Third-Party Beneficiaries

The privity principle says only the parties to a contract can enforce it. The third-party beneficiary doctrine is the exception: a non-party may sue on a promise made for her benefit, even though she gave no consideration and never signed. The whole case turns on a single line: was the third party an intended beneficiary, or merely an incidental one? Intent of the contracting parties, not foreseeability of harm to the outsider, is the operative inquiry.

The intent test

R2d § 302. A beneficiary is an intended beneficiary — and may enforce the promise — if recognition of a right to performance is appropriate to effectuate the intent of the parties and either (a) the performance will satisfy an obligation of the promisee to pay money to the beneficiary (the creditor beneficiary), or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance (the donee beneficiary). Everyone else is an incidental beneficiary, who has no enforceable right. The line between intended and incidental is the entire doctrine; a party may be foreseeably harmed by breach and still be merely incidental.

R2d § 304. A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the beneficiary may enforce it directly against the promisor.

R2d § 311. Until the beneficiary’s rights vest — by manifesting assent at one party’s request, by suing to enforce, or by materially changing position in reliance — the contracting parties retain power to modify or discharge the duty to the beneficiary. After vesting, they cannot. The parties may also reserve that power in the contract itself, or disclaim third-party rights entirely with an express “no third-party beneficiaries” clause.

Cases

Lawrence v. Fox is the foundational case. Holly lent Fox money on Fox’s promise to pay Lawrence, to whom Holly already owed the same sum. Lawrence — who gave Fox nothing — was held able to sue Fox directly. It is the classic intended creditor beneficiary: Fox’s performance discharged Holly’s debt to Lawrence.

Sovereign Bank v. BJ’s Wholesale Club tests the doctrine at its modern edge. An issuing bank sought to enforce data-security obligations in a contract between Visa and an acquiring bank after a breach. The Third Circuit reversed summary judgment and sent the intended-beneficiary question to a jury, because Visa’s own memos described the security rules as protecting issuers. The lesson: in diffuse multi-party commercial systems, express statements of protective purpose can convert what looks incidental into intended — but absent them, an outsider harmed by breach remains incidental.

What you should be able to do

State the § 302 intent test and sort a third party into intended-creditor, intended-donee, or incidental. Explain why foreseeable harm does not equal intended-beneficiary status. Apply the § 311 vesting rules to decide whether the original parties may still modify or rescind, and recognize the drafting move — an express disclaimer — that forecloses the whole question. Next class: when an outsider acquires rights or duties not by the original contract but by transfer — assignment and delegation.