Third-party beneficiaries: who else can sue on a promise

New York, the eighteen fifties. A man named Holly owes money to a man named Lawrence. Holly lends that same sum to a man named Fox, for a day, and in the hearing of a witness tells Fox to pay it, not back to Holly, but to Lawrence, in discharge of Holly's debt. Fox agrees. Fox does not pay. Lawrence, who was not in the room, who gave Fox nothing, and to whom Fox promised nothing directly, sues Fox on the promise.
Fox has two arguments, and they are the whole subject. First, the witness's account of what Holly said is hearsay. Second, and more seriously, Lawrence is a stranger. In general, there must be privity of contract. The party who sues upon a promise must be the promisee, or he must have some legal interest in the undertaking. The promise was made to Holly, for Holly's money. What is Lawrence doing in court?
So here is the question. For thirty seven lectures, the parties have been two. Offeror and offeree, promisor and promisee. Can a third person, outside the bargain, who paid nothing, enforce it? Think about it before I go on, because the answer was contested in eighteen fifty nine, and the dissent in this case is still the law in England.
And now the question I keep asking. What exactly did these people promise each other? Holly promised Fox a day's loan. Fox promised Holly to pay Lawrence. Nobody promised Lawrence anything. Today's module leaves the two-party world. This lecture is about third parties who benefit from a promise. The next is about the limits. The last is about parties who come in later, by assignment and delegation.
Here is the first line for the board. Where one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it. The beneficiary sues on the contract, though he gave no consideration and received no promise. The law operating on the act of the parties creates the duty, establishes a privity, and implies the promise and obligation on which the action is founded.
Second line. Not every third person who would gain from performance may sue. The modern test is intent. A beneficiary is intended, and may enforce the promise, where recognition of his right is appropriate to effectuate the intention of the parties and either the performance will satisfy a debt the promisee owes him, or the promisee intends to give him the benefit of the performance. A creditor beneficiary, or a donee beneficiary. Anyone else is incidental, and incidental beneficiaries have no rights.
Third line. Until the beneficiary relies, sues, or assents at a party's request, the promisor and promisee may change or cancel the promise between themselves. After that, his right is vested and they may not. And the promisor may raise against the beneficiary any defense he would have against the promisee. The beneficiary takes the promise as it is.
Now the case. Lawrence against Fox, Court of Appeals of New York, eighteen fifty nine, Judge Gray. The hearsay point went nowhere. Had the plaintiff sued Holly for this sum of money no objection to the competency of this evidence would have been thought of. The consideration point went nowhere either. Fox got a loan, and the loan was consideration for a promise to pay Holly's creditor, as an earlier case had held about hay.
The privity point was the case. As early as eighteen oh six it was announced by the Supreme Court of this State, upon what was then regarded as the settled law of England, that where one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it. Judge Gray followed the Massachusetts cases too. If A promises B for a valuable consideration to pay C, the latter may maintain assumpsit for the money.
Fox said he was no trustee. Holly's money was his own, not a fund held for Lawrence. Gray answered that the trust cases were applications of the rule, not its limit. The consideration received and the promise to Holly made it as plainly his duty to pay the plaintiff as if the money had been remitted to him for that purpose.
And to the argument that Holly could have released Fox, so Lawrence controlled nothing, the court said only, it is enough that the plaintiff did not release the defendant from his promise.
Then the sentence that gives the game away. If, therefore, it could be shown that a more strict and technically accurate application of the rules applied, would lead to a different result, which I by no means concede, the effort should not be made in the face of manifest justice. Fox owed the money to someone. He had promised to pay it to Lawrence. Nobody but Lawrence was hurt when he did not. Judgment affirmed.
Now read the dissent, Judge Comstock, because it is the rule you will meet in every other common law country. The plaintiff had nothing to do with the promise on which he brought this action. It was not made to him, nor did the consideration proceed from him. If he can maintain the suit, it is because an anomaly has found its way into the law on this subject. And the practical point. Holly could have countermanded the direction at any time.
The arrangement itself was between other parties, and was under their exclusive control.
Comstock's conclusion. The promise to repay the money created an obligation in favor of the lender to whom it was made and not in favor of any one else. He lost, five to two. But his point about control became the vesting rule. Until the beneficiary's right vests, the parties to the contract can indeed undo it.
What they cannot do is undo it after he has relied on it, and they cannot argue, as Fox did, that because they might have undone it, he never had it.
Lawrence was a creditor beneficiary. Holly owed him. For sixty years New York limited the rule to that, and to promises for a wife or child. Then Malone, New York, and a dying woman. Judge Beman's wife has a small estate, a house and little else. He draws her will as she directs.
A thousand dollars to her niece, small legacies to others, the use of the house to the judge for life, and the remainder to a society for the prevention of cruelty to animals.
When the will is read back to her, she says it is not what she wants. She wants the house to go to the niece. The judge offers to write another will. She is afraid she will not hold out long enough to sign it. So the judge says that if she will sign the will he will leave the niece enough in his will to make up the difference.
He avouched the promise by his uplifted hand with all solemnity and his wife then executed the will. When he came to die it was found that his will made no provision for the plaintiff.
The niece sued the judge's estate for six thousand dollars, the value of the house. No debt was owed to her. She was not the judge's wife or child. Under the New York rule as it then stood, she was outside the classes. The Court of Appeals, in Seaver against Ransom, nineteen eighteen, Judge Pound, let her in, and the reasoning is the whole modern law.
First, the history, honestly told. The general rule, both in law and equity, was that privity between a plaintiff and a defendant is necessary to the maintenance of an action on the contract. The consideration must be furnished by the party to whom the promise was made. But the right of the beneficiary to sue on a contract made expressly for his benefit has been fully recognized in many American jurisdictions, and is said to be the prevailing rule in this country.
It has been said that the establishment of this doctrine has been gradual, and is a victory of practical utility over theory, of equity over technical subtlety.
Then the New York categories, four of them. Where there is a pecuniary obligation running from the promisee to the beneficiary, the creditor cases. Where the contract is made for the benefit of the wife, affianced wife or child of a party. The public contract cases, where a city contracts for its inhabitants. And where, at a party's request, the promise runs directly to the beneficiary. The niece fitted none, unless the second could stretch.
It stretched. The desire of the childless aunt to make provision for a beloved and favorite niece differs imperceptibly in law or in equity from the moral duty of the parent to make testamentary provision for a child. The contract was made for the plaintiff's benefit. She alone is substantially damaged by its breach. The representatives of the wife's estate have no interest in enforcing it specifically.
And then the sentence that dissolved the categories. The constraining power of conscience is not regulated by the degree of relationship alone. The dependent or faithful niece may have a stronger claim than the affluent or unworthy son. No sensible theory of moral obligation denies arbitrarily to the former what would be conceded to the latter. The court quoted the judge below. The doctrine of Lawrence against Fox is progressive, not retrograde. And it stated where American law was going.
The tendency of American authority is to sustain the gift in all such cases and to permit the donee-beneficiary to recover on the contract.
Put the two cases side by side. Lawrence, the creditor beneficiary. The promisee owed him, and the promise was a way of paying. Seaver, the donee beneficiary. The promisee owed her nothing, and the promise was a gift. Both may sue, because in both the promisee meant the performance to go to them. The Restatement folds both into one word, intended, and puts everyone else in the other box, incidental. The next lecture is about that other box.
Now let's change one fact. Before Lawrence heard of the arrangement, Holly had gone back to Fox and said, forget Lawrence, pay me instead, and Fox had paid Holly. Does Lawrence recover from Fox? Choose an answer before I go on.
No. This is Comstock's point, and modern law accepts it as far as it goes. Until the beneficiary has relied on the promise, brought suit on it, or assented to it at a party's request, the promisor and promisee may modify or discharge it between themselves. Lawrence had a claim against Holly all along, and still has it. What he never got was a vested right against Fox.
Had he learned of the promise and, say, forborne to sue Holly in reliance on it, the answer would flip.
Change one fact again. The judge had told his wife, sign it and I will see the niece is looked after, without naming a sum or a source, and the will was signed. Choose.
Now the niece has an intent problem and a definiteness problem. The Seaver promise was specific. Enough in his will to make up the difference, and the difference was the value of the house. See the niece is looked after is the kind of language we met in Module Six, too indefinite to enforce, and it also leaves open whether the judge meant a gift the niece could sue for or a comfort to his wife. Courts do not manufacture beneficiaries from vague reassurance.
Change one fact a third time. Fox had a defense against Holly. The day's loan was at a usurious rate of interest that made the whole transaction unenforceable under the statute of the day. Choose.
Then Fox has the same defense against Lawrence. The beneficiary stands in the promisee's shoes. He gets the promise as it was made, with its conditions and its defects. A promisor who could resist the promisee can resist the beneficiary. What he cannot do is raise against the beneficiary a separate claim he has against the promisee on some other matter, unless the contract says so.
Here is what people get wrong here, and why it is tempting. The first mistake is thinking anyone who would gain from performance can sue. Most people who benefit from a contract are incidental. The question is what the promisee intended. The second mistake is forgetting vesting. A beneficiary's right can be changed by the parties until he relies or sues.
The third mistake is thinking the beneficiary gets a better promise than the promisee had. He does not. Defenses travel with the promise.
Here is the rule, in one breath. A third person may enforce a promise made for his benefit where the promisee intended the performance to satisfy a debt to him or to make him a gift, so that recognising his right effectuates the parties' intention, and everyone else who might gain from performance is an incidental beneficiary with no rights.
Until the beneficiary relies, sues or assents, the parties may vary the promise, and the promisor keeps against the beneficiary every defense he had against the promisee. Now, five questions.