I don’t know if you were taught third party contracts the way I was; but I didn’t learn about this potential essay disaster until the last month of 1L. Since the mention of the term I, and many fellow 1L’s, have quaked in fear of the third-party contract.
Shhh, come close, this is a secret: It’s only a few sentences difference from your standard contract review!
Who Is In Your Party of Three?
You have two specific types of third party contracts you need to keep in mind: 1.) third party beneficiaries and 2.) assignees and delegates. Assignees or delegates are people who will be receiving the performance of one of the original contracting parties or who agree to perform in the place of one of the original contracting parties; thus, rights or duties arise after formation of the contract.
AFTER. This is the key term; after formation. When you are writing your essay, always starting in formation, you will clearly be able to identify in your offer and acceptance analysis if a third party was identified at the time of contracting or after the offer and acceptance has happened.
If during your initial discussion on Offer and Acceptance you clearly identify a third party who is identified at the time of contracting then you know immediately you are working with an Intended Third Party Beneficiary. Of course, this is always the easiest to identify and not the third party that shows up in our nightmares; those parties show up late and are never timely.
When you are faced with terms in 1L that you don’t understand or fact patterns you just don’t get, change them.
Third party beneficiaries are persons who are to receive the performance of one of the original parties and whose rights to receive that performance existed at the formation of the contract; they showed up to make the reservations for dinner with you and your dinner guests.
Delegatees and Assignees are sometimes hard terms to understand when you haven’t worked in the legal field before. When you are faced with terms in 1L that you don’t understand or fact patterns you just don’t get, change them. Make the terms/fact patterns more relatable.
Imagine you’ve graduated law school, taken and passed the California Bar and are now the proud owner of You’re an Attorney At Law Practice! Years go by and you get old and are ready to retire. You sell your law firm to Alan the Attorney. Part of your agreement in the sale is that Alan the Attorney will continue to represent your current clients and that Alan the Attorney will be able to collect on outstanding invoices from clients. In this fact pattern, Alan the Attorney is a delegate and assignee to each and every contract between you and the client
Flavors of Third Parties
If your not staring down the barrel of an “AFTER” party then you are looking at a party who was intended (identified) at the time of contracting/formation. Parties identified at the time of contracting are third-party beneficiaries and as usual, they come in different flavors. The flavors your looking for are based on the Majority view and the Second Restatement.
Under the Majority view, aka First Restatement, you have 1.) creditor beneficiaries, 2.) done beneficiaries and 3.) incidental beneficiaries.
Take a breath, don’t let this overwhelm you, you can do this, its not as bad as you think!
Under the Majority view creditor beneficiaries are identified if 1.) the promise does not intend to make a gift to that third party 2.) the promisors performance which is given to the promisee is intended to satisfy an actual obligation owed to the third party.
The done beneficiary is identified if the promisee intended to make a gift to the third party or confer a right to the third party to performance. These terms are hard to understand for many; so think of them in a context that makes sense.
Think about your hypothetical law practice. You are hired by Terry the Testator to write a will which gives everything to his son Bobby. Bobby is the donee beneficiary of the contract, even though you provided the services to Terry and the original agreement was between you and Terry.
Incidental beneficiaries are easier; they are third persons who benefit from the performance of a contract but aren’t creditors or donee beneficiaries. The original parties didn’t mean to give them any benefits and whatever benefits they get are totally incidental
Taste the Restatement
The Second Restatement identifies 1.) intended beneficiaries and 2.) incidental beneficiaries (much simpler if you ask me).
Intended beneficiaries are exactly what you think they are under the Second Restatement. They are third parties who 1.) are recognized as having the right to performance to fulfill the intentions of the original contracting parties 2.) performance will satisfy an obligation to pay money to the beneficiary or the circumstances show that the promise intends to provide the beneficiary the promised performance.
Incidental Beneficiaries are (this is the same as the Majority view analysis) those who incidentally benefit from performance but were not intended by the original parties to receive any benefit.
Now that we have clearly identified who is at our dinner party we need to see if they have vested. Until the rights of a third party beneficiary have vested, they are subject to modification or termination by the original parties. According to the Second Restatement you need to look for the following:
- The third party beneficiary learns of the contract and assents to it in a manner invited or requested by the original parties
- The third party beneficiary materially changes position in reasonable reliance on the promise
- The third party beneficiary brings suit to enforce the promise
Wait There Is More
How could we ever forget our assignment of rights or our delegation of duties discussion? Assignment and delegation refer to situations, after formation, where one of the original parties to the contract transfers A. the right to receive performance (assignment) or B. the duty to render a return performance (delegation) under that contract to a third party. When both an assignment and a delegation are made keep your eyes peeled for the elements of Novation!
How to Approach Assignments?
- Was the Assignment Effective?
- Are there any restrictions or limitations on the power to assign?
- Has revocation of the assignment happened?
- What are the rights of the parties after an assignment has occurred?
This is just a taste of the assignment and delegation discussion.
Practice Identifying Parties in Real Life. Look at all the contracts you enter into in your daily life and try to identify your own real life third party beneficiaries and where they fall.
Phew, that was a lot! Check out our next article on Assignment and Delegation to see how to begin to understand how the rights of the parties change and how to do an analysis in an Assignment and Delegation fact pattern.
The Queen Bee of 1L