Intended Beneficiary: Everything You Need to Know
An intended beneficiary is a specific type of third-party beneficiary. 3 min read
An intended beneficiary is a person or legal entity that has been explicitly named in the terms of a contract as one that is intended to receive the benefits associated with executing the contract in question.
Intended Beneficiary Law and Legal Definition
An intended beneficiary is a specific type of third-party beneficiary. The intended beneficiary will benefit from the execution of a contract by acquiring certain rights under the terms of the contract in question. They also have the ability to enforce the terms of a contract once their rights have vested. Intended beneficiaries are also sometimes referred to as "direct beneficiaries."
The intended beneficiary is justified in their reliance on a promise that has been made in a contract. It doesn't matter if they learn about this promise from any of the following:
- The promisor
- The promisee
- A third party
It also doesn't matter if the promise is intended to satisfy the promisee's contractual obligations, as a gift, or something else entirely. If the beneficiary's justifiable reliance on a promise undergoes a material change, that change precludes any modification or discharge of the agreement that the beneficiary did not consent to. Although there isn't any novation or change in the beneficiary's position, the promisor and promisee' power to vary the promisor's obligations to the beneficiary is nullified in the event that the beneficiary assents to the promise in question in a manner which is invited by either of the other parties.
Intended vs. Incidental Beneficiary
For a third party beneficiary to be able to claim rights under a contract, they must be named as an intended beneficiary and cannot be an incidental beneficiary. The burden of proof that they are in fact an intended beneficiary is on the third party. For this reason, it can be helpful to understand the difference between an intended beneficiary and an incidental beneficiary.
Incidental beneficiaries are parties that can potentially benefit from a contract's execution even though it was not the intention of any of the contract's involved parties. For example, if somebody hires a contracting company to renovate their home and they insist that they use a specific painter due to their good reputation in the area, the painter becomes an incidental beneficiary to the agreement between the homeowner and the contractor. Neither of the contracting parties is agreeing to this with the explicit intention to benefit the painter.
The homeowner really just wants the best work possible to be done on their house and the contractor just wants to be paid for the work. If either the homeowner or the contractor breaches the agreement in a way that prevents the painter from ever getting the job, the painter has no rights to recover damages under the contract. As another example, say somebody offers to buy a Lexus for their friend. If they later go back on their word, Lexus has no rights to sue for a breach of contract.
The main difference between an incidental beneficiary and an intended beneficiary is that one of the active parties in a contract, known as the promisee, has made a promise to provide a consideration to a second party, known as the promisor, in exchange for the promisor agreeing to provide something to a third party beneficiary that has been explicitly named in the agreement.
The promisee has to have the intention to specifically benefit the intended beneficiary. However, this requirement has a somewhat unusual definition under the laws that pertain to such matters. Even though it can be presumed that the promisor has the best interests of the intended beneficiary at heart, if somebody were to enter into a contract with another person to deliver a nest of hornets to their worst enemy, their enemy is legally considered to be the intended beneficiary of the agreement.
There are commonly two situations in which an intended beneficiary relationship can occur. The first is in a creditor beneficiary scenario, which consists of one party owing a debt of some sort to another party. The debtor agrees to provide consideration of some sort to another party and, in exchange, that party will promise to pay some or all of the debt that is owed.
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