Third-Party Interests
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Objectives
Chapter Objectives:
• Use vocabulary regarding third-party
beneficiaries, assignments, and delegations
properly
• Differentiate among the various types of thirdparty beneficiaries
• Discuss the legal remedies available to the
parties to a third-party contract, assignment,
or delegation
• Determine whether the rights and/or
obligations under the contract can be assigned
and/or delegated
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Objectives
• This chapter will explore WHO, outside of the
contracting parties, may have an interest in
the agreement,
• HOW their interests are created and
perfected, and
• WHAT effect they have on the performance
obligations in the agreement
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Definitions
• Third-party beneficiary
– A person, not a party to the contract, who
stands to receive the benefit of performance
of the contract
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Definitions
• Privity
– A relationship between the parties to the
contract who have rights and obligations to
each other through the terms of the
agreement
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Definitions
• Intent
– Having the knowledge and desire that a
specific consequence will result from an
action
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Definitions
• Promisor
– The party who makes a promise to perform
under the contract
• Promisee
– The party to whom the promise of
performance is made
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Types of Third-Party Interests
• Examples of third-party contracts are wills
and insurance policies
• Wills are contracts between the person
writing the will and the state. The state, the
promisor, agrees to dispose of the deceased
person’s possessions, as the promisee, has
directed and benefits from the certainty of
having these assets divided among her loved
ones—the third-party beneficiaries
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Types of Third-Party Interests
• The same logic follows with respect to
insurance policies as third-party contracts
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Types of Third-Party Interests
In order to be considered valid third-party
beneficiaries, the contract must have
named them in the formative stage. The
parties must, at the time of contract,
intend to benefit the third party. This
element is critical as it defines the thirdparty beneficiary contract
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Types of Third-Party Interests
• Incidental beneficiaries
− Persons who may derive some benefit from
the performance of a contract but who were
not intended to directly benefit from the
performance
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Right To Sue
• The third party has legally enforceable
rights under the contract and, although not
a party to the transaction, can sue for its
enforcement
• Example: A beneficiary under a life
insurance contract may sue to enforce the
performance (payment) of the policy if the
insurance company fails to pay a valid claim
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Right To Sue
• In a third-party creditor beneficiary contract,
the promisor agrees to pay a debt owed by the
promisee
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Right To Sue
• The more common type of beneficiary is the
donee
– A donee receives a gift as a result of the
transaction. The promisor confers a benefit
on the donee at the request of the promisee
– Again, it is easy to refer to wills: the donees
are the heirs of the estate; they receive
their inheritance as a gift from the testator
(promisee) through the state’s probate
system (promisor)
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Right To Sue
• At the time the beneficiary learns of the
agreement, her rights in the contract become
vested
• If the third-party beneficiary knows of and
consents to the contract, the parties cannot
cancel or modify the agreement without the
beneficiary’s consent
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Right To Sue
• Who can sue whom?
– Based on privity, both the promisee and
promisor can sue each other
– Both the beneficiary and the promisee can
sue the promisor if the promisor fails to
bestow the benefit
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Right To Sue
• Who can sue whom?
– However, the promisor cannot sue the thirdparty beneficiary as that party has no
obligations with regard to the original
obligations under the contract. The thirdparty beneficiary is merely the recipient of
the performance with no other duty to
discharge
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Right To Sue
• Assertion of defenses
– Either the original parties or a third-party
beneficiary has the right to claim any legal
defenses or excuses that they may have as
against each other. They are not
extinguished by a third party
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Assignment/Delegation Of
Contractual Rights & Obligations
• Either party, the offeror or offeree, may assign
their rights to receive performance and/or
delegate their duties to perform under the
original contract to a new third party
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Assignment/Delegation Of
Contractual Rights & Obligations
• Assignment
– The transfer of the rights to receive the
benefit of contractual performance under
the contract
• Delegation
– The transfer of the duties/obligations to
perform under the contract
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Assignment/Delegation Of
Contractual Rights & Obligations
• Assignor
– The party who assigns his rights away and
relinquishes his rights to collect the benefit of
contractual performance
• Assignee
– The party to whom the right to receive contractual
performance is transferred
• Obligor
– The original party to the contract who remains
obligated to perform under the contract
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Assignment/Delegation Of
Contractual Rights & Obligations
• Delegant/Delegator
– The party who transfers his obligation to
perform his contractual obligations
• Delegate/Delegatee
– The party to whom the obligation to
perform the contractual obligations is
transferred
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Assignment/Delegation Of
Contractual Rights & Obligations
• If the contract is silent as to the ability of the
parties to assign their rights, it is usually
assumed that assignment is permissible if it
is reasonable
• The assignment does not substantially alter
the rights and obligations of the original
parties to the contract
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Summary
• If the parties to a contract intend to have the
performance, the benefit of the contract,
conferred on a person not in privity to the
contract, they have created a third-party
beneficiary contract
• The promisor is the person who will bestow
the benefit upon the third party and the
promisee is the person obligating himself to
the promisor
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Summary
• There are two categories of third-party
beneficiaries: creditors and donees
• At the time the beneficiary learns of the
agreement, his rights in the contract become
vested
• A third-party beneficiary can sue for
enforcement of the contract and the defendant
can assert any defenses that he would have if
sued by the party in privity
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Summary
• After making the contract, the parties may
assign their rights and/or delegate their duties
under the contract to a third party
• The most important difference to remember
between the two—assignment and
delegation—is that an assignor usually is no
longer liable under the contract, meaning
that he is not party to a suit to enforce the
assignment, whereas a delegant remains
liable under the contract
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