Also known as: intended beneficiaries · third party beneficiary
Written by attorneys — see sources below.
A third party to a contract who acquires an enforceable right to performance because the contracting parties intended to confer that benefit directly on the third party. Recognition of the right is appropriate to effectuate the parties' intention when the promised performance will satisfy a money obligation of the promisee to the beneficiary or the circumstances show that the promisee intends to give the beneficiary the benefit of performance.
Andrew purchased a key-person life insurance policy from Black Assurance that named Federal Surety as sole beneficiary and directed proceeds to satisfy Andrew's outstanding loan. After Andrew died, Federal Surety demanded payment from Black Assurance. Federal Surety qualifies as an intended beneficiary because the policy performance satisfies Andrew's debt obligation to it.
Ivy Investments contracted with Inertia Dynamics to construct a specialized facility that would satisfy Ivy's preexisting obligation to supply space to Ironwood Capital. Ironwood Capital sued Inertia Dynamics for specific performance after delays. Ironwood Capital may maintain the suit for specific enforcement because it is an intended beneficiary of the construction contract.
Interlink Communications contracted with an insurance company that agreed to pay any future buyer of equipment for loss by fire or theft within one year after sale. Interlink later sold equipment to India Inoue and told her about the coverage. India Inoue holds rights as an intended beneficiary even though she was not identified when the insurance contract was formed.
Foundation Health Psychcare Services required employees to sign arbitration agreements covering antidiscrimination claims. An employee sued to enforce the agreement's cost-shifting provisions after the employer refused to pay arbitration fees. The employee may enforce the agreement as an intended beneficiary because the contract was formed to confer direct procedural rights on covered employees.
Mary Armendariz and Dolores Olague-Rodgers were hired by Foundation Health Psychcare Services, Inc. in July and August of 1995 for positions in the Provider Relations Group and were later promoted to supervisory roles with annual salaries of $38,000. As a condition of their employment, the employees signed application forms and separate arbitration agreements that required binding arbitration of any dispute arising from termination of employment. The arbitration clause provided that the employees' exclusive remedies would be limited to back wages from the date of discharge until the arbitration award and expressly excluded other remedies such as reinstatement and injunctive relief. On June 20, 1996, the employees were informed that their positions were being eliminated and that they were terminated. During their employment, they alleged that supervisors and coworkers engaged in sexually based harassment and discrimination, and they claimed the termination occurred because of their perceived or actual sexual orientation. The employees filed a complaint against the employer and its parent company alleging a cause of action for violation of the FEHA as well as tort and contract claims for wrongful termination, seeking general damages, punitive damages, injunctive relief, and attorney fees and costs. The employer filed a motion to compel arbitration under Code of Civil Procedure section 1281.2, supported by declarations. The trial court denied the motion, concluding that the arbitration agreement was an adhesion contract containing provisions so one-sided as to shock the conscience, including the requirement that only employees arbitrate claims and the limitation of damages to backpay. The Court of Appeal reversed the trial court's order, holding that the damages provision was unconscionable but that the remainder of the agreement should be enforced after severance. The Supreme Court granted review of the case.
View caseTess hired attorney Mel to draft a will leaving her estate to her nephew Benny. Mel negligently omitted required attestation formalities, causing the will to fail. Benny may recover from Mel as an intended beneficiary of the attorney-client contract because the drafting was performed specifically to confer the testamentary benefit on him.
Plaintiffs, who are some of the beneficiaries under the will of Eugene H. Emmick, deceased, brought this action for damages against defendant L. S. Hamm, an attorney at law who had been engaged by the testator to prepare the will. They have appealed from a judgment of dismissal entered after an order sustaining a general demurrer to the second amended complaint without leave to amend. The allegations of the first and second causes of action are summarized as follows. Defendant agreed with the testator, for a consideration, to prepare a will and codicils thereto for him by which plaintiffs were to be designated as beneficiaries of a trust provided for by paragraph Eighth of the will and were to receive 15 per cent of the residue as specified in that paragraph. Defendant prepared testamentary instruments containing phraseology that was invalid by virtue of section 715.2 and former sections 715.1 and 716 of the Civil Code. Paragraph Eighth of these instruments transmitted the residual estate in trust and provided that the trust shall cease and terminate at 12 o’clock noon on a day five years after the date upon which the order distributing the trust property to the trustee is made by the Court having jurisdiction over the probation of this will. After the death of the testator the instruments were admitted to probate. Subsequently defendant advised plaintiffs in writing that the residual trust provision was invalid and that plaintiffs would be deprived of the entire amount unless they made a settlement with the blood relatives of the testator under which plaintiffs would receive a lesser amount. As a result, plaintiffs were compelled to enter into a settlement under which they received a share of the estate amounting to $75,000 less than the sum which they would have received pursuant to testamentary instruments drafted in accordance with the directions of the testator. The third cause of action alleges that after admission of the will and codicils to probate, Harold Houghton Emmick, Walton Russell Emmick, Delta Inez Spelman, and Retha Newell instituted a will contest. The executors, defendant, and the contestants reached a settlement agreement under which $10,000 would be paid to the contestants from the assets of the estate in return for releases. Defendant caused to be executed releases which did not preclude the contestants from a subsequent attack upon the validity of the testamentary instruments. As a consequence, the contestants joined in a legal attack upon the validity of the residual clause and plaintiffs would have received an additional sum of $15,000 from the estate if the releases had been prepared in accord with good legal practice. The trial court sustained a general demurrer to the second amended complaint without leave to amend and entered a judgment of dismissal from which the plaintiffs appealed.
View caseArthur Young prepared an audit report for a company knowing the report would be used by investors to decide whether to purchase securities. Investors who relied on the negligent report and suffered losses sued the auditor. The investors cannot recover because they are not intended beneficiaries of the audit contract under the circumstances presented.
Osborne Computer Corporation was founded in 1980 by entrepreneur Adam Osborne and began manufacturing the Osborne I portable personal computer for the mass market, with shipments starting in 1981. By fall 1982, sales of the company's sole product had reached $10 million per month, making the company one of the fastest growing enterprises in the history of American business. In 1981 and again in 1982, the company retained Arthur Young & Company to audit its financial statements and issue audit reports. Arthur Young issued unqualified audit opinions on the company's 1981 and 1982 financial statements. The 1982 opinion was issued on February 11, 1983, appeared on Arthur Young's letterhead addressed to the company, and 100 copies of the professionally printed opinion were personally delivered to the company. The 1982 financial statements reported a modest net operating profit of $69,000 on sales of more than $68 million. In late 1982 the company postponed a planned initial public offering and instead issued warrants to investors in exchange for bridge financing loans or letters of credit. Plaintiffs, a group that included individuals as well as pension and venture capital funds, invested in the company in early 1983; one plaintiff, Robert Bily, purchased 37,500 shares of stock from Adam Osborne for $1.5 million. With one exception, plaintiffs testified that they made their investments in reliance on Arthur Young's unqualified 1982 audit opinion. After the warrant transaction closed on April 8, 1983, sales declined sharply because of manufacturing problems with the company's new Executive model computer, the public offering never occurred, and the company filed for bankruptcy on September 13, 1983, causing plaintiffs to lose their investments. Plaintiffs brought separate lawsuits against Arthur Young in Santa Clara County Superior Court that were consolidated for trial. Plaintiffs' expert witness identified more than 40 deficiencies in the 1982 audit amounting to gross professional negligence, including an understatement of liabilities by approximately $3 million that turned the reported $69,000 profit into a loss of more than $3 million, and testified that Arthur Young had discovered but failed to disclose material weaknesses in the company's internal accounting controls. After a 13-week trial the jury returned a verdict for plaintiffs on the professional negligence claim and awarded approximately $4.3 million in compensatory damages, but found for Arthur Young on the fraud and negligent misrepresentation claims. The trial court granted Arthur Young's motion for judgment notwithstanding the verdict on the negligence claim. The Court of Appeal reversed the judgment in favor of Arthur Young. The Supreme Court of California granted review.
View caseAn intended beneficiary acquires an enforceable right because recognition of that right effectuates the contracting parties' intention and either satisfies a money obligation of the promisee or the circumstances show the promisee intends to confer the benefit. An incidental beneficiary receives only a remote or fortuitous benefit with no enforcement rights.
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Yes. An intended beneficiary may enforce the promisor's duty to perform. The beneficiary may also proceed against the promisee when the beneficiary holds a separate claim against the promisee that the promised performance would satisfy.
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No. It is not essential that the beneficiary be identified at the time the contract containing the promise is made.
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Consideration need not move directly between the promisor and the beneficiary. Performance furnished by the promisee in exchange for the promisor's commitment to render performance to the beneficiary supplies valid consideration that supports enforcement by the intended beneficiary.
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