§ 19.01 Third Party's Right of Enforcement

In order for a third party to be entitled to enforce a contract of which it is the beneficiary, the principle parties to the contract must have intended to create legally enforceable rights in the third party.

Third parties possessing the right of enforcement fall into two categories:

1) donee beneficiaries – third parties upon whom the promisee attempts to confer a gift

2) creditor beneficiaries – third parties to whom the promisee owes a debt, which is to be satisfied by performance of the promise

The Restatement instead uses the term "intended beneficiary" to designate all third party with rights of enforcement. [Restatement § 302]

A third party upon whom the parties to the contract did not intend to bestow enforcement rights is classified as an incidental beneficiary to the contract.

§ 19.02 From Whom Third Party May Seek Enforcement

Where the promisor fails to perform the promise that was made for the benefit of a creditor beneficiary and the creditor beneficiary brings action against the promisee, the promisee may then bring action against the promisor. However, where the promisor fails to perform the promise that was made for the benefit of a donee beneficiary and the donee beneficiary brings action against the promisee, in most jurisdictions the promisee does not have an action against the promisor, although some courts allow an action for specific performance.

§ 19.03 Vesting of Third Party's Rights

Once the third party's rights have vested, the original parties cannot modify or rescind a contract in such a manner that would derogate the third party beneficiary's rights, without the third party's consent. Jurisdictions differ as to whether the third party's rights vest:

• at the time the contract is made;
• at the time the third party learns of the contract and agrees to accept the benefits flowing from it (if the third party does not expressly reject the benefits, he is deemed to have accepted them)
• upon a change in position, even if only slight, by the third party beneficiary in reliance upon the contract (this is the majority approach set forth in Restatement § 311(3))

While some states apply a consistent rule for all third party beneficiaries, others apply different rules depending on the status of the beneficiary. Some states apply different vesting rules to donee and creditor beneficiaries, with the rights of donee beneficiaries vesting earlier – at the time the contract is made or upon learning of the contract and accepting the benefits – and the rights of creditor beneficiaries vesting upon a change in position. Some states provide for immediate vesting of the rights of a third party beneficiary who is a minor.

§ 19.04 Defenses Against the Third Party Beneficiary

The promisor can assert any claim or defense arising out of the contract against the third party that he could have asserted against the promisee, except for any modification or rescission that derogates the third party's rights after such rights have vested