Contract Relativity and Third-Party Effects

Contractual Principle of Relativity

Contracts only produce effects on the contracting parties. Exceptionally, this principle supports affecting heirs, unless the rights and obligations are of a personal nature.

Contracts Affecting Third Parties

Sometimes a contract may affect third parties outside the contracting parties. This situation occurs in:

Contract for the Benefit of a Third Party

An agreement establishing the contents wholly or partly for the benefit of a third person outside the contract. It results in a **right** which allows the third party to **benefit from** the content of the contract as agreed. E.g., Life insurance.

The parties involved in this type of contract are:

• Promisor: The contracting party obliged to **benefit** the third party (sometimes called the third-party debtor).
• Promisee: The contracting party who makes the contract.
• Third Party: The person who receives the benefits.

The requirements for the contract to become effective in **favor of** third parties are set out in Article 1257 of the Civil Code, which states that the third party must accept the benefit in its favor and should notify its acceptance to the promisor. This article is not clear on who has the **power to revoke** the contract, but it is understood that this occurs only when the promisor and promisee agree.

Contract to the Detriment of a Third Party

The content of the contract **affects** the rights of third persons outside the **formation** of the contract. The third party must **hold a subjective right**, and this is the person who is injured. The legal right that is injured typically derives from a **prior contract** with one of the parties.

Effects of Contracts to the Detriment

• The injured person may require the cessation of the activity that injures or harms their legal right.
• The injured person may claim compensation for damages.

Distinction Based on Bad Faith

A distinction should be made based on whether or not there was **bad faith** on the part of the other contracting party. If the other contracting party recognizes that there is a prior agreement, and makes the new contract, this is considered acting in **bad faith**. If they are not aware of the prior contract, bad faith cannot be attributed.

If both contracting parties are acting in bad faith, the injured party may demand the cessation of activity and compensation for damages **jointly**. This indemnity is **joint and several**. This means the injured party can claim the full amount from either party, or a portion from each (the courts typically understand this as **joint and several** liability).

If one party was unaware of the previous contract, the third party may require the cessation of activity and compensation for damages from the party who acted in bad faith. If the second contract **cannot be fulfilled** because it conflicts with the prior right, the new contracting party (who was unaware) may also claim compensation for damages from the party who acted in bad faith, due to **breach**.