1. Incidental Beneficiary Definition
2. Incidental Beneficiary Law
3. Third party beneficiary

An incidental beneficiary example is a legal entity or individual who is not party to a contract and unintentionally becomes the third party beneficiary of the contract once it has been carried out.

Incidental Beneficiary Definition

An incidental beneficiary is a person or legal entity that is not party to a contract and becomes an unintended third party beneficiary to a trust or contract. In contrast, an intended beneficiary is explicitly promised certain benefits in a contract but they are still not party to the contract itself. Incidental beneficiaries are not explicitly promised any such benefits but might stand to benefit from the contract under certain circumstances. 

For example, when a homeowner signs a service contract with a landscaping provider, their neighbor might become an incidental beneficiary due to the fact that a well-manicured lawn can increase the neighborhood's property value. An incidental beneficiary does not have any legal rights to the benefits they are receiving, however. In this scenario, if either contracted party breaks the contract, the homeowner's neighbor has no grounds to sue for loss of the benefit they were receiving.

Incidental Beneficiary Law

There are generally two categories that a third party beneficiary will fall under:  

  • Intended beneficiaries  
  • Incidental beneficiaries

Intended beneficiaries have the right to pursue legal action in the event of a breach of a third-party beneficiary contract. However, to pursue such action, the third party must be able to establish the following:

  • A contract exists between party A and party B
  • Either "clear" or "manifest" intentions between party A and party B that the contract is meant to benefit the third party directly
  • A breach of contract has occurred by party A or party B
  • Damages have happened to the third party as a result of the breach  

It is important to note that an incidental beneficiary does not have any rights under the contract.

Third party beneficiary

According to established laws pertaining to contracts, a third party beneficiary has the right to sue on contracts under certain circumstances, despite the fact that they are not directly involved in its execution. These rights come into play when the third party is named as an intended beneficiary of the contract, rather than becoming an incidental beneficiary. When the intended beneficiary relies on or agrees to this relationship they gain the right to sue either of the other involved parties, depending on the specific circumstances the relationship was formed under.

A third-party beneficiary is not able to claim shares in proceeds from a contract once certain conditions have been met. Beneficiaries may be either business entities or individuals who will ultimately receive a benefit in some form. This is also sometimes referred to as an incidental beneficiary or, in other words, a third party beneficiary that has received benefits even though they weren't involved in the original agreement they are benefiting from.

Auto insurance contracts are a common example of this concept. A car owner has entered into an agreement with their insurance company. The insurance company agrees to provide coverage in the event that the car takes on damage in an automobile accident. The one who benefits most from this agreement, however, is not the owner of the car but the repair shop that will be responsible for correcting the physical damage done to the car. The repair shop in this example effectively becomes the third party beneficiary due to the fact that they're receiving the money from the insurance company and not the car owner.

A third-party beneficiary may also be a business entity or individual that has legal rights when it comes to enforcing a contract. A parent may lease a car for their child, for example. Even though the child in this example was not directly involved in forging the agreement, if the dealership fails to meet their obligations, the child can exercise certain rights as a third party beneficiary and pursue legal action to force the dealership to uphold the obligations they agreed to with the parent.

Under most circumstances, a third-party beneficiary must be named as the intended beneficiary of a contract to be able to pursue legal rights under the contract. It's up to the beneficiary to prove that they are actually an intended beneficiary.

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