Schwartz and Scott, ‘Third Party Beneficiaries and Contractual Networks’

A recent and increasing trend of economic agents is to form productive associations such as networks, platforms and other hybrids. Subsets of these agents contract with each other to further their network project and these contracts can create benefits for, or impose costs on, agents who are not contract parties. Contract law regulates third party claims against contract parties with the third party beneficiary doctrine, which directs courts to ask whether the contracting parties ‘intended’ to benefit a particular third party. The doctrine has been inconsistently applied because it is unsuited to network contexts. Rather, the relevant question is whether honoring third party claims will advance or retard efficient network formation and function. We show here what courts do with third party claims when network members fail to perform for third parties and what the law’s best responses to such breaches should be. Among our principal results are that courts honor third party claims when contract members likely can price them and when third parties incur substantial reliance losses, but protect third party interests less frequently than they should and refuse relief to members of potential beneficiary classes when contract members can identify the class itself but not every agent who is likely to be in it. We caution that our conclusions are tentative because lawyers have largely ignored modern third party cases and economists have studied networks but commonly model individual agent interaction rather than network member contracting and breach. Thus, we write on relatively clean legal and economic slates and hope more to excite interest in the subject than conclusively to resolve these complex issues.

Schwartz, Alan and Scott, Robert E, Third Party Beneficiaries and Contractual Networks (January 9, 2015).

First posted 2015-01-19 07:33:11

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