Third Party Beneficiaries in Contract Law on the UBE

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The Rules Pertaining to Third Party Beneficiaries in Contract Law on the UBE


At the outset, please check the ‘Contracts’ section of this blog for posts on Assignments as well as Delegation of Duties.

With respect to Contracts on the UBE, we can expect to see 2-3 MBE questions on the Contracts subsection of Third Party Beneficiaries (hereinafter “TPB”) and can also easily see an issue from this topic on an MEE essay.  It is also, typically, the last subject covered on the majority of outlines and unfortunately, often overlooked.  I am not suggesting that it is an “easy” subsection by any means, but it can be mastered.

Definition of TPB and Common Vocabulary Used

            We can define a scenario concerning a TPB as 'two people entering into a contract intended to benefit a third party.'  Some common vocabulary used in this section of Contract law includes:

- TPB is a person who is NOT a party to the contract but has contractual rights because the contract was intended to benefit them, specifically.
- Promisor is the party who promises to perform for the TPB.
- Promisee is the party who secures the promise.
- Intended Ben is the person to whom performance is to be given under the contract.
- An incidental beneficiary has no right under the contract (see below).
- A donee beneficiary is a person who is receiving the performance as a gift.
- A creditor beneficiary is receiving the performance to repay a debt (rather rare).

Categories of Third Party Beneficiaries

A third-party beneficiary is either a donee or a creditor. A donee beneficiary benefits from a contract gratuitously; that is, not in exchange for a service he has provided. For example, assume that Adam enters into a contract with Bob, a landscaper, providing that Bob will shovel the snow off Adam’s elderly neighbor, Derwin’s, driveway every time it snows more than three inches. Derwin is not a party to the contract, but he is an intended third-party beneficiary who will gratuitously benefit from Adam’s contract with Bob.  A creditor beneficiary is a person to whom an obligation is owed by the promisee. In the previous example, imagine that Derwin had paid Bob to shovel his snow. So, if Bob hires Jason to shovel Derwin’s snow, he is doing so to offset his own contractual obligation. Bob is therefore an intended third-party creditor beneficiary.

Contract Rights of a Third Party Beneficiary

Both donee and creditor beneficiaries can enforce contract rights, but to do so, both must be intended beneficiaries. The named beneficiary on a life insurance policy (the person who is to receive the death benefit upon the death of the insured) is a classic example of an intended beneficiary under the life insurance contract.  In general, an intended beneficiary is one who is 1) Identified in the contract OR 2) Receives performance directly from the promisor; or circumstances demonstrate that the promisee will give the beneficiary the benefit from the contract.
BAR EXAM NOTE:  Incidental beneficiaries do not have the legal right to enforce a contract after it has been breached.  The exam will attempt to trick you in this regard and it is your job to determine if a beneficiary is deemed to be intended or incidental.

Vesting of the Rights of the Third Party Beneficiaries

For a third-party beneficiary to enforce a contract, his rights under the agreement must have vested, which means that the right must have come into existence.
Aside from the fact that the contract becomes enforceable by the third party upon vesting, the timing of the vesting is important for another reason. Before the third-party beneficiary’s rights vest, the original parties to a contract can modify their contract in any way they see fit. Once rights vest, the original parties cannot discharge or modify contractual rights without the beneficiary’s agreement to a change to the contractual rights.
         A third-party beneficiary’s rights vest when any of the following three things happen: 1) The beneficiary assents to the promise in a contract in the manner requested by the parties; 2) The beneficiary sues to enforce the contract’s promise; or 3) The beneficiary materially changes position in justifiable reliance on the contract’s promise.
A third-party beneficiary is more than a mere outsider to a contractual arrangement. A third-party beneficiary is often a legally protected entity with rights who can enforce the agreement to which she is a beneficiary.

Recession and Modification of the Contract

BAR EXAM NOTE:   This is a very important and nuanced section of TPB law. 

Recent MEE issues concerning this subsection have covered this area specifically.  The general rule is that the promisor and promisee can rescind or modify the contract until the rights of/for the TPB contained with the contract have vested.  Once the TPB knows about the contracts and has relied on the contract, the contract can’t be modified without the consent of the TPB. The exception to this rule is that any contrary language in the contract controls.  Contrary contractual language will permit modification even if the TPB has relied upon same.  Lastly, you are able to change a TPB per the contractual language.  Be mindful on the UBE (either with an MBE or MEE question) as to whether the contract language indicates a change in the beneficiary.

Conclusion

It is extremely important to understand when right vest, whether a beneficiary is deemed incidental or intended and whether the beneficiary is a donee or creditor.  Success on the likely 2-3 MBE questions in this area of law, and perhaps success on a Contracts MEE issue depends on your knowledge of the law. For more information concerning this section of Contracts, another area of Contracts law, or a different legal topic tested on the UBE, please do not hesitate to contact us at PassYourBarExam@gmail.com

GOOD LUCK!

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