Contract for the Benefit of Third Parties

Contract for the Benefit of Third Parties

Der Contract for the Benefit of Third Parties is one of the special contractual forms of the law of obligations and describes a contract in which not only the contracting parties themselves are entitled or obliged, but a third person is benefited. The central provision in German law is found in Section 328 of the German Civil Code (BGB). The contract for the benefit of third parties makes it possible to grant claims to contractual benefits directly to a person who is not a party to the contract—the so-called third party.

Basic Concept and Legal Framework

Definition and Legal Basis

A contract for the benefit of third parties is a bilateral contract in which the promisor (debtor) promises the promisee (creditor) to perform an obligation in favor of a third party. The legal basis is Section 328 BGB:

“A contract may provide that performance is to be rendered to a third party. The third party is entitled to claim performance if such was agreed with the promisee…”

The contract for the benefit of third parties differs from the so-called contract with protective effect in favor of third parties, in which the third party is merely included in the protective scope of the contract but does not acquire any independent claims to performance.

Involved Parties

• Promisor/Debtor: The party who is obliged to perform.
• Promisee/Creditor: The party who concludes the contract and agrees to the debtor’s performance in favor of the third party.
• Third Party: The person for whose benefit the contract creates an obligation to perform.

Legal Nature and Types of Contract for the Benefit of Third Parties

True and Non-True Law of Obligations in Favor of Third Parties

The configuration of the third party’s right to claim depends on the concrete agreements made by the contracting parties:

• True Contract for the Benefit of Third Parties (Section 328(1) Sentence 1 BGB): The third party obtains their own enforceable claims against the promisor. He can demand the agreed performance directly.
• Non-True Contract for the Benefit of Third Parties: The third party receives no independent right to claim. The performance is to be rendered to the third party, but the promisee remains the sole holder of the claim.

This distinction is essential for the legal consequences between the parties.

Direct and Indirect Contracts for the Benefit of Third Parties

• Direct Contract for the Benefit of Third Parties: The third party has an immediate right to claim, usually by an express agreement between promisor and promisee.
• Indirect Contract for the Benefit of Third Parties: Here the third party lacks an immediate right to claim; the promisee holds the claim and has an obligation towards the third party.

Rights and Obligations of the Contracting Parties

Rights of the Third Party

In a true contract for the benefit of third parties, under Section 328 BGB, the third party has the independent right to claim performance. The third party’s right to claim arises upon conclusion of the principal contract, but may be tied in the contract to specific conditions, such as the occurrence of an event.

Position of the Promisee

Despite provision of performance to the third party, the promisee remains a central element of the contractual obligation. The promisee typically has his own claims (e.g., the right to withdraw). Important: According to the rules of the contract, the promisee may revoke or modify the right of the third party up to the point of acceptance, provided nothing to the contrary has been contractually agreed.

Revocation and Modification

Before acceptance by the third party, the contract for the benefit of third parties is generally freely revocable (Section 328(2) BGB), unless irrevocability or other agreements have been made.

Distinction from Other Types of Contracts

Distinction from the Contract with Protective Effect in Favor of Third Parties

In a contract with protective effect in favor of third parties, the third party is merely included in the protective scope of the contract. In the event of a breach of duty, the third party can assert their own claims for damages but does not have an independent claim to fulfillment of the primary contractual obligation.

Distinction from Assignment of Claims (Cession)

In a cession, an existing claim is transferred from the previous creditor to a new creditor. The contract for the benefit of third parties, by contrast, creates a new claim for the third party already upon conclusion of the contract.

Areas of Application in Practice

Typical Practical Examples

• Life Insurance: The insurance benefit is arranged for a beneficiary specified in the contract (e.g., relatives).
• Gift Agreements: A donor instructs a third party to render performance in favor of a donee.
• Building Savings Contracts: The allocation is made directly to third parties, often to children or other relatives.

Significance in Economic Life

Contracts for the benefit of third parties are particularly widespread in the transport or financial sectors. For example, companies can take out goods insurance policies for their customers so that the customers have a direct claim against the insurer in the event of damage.

Special Features and Controversial Issues

Acceptance by the Third Party

Under German law, it is not required for the third party to expressly accept the contract; any behavior that can be understood as acceptance is sufficient. The timing of acceptance can be decisive, as until then the promisee may revoke or amend the right.

Protection against Defenses

The promisor is generally entitled to assert all defenses arising from the contractual relationship with the promisee against the third party as well (Section 334 BGB). The third party only acquires those rights as agreed between the parties.

Contracts for the Benefit of Third Parties in the International Context and in Tax Law

Even outside German law, the contract for the benefit of third parties is a recognized instrument, for example in Roman law jurisdictions (e.g., Austria, Switzerland) with their own particular designs.

In tax law, the contract for the benefit of third parties can trigger income and gift tax consequences, especially if the contract results in a financial advantage for the third party.

Literature and Case Law

The case law of the Federal Court of Justice (BGH) and various standard works on the law of obligations regularly address individual questions concerning the contract for the benefit of third parties. In addition to the interpretation of the respective contract clauses, issues such as the possibility of revocation or the enforceability of rights of the third party frequently come to the fore.

Summary

The contract for the benefit of third parties is an important legal instrument in the law of obligations, which makes it possible to grant an outside third party immediate claims arising from a contract. Careful drafting and precise knowledge of the legal framework are central in contract practice, as the interests of debtor, creditor, and third party must be carefully balanced. The detailed regulation of this contract type in the German Civil Code as well as its numerous fields of application underline its practical relevance and versatility.

Frequently Asked Questions

Can the third party independently assert the right to claim?

The third party acquires their own right to claim against the debtor (promisor) through a contract for the benefit of third parties (Section 328 BGB). As a rule, the third party can exercise this right independently, i.e., the third party can claim performance directly from the debtor without needing the involvement or consent of the promisee. The scope of this right is determined by the type of right granted, which can be expressly or impliedly defined in the contract. In a true contract for the benefit of third parties, the third party also normally has the right to bring an independent legal action—so he may sue the debtor for fulfillment of the promised performance. Limitations on this right may result from the contents of the contract and from the principles of good faith (Section 242 BGB). In addition, the right of claim of the third party can be limited in time, subject matter, or content by the contract between debtor and promisee.

Can the promisee revoke or amend the contract?

Whether and to what extent the promisee can revoke or modify the contract depends mainly on the position granted to the third party by the contract. According to Section 333 BGB, the debtor and the promisee can, as a rule, amend or revoke the contract at any time until the third party has accepted the right to claim. Acceptance is usually made by means of an express declaration or implied conduct, e.g., by asserting the claim against the promisor. Once acceptance has been given, rescission or modification is only possible with the consent of the third party. An exception applies in the case of a mere non-true contract for the benefit of third parties or a contract with protective effect in favor of third parties, as the third party’s legal position is weaker from the outset.

What rights and obligations does the debtor (promisor) have?

By entering into the contract, the debtor undertakes to render a specific performance to the third party. As a rule, this results in two external obligations for the debtor: one toward the promisee and—if a true contract for the benefit of third parties exists—one toward the third party. The debtor may assert all defenses based on the contract itself or in the relationship to the promisee against the third party. If the contract is withdrawn or terminated, the debtor can raise this even against the third party. The obligation to perform exists to the extent and under the conditions established in the contract. The debtor does not owe the third party any further subsidiary obligations unless these are expressly stated in the contract or required by law.

What happens if the third party dies before the occurrence of the event triggering performance?

If the event triggering performance occurs only after the third party’s death, further entitlement depends on what has been provided in the contract. If the contract is tailored to a personal performance for the third party (e.g., maintenance, obligations of a highly personal nature), the claim often lapses upon the death of the third party. In other cases, especially if the contract does not expressly specify the highly personal nature of the performance, the rights arising from the contract can be transferred to the heirs, so that they can act as creditors in place of the deceased third party. This applies especially to financial performance, such as cash payments or insurance benefits. In such cases, a careful review of the contract’s contents and, if necessary, supplementary interpretation in accordance with Sections 133, 157 BGB, is required.

Can a contract for the benefit of third parties also be used to secure claims arising from contracts with protective effect for third parties?

A contract for the benefit of third parties and a contract with protective effect for third parties pursue different objectives and have different legal effects. While in a contract for the benefit of third parties, the third party acquires their own right to claim, in contracts with protective effect, the third party only obtains a claim for damages in the event of a breach of contractual duties. However, in individual cases, contracts may confer both rights from a contract for the benefit of third parties and protective effects for third parties if this is expressly stipulated or is to be inferred from the contract’s purpose. In practice, this means that contracting parties can deliberately safeguard or supplement claims from protective contracts in favor of third parties by concluding a true contract for the benefit of third parties. In this way, the legal position of the third party is significantly strengthened, especially with regard to the direct right to performance and independent right to bring legal action.

What is the significance of acceptance by the third party in a contract for the benefit of third parties?

Acceptance by the third party is central for the irrevocability of their legal position. According to Section 333 BGB, the contract may be revoked or altered by the original parties (promisee and debtor) as long as the third party has not accepted the right. Once acceptance is given—and a formal declaration of acceptance is not necessary; any clear assertion or implied invocation will suffice—the third party’s right becomes binding. From this point on, the third party’s claim can, as a rule, only be revoked or substantively changed with the third party’s consent. Acceptance thus effects the substantive and legal consolidation of the third party’s legal position and limits the parties’ freedom of disposition.

What special rules apply to multi-person relationships?

In multi-person relationships—for example, where several third parties are intended as beneficiaries—it must be distinguished whether there is a joint creditor relationship or a partial creditor relationship. This depends on the intention of the parties and, if in doubt, can be interpreted with reference to Sections 428 BGB (joint creditors) and 420 BGB (partial creditors). The question to be clarified is whether all third parties can demand performance jointly (as joint creditors), whether each third party may demand only part, or whether there is a freely exercisable right to claim. Another issue arises if a third party loses their position (e.g., through death or waiver): Here, the contract should clarify whether a substitute beneficiary is named or the rights pass to the other third parties or their heirs. The precise structuring of multi-person relationships should therefore be clearly regulated contractually to avoid legal disputes.