Restatement of Contracts on Beneficiaries

The restatement of contracts is widely recognized and used in legal treatizes forming a part of jurisprudence in the United States. Restatement of contract is followed by the federal court and state courts for determining the status of a third-party beneficiary. Two conditions are set forth by the Restatement Section 302 for conferring third-party rights. The first condition distinguishes the right to performance in the beneficiary as apposite in effectuating parties’ intent. The second condition endows with either a debt that will be fulfilled by the contractual promise to the third party or as designated by the conditions where the promise aims to give the beneficiary the advantage of the promised performance. The Restatement of the contract provides these conditions for establishing the rights of third-party beneficiaries unless otherwise is agreed between the parties. When considering the intentions of actual parties to the contract, it is imperative to know if someone is a third-party beneficiary of such a contract. The court has the discretion to determine the parties’ intention from the contract’s language concerning a third-party beneficiary if the parties do not state their intentions clearly. While determining the parties’ intention in the first and second estatement of contracts concerning third party beneficiary is relied upon by the courts.

First Restatement of Contract
The third-party beneficiaries are divided into three categories such as first restatement: beneficiaries, creditor beneficiaries, and incidental beneficiaries. Under the restatement of contracts, enforcement rights were given to the first two categories only. The rights of both the third party and the original parties to the contract are addressed in the first restatement of the contracts. It entails that the third party has the authority to impose a contract, and the original parties have the authority to make amendments in the contract subsequently. Here, beneficiaries are of two types mentioned above were recognized to eliminate confusion in the law of third-party beneficiaries. These two categories are the donee beneficiaries and the creditor beneficiaries.

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Donee beneficiary- The third party, becomes a donee beneficiary when a promise is not indebted to the third party while intends to benefit the promisor’s performance to such third-party.

Creditor Beneficiary- Here, the third party becomes a creditor beneficiary when a promisor agreed to the third-party to pay the promisee’s debt.

According to the terms of a contract between two parties, the donee beneficiary has been recognized under the first restatement of contract. Whereas, if no such terms are mentioned in the contract and performance of the contract satisfied the actual duty of the promisee to such beneficiary who is the creditor beneficiary. However, with restatement’s adoption, third-party beneficiaries did not fall in either category.

Second Restatement of Contract
One of the significant aspects of the second restatement of contracts is the ‘intent to benefit test’. Issues regarding the first restatement were confronted by the drafters where recovery was allowed to such third parties that did not fall in either of the categories. There were two possible alternative approaches they are: adding a new category for including third-party beneficiaries not included in the first restatement. The second was forming an analytical framework enabling the court to determine the right of third-party beneficiaries entitled to recovery. In 1981, the second restatement of contracts was approved where the donee and the creditor beneficiary terms were removed as they created difficulties. It was further combined to form a single category known as ‘intended beneficiary.’ Section 302 lays down the current restatement principles, which are as follows:

The beneficiary of a promise is considered as the intended beneficiary unless otherwise agreed by the parties to contract if the recognition of a right of performance is appropriate for effectuating the parties’ intention. Also, the performance of the promise satisfies the obligation of the promise to pay the money to the beneficiary. It also includes such circumstances that indicate the promise’s intention for giving the beneficiary the benefit of promised benefit.

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