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Contracts for Benefit of Third Persons CONTRACTSCONTRACTS FORFOR THETHE BENEFITBENEFIT OFOF THIRDTHIRD PERSONSPERSONS1' ARTHURARTHUR L.L. CORBINCORBIN ProfessorProfessor ofof Law,Law, YaleYale UniversityUniversity ByBy thethe greatgreat weightweight ofof authorityauthority inin thethe UnitedUnited StatesStates thethe samesame factsfacts thatthat operateoperate toto createcreate contractualcontractual relationsrelations betweenbetween thethe offerorofferor andand thethe acceptoracceptor maymay alsoalso operateoperate toto createcreate rightsrights inin aa thirdthird person.:person. 2 ItIt maymay bebe useful,useful, therefore,therefore, toto examineexamine inin detaildetail thethe naturenature andand limitslimits ofof thisthis doctrinedoctrine andand toto classifyclassify andand discussdiscuss thethe casescases inin distinctdistinct groups.groups. ToTo manymany studentsstudents andand practitionerspractitioners ofof thethe commoncommon lawlaw privityprivity ofof contracflcontract3 becamebecame aa fetish.fetish. AsAs such,such, itit operatedoperated toto deprivedeprive manymany aa claimantclaimant ofof aa remedyremedy inin casescases wherewhere accordingaccording toto thethe moresmores ofof thethe timetime thethe claimclaim waswas just.just. ItIt hashas mademade manymany learnedlearned menmen believe-believe thatthat aa chosechose inin actionaction couldcould notnot bebe assigned.assigned. EvenEven now,now, itit isis gravelygravely assertedasserted thatthat aa man cannotcannot bebe mademade thethe debtordebtor of anotheranother againstagainst his will.will. ButBut thethe commoncommon lawlaw was gradually influencedinfluenced byby equity and byby thethe lawlaw merchant, soso thatthat by assignmentassignment a debtor couldcould becomebecome boundbound to pay a perfect stranger to himself, although until thethe legisla­legisla- tureture stepped in,in, the common-lawcommon-law courtscourts characteristicallycharacteristically made use of a fictionfiction and pretended that theythey were not doing that which theythey really were doing. TRUST BENEFICIARIES If without privity of contract, one may become indebtedindebted to another, the lack of privity is surely no reason for denying him a beneficial right. As usual, equity saw this long before the common law did.·did.' This article 1 This article contains the substance of certain sections in an edition of Anson on Contracts toto be published by thethe Oxford University Press. Some use has been made ofof thethe notes of Professor E. W. Huffcut in an earlier edition. 2 See 13 C. J.7o5, sec. 815, 2 See 13 C. I. 705, sec. 815, citing more thanthan 350 cases; 6 R.R C. LL. 884,884. sec. 271;271 ; Wald's Pollock, Contracts (Williston's ed. 1906)i9o6) 237-278. 'In• In orderorder thatthat privityprivits ofof contract may exist,exist, itit seemsseems toto be necessarynecessary for AA toto say toto B "I promisepromise you."sou:' It requiresrequires thethe voluntaryvoluntary selection of eacheach partyparty bybv thethe other.other. See criticismcriticism ofof thethe termterm privityprivity inin i5IS Am.AM.. LAwLAW Rnv.REv. 244-5.244-5- ForFor recentr~ent adherenceadherence toto thethe fetish,fetish, seesee 66 R.R C.C. L.L. 885,885, sec.sec. 271. 'Not• Not alone inin thethe cases ofof trusteetrustee andand cestuicestui que trusttrust waswas thisthis true.true. The courtcourt diddid notnot shrinkshrink fromfrom expandingexpanding thethe conceptconcept ofof aa trusttrust toto covercover thethe casecase ofof aa contractcontract beneficiary.beneficiary. See TomlinsonTomlinson v.v. Gill (756)(1756) Ambler,Ambler, 33o,330, beforebefore Hardwicke,Hardwicke, LL. C.;c.; MooreMoore v.v. DartonDarion (1851)(1851) 44- DeG.DeG. && Sm.Sm. 517.517. SeeSee alsoalso SchoolSchool DistrictDistrict'lJ. v. LiversLivers (1899)(1899) 147147 Mo.Mo. 58o;580; ForbesForbes'lJ. v. ThorpeThorpe (ig91)(I9U) 2o9209 Mass.Mass. 570;570; GrimeGrime v.'lJ. BordenBorden (1896)(dlg6) x66166 Mass.Mass. i98;19B; NashNash v.'lJ. CommonwealthCommonwealth (1899)(1899) 174174­ Mass.Mass. 335.335. [xoo83[1008] HeinOnline -- 27 Yale L.J. 1008 1917-1918 CONTRACTCONTRACT BENEFICIARIESBENEFICIARIES 1001oo99 NoNo privityprivity isisis necessarynecessary tototo createcreate rightsrights inin aa cestuicestui queque trust,trust, andand nono considerationconsiderationconsideration needneed movemove fromfrom him.him. IfIf itit waswas possiblepossible andand desirabledesirable forforfor equityequity tototo recognizerecognizerecognize thethe veryvery extensiveextensive rights,rights, powers,powers, privileges, andand immunitiesimmunitiesimmunities ofof aa cestuicestui queque trust,trust, itit isis equallyequally possible,possible, and itit appearsappearsappears tototo thethethe AmericanAmerican courtscourts toto bebe equallyequally desirable,desirable, toto recognizerecognize similarsimilarsimilar relationsrelationsrelations betwenbetwen aa promisorpromisor andand aa contractualcontractual beneficiary. ItIt isisis nono answeranswer tototo saysay thatthatthat inin thethe oneone casecase thethe magicmagic wordswords "in"in trust"trust" werewere used,used, whilewhile ininin thethethe latterlatter theythey werewere not.not. ThisThis wouldwould bebe meremere fetishfetishfetish worshipworship onceonce more.more. ItIt maymay bebe thatthat thethe rights,rights, powers, privileges,privileges, andand immunitiesimmunitiesimmunities ofof aa cestuicestui queque trusttrust areare moremore numerous andand valuablevaluable thanthanthan areare thosethose ofof aa contractcontract beneficiary.beneficiary. The cestui que trust,trust,trust, withoutwithout privityprivity andand without givinggiving value, gets soso much;­much;- shouldshould notnot thethethe contractcontract beneficiarybeneficiary be givengiven at leastleast a crumb?5crumb ?5 ItIt maymay bebe arguedargued thatthatthat inin thethe casecase of trusttrust therethere isis a specific res,res, whilewhile inin thethe casecase ofof thethethe contractcontract therethere isis not.not. This isis also a dis­dis- tinctiontinction thatthat provesproves nothing.nothing. SupposeSuppose therethere isis a specific physical res-itsres-its meremere existenceexistence isis nono reasonreason for creatingcreating rights inin aa benefi­benefi- ciaryciary withoutwithout privity andand without value given by him. InIn many cases ofof trust,trust, however,however, theretherethere isis nono physicalphysical res.res. The trusttrust res isis then said toto consistconsist ofof thethethe rightsrights andand powers of thethe trustee, which he "holds" inin trusttrust and must exerciseexercise forfor thethe benefit of the cestui que trust. If suchsuch anan unreal resres may be the basis of rightsrights in a beneficiary, there isis no greatergreater difficultydifficulty in the case of contract.contract. TheThe reasonsreasons forfor recognizingrecognizing rights inin the contract beneficiary are substantiallysubstantiallysubstaritially thethe samesame asas thosethose underlying the rights of a cestui que trust.trust. By so doing thethe intention ofof the parties is carried out and the beneficiary'sbeneficiary's justjust expectations are fulfilled. The reason is not, as hashas sometimessometimes beenbeen suggested,suggested, that the promisee was acting as the agentagent ofof thethe thirdthird party.6party.' He was not inin fact so acting and nobody supposedsupposed thatthat he was. Nor is thethe beneficiary's right to be explained 7 on somesome theorytheory of subrogation.subrogation.T POSSESSION OF ASSETS BY THE PROMISOR InIn nearly all of thethe American jurisdictions, including those that deny a rightright of action toto most thirdthird party beneficiaries, there is one sortsort of beneficiary who is given a right of action. "Where, under a •'See•See Pennsylvania Steel Co. v. New York City R. Co. (1912)(1912) 19Bi98 Fed. 721, 749.749. Lord Mansfield inin Martyn v. Hind (1776) Cowp. 437.437, 443, 443. saidsaid itit was a matter of surprisesurprise how a doubt could have arisen inin a case like Dutton v. Poole (1677)(1677) 22 Lev. 2IO.210. •'See•See opinion of Johnson, C. J.,J., and Denio, J.,J., in Lawrence v.v. Fox (859)(1859) 2020 N.N. Y. 268; Union Inst. v. Phoenix Ins. Co. (i9o7)(1907) 196 Mass. 23o.230. InIn accord with thethe texttext isis thethe opinion of Finch J., inin Gifford v. Corrigan (188g)(1889) 117II7 N.N. Y. 257·257.257· '11 See discussion belowbelow inin connection with mortgagee-beneficiaries. 68 HeinOnline -- 27 Yale L.J. 1009 1917-1918 10101ioO YALEYALE LAWLAW JOURNALJOURNAL contractcontract betweenbetween twotwo persons,persons, assetsassets havehave comecome toto thethe promisor'spromisor's handshands oror underunder hishis controlcontrol whichwhich inin equityequity belongbelong toto aa thirdthird person,"person," thethe beneficiarybeneficiary cancan maintainmaintain anan actionaction atat lawlaw inin hishis ownown name.name.88 TheseThese casescases essentiallyessentially recognizerecognize thatthat aa ·beneficiarybeneficiary cancan acquireacquire aa legallegal rightright withoutwithout privityprivity andand withoutwithout givinggiving consideration.consideration. InIn somesome suchsuch casescases aa truetrue equitableequitable trusttrust maymay existexist withwith respectrespect toto somesome specificspecific res.res. InIn mostmost suchsuch cases,cases, however,however, thisthis isis notnot so.so. IfIf therethere isis aa trusttrust andand aa specificspecific res,res, thethe dutyduty ofof thethe promisorpromisor shouldshould bebe heldheld toto bebe merely thethe dutyduty toto account.account. TheThe factfact isis thatthat thethe dutyduty enforcedenforced
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