Third-Party Beneficiaries, Assignment, and Delegation

Third-Party Beneficiaries

When two parties (the promisor and the promisee) contract intending to benefit a third person, that third-party beneficiary (TPB) may be able to enforce the contract. The threshold question is whether the beneficiary is intended or merely incidental.

• An intended beneficiary is one whom the contracting parties intended to benefit and to give the right of enforcement — shown by naming them in the contract, by performance running directly to them, or by the surrounding circumstances. Two sub-types: a creditor beneficiary (the promisee owes them a debt the promisor's performance will satisfy) and a donee beneficiary (the promisee intends a gift, e.g., a life-insurance beneficiary). Only intended beneficiaries can sue.
• An incidental beneficiary merely happens to benefit and has no enforcement rights (e.g., a neighbor who would benefit if you contract to renovate your house gains nothing enforceable).

Who Can Sue Whom

The promisor may assert against the TPB any defense the promisor has on the contract (failure of consideration, the TPB's own breach, etc.), because the TPB takes subject to the contract's terms.

Vesting

A TPB's rights are not protected until they vest. Before vesting, the original contracting parties may modify or rescind the contract and eliminate or change the beneficiary's rights at will. Once vested, the parties cannot alter or extinguish those rights without the beneficiary's consent (unless the contract reserved a power to modify, as many insurance policies do).

Vesting occurs when the beneficiary, learning of the contract:

1. Manifests assent to the promise in a manner invited by the parties, OR
2. Brings suit to enforce the promise, OR
3. Materially and justifiably relies on the promise to their detriment.

Essay flag: When a problem has the original parties rescinding or modifying a contract that names a third party, the entire question often turns on whether the beneficiary's rights had VESTED before the change. Timeline the facts carefully.

Defenses against the beneficiary: Because the TPB's rights derive entirely from the contract, the promisor may raise against the beneficiary any defense the promisor could raise against the promisee — lack of consideration, the promisee's own breach, failure of a condition, fraud, or the Statute of Frauds. The beneficiary cannot acquire greater rights than the promisee bargained for. One exception: defenses arising AFTER the rights vest, from a later modification the beneficiary did not consent to, generally cannot be used to cut down a vested beneficiary's rights.

Assignment of Rights and Delegation of Duties

Distinguish the two halves of transferring a contract:

Assignment transfers a party's RIGHTS (most commonly the right to receive payment or performance) to a third party (the assignee). The general rule favors free assignability. An assignment is INEFFECTIVE or barred when it:

• would materially change the obligor's duty, materially increase the burden or risk, or impair the chance of return performance (e.g., you cannot assign your right to receive a personalized service if it changes what the obligor must do);
• is prohibited by statute or public policy; or
• is validly barred by an anti-assignment clause — but note the construction rule: a clause prohibiting assignment of 'the contract' is read to bar only delegation of duties, not assignment of the right to payment; and even a clause barring assignment of rights often makes an assignment a breach but still effective (the assignee gets the right; the assignor is liable for breach) unless the clause says assignment is 'void.'

The assignee steps into the assignor's shoes and takes subject to all defenses the obligor had against the assignor. Gratuitous assignments are revocable (by the assignor's death, a subsequent assignment, or notice of revocation); assignments for value are irrevocable. As between successive assignees of the same right, the majority follows first-in-time, first-in-right, with the well-known exceptions: a later bona fide assignee for value without notice prevails if they are the first to obtain payment, a judgment, a novation, or possession of a token/writing.

Delegation transfers a party's DUTIES to a delegatee. Duties are delegable UNLESS performance depends on the personal skill, character, or judgment of the delegating party (a famous portrait artist cannot delegate the painting) or delegation is barred by the contract or would breach a special-trust relationship. Crucially, the delegating party remains liable — delegation does not release the original obligor; only a novation (a new contract substituting the delegatee with the obligee's consent) discharges them.

If the delegatee assumes the duty for consideration, the obligee becomes an intended beneficiary and may sue the delegatee directly.