Usually there are two parties (although more can be included) in a contract. When these parties connect, sometimes their agreement affects others outside of the agreement. This affect can be either incidental or intentional. This article will focus on those intentional third parties and what rights or duties may be required for contract enforcement.
Vogan v. Hayes Appraisal Associates, Inc.
588 N.W.2d 420 (Iowa 1999).
Hayes and MidAmerica had an agreement. Vogan is the third party beneficiary suing Hayes. Vogan won at trial but lost on appeal. This appeal followed.
Questions
First, whether the Vogans were third party beneficiaries.
Second, whether Hayes’s conduct was a cause of injury to the Vogans.
Third, whether the Vogans could recover because of party contemplations.
Rule
A person is a third party beneficiary if:
- Recognition of third party performance was within the intention of the original parties; and either
- The beneficiary is to receive money from one of the parties; or
- Circumstances show that the promisee intended to give a benefit to the third party through their performance.
Holding
The Vogans were third party beneficiaries who were injured by Hayes’s conduct, which could have been contemplated at the time of the contract formation. Consequently, the court of appeals is reversed and the district court is affirmed.
Facts
The Vogans had obtained a mortgage from MidAmerica to finance the building of their home. Hayes was there to appraise the value and completion progress of the home periodically. The purpose of these periodic appraisals were to inform MidAmerica how much money should be released for the completion of the project. However, Hayes failed in their task. At one point, they argued that the home was 90% complete, when it was not in fact that complete. For instance, MidAmerica had loaned out nearly 220,000. There was still 60,000 left remaining work. This means that the home won only about 70% complete. This erroneous appraisal caused MidAmerica to release the remainder of the loan. With this money the contractor defaulted, Vogan was unable to make payments, and MidAmerica sought foreclosure.
Analysis
In the present case, the parties intended Vogan to be a beneficiary. There was no doubt that the loan was to be dispersed for Vogan’s use on the house. Additionally, appraisals and invoices sent to MidAmerica had the Vogan’s name on the documents. As such, Hayes knew that the appraisals were intended to benefit Vogan by outlining how much money was to be released.
Additionally, Hayes erroneous appraisals did cause the Vogan’s injury. Had the appraisal not revealed that the home was 90% complete, MidAmerican would not have released the remaining funds. Thus, the appraisal caused the injury.
Finally, this injury was within the contemplation of the parties at the time the contract was made.
Additional Notes
Creditor beneficiaries – A owes money to B, B owes money to C. A and B contract that A will pay C directly, rather than through B (e.g. cutting out the middle man).
Donee beneficiaries – A promises B to do something that will benefit C. C is a donee beneficiary able to go to the court to collect from A.
Restatement 2 Contracts § 302
“Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either
- the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or
- the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
Subsection 1 is creditor while subsection 2 is a donee.
Whose intention matters to determine if the individual is an intended beneficiary? Argument 1: must be the intention of 1. Argument 2: Promisse’s intention. 3rd Argument: could be promisors intention if promisee has reason to know of that intention.
Chen v. Chen
893 A.2d 87 (Penn. 2006).
The daughter won at trial and on appeal. Now, the father makes this appeal.
Question
Ultimately, is the child allowed to intervene in this litigation? To answer that question, the court needs to first answer, “is the child an incidental or intended third-party beneficiary for settlement agreements involving child support?”
Rule
For a party to be an intended beneficiary, the express language of the contract must say that the individual is intended to be a beneficiary. If the language is silent, then the individual is only an incidental beneficiary.
There is a two part test:
- First, the recognition of the beneficiary’s right must be “appropriate to effectuate the intention of the parties,” and
- Second, the performance must “satisfy an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”
In the present case, the second prong is satisfied so the only issue remaining is the first print.
Holding
Here, the daughter is not an intended beneficiary. Thus, the lower court’s ruling is reversed.
Facts
Richard Chen and his wife were married for six years before obtaining a divorce. However, before obtaining the divorce, the couple had two children. The daughter was to remain with her mother while the son was to remain with the father. As for the daughter, the parents agreed that Mr. Chen would pay Mrs. Chen $25/week in child support. Additionally, this amount was to increase if Mr. Chen’s salary increased.
The daughter grew, and so did Mr. Chen’s salary. However, although he paid his 25/week, Mr. Chen never increased the amount of child support in accordance with the principles of the agreement. Thus, when Mrs. Chen was notified that the support would cease when the daughter turned 18, she sued Mr. Chen for the balance not paid for as his salary increased. Additionally, the daughter intervened (joined, see Civ Pro II) to become a party of the litigation. At this point, the mother dropped out, thus leaving the daughter and father as sole opposing parties.
Analysis
The key phrase of this opinion is that the daughter the daughter’s “right to performance is not appropriate to effectuate the intention of the parties.” In other words, she is not an intended beneficiary and it is not appropriate to make her one. Why? Well, the parties did not expressly agree to directly pay the daughter. Instead, the mother was to be paid for the purpose of supporting her daughter. Although the concurrence would stop with this analysis, the majority continues to outline further policy reasons why a child should not be a part of this litigation. For example, allowing the child to be an intended beneficiary would open the door to all children suing parents everywhere for the direct dollar of child support.
Additional Notes
Is the daughter an incidental or intended beneficiary with the ability to enforce the agreement?
There is a two part test:
- First, the recognition of the beneficiary’s right must be “appropriate to effectuate the intention of the parties,” and
- Second, the performance must “satisfy an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”
The courts have the discretion to see if it would be appropriate to determine that there is an intention of the parties. However, the court here finds it inappropriate because of strong public policy. Absent special circumstances (designation to pay directly, inability to enforce by an actual party), enforcement would not be appropriate.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
