1. Basics of a Donee Beneficiary
2. Donee vs. Creditor Beneficiaries
3. Third Parties and Contracts
4. Rights of Beneficiaries
5. Incidental Beneficiaries

A donee beneficiary is a type of third-party beneficiary that is created in a contract where the promisee does not owe a debt to the third party.

Basics of a Donee Beneficiary

A donee beneficiary is a type of intended third-party beneficiary. Donee beneficiaries occur when the second party in a contract (the promisee) does not owe a debt to the third party but wants to provide them with the benefit of the performance of the first party (the promisor). This arrangement is often also called a gift promise.

A common example of the creation of a donee beneficiary is the recipient of a life insurance policy. In exchange for a premium, the insurance company (promisor) assures the owner of the policy (promisee) that their spouse (donee beneficiary) will receive a payout upon the death of the policyholder.

While the surviving spouse was not a party to the initial contract, they retain the right to sue if the contract is not fulfilled. A further example would be if you hired a woodcutting company to cut trees in your neighbor's yard as a Christmas gift. If the company never cuts the trees, your neighbor could sue the company to enforce the contract.

Donee beneficiaries are people for whom a contract was entered into for their benefit but who aren't actually a party to the contract. If the donee beneficiary is not aware that a contract exists, they are not entitled to the benefits of the contract. However, these beneficiaries can pursue damages for vested rights. For instance, if a contract is canceled, a donee beneficiary can sue the promisor if the beneficiary has acted on the contract.  

Donee vs. Creditor Beneficiaries

Donee and creditor beneficiaries are two types of intended beneficiaries. However, there are some major differences between the two that you need to consider. The main difference between the two involves situations where the promisor and promisee try to change the third party's rights.

In most cases, the donee beneficiary's rights cannot be altered without their express consent. The exception is if this power is stated in the original contract. Regardless of whether they know of the contract's existence, a donee beneficiary has rights as soon as the contract is in place. On the other hand, a creditor beneficiary only has rights when they are made aware of and agree to a contract.

Third Parties and Contracts

One of the trickiest issues related to third-party beneficiaries is if they have the ability to enforce a contract by filing a lawsuit. The basic rule is people that are a non-party are not able to enforce the terms of a contract. The reason for this is that non-parties do not have privity with the people involved in the contract. However, in some circumstances, intended beneficiaries do have the ability to enforce contracts.

The contract legally binds these two parties. In some contracts, the benefits provided to one party will be transferred to a third party. In essence, this means that a third-party contract provides the non-party the right to make sure that a contract is enforced. 

Rights of Beneficiaries

The specific terms of a contract will limit the rights of beneficiaries. For instance, if the promisee does not perform their responsibilities, the beneficiary will lose their rights if this failure also terminated the rights of the promisee. Some contracts include language to prevent these circumstances.

If you made a contract for the purpose of providing a gift to a friend and you don't make the payments required of the contract, your friend would not be able to file a claim. When a third-party beneficiary sues a promisor, the promisor can defend themselves as if they were being sued by the promisee. The promisor could, for instance, provide proof that they were not paid, invalidating the beneficiary's claim.

The rights of a third party only take effect after certain specific conditions have been met:

  • The contract between the offeror and the offeree is made.
  • The two parties in the contract wish to intentionally benefit the third party.
  • The contract names the third party.

Incidental Beneficiaries

Some third-party beneficiaries are known as incidental beneficiaries. This means that while they benefit from a contract, the benefit was not intended. Incidental beneficiaries do not have rights when a contract is unfulfilled. If you schedule tree removal for your property and this removal would also benefit your neighbor, they don't have the right to sue if the trees are never removed because the removal was not contracted for their benefit.
 
If you need help understanding your rights as a donee beneficiary, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.