Third Parties to a Contract: Third-Party Beneficiaries and Assignment
This concept is really two related ideas wearing one hat: when a stranger to the contract can sue on it, and when one of the original parties hands their contract right to som
13. Third Parties to a Contract: Third-Party Beneficiaries and Assignment
Under some circumstances, third parties may enforce the terms of a contract.
- Under the common law, an intended third-party beneficiary may enforce a contract even though they were not party to the contract and provided no consideration.
- A third party is an intended beneficiary if the contracting parties manifested an intent to create rights in that person. The contracting parties may manifest that intent expressly, or it may be implied because it is necessary to effectuate the intent of the contracting parties.
- Intended beneficiaries differ from incidental third-party beneficiaries. An incidental beneficiary is a party who benefits from performance of a contract, but who does not qualify as an intended beneficiary. Incidental beneficiaries have no enforceable contract rights.
- A third-party beneficiary’s rights are subject to the same defenses the promisor has against the promisee in the underlying contract.
- Under both the common law and the UCC, contractual rights are assignable.
- The party making the assignment is the assignor and the party receiving the contract right is the assignee.
- The assignee may enforce the contract against the obligor (the remaining party to the original contract).
- The obligor retains the same defenses against the assignee as it has against the assignor.
- Contractual provisions prohibiting assignment usually are not enforceable.
- The Nevada FLE does not test the rules that govern vesting of a third-party beneficiary’s rights.
This concept pairs two ideas: an intended beneficiary may enforce a contract though never a party and giving no consideration, while an incidental beneficiary cannot; and contractual rights are generally assignable, letting the assignee enforce against the obligor. Both take the right subject to the same defenses available in the original deal.
This concept is really two related ideas wearing one hat: when a stranger to the contract can sue on it, and when one of the original parties hands their contract right to someone else. Take the third-party beneficiary side first. The default in contract law is that only the people who actually made the deal can enforce it. But there is a carve-out. If the two contracting parties meant to create a right in some specific outside person, that person is an intended beneficiary, and an intended beneficiary may enforce the contract even though they were never a party to it and never gave any consideration. That last part surprises people: the usual rule that you need consideration to enforce a promise simply does not apply to the intended beneficiary. The intent can be stated expressly in the contract, or it can be implied where recognizing the right is necessary to effectuate what the parties were trying to do.
Set that against the incidental beneficiary, who merely happens to benefit from someone else's performance. The incidental beneficiary has no enforceable rights, none, and that line, intended versus incidental, is the whole ball game on this side of the concept. There is one important limit even for the intended beneficiary: that beneficiary takes the contract as it is. Their rights are subject to the same defenses the promisor could raise against the promisee in the underlying deal, so a beneficiary cannot collect on a contract the promisor could lawfully refuse to perform.
Now the assignment side. Under both the common law and the UCC, contractual rights are assignable. The party handing the right away is the assignor; the one receiving it is the assignee; and the other original party, the one who now has to perform for the assignee, is the obligor. The assignee steps into the assignor's shoes and may enforce the contract against the obligor. But, just like the beneficiary, the assignee takes the right subject to baggage: the obligor keeps the same defenses against the assignee that it had against the assignor. And one practical point that catches people: a clause in the contract saying the rights cannot be assigned usually is not enforceable, so the assignment generally goes through anyway.
One thing this concept does not reach is vesting, the timing rules about when a beneficiary's right becomes fixed and protected from modification. The Nevada FLE puts vesting out of scope, so never let the right answer turn on when, or whether, a beneficiary's rights vested.
"Intended sues, incidental loses."
The only beneficiary who can enforce is the intended one (the parties meant to create a right in that person).
The incidental beneficiary, who just happens to benefit, gets nothing.
And the intended beneficiary needs no consideration and need not be a party.
Assignment cast in order: assignor (hands the right away) → assignee (gets the right, sues to enforce) → obligor (still has to perform, owes the assignee).
The assignee enforces against the obligor.
"You take it with the baggage."
both the intended beneficiary and the assignee take the right subject to the same defenses the promisor/obligor had in the original deal.
A defense good against the original party is good against them too.
Anti-assignment clause?
Usually not enforceable, so the assignment generally still works.
And vesting is out of scope, never let the answer turn on it.
A homeowner hires a roofing contractor to re-roof the house, and the written contract says the contractor will pay the homeowner's elderly mother a stated sum directly for supervising the job, because the parties want her looked after. The contractor does the roofing but never pays the mother. She sues the contractor on the contract.
She prevails as an intended beneficiary, subject to any defense the contractor had in the underlying deal. Now suppose the contract said nothing about the mother, but the new roof happens to raise the value of the rental property she lives in next door. There the parties never meant to create a right in her; she is only an incidental beneficiary, and she has no enforceable rights at all.
A "No" against an intended beneficiary that leans on "not a party" or "gave no consideration," or an assignee/obligor option built on a true-but-harmless fact (the assignee acted in good faith, suffered a loss, was unaware of the breach).
An intended beneficiary may enforce even though not a party and with no consideration; and the obligor keeps the same defenses against the assignee it had against the assignor, regardless of the assignee's good faith.An option that flips the beneficiary test (calling a merely benefited person "intended," or treating an incidental beneficiary as enforceable) or that misnames the assignment roles (e.g., saying the obligor may refuse simply because it is the obligor).
Only an intended beneficiary (one the parties manifested an intent to give a right to) may enforce; an incidental beneficiary has none. And the obligor is exactly the party the assignee enforces against.An absolute: "an anti-assignment clause is never enforceable," "any third party who benefits can sue," or "a beneficiary can never recover once any dispute arises."
The in-scope rules are bounded: anti-assignment clauses USUALLY are not enforceable; only INTENDED beneficiaries may enforce; and a beneficiary loses only to a valid defense, not to any dispute at all.A correct yes/no propped up by the wrong rule, e.g., a beneficiary wins "because the beneficiary supplied consideration," or an assignee wins on a rule that does not control the issue.
Name the operative rule that actually decides the issue: intended-beneficiary enforcement needs no consideration, and the assignee enforces because rights are assignable and run against the obligor.the stem hands you someone who wants to enforce a contract they did not personally sign, either an outside person who benefits from the deal, or someone who was handed a contract right by one of the original parties.
sort which story it is.
If it is an outside beneficiary, ask the single dividing question: did the contracting parties manifest an intent to create a right in this person (intended, can enforce, no consideration or party status needed) or does this person merely happen to benefit (incidental, no enforceable rights)?
Then check the limit: even an intended beneficiary takes subject to the promisor's defenses against the promisee.
If instead the story is an assignment, name the cast, assignor hands the right to the assignee, who enforces against the obligor, and remember the obligor keeps every defense it had against the assignor, and an anti-assignment clause usually will not stop the assignment.
Any answer that turns on when a beneficiary's rights vested is out of scope and a distractor.
A grandmother contracted with a landscaping company to install a play structure, and the written contract stated that the company would build it in the backyard of her grandson's home and that the grandson alone would have the right to demand its completion. The grandmother paid the full price. The company never built the play structure. The grandson, who is an adult, sued the company to enforce the contract. The company argued that the grandson could not sue because he never signed the contract and never paid anything toward it.
Is the grandson likely to succeed in enforcing the contract?
A city contracted with a construction firm to repave a stretch of road that runs past a diner. The owner of the diner expected that smoother access would bring in more customers, and indeed the parties to the contract knew the diner sat along the route. The firm abandoned the project halfway through, leaving the road torn up. The diner owner, whose business fell off sharply, sued the construction firm to enforce the repaving contract. Nothing in the contract mentioned the diner or gave its owner any rights.
Is the diner owner likely to succeed in enforcing the contract?
A supplier contracted to deliver custom cabinets to a builder, and the contract expressly directed that payment go to a designer the builder owed money to, giving the designer the right to collect that payment directly. After signing, the supplier delivered cabinets that were so defective they amounted to a material breach, which under the contract excused the builder from paying. The designer, an intended beneficiary, sued the builder for the payment. The builder raised the supplier's material breach as a reason it owed nothing.
Is the designer likely to recover the payment from the builder?
A freelancer was owed payment by a marketing agency for completed work. The freelancer assigned the right to that payment to a lender in exchange for cash up front. The agency's contract with the freelancer contained a clause stating that neither party could assign its rights without the other's written consent, and the freelancer never obtained the agency's consent. The lender, now holding the assigned right, sued the agency for the payment. The agency argued only that the anti-assignment clause barred the assignment.
Is the lender likely to succeed in collecting the payment from the agency?
A homeowner contracted to pay a contractor for a kitchen remodel. Before the work was done, the contractor assigned its right to the homeowner's payment to a supplier to settle a debt. The contractor then performed the remodel so poorly that it was a material breach, which under the contract excused the homeowner from paying. The supplier, holding the assigned right to payment, sued the homeowner. The homeowner raised the contractor's material breach as the reason no payment was owed.
Is the supplier likely to recover the payment from the homeowner?