefit provided for in the contract. Under the South
African interpretation, however, prior to formal acceptance of the benefit, the
third-party beneficiary only has a spes, or expectation; in other words, he does
not have the right to accept, but rather a mere competency.[3] Acceptance may a
lso be a suspensive condition in certain contracts. Under Scots law, acceptance
is not necessary to be vested in a right of action, but is necessary to be liabl
e. Before acceptance, however, the ius quaesitum tertio is tenuous so that accep
tance of a benefit does not create a right, but rather entrenches that right. In
either case, the contracting parties may vary or rescind the contract until acc

eptance or reliance.[4]
Intended v. 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 b
urden is on the third party to plead and prove that he was indeed an intended be
neficiary.
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 contracting party. For
example, if Andrew hires Bethany to renovate his house and insists that she use
a specific house painter, Charlie, because he has an excellent reputation, then
Charlie is an incidental beneficiary. Neither Andrew nor Bethany is entering in
to the contract with the particular intent to benefit Charlie. Andrew simply wan
ts his house properly renovated; Bethany simply wants to be paid to do the renov
ation. If the contract is breached by either party in a way that results in Char
lie never being hired for the job, Charlie nonetheless has no rights to recover
anything under the contract. Similarly, if Andrew were to promise to buy Bethany
a Cadillac, and were to later go back on that promise, General Motors would hav
e no grounds upon which to recover for the lost sale.
Intended beneficiary
The distinction that creates an intended beneficiary is that one party the "promis
ee" makes an agreement to provide some consideration to a second party the "promisor
" in exchange for the promisor's agreement to provide some product or service to t
he third-party beneficiary named in the contract. The promisee must have an inte
ntion to benefit the third party (though this requirement has an unusual meaning
under the law). Although there is a presumption that the promisor intends to pr
omote the interests of the third party in this way, if Andrew contracts with Bet
hany to have a thousand killer bees delivered to the home of Andrew's worst enem
y Charlie, then Charlie is still considered to be the intended beneficiary of th
at contract. (This would be illegal if the intent was to scare his enemy; contra
cts are voided based on criminality.)
There are two common situations involving intended beneficiaries:
Creditor beneficiary
e.g., when Andrew owes some debt to Charlie, and Andrew
agrees to provide some consideration to Bethany in exchange for her promise to
pay Charlie some of the debt
Donee beneficiary
e.g., when Andrew wishes to make a gift to Charlie and And
rew agrees to provide some consideration to Bethany in exchange for her promise
to pay Charlie the amount of the gift. Under old common law principles, the done
e beneficiary actually had a greater claim to the benefits this created, but suc
h distinctions have 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 efforts by the promisor or the promi
see to rescind or modify the contract at that point are void. Indeed, if the pro
misee 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 par
ty's contract rights.
There are four ways to determine whether the third party beneficiary's rights ha
ve vested:
If the beneficiary knows of and has detrimentally relied on the rights creat

ed;
If the beneficiary expressly assented to the contract at the request of one
of the parties;
If the beneficiary files a lawsuit to enforce the contract; or
If the beneficiary's rights vest pursuant to an express term in the contract
providing for such vesting.
Breach and defenses
Where a contract for the benefit of a third party is breached by the non-perform
ance of the promisor, the beneficiary can sue the promisor for the breach just a
s any party to a contract can sue the other. Because the rights of the third par
ty are defined by the contract created between the promisor and the promisee, th
e promisor may assert against the beneficiary any defenses to the contract that
could be asserted against the promisee. These include all of the traditional bas
is by which the formation of a contract may be challenged (e.g., lack of capacit
y, lack of consideration, the statute of frauds) and all of the traditional base
s by which non-performance on the contract may be excused (e.g., failure of cons
ideration, impossibility, illegality, frustration of purpose).
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 th
e promisor's failure to perform can be reduced by the amount thus owed. If the p
romisor 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 a
ctual debt).
A creditor beneficiary can sue both the promisor and the promisee, but the benef
iciary cannot recover against both. If the suit is successful against one party
to the contract, the other party will be dismissed. Because the creditor benefic
iary is receiving the performance of the promisor in order to fulfill the promis
ee'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 performa
nce simply means that the debt has never been paid.
A donee beneficiary can sue the promisor directly to enforce the promise. (Seave
r v. Ransom, 224 NY 233, 120 NE 639 [1918]). A donee beneficiary is when a contr
act is made expressly for giving a gift to a third party, the third party is kno
wn as the donee beneficiary. The most common donee beneficiary contract is a lif
e insurance policy.
Rights that accrue to the promisee
The promisee can also sue the promisor for failing to pay the third party benefi
ciary. Under the common law, such suits were barred, but courts have since deter
mined that the promisee can sue for specific performance of the contract, provid
ed that the beneficiary has not already sued the promisor. Furthermore, if the p
romisee was in debt to a creditor beneficiary, and the failure of the promisor t
o perform caused the promisee to be held liable for that debt, the promisee can
sue to recover the amount of the debt.
Notes
"Legal Definition of ius quaesitum tertio". legal-glossary.org. Retrieved 2014-0
9-12.
David J. Joubert, "Agency and Stipulatio Alteri", Southern Cross: Civil Law and
Common Law in South Africa, eds. Reinhard Zimmerman & Daniel Visser (Oxford: Oxf
ord UP, 1996), 356.
Elzette, Muller, "The Treatment of Life Insurance Policies in Deceased Estates w

ith a Perspective on the Calculation of Estate Duty", Tydskrif vir Hedendaagse R

omeins -Hollandse Reg, 69, 2006, p. 262.
Philip Sutherland, "Third-Party Contracts", European Contract Law: Scots and
South African Perspectives, eds. Hector L. MacQueen & Reinhard Zimmermann (Edin
burgh: Edinburgh UP, 2006), 215-6.
See also
Beneficial interest
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