Creditor Beneficiary: Everything You Need to Know
A creditor beneficiary, in simple terms, is a person or legal entity that is owed a service or asset that will be provided upon the complete execution of a contractual agreement.3 min read
A creditor beneficiary, in simple terms, is a person or legal entity that is owed a service or asset that will be provided upon the complete execution of a contractual agreement.
Creditor Beneficiary Law and Legal Definition
A creditor beneficiary is a person or legal entity that is owed or is believed to be owed a duty by a promisee that is fulfilled upon the performance of certain obligations by the promisor. The creditor beneficiary will intentionally benefit from an agreement that reduces or eliminates the debt that they are owed. Creditor beneficiaries are a specific type of third-party beneficiaries, meaning they are not directly involved in the contract they will ultimately benefit from.
Normally, a stranger to a contract does not have any rights under the contract. Third party beneficiary contracts, however, are an exception to this. Under a third party beneficiary contract, the third party has the right to enforce promises they will benefit from, despite the fact that they are not directly involved in the execution of the contract. The third party must be one of the following, however, to exercise these rights:
- A donee beneficiary
- A creditor beneficiary
Simply put, this means that a creditor beneficiary is a third party to the contract that is explicitly designated to receive the benefits associated with the execution of the contract by the other two parties. They are expected to receive these benefits due to certain obligations that are owed to them by the promisee. In simple terms, the creditor beneficiary is a third party that is designated to receive a benefit from the execution of a contract that satisfies a debt they are owed.
Agreements of this nature have a number of different party types, such as:
- The debtor or promisee
- The promisor
- The creditor
The debtor is also known as the promisee and owes a debt to the creditor. The debtor enters into a contract with the promisor, who will, in turn, pay the owed debt to the creditor using assets that have been provided by the debtor. In this scenario, the creditor is a third party beneficiary of the contract and receives the assets via the promisor.
Third Party Beneficiaries
In most contract scenarios, there will be two types of parties involved:
- The promisor
- The promisee
Third party contracts, however, include the following parties:
- The promisor
- The promisee
- A third-party beneficiary
Creditor beneficiaries have no part in the actual execution of a loan contract. Instead, they are a third party that benefits when the contract is fulfilled with the intent to satisfy a legal obligation. If a person owed $500 to a creditor, for example, and that person then loans $500 to another person who has promised to use that money to pay the original debtors obligation to the creditor, the creditor then becomes a third party beneficiary.
The other person involved in the agreement becomes the promisor and makes sure that the promise is enforced. The original debtor becomes the promisee. The contract is between the original debtor and the person promising to use the money they have received to pay the debtors obligation. The creditor, in this scenario, is the third party beneficiary.
If the promisor refuses or otherwise fails to pay $500 to the creditor, as the third party beneficiary, the creditor has the right to pursue legal action against the promisor and will likely win the case. Even though the creditor is not actively involved in the execution of the contract, the other parties involved both intend for the creditor to become the beneficiary which gives them certain enforceable rights that they can exercise against the promisor.
Both the creditor and the debtor, in fact, have the ability to pursue legal action against the promisor if it becomes necessary to enforce the promise of payment. However, the creditor's rights only come into play when they become aware of and assent to the agreement. The creditor can also pursue a case against the original debtor for the $500 since the debt originated with them and they still have a legal obligation to pay it. The debtor may then, in turn, file a legal claim against the promisor for committing a breach of contract.
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