Agreements often include clauses which provide benefits in favour of third parties and in some cases impose obligations on parties who are not signatories to the agreements in question. These clauses are commonly referred to as stipulatio alteri.
This article sets out examples of stipulatio alteri, their validity and enforceability, common misconceptions and errors and our recommendations when contemplating drafting such clauses into agreements.
Examples of stipulatio alteri:
Stipulatio alteri may be used in several scenarios which include, but are not limited to –
- establishing inter-vivos trusts;
- providing beneficiaries of life insurance policies direct claims against insurers;
- providing rights and obligations to a party which is not yet in existence;
- imposing restrictive conditions on third parties; and
- providing estate agents claims for commission from persons other than the person who instructed such agent.
The abovementioned examples are typical scenarios in which stipulatio alteri can be found, however any agreement may contain a stipulatio alteri depending on the objectives thereof.
Validity and enforceability:
In order for a stipulatio alteri to be validly created and enforceable it is a requirement that the contracting parties intend to create an enforceable obligation in favour of the third party, and the third party obtains a legal right to demand the performance or non-performance in accordance with such obligation.
The right will only legally vest with the third party once it notifies the party promising such performance that it accepts such benefit. Before such acceptance by the third party, the signatories to the contract may still vary or cancel the right and/or release the promising party from the obligation to benefit the third party.
There is varying case law regarding the basis for the enforceability such rights and obligations. In some cases, it has been found by the courts that the third party becomes a party to the contract upon acceptance of the benefit, thereby establishing a contractual relationship between itself and all the existing parties thereto. In other cases, the court has found that the third party establishes a contractual relationship only with the promising party. This determination would depend greatly on the manner in which the stipulatio alteri is drafted.
The requirements of valid stipulatio alteri are therefore clearly established, however, there are differing views on the contractual nature thereof.
Misconceptions and errors:
It is a common misconception that stipulatio alteri can only provide rights and/or benefits to third parties but it cannot impose obligations thereon.
A benefit provided to a third party can in fact contain a reciprocal or corresponding obligation attributable to the third party. In such event, acceptance of the benefit would not be sufficient, and acceptance of the obligation would also be required for the stipulatio alteri to be enforceable.
One must also be careful not to confuse a stipulatio alteri with an adiectus solutionis causa, namely a third party who accepts performance on behalf of a beneficiary. The latter does not acquire a right to demand such performance unlike the former and these are two different concepts with distinct legal implications.
A stipulatio alteri is a viable and legally enforceable option to provide for rights and benefits to third parties, however it is advisable, to the extent possible, to insert all parties which derive benefits and incur obligations as signatories to the corresponding agreements. Doing so guarantees greater certainty regarding the contractual relationship between the parties.
For purposes of establishing inter-vivos trusts, providing claims in terms of insurance agreements and entering into contracts with parties which are not yet in existence, which examples were mentioned above but which were not the focus of this article, stipulatio alteri remain a useful and effective manner of providing rights and/or imposing obligations on third parties.
VDMA’s team of experts is at your disposal for any assistance that you may require with the drafting, reviewing and/or the amending of contracts.