A donee beneficiary example, in simple terms, is a third party to a contract who does not participate in the execution of said contract but, instead, receives the benefits associated with the contract's performance as a pure donation.

Donee Beneficiary Definition

A donee beneficiary can be an individual or legal entity to whom the promising party in a contract intends to donate the benefits of a contract's execution. In a contractual setting, a donee and creditor beneficiaries are third parties who are not actually involved in the execution of the contract. When a contract is carried out, if the benefits associated with the execution go to a third party in the form of a pure donation, that party is considered to be a donee beneficiary.

In other words, a donee beneficiary is a person or legal entity that has been designated as the recipient of the benefits associated with the performance carried out by two other parties that have entered into a contractual agreement with one another. They are a stranger in terms of contractual consideration and they are to receive the benefits of the contract's execution in the form of a pure donation by the promising party. The donee beneficiary is a non-party in the contract but they still receive benefits upon the contract's completion.

Donee beneficiaries might also be a third party that benefits from a gift or donation. If one person, for example, promises to give somebody a gold watch, the person offering the watch is the donor and the person receiving it is the donee. In order to obtain the watch, the donor is going to purchase it from a third party. The third party becomes the donee beneficiary in this story because they're receiving a benefit in the form of money for the exchange without actually participating in the exchange itself.

What Is a Beneficiary?

As the name suggests, a beneficiary is a person that receives a benefit. For example, somebody receiving an inheritance because they were named in somebody else's will would be considered a beneficiary. A person named in an insurance policy as the one to receive funds in the event that the policy makes a payout would also be a beneficiary. 

When dealing with contracts, a person that receives benefits from the contract that they are not directly involved in is considered a third-party beneficiary. In every contract, there are always at least two parties involved:  

  • The promisor  
  • The promisee  

In some scenarios, however, a third party might also benefit from the contract. In this case, the contract would include the following:  

  • The promisor   
  • The promisee  
  • A third-party beneficiary

Creditor beneficiaries are non-involved parties in a contract that receive benefits when promises are made to satisfy certain legal obligations. Say a person owes a creditor a total of $500, for example. That person may lend $500 to a third party who has promised to use the money to pay the person's debt. The third person in this scenario has become the promisor and is bound to enforce the promise that's been made. 

The first person (who originally owed $500 to the creditor) is the promisee that the promise has been made to. In this story, the contract is between the promisor and the promisee. The consideration for this contract is the promise that the $500 loan received from the promisee will be used to pay the money they owe to their creditor. The creditor has effectively become the third party beneficiary. If the promisor fails to pay them the $500 they promised to pay, the creditor has the right to sue them and will likely win the case. 

Even though the creditor is not directly involved in the contract, the other two parties both intend for the creditor to be the beneficiary of the agreement. In this case, both the original debtor and the creditor have legal rights that can be enforced against the promisor if they fail to pay the creditor as they agreed to do. Either party has the ability to sue to promisor and enforce the promise they made to pay the creditor.  However, the creditor is only able to claim rights to enforce the contract when they learn about and agree to the contract. 

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