Incidental Beneficiary: Everything You Need to Know
An incidental beneficiary is someone who benefits from a trust or contract without intent.3 min read
2. Intended Beneficiary Information
3. Breach of Contract
An incidental beneficiary is someone who benefits from a trust or contract without intent.
What Are Incidental Beneficiaries?
Someone that indirectly benefits from the enforcement of a contract or trust is known as an incidental beneficiary. For example, if your parent receives a gift or inherits money from your grandparent, and that gift then benefits your entire family, you are an incidental beneficiary because the gift was not originally intended for you.
As another example, let's assume that one person hires another for the purpose of renovating a home. Now, let's say that the person doing the renovation insists you handle a specific task, such as painting, because of your reputation. In this instance, you would be an incidental beneficiary because you are benefiting from the relationship between the homeowner and the renovator without actually being involved in their contract.
Contract law covers two different types of third-party beneficiaries:
- Incidental beneficiaries.
- Intended beneficiaries.
Intended beneficiaries have the right to enforce a contract they benefit from when the contract is breached.
For a third-party beneficiary to bring a lawsuit for breach of contract, they must establish four important facts:
- A contract between two parties exists.
- The clear purpose of the contract is to benefit the third party or the class of persons to which the third party belongs.
- One of the two parties have breached the contract.
- The third party was damaged by the breach.
Incidental beneficiaries do not have the legal right to enforce a contract after it has been breached.
Intended Beneficiary Information
An intended beneficiary is created when one party agrees to provide consideration to another party in exchange for a benefit provided to the third party. The benefit received by the third party is usually monetary, although it can also be a service. There are two ways that an intended beneficiary can be created.
A creditor beneficiary is when one party agrees to cover the debts of the second party that are owed to the third party. While this may seem confusing, it's actually quite simple.
For example, if you are required by law to pay child support and your sibling contracts with you to cover these debts, your child, who is receiving the payments is considered the creditor beneficiary. If these payments stop, your child may be able to sue your sibling for failing to uphold their contractual obligations.
The other common type of intended beneficiary is known as a donee beneficiary. In these cases, the first party wishes to give a gift to the third party and agrees to give consideration to the second party in exchange for payment of the gift.
A good example of a donee beneficiary is the recipient of a life insurance policy payout. The second party, the insurance company, agrees to provide a payout to the third party upon the death of the first party in exchange for monthly premium payments. If the beneficiary of the policy does not receive payment, they can sue the insurance company even though they were not a part of the contract.
Breach of Contract
When the promisor of a contract breaches the contract, the third party has the ability to file a lawsuit against the promisor. However, because the contract between the promisor and promisee defines the third party's rights, the promisor is allowed to use the same defenses available when being sued by the promisee. The following are some of the defenses available to the promisor:
- The statute of frauds.
- Lack of consideration.
- Lack of capacity.
The promisor may also defend themselves using the legal excuses for non-performance of a contract:
- Failure of consideration.
- Frustration of purpose.
Because the promisor can defend themselves in exactly the same way they would when being sued by the promisee, they also have the ability to file counterclaims against the third-party beneficiary. However, the liability of the third party cannot be more than what the amount owed by the promisor as defined by the contract.
In simpler terms, if the promisee owes the promisor money, damages awarded to the third party can be reduced based on the amount still owed to the promisor. If the amount of money owed to the promisor exceeds the value of the contract, the third party may not be awarded any money. However, the third party will not and cannot be forced to assume a debt.
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