Third Party Beneficiaries

1. Third Party Beneficiaries Promises for the benefit of a third party.

2. Problem 166 new car from MGM Judge Hardy son Andy go to law school Andy goes to law school – Loves it!! Dad doesn’t buy him the car. MGM sues Dad – claims to be 3PB. Is it? Does it have a C/A?

3. Problem 167 $20,000 Judge Hardy MGM new car to Andy MGM fails to deliver car. Dad’s deceased. Andy sues for breach of K. Is Andy a Third Party Beneficiary? Does he have a C/A?

4. Dutton v. Poole Daughter £1000 love and affection pay sister Son don’t sell property Dad

5. Third Party Beneficiaries Third Party Beneficiary (3PB) benefit intent promise Promisor consideration Promisee

6. 3PB Terminology • Promisor – promise will benefit 3PB • Promisee – bargains for that promise • Third Party Beneficiary – will benefit from performance of underlying K. • Note: Must have valid underlying K. • 3PB does NOT have to be specifically ID’d at time of K – description enough.

7. Lawrence v. Fox Lawrence (P)(3PB) $300 debt promise to pay Fox (D) $300 loan Holly

8. Fox’s defenses: • Evidence was hearsay • No – competent evidence • No consideration • No – consideration can run from and to other (Farley v. Cleveland) • No privity • Still K obligation • Trust analogy

9. Farley v. Cleveland Farley (P)(3PB) $ debt promise to pay Cleveland (D) hay Moon

10. Intended Beneficiaries • Standing to sue on K • Intent of parties (or intent of promisee and knowledge of promisor) – may be • Donee (Dutton) • Creditor (Lawrence) • Other intended beneficiary (R2K) • If no intent: incidental beneficiary – no standing to sue on promise.

11. Problem 168 Lawrence (P)(3PB) $300 debt promise to pay Fox (D) $300 loan Holly Q: Does Holly still owe the money?

12. Creditor 3PB can still sue promisee on original debt. • Debt owed to 3PB does not go away because someone else agreed to pay it – Problem 168 & 169. • Only if parties agree to a novation (release promisee and substitute promisor) will the 3PB be unable to sue – Problem 170. • So, creditor 3PB can sue promisor, promisee, or both, but can only collect one total recovery of obligation.

13. Problem 169 Finance Company car payments debt promise to pay George Martha consideration Martha still owes the money – her debt.

14. Problem 170 speak Chalk Gilberts $1,000 PodiumGilberts Gilberts released Chalk. Can only sue Podium. Podium Chalk

15. Donee beneficiary: • Cannot sue promisee • Underlying K is supported by consideration, but no consideration has been given to the promisee by the 3PB. • Donee beneficiary can sue only the promisor. gift

16. Government Contracts • R2K 313(1) – 3PB rule applies to gov’t Ks unless against public policy. • Consider whether K . . . • provides direct benefit to citizen (3PB) or • provides direct benefit to government, and indirect benefit to citizen; • Provides for direct liability to 3P; • Provides for performance of gov’t duty.

17. Generally no 3PB claim between owners and subs (vertical privity) . . . Owner General Sub Or among various contractors hired by same person (horizontal privity). Owner Contractor Contractor Contractors

18. UCC Warranties – UCC 2-318 • A: Warranty extends to any natural person • In family, household or guest • Reasonably expected to use, consume, or be affected by the goods • Injured in person • May not exclude or limit

19. Alternative A Buyer spouse occupant guest Horizontal privity Identifies plaintiffs.

20. UCC Warranties – UCC 2-318 • B: Warranty extends to any natural person • Reasonably expected to use, consume, or be affected by the goods • Injured in person • May not exclude or limit (Now any natural person – could include, for ex., employee)

21. Alternative B Alt A + . . . Buyer Spouse occupant guest employee other remote buyer

22. UCC Warranties – UCC 2-318 • C: Warranty extends to any person • Reasonably expected to use, consume, or be affected by the goods • May not exclude or limit (Can be a legal person (ex.: corporation) and the injury could include property damage – May or may not also include economic loss.)

23. Alternative C Alt A & B + . . . Manufacturer Intermediate seller Remote buyer Vertical Privity Identifies defendants.

24. Effect of choices • States choose option • Option chosen sets minimum standard – courts can expand liability. • Texas leaves entirely to courts • Has been extended to employee • Has been extended in implied warranty situation to remote seller – included economic damages

25. Attorney/Client Ks • Non-clients are generally not 3PBs of attorney-client K. • Majority of states have an exception for wills • Intended will beneficiary has standing to sue attorney for malpractice in drafting will. • Attorney has no duty other than to do what the client wanted. • Difficult to enforce without this exception. • Texas Supreme Court has rejected this exception.

26. Will cases Will Beneficiary (3PB) benefit intent will Attorney pay Client

27. Defenses – R2K 309 • Must have valid underlying K to have 3PB K • Any defenses related to formation (mistake, incapacity, etc.) are good against 3PB • Right of 3PB subject to defenses arising after formation (impracticability, non-occurrence of condition, failure of performance, etc.) • Parties can agree at formation that rights of beneficiary not subject to same conditions as those of promisee.

28. Problem 174 Cable TV insurance K req benefit intent pay benefit NoRisk pay for policy Wanda Condition failed. K unenforceable.

29. Problem 175 Sky $350 $500 debt pay $350 Nathan release Nicely gambling debt Unenforceable – illegality.

30. Insurance example Bank insurance K duty benefit intent insurance Insurance Co. pay Homeowner premiums

31. Problem 176 Lawrence (P)(3PB) $300 debt promise to pay Fox (D) $300 loan Holly

32. Vesting – R2K 311 • Generally promisor and promisee retain right to change K until rights of 3PB vest. • Rights vest when the 3PB “accepts,” relies on the promise, or sues on the K. • Promisor and promisee can agree to immediate vesting (Ex: life insurance). • Once rights have vested, promisor and promisee cannot change K w/o 3PB. • Vesting does not change effect of defenses.