George S. Geis
University of Virginia School of Law
Virginia Law and Economics Research Paper No. 2011-06
The law of third party beneficiaries considers whether an outsider can sue for damages on a contract formed by others. Some might believe that external claims are never allowed in private contracting because privity is required to maintain a lawsuit. This is incorrect, though the mistake would be understandable because third party interests are largely treated as a postscript on contract law. Few teach this material, and academic commentary on the topic is sparse.
This disregard for third party rights is surprising, however, because the legal treatment of beneficiaries is a major source of contention in contract law. Hundreds of cases are litigated annually - in part because the standard for perfecting rights in this area is so ambiguous. Moreover, careful reflection on third party beneficiary contracting uncovers a powerful, even foundational, tool that can be used to adjust legal relationships in diverse areas of activity. Simply put, third party beneficiary contracts are quite different from bilateral contracts because they allow a promisor to adjust her legal rights with many, many others in one fell swoop by interposing a willing counterparty and setting the desired terms - a practice I will call “broadcast contracting.”
This Article describes the phenomenon of broadcast contracting, analyzes the theoretical rationale for these arrangements, and proposes some normative principles for incorporating broadcast contracts into a sensible system of contract law. I make two primary claims. First, the law should continue to empower private counterparties to establish these agreements and thereby confer rights on outsiders. Second, legal treatment of third party claims relies far too heavily on conjecture about a vague standard; in this context, at least, the goals of contract law would be better served by moving toward a rule that insists on explicit grants of third party rights as a precondition to outside liability.
Number of Pages in PDF File: 52
Date posted: September 13, 2011 ; Last revised: October 13, 2011