Third-party rights - Third-party beneficiaries

Learning Outcomes

This article explains the rights of third-party beneficiaries in contract law, including:

• Identifying the promisor, promisee, and third-party beneficiary in bar-style fact patterns.
• Distinguishing intended beneficiaries—creditor and donee—from incidental beneficiaries who lack enforcement rights.
• Determining when and how an intended beneficiary’s rights vest and cut off the original parties’ ability to modify or discharge the contract.
• Analyzing who can sue whom (and on what theories) among the promisor, promisee, and beneficiary once rights have vested.
• Evaluating the promisor’s available contract defenses against an intended beneficiary and how those defenses mirror defenses against the promisee.
• Comparing third-party beneficiary problems with assignment and delegation to avoid common MBE traps.
• Applying these doctrines to typical MBE scenarios involving payment obligations, gift promises, and modifications that occur before or after the beneficiary learns of the contract or relies on it.
• Recognizing available remedies—including damages, specific performance, and promissory estoppel theories—when performance for an intended third-party beneficiary is withheld or improperly modified.

MBE Syllabus

For the MBE, you are required to understand when a person who is not a party to a contract can nonetheless enforce that contract, with a focus on the following syllabus points:

• Distinguish between intended and incidental beneficiaries.
• Identify creditor and donee beneficiaries as types of intended beneficiaries.
• Determine when a third-party beneficiary's rights vest, cutting off the original parties' power to modify or discharge the contract.
• Analyze the rights and liabilities between the third-party beneficiary, the promisor, and the promisee.
• Recognize defenses available to the promisor when sued by the third-party beneficiary.
• Distinguish third-party beneficiary situations from assignment of rights and delegation of duties.
• Apply these rules to both common-law contracts and UCC Article 2 sales contracts.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. A third party whose benefit from a contract is purely unintentional and who cannot enforce the contract is known as:
   1. A creditor beneficiary
   2. A donee beneficiary
   3. An incidental beneficiary
   4. An intended beneficiary
2. The rights of an intended third-party beneficiary vest when the beneficiary:
   1. Learns of the contract.
   2. Materially changes position in justifiable reliance on the promise.
   3. Is identified by name in the contract.
   4. Receives notice from the promisor that performance is due.
3. Promisor contracts with Promisee to pay Promisee's $500 debt to Creditor. Before Creditor learns of the contract or relies on it, Promisor and Promisee agree to rescind their contract. Can Creditor successfully sue Promisor?
   1. Yes, because Creditor is an intended beneficiary.
   2. Yes, because the original debt remains unpaid.
   3. No, because Creditor's rights had not yet vested.
   4. No, because Creditor was not a party to the contract.
4. Buyer contracts with Seller that Seller will deliver 1,000 widgets to Customer and Buyer will pay the price. Before Customer knows of the contract, Buyer and Seller validly modify it so that Seller will instead deliver the widgets to Buyer. Customer sues Seller for non-delivery. Is Customer likely to succeed?
   1. Yes, because Customer was the originally intended beneficiary.
   2. Yes, because Seller’s performance would have directly benefited Customer.
   3. No, because Customer’s rights had not vested at the time of the modification.
   4. No, because Customer is only an incidental beneficiary.
5. Two siblings orally agree that when they sell their café, each will pay their friend $10,000 in gratitude for his past unpaid help. The friend learns of the promise and, relying on it, makes a down payment on a new car. Before the sale closes, the siblings sign a written agreement that only one sibling will pay the friend $10,000 and the other will pay nothing. Can the friend enforce the earlier promise against the sibling who later refused to pay?
   1. No, because past services are not consideration.
   2. No, because the siblings were free to modify their own agreement.
   3. Yes, because the friend’s reliance caused his rights to vest.
   4. Yes, but only under a quasi-contract theory.

Introduction

Generally, only parties to a contract have rights and duties under it. However, a major exception exists where the contracting parties intend their agreement to benefit a third person. This person, known as a third-party beneficiary, may be able to enforce the contract despite not being a party to its formation. The key distinction is whether the benefit to the third party was intended or merely incidental.

To analyze third-party rights, you must identify the relationship between the parties: the promisor (the party whose performance benefits the third party), the promisee (the party who obtains the promise that benefits the third party), and the third-party beneficiary (the outsider who benefits).

Key Term: Third-Party Beneficiary
A person who is not a party to a contract but stands to benefit from the contract's performance.

Key Term: Promisor
The party who makes the promise that is to be rendered for the benefit of the third party. The promisor is the party the beneficiary will usually sue.

Key Term: Promisee
The party who bargains for the promisor’s promise and intends that performance to benefit the third party.

On the MBE, virtually every third-party beneficiary question can be organized around three questions:

• Is the third party an intended or incidental beneficiary?
• If intended, have the beneficiary’s rights vested (so that the contract can no longer be changed to the beneficiary’s detriment without consent)?
• Given the posture in the question, who can sue whom, and what defenses are available?

Keeping those three questions in mind will greatly simplify third‑party beneficiary fact patterns.

Identifying Third-Party Beneficiaries

The essential first step is determining whether a third party has legally enforceable rights under the contract. This depends on whether the third party is an intended beneficiary or merely an incidental beneficiary.

Intended vs. Incidental Beneficiaries

• Intended Beneficiary: Enforcement rights are granted if the contracting parties (especially the promisee) intended the third party to benefit from the promised performance. The benefit must run directly to the third party. Recognition of a right to performance in the beneficiary must be appropriate to effectuate the parties' intentions.
• Incidental Beneficiary: A person who benefits from a contract but whom the parties did not intend to benefit directly has no rights under the contract. The benefit is merely an unintended byproduct of the contract.

Key Term: Intended Beneficiary
A third party whom the contracting parties intended to benefit directly from their contract. Intended beneficiaries have rights to enforce the contract.

Key Term: Incidental Beneficiary
A third party who benefits from a contract only indirectly and unintentionally. Incidental beneficiaries have no rights to enforce the contract.

Courts (and examiners) focus primarily on the promisee’s intent. Ask:

• Was the promisee’s purpose to confer a right or benefit directly on this particular third person?
• Did the contract direct the promisor to render performance to the third party (e.g., “pay C $5,000” or “deliver the goods to X”)?
• Is the beneficiary named or described in a way that shows they are the contemplated recipient (e.g., “my daughter,” “my lender”)?
• Would recognizing enforcement rights in the third party effectuate what the parties were trying to accomplish?

If the answer is yes, the beneficiary is intended and can potentially sue. If the third party’s gain is just a side effect (for example, higher property values in the neighborhood), the beneficiary is incidental and has no contract rights at all.

Worked Example 1.1

Developer contracts with Builder to construct a large shopping mall on Developer's land. The mall is expected to significantly increase customer traffic in the area, benefiting nearby Retailer's shop. Builder breaches the contract by failing to complete the mall. Can Retailer sue Builder for breach of contract?

Answer:
No. Retailer is merely an incidental beneficiary. While the mall's construction would have benefited Retailer, the primary purpose of the Developer–Builder contract was to benefit Developer, not surrounding businesses. The benefit to Retailer was indirect and unintentional from the contracting parties' viewpoint, so Retailer has no enforcement rights.

A very similar pattern appears frequently on the MBE: neighbors or nearby businesses hoping to benefit from someone else’s construction or improvements. Unless the contract was actually made for them, they are incidental beneficiaries only.

Types of Intended Beneficiaries

Intended beneficiaries are traditionally classified as either creditor or donee beneficiaries, though the modern approach (Restatement Second) focuses simply on whether the beneficiary was intended. The labels still show up on the MBE, especially when analyzing the beneficiary’s rights against the promisee.

Creditor Beneficiary

A person is a creditor beneficiary if the promisee's primary intent in securing the promisor's performance was to discharge an obligation the promisee already owed to the third party.

Key Term: Creditor Beneficiary
An intended beneficiary to whom the promisee owed a pre-existing duty, which the promisor's performance is intended to discharge.

Common pattern: A owes C money. To satisfy that debt, A contracts with B that B will perform in favor of C (often by paying C directly). C is an intended creditor beneficiary of B’s promise.

A creditor beneficiary has two potential sources of recovery:

• Against the promisor, on the contract made for the creditor’s benefit.
• Against the promisee, on the original debt.

However, the beneficiary is entitled to only one satisfaction overall.

Donee Beneficiary

A person is a donee beneficiary if the promisee's primary intent was to make a gift to the third party by securing the promisor's performance for the third party's benefit. There is no pre-existing obligation owed by the promisee to the third party. The classic example is a life insurance policy where the insured (promisee) contracts with the insurer (promisor) to pay proceeds to a named beneficiary (donee beneficiary).

Key Term: Donee Beneficiary
An intended beneficiary to whom the promisee intended to make a gift through the promisor's performance.

Because there is no pre-existing debt, a donee beneficiary usually has no contract claim against the promisee if the promisor fails to perform. Their contract claim runs against the promisor.

Worked Example 1.2

Father contracts with Painter for Painter to paint Daughter's house as a birthday gift. Painter fails to perform. Is Daughter a creditor or donee beneficiary? Can she sue Painter?

Answer:
Daughter is a donee beneficiary. Father (promisee) intended to confer a gift upon Daughter. There was no pre-existing debt from Father to Daughter that the painting was meant to discharge. As an intended (donee) beneficiary whose rights have likely vested (see below), Daughter can sue Painter (promisor) for breach.

Worked Example 1.3

Cam loaned Abe $500 last month. In satisfaction of this debt, Abe agrees with Beth that Beth will mow Cam’s lawn 10 times, and in return Abe will pay Beth $500. Beth never mows the lawn. Cam sues Beth for breach. What is Cam’s status, and can he recover from Beth?

Answer:
Cam is a creditor beneficiary. Abe (the promisee) owed Cam a pre-existing $500 debt and arranged Beth’s performance to discharge that obligation. Because Cam is an intended beneficiary, he can sue Beth (the promisor) directly for breach of the contract made for his benefit. Cam can also still sue Abe on the original debt, but he is entitled to only one full recovery.

These labels (creditor vs. donee) rarely affect vesting under the modern approach but matter when you analyze whether the beneficiary has any claim against the promisee in addition to the promisor.

Vesting of Rights

An intended third-party beneficiary's rights are not automatically secure. The original contracting parties (promisor and promisee) generally retain the power to modify or rescind the contract, thereby altering or eliminating the third party's rights, until those rights have vested.

Key Term: Vesting
The point at which a third-party beneficiary's rights under the contract become secure against modification or discharge by the original contracting parties.

Under the modern Restatement (and for MBE purposes), vesting occurs when the beneficiary, after learning of the promise, does any one of the following:

1. Manifests assent to the promise in a manner invited or requested by the parties; or
2. Brings suit to enforce the promise; or
3. Materially changes position in justifiable reliance on the promise.

Until one of these occurs, the promisor and promisee are free to change their agreement, including substituting a different beneficiary or cancelling the benefit altogether.

Once vesting occurs, their power to vary the third party's rights without the third party's consent terminates, unless the contract expressly reserves a power to modify even after vesting. If the contract says, for example, “The parties may modify this agreement at any time without the consent of any beneficiary,” that clause will usually be honored.

Note two key exam points:

• The beneficiary’s rights cannot vest before the beneficiary knows about the contract.
• Some older cases treated donee beneficiaries as vesting at formation, but on the MBE assume the Restatement approach above unless the facts clearly indicate otherwise.

Worked Example 1.4 (No Vesting: Modification Effective)

A hatmaker enters into a written agreement with a rodeo manager to make 500 leather cowboy hats at $75 per hat. The contract states that the rodeo manager will pay one-fourth of the total purchase price directly to a tannery owner to whom the hatmaker owes a debt. The tannery owner does not know of this arrangement. Five days later, before anyone tells the tannery owner, the hatmaker and the rodeo manager validly modify the contract to remove the promise to pay the tannery owner. After the modification, the rodeo manager’s brother tells the tannery owner about the original arrangement. The rodeo manager refuses to pay the tannery owner. The tannery owner sues the rodeo manager. Can he recover?

Answer:
No. The tannery owner was an intended creditor beneficiary of the original contract, but his rights had not yet vested when the hatmaker and rodeo manager modified their agreement. At the time of modification, the tannery owner did not know about the contract and had not assented, relied, or sued. The modification thus extinguished any rights he might otherwise have had, so he cannot enforce the original promise.

Worked Example 1.5 (Vesting by Reliance: Modification Ineffective)

A sister and brother open a coffee shop. Their friend, a guitarist, plays weekly for free to help the shop become popular, hoping for publicity. Later, when a businessperson offers to buy the shop, the siblings orally agree that each will pay the guitarist $10,000 from their share of the sale proceeds in gratitude. The sister tells the guitarist, who is so delighted that he makes a down payment on a new car in reliance on the promised payments. When the sale closes, the siblings sign a written contract stating that only the sister will pay the guitarist $10,000 and the brother will pay him $5,000. The brother pays only $5,000. The guitarist sues the brother for the additional $5,000. Is the guitarist likely to prevail?

Answer:
Yes. The guitarist is an intended donee beneficiary of the siblings’ oral agreement. Once he learned of the promise and materially changed his position (by making a car down payment) in justifiable reliance, his rights under the original promise vested. After vesting, the siblings could not modify their obligations to his detriment without his consent. The later written contract between the siblings cannot cut down his vested right to $10,000 from each sibling, so he can recover the remaining $5,000 from the brother.

Even though the guitarist’s earlier performances helped the business, those were not bargained for as consideration in the later promise; he is treated as a donee beneficiary whose rights vest through reliance, not as a contracting party himself.

Rights and Liabilities

Once an intended beneficiary's rights have vested, specific enforcement rights and liabilities arise among the three parties. The key relationships are:

• Third-party beneficiary vs. promisor
• Third-party beneficiary vs. promisee
• Promisee vs. promisor

Third-Party Beneficiary vs. Promisor

The intended beneficiary may sue the promisor directly for breach of the contract. This is the most commonly tested lawsuit: beneficiary suing promisor.

The beneficiary’s recovery is based on the same measure of damages the promisee could have obtained, because the beneficiary is enforcing the promisor’s obligation under the contract.

Promisor’s Defenses Against the Beneficiary

The promisor can assert against the beneficiary any defense that the promisor has against the promisee arising from the contract (e.g., lack of consideration, failure of a condition, illegality, fraud, duress, impracticability). In other words, the beneficiary “stands in the shoes” of the promisee.

However, the promisor generally cannot assert defenses that the promisee might have against the beneficiary relating to any separate transaction between them, unless the promisor’s promise is expressly limited to “whatever the promisee owes the beneficiary.”

Worked Example 1.6 (Promisor’s Contract Defense)
Abe forces Beth at gunpoint to promise to pay $225,000 to Cam in exchange for a casebook. Beth later refuses to pay Cam. Cam sues Beth as an intended beneficiary.

Beth can raise duress as a defense. Because Beth could assert duress against Abe in a suit between them, she can assert the same defense against Cam, the third-party beneficiary.

The promisor’s liability to the beneficiary can also be affected by modification or rescission of the original contract, subject to the vesting rules discussed above.

Third-Party Beneficiary vs. Promisee

The beneficiary’s rights against the promisee depend heavily on whether the beneficiary is a creditor or donee beneficiary.

Creditor Beneficiary vs. Promisee

• A creditor beneficiary can sue the promisee on the pre-existing debt that the promisor was supposed to discharge.
• The beneficiary may sue both the promisor (on the third-party beneficiary contract) and the promisee (on the original debt), but the beneficiary is entitled to only one satisfaction.

Example: In the Cam–Abe–Beth scenario above, Cam can sue Abe (the original debtor) on the loan, and can also sue Beth (the promisor) under the contract made for his benefit. Recovery from one reduces or eliminates recovery from the other.

Donee Beneficiary vs. Promisee

• A donee beneficiary generally has no right to sue the promisee if the promisor fails to perform, because there was no existing obligation between the promisee and the beneficiary.

However, there is an important possible exception through promissory estoppel if the promisee made assurances directly to the beneficiary and the beneficiary relied.

Key Term: Promissory Estoppel
A doctrine allowing enforcement of a promise where the promisee (or beneficiary) reasonably and foreseeably relies on it to their detriment, and justice requires enforcement, even without traditional consideration.

If the promisee made a promise directly to the donee beneficiary (“I have arranged for Painter to paint your house; you can rely on it”), and the beneficiary incurs expenses or changes position in reliance, the beneficiary may be able to sue the promisee under promissory estoppel even though no contractual duty was owed.

Promisee vs. Promisor

The promisee may sue the promisor for breach of contract regardless of whether the third party sues.

• If the breach involves failure to perform for a creditor beneficiary, the promisee can sue for:

  • Specific performance to compel the promisor to pay the beneficiary, thereby discharging the promisee's debt; or
  • Damages, particularly if the promisee has already paid the debt and thus suffered out-of-pocket loss.

• If the breach involves a donee beneficiary, the promisee’s economic damages may be small (because the promisee intended a gift). In such cases, specific performance may be the preferred remedy if available.

Because the promisor’s breach interferes with the promisee’s plan to discharge a debt or make a gift, courts will often award the promisee at least nominal damages and sometimes specific performance.

Modification and Discharge

As noted under Vesting, the original parties can modify or discharge their contract by mutual agreement up until the intended beneficiary's rights vest. After vesting, modification or discharge typically requires the beneficiary's consent.

Key points for the MBE:

• Before vesting:

  • The promisor and promisee may cancel the contract, substitute another beneficiary, or change the performance terms.
  • Any attempted suit by the beneficiary after such modification will fail, because the beneficiary had no vested rights at the time.

• After vesting:

  • The promisor and promisee cannot take away or materially reduce the beneficiary’s rights without the beneficiary’s consent, unless the contract expressly retained such a power.
  • They may still modify the contract in ways that benefit the beneficiary (for example, increasing the amount to be paid) without consent.

Remember that the exam can test this by telling you when the beneficiary learned of the contract, when the modification occurred, and whether any reliance took place. Always put the events on a timeline and ask: had any vesting event already occurred when the change was made?

Defenses

When sued by an intended third-party beneficiary, the promisor may raise any defense against the beneficiary that the promisor could have raised against the promisee. This includes defenses related to:

• Contract formation (e.g., lack of consideration, misrepresentation, fraud, duress, mistake, illegality, lack of capacity).
• Failure of conditions (e.g., a condition precedent to the promisor’s duty did not occur).
• Impracticability, frustration of purpose, or other doctrines discharging duty.

In addition, if the promisor’s duty was framed as “to pay whatever the promisee owes the beneficiary,” the promisor may also be able to raise any defenses the promisee would have against the beneficiary on that obligation (for example, that the beneficiary has already been paid in full).

However, defenses based solely on separate transactions between promisor and beneficiary (unrelated to the third-party contract) are typically not available to reduce liability under the third-party beneficiary contract.

Exam Warning

Do not confuse third-party beneficiary rights with assignment or delegation. Third-party beneficiary rights are created by the original contract itself, intending to benefit an outsider from the outset. Assignment and delegation involve the transfer of rights or duties after the contract is formed.

A quick comparison:

• Third-party beneficiary:

  • Third party is identified or contemplated at formation.
  • Rights arise directly from the contract between promisor and promisee.
  • Focus is on intent and vesting.

• Assignment:

  • A party to an existing contract later transfers a right (usually the right to payment) to an assignee.
  • The right did not belong to the assignee at formation.

• Delegation:

  • A party transfers a duty to perform to a delegate.
  • The original obligor usually remains liable unless there is a novation.

On the MBE, if the benefit to the third person is present from the beginning, think third-party beneficiary. If someone later transfers a right or duty, think assignment or delegation instead.

Summary

Third-party beneficiaries are non-parties who benefit from a contract between others. Only intended beneficiaries (creditor or donee) have rights to enforce the contract. Incidental beneficiaries do not.

An intended beneficiary's rights vest when, after learning of the contract, the beneficiary:

• Manifests assent in a manner invited by the parties,
• Brings suit to enforce, or
• Materially changes position in justifiable reliance on the promise.

Prior to vesting, the original parties can freely modify or discharge the contract, including eliminating the benefit to the third party. After vesting, modification or discharge that harms the beneficiary’s rights generally requires the beneficiary's consent, unless the contract expressly reserves a continuing power to modify.

Once rights have vested:

• The beneficiary can sue the promisor directly.
• The promisor can assert against the beneficiary any defenses it would have against the promisee.
• A creditor beneficiary can also sue the promisee on the original obligation (but is entitled to only one full recovery).
• A donee beneficiary generally cannot sue the promisee in contract, but may have a promissory estoppel claim if the promisee made promises directly to the beneficiary and induced detrimental reliance.
• The promisee can sue the promisor for breach and may obtain damages or specific performance, depending on the circumstances.

Correctly identifying whether a beneficiary is intended or incidental, and whether rights have vested, is central to answering MBE questions on third-party beneficiary contracts.

Key Point Checklist

This article has covered the following key knowledge points:

• A third-party beneficiary is an outsider who benefits from a contract between others.
• Promisor, promisee, and beneficiary must be clearly identified in each fact pattern.
• Only intended beneficiaries, not incidental beneficiaries, can enforce a contract.
• Intention is determined primarily by the promisee's purpose: to discharge a debt (creditor beneficiary) or confer a gift (donee beneficiary).
• Under the modern Restatement view, vesting occurs when the beneficiary assents, sues, or materially relies after learning of the contract.
• Prior to vesting, the original parties can modify or discharge the contract, including removing the beneficiary.
• After vesting, the beneficiary's consent is generally needed for modification or discharge unless the contract reserves a power to modify.
• An intended beneficiary can sue the promisor directly for breach.
• The promisor can assert against the beneficiary any contract defense the promisor has against the promisee.
• A creditor beneficiary can sue the promisee on the original obligation, but only one satisfaction is allowed.
• A donee beneficiary generally cannot sue the promisee, absent detrimental reliance sufficient for promissory estoppel.
• Promisee can sue the promisor for specific performance or damages when performance for the beneficiary is not rendered.
• Third-party beneficiary situations must be distinguished from assignment of rights and delegation of duties on the MBE.

Key Terms and Concepts

• Third-Party Beneficiary
• Promisor
• Promisee
• Intended Beneficiary
• Incidental Beneficiary
• Creditor Beneficiary
• Donee Beneficiary
• Vesting
• Promissory Estoppel