Third-Party Beneficiary Doctrine

The third-party beneficiary doctrine permits a person who is not a party to a contract to enforce it if the contracting parties intended to benefit that person. The doctrine is an exception to the traditional privity requirement, which ordinarily limits contract enforcement to the parties who formed the agreement. The Restatement (Second) of Contracts Sections 302-315 provides the modern framework.

Third-party beneficiaries are classified as either intended or incidental. An intended beneficiary is one whom the contracting parties intended to benefit — the contract was made for their benefit, and they have enforceable rights. An incidental beneficiary is one who may benefit from the contract's performance but was not the intended object of the parties' agreement and has no enforceable rights. The key question is whether the promisee (the party who secured the promise) intended to give the beneficiary the right of performance, looking at the contract language, the surrounding circumstances, and the relationship between the parties.

Intended beneficiaries are further classified as donee beneficiaries (when the promisee's purpose is to make a gift to the third party) and creditor beneficiaries (when the promisee owes an obligation to the third party that the contract is intended to satisfy). A creditor beneficiary can sue both the promisor (on the contract) and the promisee (on the underlying obligation). A donee beneficiary can enforce the contract against the promisor.

The rights of a third-party beneficiary vest when the beneficiary materially changes position in justifiable reliance on the promise, brings suit to enforce the promise, or manifests assent to the promise at the request of the promisor or promisee. Before vesting, the original parties may modify or rescind the contract without the beneficiary's consent. After vesting, the beneficiary's rights are locked in and cannot be altered without their agreement. Understanding when vesting occurs is critical for exam analysis.