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Section 3. The Search for Doctrinal Clarity2
The erratic historical development of the third party beneficiary idea has left us with a considerable number of triangular groupings: trustor-trustee-beneficiary; principal-agent-third party; creditor-debtor-surety; promisor-promisee-third party. The relationship among these various categories has never been entirely clear; as a result, even after the "progressive" doctrine of Lawrence v. Fox had won wide acceptance, the exact nature and scope of the rights enjoyed by a third party beneficiary remained uncertain. One important, and unresolved, issue concerned the significance of the relationship between promisee and beneficiary: Judge Gray's opinion in Lawrence v. Fox seemed to imply that Lawrence's recovery was dependent upon his standing in a particular relationship to Holly — that of creditor to debtor — suggesting, perhaps, that if things had been otherwise Lawrence might have lost his lawsuit. Sixty years later, in Seaver v. Ransom, the same court emphasized the special relationship between niece (third party) and aunt (promisee), carefully avoiding an explicit endorsement of what the headnote to Lawrence v. Fox had exuberantly declared to be the "general doctrine" of that case that "any third person, for whose direct benefit a contract was intended, could sue on it" (emphasis added). All of this left the reach of the doctrine in doubt; by 1918 no one could dispute that contract beneficiaries had certain established legal rights, at least in New York and a few other progressive jurisdictions, but the class of beneficiaries entitled to protection remained almost as undefined as it had been in 1859.3
The Restatement First of Contracts devoted an entire Chapter (Chapter 6, §§3-147) to the subject of third party rights. Chapter 6 was almost certainly the handiwork of Arthur Corbin, a tireless proselytizer for the rights of third party beneficiaries. (Corbin wrote six articles on the subject and probably did more than any court to win acceptance for the doctrine.) See Waters, The Property In the Promise: A Study of the Third Party Beneficiary Rule, 98 Harv. L. Rev. 1109, 1148-1172 (1985). The nomenclature that the Restaters adopted to describe the rights of contract beneficiaries has been widely employed in subsequent opinions and, on first appearance, seems a useful aid in reducing to a semblance of order the doctrinal chaos reviewed in the preceding section.4
The Restatement First's treatment of third party beneficiaries begins with a distinction among what are termed "donee," "creditor," and "incidental" beneficiaries. Subsections (1) and (2) of §133 provide:5
(1) Where performance of-a promise in a contract will benefit a person other than the promisee, that person is. . .
(a) a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in obtaining the promise or all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary;
(b) a creditor beneficiary if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, or a right of the beneficiary against the promisee which has been barred by the Statute of Limitations or by a discharge in bankruptcy, or which is unenforceable because of the Statute of Frauds;
(c) an incidental beneficiary if neither the facts stated in Clause (a) nor those stated in Clause (b) exists.
(2) Such a promise as is described in Subsection (1a) is a gift promise. Such a promise as is described in Subsection (1b) is a promise to discharge the promisee's duty.
Section 147 provides that: "An incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee." Thus, under the Restatement First's categorization, a beneficiary must be able to qualify either as a "donee beneficiary" or a "creditor beneficiary" in order to be entitled to bring an action. The term "incidental beneficiary" is used to describe would-be beneficiaries who do not qualify. In the Comment to §133 the Restaters give the following illustrations of such would-be or non-qualifying beneficiaries:7
9. B promises A for sufficient consideration to pay whatever debts A may incur in a certain undertaking. A incurs in the undertaking debts to C, D and E. If, on a fair interpretation of B's promise, the amount of the debts is to be paid by B to C, D and E, they are creditor beneficiaries; if the money is to be paid to A in order that he may be provided with money to pay C, D and E, they are at most incidental beneficiaries.
11. B contracts with A to erect an expensive building on A's land. C's adjoining land would be enhanced in value by the performance of the contract. C is an incidental beneficiary.
12. B contracts with A to buy A a new Gordon automobile. The Gordon Company is an incidental beneficiary. Though the contract cannot be performed without the payment of money to the Gordon Company, the payment is not intended as a gift nor is the payment a discharge of a real or supposed obligation of the promisee to the beneficiary.
The Comment to S147 adds a fourth illustration;9
A, an owner of land, enters into a contract with B, a contractor, by which B contracts to erect a building containing certain vats. C contracts with B to build the vats according to the specifications in the contract. The vats are installed in the building, but, owing to defective construction, leak and cause harm to A C is under no duty to A who is only an incidental beneficiary of the contract between Band C, since C's performance is not given or received in discharge of B's duty to A
In the Restatement Second, the topic of contract beneficiaries is addressed in Chapter 14 (§§302-315). The Introductory Note to Chapter 14 states that the terms "donee" and "creditor" beneficiary have been avoided because they "carry overtones of obsolete doctrinal difficulties."Instead, the Restaters have chosen to build their discussion of third party rights on a distinction between what are termed "intended" and "incidental" beneficiaries. Section 302 reads as follows:11
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance if the beneficiary is appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
As under the Restatement First "[a]n incidental beneficiary acquires by virtue of the promise no right against the promisor or the promisee"(§315).13
Does this shift in terminology seem to you significant? Helpful? How would the cases in the preceding section have been decided under the two Restatements? It is clear enough that the plaintiff in Lawrence v. Fox 'was a "creditor" beneficiary and the niece in Seaver v. Ransom a "done" beneficiary. But how about the mortgagee in the situation illustrated by Vrooman v. Turner? Can he even be described as an "intended" beneficiary? Under the approach adopted in the Restatement Second, C has rights under the A-B contract only if that is the intention of "the parties."Does this mean that A and B must both have such an intention, or is it sufficient that B (the promisee) intend to confer rights on C? Significantly, Comment d to §302 states that "if the beneficiary would be reasonable in relying on the promise as manifesting an intention to confer a right on him, he is an intended beneficiary." This is clearly meant to protect the reliance interest of the beneficiary and suggests that neither A nor B need have an actual intention to benefit C in order for C to have rights under their contract as a third party beneficiary. In a case of this sort, what would the extent of C's rights be? See Restatement Second §90(1) ("A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person . . . ") (emphasis added).14
As you read the following materials, consider whether the Restatement First's emphasis on the promisee-beneficiary relationship or the Restatement Second's general requirement of intent seems more consistent with the case law, and whether either is desirable.
June 02, 2014
Kessler, Gilmore & Kronman
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