297: Listen and Learn -- Third-Party Rights in Contracts (Part 2 - Beneficiaries)

Alison also runs The Girl's Guide to Law School. If you enjoy the show, please leave a review on your favorite listening app, and check out our sister podcast, the Law School Toolbox podcast. If you have any questions, don't hesitate to reach out to us. You can reach us via the contact form on BarExamToolbox.com, and we'd love to hear from you. And with that, let's get started. Welcome back to the "Listen and Learn" series. This is Part 2 of our exploration of third-party rights in contracts.

Did you miss Part 1? We will link to it in the show notes. In our previous episode, we covered assignments and delegations - how parties to a contract can transfer their rights or obligations to others. Today, we're going to complete our discussion by diving into third-party beneficiaries and applying all these concepts to some practical scenarios. So let's start with a quick recap.

Remember, an assignment is the transfer of a contractual right, while a delegation is the transfer of a contractual obligation. Both have specific rules governing when they're valid and how they operate. Now let's move on to our new material for today - third-party beneficiaries. Generally, a party who is not in privity of contract with another party, cannot assert a claim for breach against that party.

However, when the party asserting the claim is an intended third-party beneficiary, the party has the same rights as those in privity of contract and can assert a claim for breach. An intended third-party beneficiary is not a party to the contract, but has rights under the contract, because the contracting parties contemplated that their respective performances were intended to benefit an identified third party.

In contrast, an incidental beneficiary is a person that just happens to benefit from the contract, but has no legal rights, because the purpose of the contract was not intended to benefit them. An incidental beneficiary has no rights under the contract. To illustrate, let's say that a contractor owes a subcontractor $10,000 for prior work.

The contractor enters into an agreement with a homeowner to renovate their home for $10,000, with the express provision that the homeowner pay the $10,000 directly to the subcontractor. The subcontractor is an intended beneficiary of the contract, because the homeowner's payment of the $10,000 is expressly intended to benefit the subcontractor. In other words, the purpose of the agreement is to satisfy the contractor's debt to the subcontractor.

Therefore, if the homeowner refuses to pay the subcontractor, the subcontractor has a cause of action against the homeowner. Note in this example, the subcontractor was a creditor of the contractor, but an intended third-party beneficiary can also be the intended recipient of a gift. In that case, the third party would be called a "donee beneficiary". Now let's change the facts a little. Let's say the contractor doesn't owe the subcontractor anything.

The contractor enters into the same agreement with the homeowner, and later enters into a contract with the subcontractor to complete some of the work. The subcontractor is an incidental beneficiary of the contractor's contract with homeowner. While the subcontractor clearly benefits from that contract, its purpose was not to benefit subcontractor. If the homeowner breaches the agreement with contractor, the subcontractor will not have a cause of action against homeowner.

There's just one additional requirement for an intended third-party beneficiary to be able to enforce their rights, and that's the requirement that the rights have vested. Rights vest when a third-party beneficiary, a) manifests assent to the promise under the contract at the request of a contracting party; b) has detrimentally relied on the contract; or c) brings suit to enforce the contract. Once rights have vested, a contract cannot be changed or modified without the third-party's consent.

In the case of a donee beneficiary, a claim may only be brought against the promisor. When the third party is a creditor, however, a suit may also be brought against the promisee. Okay, that's it for our rules. Let's take a closer look at how they apply by working through a larger fact pattern: "Annie and Bob operate neighboring businesses in a shopping center. The businesses have identical storefronts with large windows of equal size and quality.

Annie and Bob have maintained their storefronts for many years and the windows are cracked, chipped, and dirty. Carl, who operates another business in the shopping center, has complained to both Annie and Bob that the condition of their storefronts reduces the number of visitors to the shopping center.

Last month, Annie entered into a valid contract with Wally, a window installer, pursuant to which Wally agreed to replace the windows in Annie's storefront and Annie agreed to pay Wally $5,000 upon completion. This was a bargain for Annie, because the other quotes she received were more than $8,000. The next day, Annie mentioned the great deal she got to Bob. Bob told Annie that he wanted to have a big event at the store, but was putting it off because of the condition of his storefront.

He said that he would have replaced his windows, but he couldn't afford the going rate for the work. Annie then suggested an arrangement that could benefit them both. She said that for $1,000, she would transfer her rights under the contract to Bob. She said, 'You'll give me $1,000 and take over the contract. Wally will replace your windows instead of mine. And when he's finished, you will pay him the $5,000.' Bob agreed to the deal and paid Annie the $1,000.

The next day, Bob saw Carl and told him about his plans to replace the windows in his store. Carl responded that it was 'really going to improve business around here'. Later that day, Annie and Bob told Wally about their deal. Wally was upset with the new arrangement and said that he would not do any work that he didn't agree to. Annie didn't want to upset Wally and wondered if she could just back out of her deal with Bob.

There is no difference in the scope or difficulty between the work required to replace Annie's windows and the work required to replace Bob's windows. 1. Can Annie back out of her agreement with Bob? 2. If Wally refuses to replace Bob's windows, would Bob succeed in a breach of contract action against Wally? 3. Assuming that Bob would succeed in the breach of contract action against Wally, would Carl succeed in a breach of contract action?

4. If Wally replaces Bob's windows and Bob does not pay the $5,000 contract price, would Wally succeed in a contract claim against Bob? Would he succeed in a contract claim against Annie?" Alright, let's take each question in turn. The first question asks whether Annie can back out of her agreement with Bob, so the first thing we need to figure out is the nature of that agreement.

We know that Annie has a pre-existing contract with Wally that requires her to pay Wally $5,000 to replace her windows. Her agreement with Bob transfers to Bob both her right to performance from Wally - which is the window installation, and her duty of performance which is her payment of $5,000. Accordingly, Annie's agreement with Bob is an assignment and delegation of her contract with Wally. Now we can figure out whether Annie can back out of the assignment.

Our rules tell us that the key question is whether there was consideration for the assignment. If there was no consideration, the assignment is revokable. If there was consideration, the assignment is irrevocable. Here, we're told that Bob paid Annie $1,000 in exchange for her assigning him the contract. Therefore, there was consideration for the assignment and Annie cannot revoke it.

Let's move on to the second question, which asks whether Bob would succeed in a breach of contract claim against Wally if Wally refuses to replace Bob's windows. There is no reason to believe that the assignment is prohibited by law or public policy, nor would it be precluded by Annie's contract with Wally. So the only issue is whether the assignment materially alters what is expected under the contract. There is no reason to conclude that it does.

We're told that Annie and Bob have neighboring storefronts that are identical, with windows of equal size and quality. We're also specifically told there is no difference in the scope or difficulty between the work required to replace Annie's windows and the work required to replace Bob's windows. In other words, there's no change to the duty owed by Wally or any increase in the burden or risk to him. Wally would be doing the exact same work, just for a neighboring business.

Moreover, there's no indication that the assignment would materially impair Wally's chance of obtaining return performance - the agreed $5,000 payment, or materially reduce the value of the contract to him. Finally, we know from our rules that an assignee may sue an obligor for non-performance, and there does not appear to be any defenses to enforcement that Wally could have asserted against Annie. Therefore, Bob is likely to succeed in a breach of contract claim against Wally.

Let's move onto the third question, which asks whether Carl would succeed in a breach of contract action against Wally. We know that Carl is not a party to any of the agreements here, so any claim would have to be based on his status as a third-party beneficiary. We also know from our rules that only intended third-party beneficiaries have rights under a contract. So the issue here is whether Carl is an intended third-party beneficiary.

We know that Carl complained to Annie and Bob about the condition of their storefronts, and seems to believe that the shopping center would receive more visitors if they would make some improvements. So, it's fair to assume that Carl would benefit from Wally's performance to some degree. That benefit, however, is merely incidental to Annie's contract with Wally. In entering into the contract, it was neither Annie's nor Wally's intent to benefit Carl.

Therefore, Carl will not succeed in a claim against Wally. Now for our last question, which asks whether Wally could succeed in a claim against Bob or Annie if he were to replace Bob's windows and not receive payment. As we noted earlier, the agreement between Annie and Bob was not only an assignment to Bob of Annie's rights against Wally, but also a delegation to Bob of Annie's obligation to Wally.

Moreover, we know from our rules that an obligor remains liable for non-performance of the contract, unless all the parties agree otherwise. With respect to the duty to pay Wally, Annie is the obligor, and there is no indication that all the parties agreed to release her from liability. Therefore, if Bob doesn't pay Wally, Wally would likely succeed in a breach of contract claim against either Bob or Annie. And with that, we've completed our exploration of third-party rights in contracts.

We've covered assignments, delegations, and third-party beneficiaries, and we've seen how these concepts apply in real-world scenarios. These topics are crucial for success on your exams and in your future legal practice. Remember, the key is to identify the type of third-party right at issue, and then apply the specific rules we have discussed. Let's quickly recap the main points from our two-part series: 1.

Assignments involve the transfer of contractual rights, while delegations involve the transfer of contractual obligations. 2. Not all rights can be assigned, and not all duties can be delegated. There are specific rules and exceptions to keep in mind. 3. Third-party beneficiaries can be either intended or incidental, and only intended beneficiaries have enforceable rights under the contract.

4. When analyzing these issues, pay close attention to the relationships between the parties and the specific terms of their agreements. We hope you found this two-part series helpful in understanding these complex, but important concepts. Remember, practice is key to mastering these topics for any exam. Try applying these rules to different fact patterns to solidify your understanding.

If you enjoyed this episode of the Bar Exam Toolbox podcast, please take a second to leave a review and rating on your favorite listening app. We'd really appreciate it. And be sure to subscribe so you don't miss any of our future episodes. And if you have any questions or comments, please don't hesitate to reach out to myself and Alison at lee@barexamtoolbox.com or alison@barexamtoolbox.com. Or you could always contact us via our website contact form at BarExamToolbox.com.

Thanks for listening, and we'll talk soon!