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 when the third party ( tertius or alteri) is the intended beneficiary of the contract, as opposed to a mere incidental beneficiary (penitus extraneus). 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 (promittens, or performing party) or the promisee (stipulans, or anchor party) of the contract, depending on the circumstances under which the relationship was created.
A contract made in favor of a third party is known as a "third-party beneficiary contract." Under traditional common law, the ius quaesitum tertio principle was not recognized, instead relying on the doctrine of privity of contract, which restricts rights, obligations, and liabilities arising from a contract to the contracting parties (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 quaesitum 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.
Ius quaesitum tertio
While the law on this subject varies, there is nonetheless a commonly accepted construction of third-party rights in the laws of most countries. A right of action arises only when it appears the object of the contract was to benefit the third party's interests and the third-party beneficiary has either relied on or accepted the benefit. A promisee nominates a third party usually for one of two reasons—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 material benefit by giving something to the third party.
There are also two possible ways to explain the functioning of the contractual relationship: 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 extinguished. [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 not. It is also distinguishable from a promesse de porte-fort under which the third party has a negative obligation to perform and, by expressing his consent, initially substitutes himself for an intended party to a contract and therefore binds himself. Also, as a somewhat distinct rule, the intended beneficiary of a third-party contract does not need to be in existence at the time the contract is concluded. This means a contract may benefit an unborn person (usually a family member) or secure benefits for a legal person, such as a company, still in the process 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 other relationship
- The contracting parties must have intended to confer a benefit, and not a simple 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 insurance 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 established 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 ius 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 also 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 liable. Before acceptance, however, the ius quaesitum tertio is tenuous so that acceptance 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 acceptance or reliance. [4]
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 (e.g., lack of capacity, lack of consideration, the statute of frauds) and all of the traditional bases by which non-performance on the contract may be excused (e.g., failure of consideration, 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 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 cannot 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 sue the promisor directly to enforce the promise. (Seaver v. Ransom, 224 NY 233, 120 NE 639 [1918]). A donee beneficiary is when a contract is made expressly for giving a gift to a third party, the third party is known as the donee beneficiary. The most common donee beneficiary contract is a life insurance policy.
In the United States, the Restatement (Second) of Contracts, Chapter 6, Sections 133-147, covers third-party beneficiaries. [5]
Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from bringing a particular claim. Legal doctrines of estoppel are based in both common law and equity. It is also a concept in international law.
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from doing an act. In broad terms, if one agrees to do something he was not otherwise legally obligated to do, it may be said that he has given consideration. For example, Jack agrees to sell his car to Jill for $100. Jill's payment of $100 is the consideration for Jack's promise to give Jill the car, and Jack's promise to give Jill the car is consideration for Jill's payment of $100.
The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract.
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, when the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter that assumes the counterparty risk of the buyer paying the seller for goods.
An option contract, or simply option, is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer". Option contracts are common in professional sports.
Consideration is an English common law concept within the law of contract, and is a necessity for simple contracts. The concept of consideration has been adopted by other common law jurisdictions, including the US.
An assignment is a legal term used in the context of the law of contract and of property. In both instances, assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee. An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift or it may be paid for with a contractual consideration such as money.
Estoppel in English law is a doctrine that may be used in certain situations to prevent a person from relying upon certain rights, or upon a set of facts which is different from an earlier set of facts.
In contract law and administrative law, delegation is the act of giving another person the responsibility of carrying out the performance agreed to in a contract. Three parties are concerned with this act - the party who had incurred the obligation to perform under the contract is called the delegator; the party who assumes the responsibility of performing this duty is called the delegatee; and the party to whom this performance is owed is called the obligee.
Tertius is the Latin word for "third", or "concerning the third". The term is used in contract law to refer to an interested third party not privy to a contract.
Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256, was a noted decision by the New York Court of Appeals, New York, United States. Hamer v. Sidway is an important case in American contract law which established that forbearance of legal rights on promises of future benefit made by other parties can constitute valid consideration, and, in addition, that unilateral contracts were valid under New York law.
Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts. The concept has been adopted by other common law jurisdictions.
A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and obligations among its parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or rescission. Contract law, the field of the law of obligations concerned with contracts, is based on the principle that agreements must be honoured.
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Privity is a doctrine in English contract law that covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a "third party". Historically, third parties could enforce the terms of a contract, as evidenced in Provender v Wood, but the law changed in a series of cases in the 19th and early 20th centuries, the most well known of which are Tweddle v Atkinson in 1861 and Dunlop Pneumatic Tyre v Selfridge and Co Ltd in 1915.
The Contracts Act 1999 is an Act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby [removed] one of the most universally disliked and criticised blots on the legal landscape". The second rule of the doctrine of privity, that a third party could not enforce a contract for which he had not provided consideration, had been widely criticised by lawyers, academics and members of the judiciary. Proposals for reform via an act of Parliament were first made in 1937 by the Law Revision Committee in their Sixth Interim Report. No further action was taken by the government until the 1990s, when the Law Commission proposed a new draft bill in 1991, and presented their final report in 1996. The bill was introduced to the House of Lords in December 1998, and moved to the House of Commons on 14 June 1999. It received royal assent on 11 November 1999, coming into force immediately as the Contracts Act 1999.
In English law, secret trusts are a class of trust defined as an arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a formal will. The property is given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. There are two types of secret trust — fully secret and half-secret. A fully secret trust is one with no mention in the will whatsoever. In the case of a half-secret trust, the face of the will names the trustee as trustee, but does not give the trust's terms, including the beneficiary. The most important difference lies in communication of the trust: the terms of a half-secret trust must be communicated to the trustee before the execution of the will, whereas in the case of a fully secret trust the terms may be communicated after the execution of the will, as long as this is before the testator's death.
Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 is an English contract law case concerning the Contracts Act 1999.
The South African law of succession prescribes the rules which determine the devolution of a person's estate after his death, and all matters incidental thereto. It identifies the beneficiaries who are entitled to succeed to the deceased's estate, and the extent of the benefits they are to receive, and determines the different rights and duties that persons may have in a deceased's estate. It forms part of private law.
