Contract in Favour of a Third Party
By way of a contract in favour of a third party (or ‘contract for the benefit of a third party’) the parties agree that a third person acquires an enforceable right against one of them. The third party is also called ‘beneficiary’ (tiers, Begünstigter). The person who promises to perform to the third party is the ‘promisor’ (promettant, Versprechender), and the party contracting with the promisor is the ‘promisee’ (stipulant, Versprechensempfänger). The designations of the parties hint at the Roman law origin of the doctrine of contracts in favour of a third party, the notion of ‘promise for another’ (stipulatio alteri). Similar terminology is still used by French lawyers who usually speak of a stipulation pour autrui, rather than a contrat conclu pour autrui. The concept of a ‘contract in favour of a third party’ only emerged in 18th-century German legal terminology (Vertrag zugunsten Dritter), and as late as 1900 the Bürgerliches Gesetzbuch (BGB) still dealt with the doctrine under the heading ‘Promise of performance in favour of a third party’ (Versprechen der Leistung an einen Dritten) (promise). The Codice civile displays similar terminological schizophrenia: whilst the official heading of the relevant key provision announces a provision on the contratto in favore di terzi, the text of the article exclusively mentions a stipulazione a favore di un terzo. Scots law focuses on the ‘right acquired by a third party’ by using the phrase jus quaesitum tertio.
Contracts in favour of a third party are of huge economic importance. Typical instances include contracts where the promisee wants to be assured of the future maintenance of members of his family, such as contracts for life insurance (insurance contracts) and contracts of annuity, although, as a general rule, all types of agreement can be concluded for the benefit of a third party. From the perspective of law and economics, the contract in favour of a third party is a mechanism for increasing efficiency. It enables the parties to create an enforceable right for the third party by way of a single transaction, as opposed to conferring it first on one of the parties and then transferring it to the third by way of a second, separate transaction.
Contracts in favour of a third party must be distinguished from other three-party situations in the law of contract. In contrast to an assignment, such a contract does not transfer an existing right but the right of the third person arises immediately out of the agreement between the promisor and the promisee. In cases of representation (agency) it is the principal, and not the representative (agent) who becomes a contracting party. This can be contrasted with a contract in favour of a third party whereby the promisee is a contracting party: the third person acquires a right without being a party to the transaction. Finally, there is no contract for the benefit of a third party if the parties agree to confer a mere benefit, rather than an enforceable right on the third party (the so-called ‘spurious contract in favour of a third party’, unechter Vertrag zugunsten Dritter).
2. Development of the doctrine
Contracts in favour of third parties have long struggled for acceptance. It was a rule of classical Roman law that ‘no one can request a person to promise to another’ (alteri stipulari nemo potest, Ulp. D. 45,1,38,17). Thus a promise or an agreement in favour of a third party was normally invalid, although a few exceptions were permitted: for some types of transactions the Roman jurists acknowledged that the parties could validly confer a benefit on a third person and even create an actionable right against the promisor on the part of the beneficiary or perhaps the promisee. From the Middle Ages onwards, the continental writers of the ius commune carefully expanded this list of exceptions, but the general rule of alteri stipulari nemo potest was upheld. The idea that contracts in favour of third parties were, as a general rule, both valid and enforceable exclusively by the beneficiary gained acceptance under the influence of the usus modernus pandectarum and with the assistance of some theoretical underpinning from the schools of modern natural law and the law of reason.
19th century legal scholarship on the Continent favoured a return to the solution of classical Roman law. The Code civil fell in line with this view and codified two principles. First, no one could ‘enter into an engagement or make a stipulation in one’s own name except for oneself’ (Art 1119), so that contractual agreements for the benefit of a third party were invalid as such. Secondly, agreements were to have ‘effect only between the parties to them’, and would not normally confer benefits on third parties (Art 1165). This principle of ‘relativity of contract’ (relativité des contrats, effet relatif des conventions) made it impossible for a third person to acquire a right from a contract that was concluded between two parties. The code allowed for only two exceptions (Art 1121), both of which had already been acknowledged under Roman law. These were cases where the promisee had a pecuniary interest in performance being made to the third party or where the promisee made a gift to the promisor, subject to the condition that the promisor would give something to the third party. A similar model was adopted by all the civil codes of the Romanistic tradition.
It was only in the late 19th century that the Cour de cassation broke free of the fetters of the Code civil and held that it would be sufficient if the promisee had a ‘moral interest’ in the third person acquiring a right from the contract. Accordingly, the beneficiary of a contract of life insurance or an annuity acquired a right against the insurer. In Germany, the proliferation of life insurance contracts also made it increasingly difficult to uphold the maxim alteri stipulari nemo potest. Finally, under the influence of Bernhard Windscheid and Joseph Unger even the influential Roman law teachers of the 19th century (Pandektensystem) acknowledged the validity and the enforceability of contracts in favour of third parties. The drafters of the BGB followed this view (§ 328) that had already prevailed in the drafting of the Swiss Code of Obligations (OR) (Art 128; now Art 112) and the Spanish Código civil (Art 1257(2)).
During the 20th century this solution gained acceptance in legal systems across Europe, be it by way of amendments to the civil codes (Austria, Portugal, the Netherlands; see also the pending reform proposals of French contract law) or by way of liberal judicial interpretations of existing codifications (Italy). For a long time, English law maintained a different position. The common law doctrine of privity of contract does not invalidate a contract for the benefit of a third party per se, as was the case under the continental maxim alteri stipulari nemo potest. However, such a contract has legal effect only between the parties, and the third person cannot acquire an enforceable right from it. Until recently, there was only a small number of exceptions to this rule. Most of these had been introduced by special legislation, eg in the case of life insurance. Now the Contracts (Rights of Third Parties) Act 1999 allows a promisor to confer an enforceable right upon a third person for nearly all types of transactions, although it seems that currently most commercial parties routinely contract out of the Act. In these cases the common law prevails and the doctrine of privity remains in force.
Once legal systems had acknowledged contracts in favour of a third party as a matter of principle, their attention turned to the precise requirements for the beneficiary’s acquisition of the right and to the legal consequences flowing from it, both for the beneficiary and for the original parties. Legislatures and courts developed complex solutions which are relatively similar in the contract laws of European jurisdictions and which have also been adopted in the more recent proposals for European and international contract law regimes.
Finally, in some legal systems the courts have used the rules on contracts in favour of third parties as a convenient peg for the creation of the doctrine of ‘contracts with protective effects for third parties’ (Verträge mit Schutzwirkung für Dritte or contratti con effetti protettivi a favore dei terzi). Such contracts are frequently said to be based on an ‘implicit’ agreement (stipulation implicite) of the parties. A contract has protective effects for a third party if a third person does not acquire a right to performance against the promisor but is nevertheless owed the same duties of care which the promisor owes to the promisee. If the promisor is in breach of this duty the third person can sue him in contract. The exact requirements and the limits of such claims are far from settled. In other jurisdictions, particularly in England, there is no need for such a doctrine because aggrieved persons who were not party to the contract can usually successfully bring an action in tort.
3. Rules on contracts in favour of a third party in recent projects for the harmonization of contract law
Neither EU private law nor international uniform law instruments, such as the CISG, contain rules on contracts for the benefit of a third party. The Principles of European Contract Law (PECL) deal with the doctrine in a fragmentary and inadequate manner by setting forth a single provision (Art 6:110) that draws its inspiration from Art 1121 Code civil. By contrast, the more recent projects for harmonizing European or international contract law spell out detailed and balanced sets of rules that match the state of art achieved in national contract laws (ch 5.2 UNIDROIT Principles of International Commercial Contracts (PICC), Title VI Section 5 Code Européen des Contrats (Avant-projet), Book II, ch 9, section 3 Draft Common Frame of Reference). None of these, though, explicitly deals with contracts with protective effects for third parties.
The proposals for harmonization are unanimous in acknowledging the validity of contracts in favour of a third party. Furthermore, they explicitly confirm that the beneficiary acquires an enforceable right. This right is not confined to specific performance and includes the right to damages for non-performance and to other contractual remedies, if applicable, as well as the beneficiary’s right to invoke clauses that exclude or limit his liability. The third party does not need to be in existence at the time the contract is made, nor does he have to be identified, but he must be identifiable with adequate certainty (see Art 5.2.2 UNIDROIT PICC).
The content of the right, the time of its coming into existence and its potential removal are very much at the disposal of the promisor and the promisee. Unless they have agreed to the contrary, the right arises immediately, directly (ie without any further action on the part of the third party, such as acceptance or accession) and independently (ie it is not derived from a right previously acquired by the promisee). The original parties to the contract can revoke or modify the right as long as it has not become irrevocable. The different proposals for harmonization suggest different moments in time after which the right is irrevocable: the beneficiary’s declaration of acceptance, the beneficiary having reasonably acted in reliance on the right, or a declaration by one of the parties to the beneficiary that the right has been conferred. The beneficiary is free to revoke the right. The right is then deemed not to have accrued and, unless otherwise agreed, the promisor must render performance to the promisee (Art 72(3)3 Code Européen des Contrats (Avant-projet)). The promisor may assert against the beneficiary all defences arising out of the contractual relationship which the promisor could assert against the promisee.
Gilbert William Frederick Dold, Stipulations for a Third Party (1948); MA Millner, ‘Ius Quaesitum Tertio’ (1967) 16 ICLQ 446; Hein Kötz, ‘Rights of Third Parties. Third Party Beneficiaries and Assignment’ in IECL VII/2 (1992) ch 13, paras 1 ff; Reinhard Zimmermann, The Law of Obligations (1996) 34 ff; Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997) 245 ff; Edgar du Perron, ‘Contract and Third Parties’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (2nd edn, 1998) 311; Vernon Valentine Palmer, ‘Contracts in Favour of Third Persons in Europe’ (2003) 11 ERPL 8; Philip Sutherland, ‘Third-Party Contracts’ in Hector MacQueen and Reinhard Zimmermann (eds), European Contract Law (2006) 203; Stefan Vogenauer, ‘§§ 328–335. Versprechen der Leistung an einen Dritten’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol II/2 (2007); Eltjo JH Schrage (ed), Ius quaesitum tertio (2008); Stefan Vogenauer in Stefan Vogenauer and Jan Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (2009) Arts 5.2.1 ff; Stefan Vogenauer, ‘The Effects of Contracts on Third Parties: The Avant-projet de réforme in a Comparative Perspective’ in John Cartwright, Stefan Vogenauer and Simon Whittaker (eds), Reforming the French Law of Obligations (2009) 235.