Restat 2d of Contracts, § 302

• Restatement of the Law, Second, Contracts
• Chapter 14- Contract Beneficiaries
• § 302 Intended and Incidental Beneficiaries

(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

(a)  the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b)  the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
(2)  An incidental beneficiary is a beneficiary who is not an intended beneficiary.

Comment:

a.  Promisee and beneficiary.  This Section distinguishes an "intended" beneficiary, who acquires a right by virtue of a promise, from an "incidental" beneficiary, who does not. See §§ 304, 315. Section 2 defines "promisee" as the person to whom a promise is addressed, and "beneficiary" as a person other than the promisee who will be benefitted by performance of the promise. Both terms are neutral with respect to rights and duties: either or both or neither may have a legal right to performance. Either promisee or beneficiary may but need not be connected with the transaction in other ways: neither promisee nor beneficiary is necessarily the person to whom performance is to be rendered, the person who will receive economic benefit, or the person who furnished the consideration.

b.  Promise to pay the promisee's debt.  The type of beneficiary covered by Subsection (1)(a) is often referred to as a "creditor beneficiary." In such cases the promisee is surety for the promisor, the promise is an asset of the promisee, and a direct action by beneficiary against promisor is normally appropriate to carry out the intention of promisor and promisee, even though no intention is manifested to give the beneficiary the benefit of the promised performance. Promise of a performance other than the payment of money may be governed by the same principle if the promisee's obligation is regarded as easily convertible into money, as in cases of obligations to deliver commodities or securities which are actively traded in organized markets. Less liquid obligations are left to Subsection (1)(b).

A suretyship relation may exist even though the duty of the promisee is voidable or is unenforceable by reason of the statute of limitations, the Statute of Frauds, or a discharge in bankruptcy, and Subsection (1)(a) covers such cases. The term "creditor beneficiary" has also sometimes been used with reference to promises to satisfy a supposed or asserted duty of the promisee, but there is no suretyship if the promisee has never been under any duty to the beneficiary. Hence such cases are not covered by Subsection (1)(a). The beneficiary of a promise to discharge a lien on the promisee's property, or of a promise to satisfy a duty of a third person, is similarly excluded from Subsection (1)(a). Such beneficiaries may, however, be "intended beneficiaries" under Subsection (1)(b).

Illustrations:

1. A owes C a debt of $ 100. The debt is barred by the statute of limitations or by a discharge in bankruptcy, or is unenforceable because of the Statute of Frauds. B promises A to pay the barred or unenforceable debt. C is an intended beneficiary under Subsection (1)(a).

2. B promises A to furnish support for A's minor child C, whom A is bound by law to support. C is an intended beneficiary under Subsection (1)(a).

3. B promises A to pay whatever debts A may incur in a certain undertaking. A incurs in the undertaking debts to C, D and E. If the promise is interpreted as a promise that B will pay C, D and E, they are intended beneficiaries under Subsection (1)(a); if the money is to be paid to A in order that he may be provided with money to pay C, D and E, they are at most incidental beneficiaries.

c.  Gift promise.  Where the promised performance is not paid for by the recipient, discharges no right that he has against anyone, and is apparently designed to benefit him, the promise is often referred to as a "gift promise." The beneficiary of such a promise is often referred to as a "donee beneficiary"; he is an intended beneficiary under Subsection (1)(b). The contract need not provide that performance is to be rendered directly to the beneficiary: a gift may be made to the beneficiary, for example, by payment of his debt. Nor is any contact or communication with the beneficiary essential.

Illustrations:

4. A, an insurance company, promises B in a policy of insurance to pay $ 10,000 on B's death to C, B's wife. C is an intended beneficiary under Subsection (1)(b).

5. C is a troublesome person who is annoying A. A dislikes him but, believing the best way to obtain freedom from annoyance is to make a present, secures from B a promise to give C a box of cigars. C is an intended beneficiary under Subsection (1)(b).

6. A's son C is indebted to D. With the purpose of assisting C, A secures from B a promise to pay the debt to D. Both C and D are intended beneficiaries under Subsection (1)(b).

7. A owes C $ 100 for money lent. B promises A to pay C $ 200, both as a discharge of the debt and as an indication of A's gratitude to C for making the loan. C is an intended beneficiary under Subsection (1)(a) as to the amount of the debt and under Subsection (1)(b) as to the excess.

8. A conveys land to B in consideration of B's promise to pay $ 15,000 as follows: $ 5,000 to C, A's wife, on whom A wishes to make a settlement, $ 5,000 to D to whom A is indebted in that amount, and $ 5,000 to E, a life insurance company, to purchase an annuity payable to A during his life. C is an intended beneficiary under Subsection (1)(b); D is an intended beneficiary under Subsection (1)(a); E is an incidental beneficiary.

9. A owes C $ 100. Not knowing of any such debt, B promises A to pay $ 100 to C. C is an intended beneficiary under Subsection (1)(a) if A manifests an intention that the payment is to satisfy the debt, an intended beneficiary under Subsection (1)(b) if A manifests an intention to make a gift of $ 100, leaving outstanding the original debt.

d.  Other intended beneficiaries.  Either a promise to pay the promisee's debt to a beneficiary or a gift promise involves a manifestation of intention by the promisee and promisor sufficient, in a contractual setting, to make reliance by the beneficiary both reasonable and probable. Other cases may be quite similar in this respect. Examples are a promise to perform a supposed or asserted duty of the promisee, a promise to discharge a lien on the promisee's property, or a promise to satisfy the duty of a third person. In such cases, if the beneficiary would be reasonable in relying on the promise as manifesting an intention to confer a right on him, he is an intended beneficiary. Where there is doubt whether such reliance would be reasonable, considerations of procedural convenience and other factors not strictly dependent on the manifested intention of the parties may affect the question whether under Subsection (1) recognition of a right in the beneficiary is appropriate. In some cases an overriding policy, which may be embodied in a statute, requires recognition of such a right without regard to the intention of the parties.

Illustrations:

10. A, the operator of a chicken processing and fertilizer plant, contracts with B, a municipality, to use B's sewage system. With the purpose of preventing harm to landowners downstream from its system, B obtains from A a promise to remove specified types of waste from its deposits into the system. C, a downstream landowner, is an intended beneficiary under Subsection (1)(b).

11. A, a corporation, contracts with B, an insurance company, that B shall pay to any future buyer of a car from A the loss he may suffer by the burning or theft of the car within one year after sale. Later A sells a car to C, telling C about the insurance. C is an intended beneficiary.

12. B contracts to build a house for A. Pursuant to the contract, B and his surety S execute a payment bond to A by which they promise A that all of B's debts for labor and materials on the house will be paid. B later employs C as a carpenter and buys lumber from D. C and D are intended beneficiaries of S's promise to A, whether or not they have power to create liens on the house.

13. C asserts that A owes him $ 100. A does not owe this money, or think that he owes it, but rather than engage in litigation and in order to obtain peace of mind A secures a promise from B to pay C $ 100. C is an intended beneficiary.

14. A, a labor union, enters into a collective bargaining agreement with B, an employer, in which B promises not to discriminate against any employee because of his membership in A. All B's employees who are members of A are intended beneficiaries of the promise.

15. A buys food from B, a grocer, for household use, relying on B's express warranty. C, A's minor child, is injured in person by breach of the warranty. Under Uniform Commercial Code § 2-318, without regard to the intention of A or B, the warranty extends to C.

e.  Incidental beneficiaries.  Performance of a contract will often benefit a third person. But unless the third person is an intended beneficiary as here defined, no duty to him is created. See § 315.

Illustrations:

16. B contracts with A to erect an expensive building on A's land. C's adjoining land would be enhanced in value by the performance of the contract. C is an incidental beneficiary.

17. B contracts with A to buy a new car manufactured by C. Cis an incidental beneficiary, even though the promise can only be performed if money is paid to C.

18. A, a labor union, promises B, a trade association, not to strike against any member of B during a certain period. One of the members of B charters a ship from C on terms under which such a strike would cause financial loss to C. C is an incidental beneficiary of A's promise.

19. A contracts to erect a building for C. B then contracts with A to supply lumber needed for the building. C is an incidental beneficiary of B's promise, and B is an incidental beneficiary of C's promise to pay A for the building.

f.  Trust and agency.  Where money or property is transferred from one person to another with an intention to benefit a third person, the manifested intention of the parties determines whether the transferee is an agent for the transferor or the third person or a trustee for the third person or whether the third person is the beneficiary of a promise made by the transferee. See Restatement, Second, Agency §§ 14B, 14L; Restatement, Second, Trusts §§ 8, 14. Similarly, an agreement between two parties may constitute one the agent of the other to confer a benefit on a third person, or the promise of one may be made to the other as trustee for a third person, or a third person may be the beneficiary of a promise of either or both; the manifested intention of the parties determines which of these possible relations is created for the particular purpose involved. There is a fiduciary relation between agent and principal or between trustee and beneficiary, but not between promisor or promisee and beneficiary of a contract. Agency requires the consent of the principal and the agent; a trust or a contract for the benefit of a third person does not require the consent of the beneficiary. Either the promisee or the beneficiary of a promise may be made a trustee of rights arising by virtue of the promise; although the beneficiary of such a trust is a beneficiary of the promise under this Section, his rights must be enforced in accordance with the law of Trusts. See Restatement, Second, Trusts §§ 26, 177, 199.

Illustration:

20. A, an insurance company, promises B in a policy of insurance to pay $ 10,000 on B's death to C as trustee for B's wife D. C is an intended beneficiary and may enforce his rights as trustee; D's rights as beneficiary of the trust and the contract are enforceable only in the manner in which rights of other trust beneficiaries are enforced.

The definition of "intended beneficiary" is new; it comprehends all those included as "donee" and "creditor" beneficiaries in former § 133. For the reasons stated in the Introductory Note to this Chapter, the terms "donee beneficiary" and "creditor beneficiary" are not used. In addition, the word "donee" was not entirely appropriate to the beneficiary of an executory gift promise; it was sometimes entirely inappropriate where "the purpose of the promisee," under Subsection (1)(a) of former § 133 was not "to make a gift" but "to confer a right." See Note, The Third Party Beneficiary Concept: A Proposal, 57 Colum. L. Rev. 406, 423-25 (1957). The new language in the preamble of Subsection (1) takes account of factors not dependent on intention, as stated in Comment d.  Subsections (2) and (3) of former § 133 are deleted; Subsection (3) is replaced by Comment f.

See 2 Williston, Contracts §§ 347-56 (3d ed. 1959); 4 Corbin, Contracts §§ 772-81 (1951 & Supp. 1980).

The text of this Section (as § 133) was revised several times, and appeared in different forms in Tentative Draft No. 3 (1967), Tentative Draft No. 4 (1968) and the Revised and Edited version of Tentative Drafts Nos. 1-7 (1973). The 1973 text is identical to that shown here. Cases and articles discussing the text of the tentative drafts of this Section often are referring to earlier versions. See, e.g., Note, 27 Hastings L.J. 137, 144 (1975), quoting the text of Tentative Draft No. 4, but making no reference to the 1973 published version.

Comment a.  For discussions of the parties' intention as a key factor in third party beneficiary contract analysis, see Note, Third Party Beneficiaries and the Intention Standard: A Search for Rational Contract Decision-Making, 54 Va. L. Rev. 1166 (1968); Note, Martinez v. Socoma Companies: Problems in Determining Contract Beneficiaries' Rights, 27 Hastings L.J. 137 (1975); Costanza v. Costanza, 346 So.2d 1133 (Ala. 1977). See also Jones, Legal Protection of Third Party Beneficiaries: On Opening Courthouse Doors, 46 U. Cinn. L. Rev. 313 (1977). A court in determining the parties' intention should consider the circumstances surrounding the transaction as well as the actual language of the contract. See Cutler v. Hartford Life Ins. Co., 22 N.Y.2d 245, 292 N.Y.S.2d 430, 239 N.E.2d 361 (1968) (citing the 1973 Tentative Draft of this Section and Comments); CF Indus. v. Transcontinental Gas Pipe Line Corp., 448 F. Supp. 475 (W.D.N.C. 1978); Gilbert Fin. Corp. v. Steelform Contracting Co., 82 Cal. App.3d 65, 145 Cal. Rptr. 448 (1978); Ross v. Imperial Constr. Co., 572 F.2d 518 (5th Cir. 1978); American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435 (S.D.N.Y. 1976). Republic Nat'l Bank v. National Bankers Life Ins. Co., 427 S.W.2d 76, 81 (Tex. Civ. App. 1968), ref. n.r.e., is a leading exponent of the view that a court should not go beyond "the four corners of [the] instrument." (See also American Elec. Power Co. v. Westinghouse Elec. Corp., supra, at 447, discussing the similar Pennsylvania rule.) Nonetheless, a later Texas case considered the surrounding circumstances at some length, Suthers v. Booker Hosp. Dist., 543 S.W.2d 723, 727-29 (Tex. Civ. App. 1976), ref. n.r.e.; in the dissent in that case, id. at 731, 733-34, Chief Justice Ellis also examined the circumstances, although he drew a different conclusion as to the parties' intentions. See also Texas Bank & Trust Co. v. Lone Star Life Ins. Co., 565 S.W.2d 353 (Tex. Civ. App. 1978), in which the court purported to apply the rule of Republic Nat'l Bank, supra, but examined the circumstances to see if a mortgage commitment letter was assignable. See also Comment d.

Comment b.  Illustration 1 is based on Illustration 6 to former § 133. Illustration 2 is based on Illustration 8 to former § 133; contrast Spates v. Spates, 267 Md. 72, 296 A.2d 581 (1972). Illustration 3 is based on Illustration 9 to former § 133; see also Hurley v. Lano Int'l, Inc., 569 S.W.2d 602 (Tex. Civ. App. 1978), ref. n.r.e., citing this Illustration in Tentative Draft. On whether an interim lender is an intended beneficiary of a long term mortgage commitment (a "takeout" mortgage), see, e.g., Texas Bank & Trust Co. v. Lone Star Life Ins. Co., 565 S.W.2d 353 (Tex. Civ. App. 1978); Republic Nat'l Bank v. National Bankers Life Ins. Co., 427 S.W.2d 76 (Tex. Civ. App. 1968), ref. n.r.e.

Comment c.  Illustration 4 is new. Illustration 5 is based on Illustration 2 to former § 133. Illustration 6 is new. Illustrations 7-9 are based on Illustrations 1, 5 and 7 to former § 133.

Comment d.  Situations in which neither a debt analysis nor a gift analysis is satisfactory include the takeout mortgage commitment, discussed in the Reporter's Note to Comment b.  The reliance analysis discussed in this Comment appears more useful, but would raise issues of the reasonableness and probability of the reliance by the interim lender. Since the interim lender may require a long term mortgage commitment before making the interim loan, a reliance analysis would appear to require a change in the result of the cases cited. This could be avoided by an express statement in the long term mortgage commitment letter disclaiming any intention to create third party beneficiary rights in interim lenders. On reliance, see Commercial Ins. Co. v. Pacific-Peru Constr. Corp., 558 F.2d 948 (9th Cir. 1977), citing this Comment in Tentative Draft; Note, 54 Va. L. Rev. 1166 (1968), supra. Cases in which there was an element of reasonable and probable reliance by a third party, but in which this factor was not discussed include Suthers v. Booker Hosp. Dist., 543 S.W.2d 723 (Tex. Civ. App. 1976), ref. n.r.e. (finding no third party beneficiary contract); and CF Indus. v. Transcontinental Gas Pipe Line Corp., 448 F. Supp. 475 (W.D.N.C. 1978) (finding that plaintiffs stated a claim as intended beneficiaries); cf. H. R. Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 159 N.E. 896 (1928).

Illustration 10 is based on Ratzlaff v. Franz Foods, 250 Ark. 1003, 468 S.W.2d 239 (1971). Illustrations 11-13 are based on Illustrations 3, 4 and 10 to former § 133. As to Illustration 12, see Ross v. Imperial Constr. Co., 572 F.2d 518 (5th Cir. 1978); Ceco Corp. v. Plaza Point, Inc., 573 S.W.2d 92 (Mo. Ct. App. 1978) (discussing both payment and performance bonds and citing this Comment in Tentative Draft); Town & Country Bank v. James M. Canfield Contracting Co., 55 Ill. App.3d 91, 12 Ill. Dec. 826, 370 N.E.2d 630 (1977) (discussing differing lines of authority). Illustration 14 is new and is suggested by Smith v. Evening News Ass'n, 371 U.S. 195 (1962); cf. Charles Dowd Box Co. v. Courtney, 368 U.S. 502 (1962). Illustration 15 is new; in Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill. App.2d 362, 219 N.E.2d 726 (1966), it was held that Uniform Commercial Code § 2-318 did not exclude other seller's warranties to non-consumer third parties.

Comment e.  Illustrations 16 and 17 are based on Illustrations 11 and 12 to former § 133. Illustration 18 is based on Isbrantsen Co. v. Local 1291, 204 F.2d 495 (3d Cir. 1953). Illustration 19 is based on Illustration 1 to former § 147.

Comment f.  Illustration 20 is based on Illustration 13 to former § 133. On the status of an injured party under the tortfeasor's liability insurance policy, see Chitlik v. Allstate Ins. Co., 34 Ohio App.2d 193, 299 N.E.2d 295 (1973).

ALR Annotations:

Third-party beneficiaries of warranties under UCC § 2-318. 100 A.L.R.3d 743.
Right of architect to compensation under contractual provision that fee is to be paid from construction loan funds. 92 A.L.R.3d 509.
Tenant's capacity to sue independent contractor, as third-party beneficiary, for breach of contract between landlord and such contractor for repair or remodeling work. 46 A.L.R.2d 1210.
Right of owner's employee, injured by subcontractor, to recover against general contractor for breach of contract between latter and owner requiring contractor and subcontractors to carry insurance. 22 A.L.R.2d 647.
Right of third person not named in bond or other contract conditioned for support of, or services to, another, to recover thereon. 11 A.L.R.2d 1010.

Digest System Key Numbers:

Contracts 177