Third Parties Third Party Beneficiaries

Third Parties

• Third Party Beneficiaries

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  A third party beneficiary is NOT a party to the contract, but he is within the expectations of at least one party to the contract
  

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  Promisor, Promisee, & Third Party Beneficiary
  
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    A loans money to B who makes a similar loan to C
    
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    C promises B that he would make repayment to A
    
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    C did not keep his promise and A sues C for the amount of the promised payment
    
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      Promisor -> C
      
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      Promisee -> B
      
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      Third Party Beneficiary -> A
      
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        Modern contract law permits A to sue C directly and cut out the middle person
        

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  Incidental vs. Intended Beneficiaries (R § 302)
  
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    Incidental→ A party that incidentally benefits from a contract in which he is not a party
    
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      Ex: Party benefits from his neighbor’s landscaping contract to grow a garden on his front lawn / may increase the value of neighbor’s property, but only incidentally
      
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    Intended→ A third party who is the recipient of the benefit of the transaction undertaken by another
    
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      Three Approaches -> A third party is an intended beneficiary if:
      
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        #1 BOTH the promisor (C) and the promisee (B) intended to benefit the third party under the contract
        
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        #2 Only the promisee (B) intended to benefit third party under the contract
        
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        #3 (Vogan) The promisee (B) intended to benefit the third party under the contract and the promisor (C) must have known or had reason to know of the promisee’s intent to benefit the third party
        
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    R § 302: Intended and Incidental Beneficiaries
    
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      (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the INTENTION of the parties and either
      
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        (a) the performance of the promisee will satisfy an obligation of the PROMISEE to pay money to the beneficiary; OR
        
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        (b) the circumstances indicate that the PROMISEE intends to give the beneficiary the benefit of the promised performance
        
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      (2) An incidental beneficiary is a beneficiary who is NOT an intended beneficiary
      

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  Defenses to Enforcement
  
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    Just being a third party beneficiary does NOT necessarily mean that A can sue and win
    
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      Defenses to enforceability are still available for the original contract b/w B and C
      
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    B and C can also modify and terminate the contract up until the point when A’s right VESTS
    
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      Under R § 311, vesting occurs when A:
      
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        Relies on the contract or
        
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        Turns down other opportunities or
        
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        He decides to sue
        
        
        

• Vogen v. Hayes Appraisal Assoc., Inc.

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  FACTS
  
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    D was hired by MidAmerica Bank to do appraisal
    
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    Monitor the progress of new home construction for P, who had obtained a construction loan from MidAmerica
    
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    MidAmerica was to use D’s progress reports to make payments to contractor / D’s progress reports were erroneous, causing P’s to take out a second mortgage loan plus more
    
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    P sued D on a third party beneficiary theory based on its failure to properly monitor the progress of the construction, thus allowing funds to be improperly released by the lender to the defaulting contractor
    

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  ANALYSIS
  
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    Promisor→ D / Promisee→ MidAmerica / Third Party Beneficiary→ P
    
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    Takes #3 Approach, taking into account both the intent of the promisor and the promisee to benefit the third party beneficiary
    
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      The promisee has to intend to benefit the third party AND the promisor has to at least had reason to know this
      
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    Did MidAmerica intend its contract w/ D to benefit P?
    
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      YES, for a pecuniary benefit
      
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    Did D know or have reason to know that MidAmerica intended to benefit P?
    
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      YES, inspection reports issued by D naming P as home purchasers gave D reason to know that MidAmerica’s purpose in contracting for periodic inspection reports was to provide protection for the money which the Ps had invested in the project
      
      
      
      

• Zigas v. Superior Court

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  FACTS
  
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    HUD helped finance certain apartments / regulations thereunder pursuant to National Housing Act
    
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    In exchange, landlords contracted that they would adhere to certain rent schedules
    
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    Landlords disobeyed and charged rents in excess of schedule, collected in excess of $2 million
    
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    Several tenants (P) brought a class action suit seeking enforcement and damages
    

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  ISSUE
  
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    When the federal government has contracted with landlords to provide apartment financing in return for rent ceilings, do tenants have standing to seek enforcement or damages?
    

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  HELD
  
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    Under the Zigas approach, since the agreement itself b/w HUD and the landlords manifested an intention that the tenants be compensated in the event of the landlords’ nonperformance, the tenants are incidental beneficiaries and have standing to seek enforcement or damages
    
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    Approaches:
    
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      Zigas Approach
      
      • 
        Zigas constitutes the California approach to more demanding restraints on third party suits against the government, concerning government contracts
        
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          (1) A stricter standard for determining who is an intended vs. incidental beneficiary
          
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          (2) An intent to benefit a third party is NOT enough by itself, but also need an intent that the third party will be refunded in the event of a breach
          
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      Restatement § 313 Approach
      
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        Because there is such a huge potential liability in these cases, it would upset government contracts and prices in general if third party beneficiaries could sue under these government contracts
        
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          (1) Same standard for determining who is an intended vs. incidental beneficiary
          
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          (2) Limit the amount of consequential damages that can be recovered by third party beneficiaries
          
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        R § 313(2) In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is NOT subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform UNLESS
        
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          (a) the terms of the promise provide for such liability; or
          
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          (b) the promisee is subject to liability to the member of the public for the damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law authorizing the contract and prescribing remedies for its breach
          

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  Directory: outlines -> Contracts%20I
  outlines -> Adil Khan Contracts Midterm outline- waldron
  outlines -> Remedies for breach of promise (1) The Interests Protected
  outlines -> Basic Process for Assessing Damages: 97 Select  interest that deserves vindication 97 a. Restitution 97
  outlines -> Chapter Five: Written Documents 1 Unsigned Documents 1
  outlines -> Cases and Materials on Contracts
  outlines -> College of Science and Health
  outlines -> Evidence outline
  outlines -> 2. Act, Omission, Status or Circumstances 4 Consequences and Causation 8 Introduction to Mens Rea and Intent 10 Levels of Fault 11
  Contracts%20I -> Contracts II outline – Professor Maggs Contract Interpretation
  
  
  
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