Donee beneficiaries and the parol evidence rule.

• Author: Perillo, Joseph M.
• Position: Symposium on Contracts

Donee beneficiaries are pretty peculiar. They own the rights created by a contract created by others. Their rights have primacy over the promisee's rights (1) but the promisees have enforceable rights as well. (2) The donee beneficiaries may be totally unaware of these enforceable rights for which they have not given consideration. (3) For purposes of this essay, "donee beneficiary" means any intended beneficiary other than a creditor beneficiary. A creditor beneficiary is a promisor who assumes a debt that "will satisfy an obligation of the promisee to pay money to the beneficiary...." (4) Thus defined, third party donee beneficiaries are of importance in commercial activity, for example, in an agreement between parent and subsidiary to indemnify a class of individuals. (5) Today, the concept of donee beneficiary has expanded from the intent to create a gift, to anytime there is an intent gratuitously to confer a right other than a right caused by the assumption of a debt owed by the promisee. (6)

Parol evidence of one's status as donee beneficiary is the subject of this essay. (7) I do not advocate in this article for any particular version of the parol evidence rule. (8) Once the donee beneficiary is identified, the contract should be subject to the parol evidence rule as any contract. (9) Whether the parol evidence rule in the appropriate jurisdiction is soft or hard, (10) the peculiar nature of the donee beneficiary merits that parol evidence ought to be welcomed and admitted. The status of donee beneficiary should be exempt from all formulations of the parol evidence rule. At the very least, evidence of surrounding circumstances should be admissible as it is in some jurisdictions in donee beneficiary cases. (11)

The generally accepted statement of the parol evidence rule is that an integrated writing may not be varied or contradicted by evidence of any prior promises or conditions. The rule itself is deceptively simple. However, Professor Thayer warned us: "Few things are darker than this, or fuller of subtle difficulties." (12) Why then in most discussions of the rule is Professor Thayer's admonition quoted? The reason is that there are many exceptions and qualifications to the rule. To pick out one of many--a deed absolute in form may be shown to be for security only. (13) As a qualification of the rule, it is submitted that status of a donee beneficiary is unrelated to the policy basis of the parol evidence rule. Donee beneficiaries have standing because typically there is no other human being or entity who has the incentive to hold the promisor to his or her promise that clearly benefits the plaintiff. If there is, judicial economy is promoted by having one law suit instead of two.

Why should the status or identity of donee beneficiaries be exempt from the parol evidence rule? Because the status of a person as a donee beneficiary has nothing to do with the parties themselves adding or subtracting a new promise or condition to their agreement. It is the law that determines who is a donee beneficiary. (14) Just as the law determines what contracts are enforceable, it determines who may enforce them. For example, certain strictures have been placed on donee beneficiaries regardless of an expression of an intent to benefit, whether the restriction involved the nexus between the beneficiary and the promisee, (15) the degree of their relationship, (16) or whether their relationship resembles privity. (17) These strictures have been relaxed but their very existence demonstrates that "Private Ordering" is not the key to the development of the legal treatment of donee beneficiaries.

Let us start our analysis with the Maryland case, what I will call the case of the two towers. (18) Two developers contracted with the owners of two adjoining parcels for ground leases. They sued the ground-lessors because they failed to cooperate in contesting their building permits and in giving estoppel certificates. (Maryland preserves the old English custom of ground leases whereby the landowner retains title to the land; a developer leases the land rather than purchases it and the lessee of the ground pays rent.) Judgment was entered for the ground-lessees for over $36 million. At issue on appeal, among other issues, was a finding of joint and several liability. Joint and several liability would attach only if the jury could find that the defendants were donee beneficiaries of each other.

In determining whether donee beneficiary status attached to the parties, the court looked at the contracts themselves as well as the surrounding circumstances. In so doing the court said:

This appears to be a deviation from the general rule for interpreting contracts, under which we do not consider "extrinsic evidence" of the parties' intent unless the language of the contract is ambiguous ... "[w]hen the clear language of a contract is unambiguous, the court will give effect to its plain, ordinary, and usual meaning, taking into account the context in which it is used.... If the contract is ambiguous, the court must consider any extrinsic evidence which sheds light on the intentions of the parties at the time of the execution of the contract." (19) The court thus stated an exception to what is the most prevalent version of the parol evidence rule.

The court noted common easements in the contracts themselves, the specifications detailing a common garage and other common amenities. While this made the status of the tenants as third party beneficiaries plausible, the lessors were held not to be third party donee beneficiaries. (20) Yet the case is significant. Its significance lies not in its holding but its methodology--its willingness to consider extrinsic evidence despite the absence of ambiguity. The competing view is expressed in a Georgia case: "[T]he contracting parties' intention to benefit the third party must be shown on the face of the contract." (21) This view is belied by a number of cases and other authorities.

Most beneficiaries are clearly identified in the contract. (22) In one such case in which the plaintiff was named in the contract, the court said: "Unless the contract is expressly designed for the benefit of a third party, resort, of necessity, must be had to extrinsic evidence to ascertain whether it was the purpose and intent of the parties to the contract to bestow a benefit or gift upon a third party." (23) Other situations of contract enforcement where the identification of a donee beneficiary is exempt from the parol evidence rule are admittedly scant. (24) But they exist. Consider a subordination agreement between purchasers of unbuilt condominiums. A subsequent mortgagee has priority over the vendees' liens whether or not the mortgage instruments claim priority. (25) The admission of the extrinsic evidence of the subordination agreement is refreshing.

Refreshing indeed is a holding that a purchaser of the assets of a corporation promised the selling corporation orally that a particular employee would be retained. In Suciu v. AMFAC Distribution Corporation it was held that the status of the employee as a third party donee beneficiary did not contradict the writing that did not deal with the individual. (26)

Claimants to the status of third party beneficiary have an even easier time in New Mexico. There, in common with most jurisdictions, "[t]he burden is on the person claiming to be a third-party beneficiary to show that the parties to the contract intended to benefit him. He may do so using extrinsic evidence if the contract does not unambiguously indicate an intent to benefit him." (27) A common illustration involves one view of restrictive covenants on the use of land. Under this view, members of...