Contracts

There are only two principal parties, the offeror and the offeree, to an ordinary contract. The terms of the contract bind one or both parties to render performance to the other in consideration of receiving, or having received, the other's performance. Contracts sometimes specify that the benefits accruing to one party will be conferred upon a third party. The effect of a third-party contract is to provide, to a party who has not assented to it, a legal right to enforce the contract.

A creditor beneficiary is a nonparty to a contract who receives the benefit when a promise is made to satisfy a legal duty. For example, suppose that a debtor owed a creditor $500. The debtor lends $500 to a third person, who promises to use the money to pay the debtor's debt. The third person is the promisor, who makes the promise to be enforced. The debtor is the promisee, to whom the promise is made. The contract is between the debtor and the third person, the promisor, and the consideration for the promise is the $500 loan that the promisor received from the debtor. The creditor is the third-party beneficiary. If the promisor refuses to pay the creditor $500, then the creditor may sue the promisor and prevail. Although the creditor is not a party to their contract, both the debtor and the promisor intend that the creditor should be the beneficiary of the contract and have enforceable rights against the promisor, since he or she is to pay the creditor. The debtor or the creditor may sue to enforce the promisor's promise to pay. The creditor's right to enforce the contract between the debtor and the promisor is effective only when he or she learns of, and assents to, the contract. The creditor may also sue the debtor for the $500, as the debtor had a legal duty to pay this loan. The debtor then may sue the promisor for breach of contract for refusing to pay the creditor.

A donee beneficiary of the contract is a non-party who benefits from a promise that is made for the purpose of making a gift to him or her. A donor wishes to give a donee $200 as an anniversary present. The donor plans to sell a television set for $200 to a purchaser, who promises to pay the donee the $200 directly. The donee is a donee beneficiary of the purchaser's promise to pay the money and may enforce this claim against the purchaser. The donee has no claim against the donor, the promisee, as the donor has no legal duty to the donee but is merely giving the donee a gift. However, the donor will be able to sue the purchaser for refusal to pay the donee, because it would be a breach of the terms of their contract of sale.

The difference between a creditor beneficiary and a donee beneficiary becomes significant when the parties to a contract attempt to alter the rights of the third-party beneficiary. The promisor and the promisee have no right or power to alter the accrued rights of the donee beneficiary without consent unless this power was expressly reserved in the contract, regardless of whether the donee knows about the contract. A donee beneficiary's rights become effective when the contract is made for his or her benefit, regardless of whether he or she knows about the contract. In contrast, a creditor beneficiary's rights vest only when the creditor beneficiary learns of, and assents to, the contract.