business law
Sample Extra Credit Answer:
Question: Shade Tree Landscaping Company enters into a contract with Jill to landscape Jack’s yard. In discussing how the contract will be performed, Jill asks Shade Tree to purchase the various trees and shrubs that will be used in the project from Fertile Nursery, a business owned by Jill’s Uncle Frank. Maria, who owns the lot next to Jack’s property, is excited to learn of Jill’s gift because she believes it will enhance the value of her property. The landscaping is a gift from Jill to Jack (Jill’s friend) but they are not related. What type of beneficiary is Jack? What type of beneficiaries are Maria and Fertile Nursery? Who can enforce the contract if Shade Tree Landscaping refuses to provide the landscaping services?
Answer: Once it has been determined that a valid and legally enforceable contract exists, the traditional common law rule was that only the parties to the contract who have rights and liabilities under the contract are entitled to enforce the agreement. This principle is referred to as privity of contract. One of the recognized exceptions to the traditional rule is when the original parties to the contract intended, at the time of the contracting, that the contract performance would directly benefit a third party. In this situation, the third person is referred to as a third party beneficiary of the contract.
As the law developed in this area, the first type of third party beneficiary the law recognized was referred to as a creditor beneficiary. The designation of the third person as a creditor beneficiary arises when one of the parties to the contract has an existing obligation to a person who is not a party to the contract. The intent of the parties to the new contract is to discharge the existing obligation to this third person by providing the promised performance under the new contract. The fact that this existing obligation would be discharged by the performance under the new contract would give the creditor beneficiary the right to enforce the new contract in the event of a breach.
As the law in this area continued to develop, the courts then recognized the concept of a donee beneficiary. In this type of contract, one of the parties to the new contract intends to confer a gift upon the intended beneficiary. Although there was no existing obligation that would be discharged by the performance of the new contract as in the case of a creditor beneficiary, the law concluded that it would be appropriate to honor the original intent of the parties to the contract.
The fact that the donee beneficiary is receiving a gift raised the additional question of when the donee beneficiary should be allowed to enforce the contract that confers the gift. The law determined that a donee beneficiary should not be able to enforce the contract until such time as the donee beneficiary’s rights have vested, which means the rights under the contract have taken effect and cannot be taken away. The classic example of a donee beneficiary is the beneficiary of a life insurance contract. Once the original party to the life insurance contract has passed away, the donee beneficiary is then said to have a vested right in the death benefit due under the life insurance contract.
Over time the courts have abandoned the importance in the distinction between a creditor beneficiary and a donee beneficiary and instead have redirected their focus to the distinction between an intended beneficiary and an incidental beneficiary. An incidental beneficiary is one that may receive a benefit from the contract between the two parties but that benefit is unintentional based upon the intent of the contracting parties as expressed in the actual language of the agreement.
In the situation at hand, Jack is clearly an intended beneficiary of the contract. He is the donee of a gift from his friend Jill. The purpose of the contract is to extend the benefit of this gift to him. Fertile Nursery is an incidental beneficiary of the contract between Jill and Shade Tree Landscaping. Even though Jill expressed a desire for Shade Tree to purchase the plants necessary to complete the landscaping project from Fertile Nursery, this desire was not made a part of the subject contract and as a result Shade Tree Landscaping is free to source the plants and shrubs necessary to complete the landscaping project from any source. Therefore, the express language of the contract makes it clear that the parties did not intend to extend a benefit upon Fertile Nursery and Jill’s uncle. Maria is also an incidental beneficiary. Although the value of her property may be enhanced by the improvements to Jack’s property, there is nothing in the express contract language that would cause a court to conclude that the parties to the original contract intended to extend a benefit to Maria.
In the event of a breach of contract by Shade Tree, Jill may seek to enforce the contract since she is one of the original contracting parties. Jack, as an intended beneficiary, may also have the ability to enforce the contract if it is determined that his rights under the subject contract have vested. The facts presented in the question are not sufficient to determine whether or not Jack’s rights under the contract have in fact vested. For example, if Shade Tree’s performance under the contract is subject to a condition precedent, then Jack’s rights under the contract would not vest until such time as the condition precedent was satisfied. If, on the other hand, Jill had paid the consideration due to Shade Tree under the contract and Shade Tree now had a duty to perform under the contract, Jack’s rights under the contract would be considered to have vested and the law would allow him, as an intended third party beneficiary to the agreement, to directly enforce the contract.
