This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The right of a third person to enforce a contract made for his benefit, was recognized in equity at an early date,1 and has been constantly enforced in most jurisdictions.2 It may be here observed that on this point the English cases are not harmonious. The cases in which the third person is allowed to sue may be explained as cases of trust. If A has received property from B, under a promise to pay B's debt to C. and such debt is less than the value of the property, it is not always apparent whether A is personally liable for the whole debt or whether his liability is measured by the value of the property in his hands. It has been said that as a general rule A is not personally liable to third persons on such contracts.3 The American authorities recognize the right of the third person to sue in equity with substantial unanimity. Thus where A, an attorney, agreed with an Indian nation to collect a claim for them for a certain percentage, out of which he agreed to adjust claims of "all parties who have rendered service heretofore in the prosecution of said claim." it was held that another attorney who had rendered such service could maintain a suit in equity against A.4 So where B conveys realty to A, and as part of the consideration therefor A agrees to pay B's debts, A is liable in equity personally to B's creditors.5 A common example of this principle is found where a grantee assumes and agrees to pay a mortgage which is a lien on such premises.6 Occasionally a case appears in which the grantee is held not liable at law to the grantor's creditors, though possibly liable in equity to the extent of the property conveyed.7 So in some jurisdictions where the party to be benefited is not named specifically, he may sue in equity though not at law.8 Whatever the original divergence between equity and the law on this point, the development of principles of equity within modern law has made the present attitude of the law on this question substantially the same as that of equity in most jurisdictions. Perfect simplicity and uniformity of statement on this point is prevented by the attitude of those courts which hold that a grantee who assumes his grantor's debt is liable to his grantor's creditors in equity upon principles assumed to be analogous to subrogation.9 The right of the mortgagee to hold the grantee personally liable is said to require two other concurrent rights: first, the mortgagee must have the right to collect any deficiency from the mortgagor; and second, the mortgagor must have the right to be reimbursed by the grantee.10 The co-existence of these rights gives the mortgagee a right to proceed directly against the grantee.11 As far as expressions of opinion go, this principle is thoroughly settled in these states.12 The doctrine of equitable subrogation as a basis for the liability of third persons is of very doubtful value in most jurisdictions. The results obtained from its application are generally the same as those resulting from the common-law rule that the promisor is personally liable to a third person for whose benefit the promise is made. The same results could have been reached under the common-law rule held by the majority of American courts; not that they always are so reached by the courts, but that they can be reached under the general rule. Furthermore, this common-law rule is in force in most of the states in which this equitable doctrine obtains. It seems to lead only to confusion to retain both doctrines side by side when the common-law doctrine can from its nature apply equally well to equity cases, and when it includes all the cases included by the equity rule, and more. The retention of the equity rule has therefore been criticized.13 In states which do not recognize the right of the third person to sue at common law, the equitable doctrine is, of course, important, as being the only means of enforcing the grantee's liability. Thus in Michigan the grantee is personally liable in equity, on principles of subrogation,14 though he is not liable at law.18 This doctrine has been extended to allow a creditor to enforce in equity a bond of indemnity against encumbrances, of which his claim is one.16 The courts which hold to the doctrine of subrogation as the basis of the right of the third person to sue. do not agree whether the right is independent of the right to foreclose or only collateral to it.
8 Fenton v. Casualty Co., 36 Or. 283, 48 L. R. A. 770, 56 Pac. 1096. See, to the same effect, Ross v. Ins. Co.. 56 N. J. Eq. 41, 38 Atl. 22.
1 Gregory v. Williams, 3 Mer. 582; Miller v. Billingsley. 41 Ind. 489. In Tennessee the court assumes that in equity a third person could sue on a contract for his benefit; and by analogy, extended the equity rule to actions at law, saying: "It may be that this distinction between a remedy at law or in equity ought not to be longer maintained." Moore v. Stovall, 70 Tenn. (2 Lea) 543. 544.
2 United States. MoKee v. Lamon, 159 IT. S. 317, 40 L. ed. 165; Blackmore v. Parkes. 81 Fed. 890, 26 C. C. A. 670.
Indiana. Davis v. Calloway, 30 Ind. 112, 95 Am. Dec. 671.
Iowa. Thompson v. Bertram, 14 Ia. 476.
Maine. Harvey v. Milk Co., 92 Me. 115, 42 Atl. 342.
Michigan. Crawford v. Edwards, 33 Mich. 354; Palmer v. Bray, 136 Mich. 85. 98 X. W. 849.
Mew Jersey. Edwards v. National Window Glass Jobbers' Association, - N. J. - . 68 Atl. 800.
Pennsylvania. Zell's Appeal. 1ll Pa. St. 532. 6 Atl. 107.
Tennessee. O'Connor v. O'Connor. 88 Tenn. 76, 7 L. R. A. 33, 12 S. W. 447.
3Colyear v. Mulgrave, 2 Keen 81.
4"A court of equity is the proper tribunal for the adjustment of their respective claims." McKee v. Lamon. 150 U. S. 317, 40 L. ed. 165
5 Blackmore v. Parkes, 81 Fed. 899, 26 C. C. A. 670.
6 Thompson v. Bertram, 14 Ia. 476; Crawford v. Edwards, 33 Mich. 354; O'Connor v. O'Connor, 88 Tenn. 76, 7 L. R. A. 33, 12 S. W. 447.
7 Capital Traction Co. v. Offutt, 17 D. C. App. 292, 53 L. R. A. 390.
8 Harvey v. Milk Co., 92 Me. 115, 42 Atl. 342.
9 United States. Keller v. Ashford, 133 U. S. 610, 33 L. ed. 667.
Michigan. Crawford v. Edwards, 33 Mich. 354; Booth v. Ins. Co., 43 Mich. 299, 5 N. W. 381; Corning v. Burton, 102 Mich. 86, 96, 62 N. W. 1040.
New Jersey. Crowell v. St. Barnabas, 27 N. J. Eq. 650; Biddle v. Pugh, 69 N. J. Eq. 480, 45 Atl. 626.
New York. Burr v. Beers, 24 N. Y.
179, 80 Am. Dec. 327; Garnsey v. Rogers, 47 N. Y. 233, 7 Am. Rep. 440.
Virginia. Osborne v. Cabell, 77 Va. 462.
10 Green v. .Stone, 54 N. J. Eq. 387, 55 Am. St. Rep. 577, 34 Atl 1099 [reversing, 32 Atl. 706]; Biddle v. Pugh, 59 N. J. Eq. 480, 45 Atl. 626.
11Crowell v. St. Barnabas, 27 N". J. Eq. 650. The mortgagee's right to sue exists "to avoid circuity of action" and "not because of any right originally in the mortgagee." Biddle v. Pugh, 59 N. J. Eq. 480, 45 Atl, 626. .
12 "By a well-settled doctrine of equity the mortgagee as a creditor may by way of subrogation have the benefit of all collateral obligations which a person standing in the situation of a surety for another holds for his indemwity." Green v. Stone. 54 N. J. Eq. 387, 390, 55 Am. St. Rep. 577. 34 Atl. 1099 [reversing (N.J. Eq.), 32 Atl. 706]. The creditor's right to recover rests on "a well-known rule in equity that a creditor is entitled to the benefit of any obligations or securities given by his debtor to one who has become surety of his debtor for the payment of the debt." Hopkins v. Warner, 109 Cal. 133, 136, 41 Pac. 868 [quoted in Ward v. De Oca, 120 Cal. 102, 105, 52 Pac. 130]. Or on the "familiar principle that the creditor is entitled by way of equitable subrogation to all the securities held by a surety of the principal debtor." Osborne v. Cabell, 77 Va. 462. 467.
13"In Thorp v. Keokuk Coal Co., 48 N. Y. 258, the court said that it saw no reason for invoking the doctrine of equitable subrogation, or resting upon it in such a ease. When the law has absorbed, in a broader equity, the narrower one enforced in chancery, the form and measure of the latter ceases to be of consequence. One does not seek to trace the river after it has-lost itseft in the lake." Gifford v. Cor-rigan, 117 X. Y. 257. 264, 15 Am. St. Rep. 508, 6 L. R. A. 610, 22 N. E. 756.
14 Crawford v. Edwards, 33 Mich. 864; Booth v. Ins. Co., 43 Mich. 299, 5 N. W. 381; Corning v. Burton, 102 Mich. 86, 96, 62 N. W. 1040, 1041; Palmer T. Bray, 136 Mich. 85, 98 N. W. 849.
15 Hicks v. MeGarry, 38 Mich. 667.
16Smith v. Peace. 69 Tenn. (1 Left) 586.
some holding that the mortgagee can sue the grantee in equity without resorting to foreclosure;17 others that he can sue only after a sale of the realty and a report of a deficiency, and then, of course, only for the deficiency.18 It has been invoked as a basis for holding that the promisor is not liable if his grantee was not personally liable; 19 that failure of such third person to perform the contract between himself and the promisee would discharge the promisor;20 that if the grantor does not see fit to interpose a defense to his liability to the mortgagee, his grantee who has assumed the debt can not interpose such defense;21 that a payment of interest on the mortgage debt, made by the grantee, prevents limitations from running;22 or for allowing reformation in a proper case and thereby eliminating a covenant to assume and pay a debt of the grantor's.23