Key Takeaways

  • An intended beneficiary is a third party explicitly named in a contract who has legal rights to enforce that agreement.
  • Courts determine intended beneficiary status by examining the intent of the contracting parties, typically found in the contract’s language and surrounding circumstances.
  • Creditor beneficiaries and donee beneficiaries are two main types of intended beneficiaries, each with specific rights.
  • Intended beneficiaries can sue for breach of contract once their rights vest, even if they were not part of the original agreement.
  • Properly identifying and naming an intended beneficiary in a contract is crucial to avoid litigation and enforce contractual expectations.

An intended beneficiary example is a person or legal entity that is explicitly named in a legal document, such as a contract, trust, or will, as the intended recipient of the benefits associated with execution of the agreement.

Third Party Beneficiary

Third party beneficiaries are people or legal entities that stand to benefit from the execution of a contract or legal agreement between two other people or entities. Every contract includes at least two basic types of parties:  

  • The promisor  
  • The promisee

Third party beneficiaries are not involved in the execution of a contract, but, if the contract in question is fulfilled, they can stand to benefit from its execution. In some situations, a third-party might have certain legal rights that they can exercise in order to enforce the execution of a contract or share in the benefits associated with it. If they can, for example, prove they are an intended beneficiary rather than an incidental beneficiary, they will have access to these rights.

According to the law of contracts, third-party beneficiaries have rights to sue on a contract, despite the fact that they were not involved in its formation or execution. This right comes into play when the third party beneficiary is named as the intended beneficiary in the contract, rather than an incidental beneficiary, and they rely on or agree to the contractual relationship, depending on the specific circumstances the agreement was made under.

If a parent chooses to purchase a car for their daughter, for example, and the dealership orders the car upon being notified of their agreement, the dealership has become a third-party beneficiary. If the parent then refuses to follow through on the purchase, the dealership has the right to pursue legal action for damages because they will experience a financial injury as a result of the failure to execute the agreement. 

As another example, consider a life insurance policy. The policy is between the insurance company and the agreed party, but neither of these is the beneficiary of the contract. The person who is to receive the benefit of the contract in the event that the insured party dies is considered the intended third-party beneficiary and has the right to sue either of the other two parties for failure to uphold the contract.

Determining Intended vs. Incidental Beneficiaries

Not every third party who benefits from a contract is considered an intended beneficiary. The key factor courts examine is the intent of the original contracting parties. This intent is typically found in the language of the agreement, the purpose of the contract, and the circumstances surrounding its formation.

  • Intended Beneficiaries are those whom the parties clearly intended to benefit and who may therefore have enforceable legal rights.
  • Incidental Beneficiaries, on the other hand, benefit indirectly and have no standing to sue if the contract is breached.

For example, if a city enters into a contract with a construction company to build a public park, the residents may benefit from the park. However, unless the contract explicitly states that the residents are intended beneficiaries, they are considered incidental and have no enforcement rights.

Intended Beneficiary

Intended beneficiaries are a specific type of third-party beneficiary. This is someone who is intended to directly receive benefits from an established agreement. Their name will typically be mentioned somewhere in the contract itself. Intended beneficiaries have just as much right to sue in the event of a breach of contract as the parties primarily involved in its execution. One of the main ways intended beneficiaries benefit from a contract is by acquiring certain rights under that contract. Intended beneficiaries also have the ability to enforce a contract once their rights have come into play. 

Intended beneficiaries are also sometimes referred to as "direct beneficiaries." Intended beneficiaries are justified in their reliance on a promise that they are named in regardless of whether they learn about the promise from any of the following:  

  • The promisor  
  • The promisee  
  • Third Parties

It also doesn't matter if the agreement is meant to satisfy the promisee's obligations, serve as the promise of a gift, or do something else. If a material change in the beneficiary's position is justified in their reliance on the agreement, that change of position will preclude, discharge, or modify the agreement without the consent of the beneficiary. Although there isn't any novation or any change of the beneficiary's position, the ability of the promisee and promisor's ability to vary the promisor's obligations to the intended beneficiary terminates when the beneficiary assents to the agreement in a way that they are invited by either of the other two parties.

In the event that the intended beneficiary decides to pursue legal action, the burden of proof falls on their shoulders in terms of whether or not they are actually an intended beneficiary of the contract. In scenarios such as this, the agreement needs to have been intended to benefit the third party in question by explicitly naming them in the terms of the contract.

Types of Intended Beneficiaries

Intended beneficiaries fall into two primary categories, each defined by the nature of the benefit conferred and the purpose of the contract:

  1. Creditor Beneficiary: This occurs when the promisee’s primary intention is to discharge a debt or legal obligation to the third party.
    • Example: A owes B $10,000. A contracts with C to pay B directly. Here, B is a creditor beneficiary and may sue C if payment is not made.
  2. Donee Beneficiary: This arises when the promisee intends to confer a gift or benefit upon the third party.
    • Example: A takes out a life insurance policy naming B as the recipient. B, as the intended recipient of a gift, is a donee beneficiary and may enforce the contract.

Understanding which type applies helps determine the scope of legal rights the third party can exercise and the timing of when those rights vest.

When Intended Beneficiary Rights Vest

An intended beneficiary’s rights typically vest — meaning they become legally enforceable — under one of the following conditions:

  • The beneficiary manifests assent to the contract in a manner invited by the parties.
  • The beneficiary relies materially on the contract, such as by changing their position based on the promised benefit.
  • The beneficiary brings legal action to enforce their rights.

Once rights vest, the contracting parties generally cannot modify or cancel the agreement without the beneficiary’s consent.

Common Legal Scenarios Involving Intended Beneficiaries

Intended beneficiaries frequently appear in various legal contexts, such as:

  • Life Insurance Contracts: The named beneficiary can enforce the insurer’s obligation upon the insured’s death.
  • Construction and Real Estate Agreements: A property owner or lender named in a subcontractor agreement may enforce performance.
  • Service Agreements: A client designated to receive services under a vendor’s contract may pursue a breach claim if services are not delivered.

Courts consistently emphasize that the clear expression of intent to benefit a third party is what distinguishes enforceable rights from incidental advantages.

Frequently Asked Questions

  1. What is the difference between an intended and incidental beneficiary?
    An intended beneficiary is explicitly meant to benefit from a contract and can enforce its terms. An incidental beneficiary benefits indirectly and has no legal rights under the contract.
  2. Can an intended beneficiary sue if they are not named in the contract?
    Generally, they must be identified in the agreement or otherwise clearly intended to benefit from it. Without such evidence, they are considered incidental and cannot sue.
  3. When do an intended beneficiary’s rights become enforceable?
    Rights typically vest when the beneficiary assents, relies on the promise, or initiates legal action.
  4. Are life insurance beneficiaries considered intended beneficiaries?
    Yes. The named beneficiary of a life insurance policy is a classic example of an intended beneficiary with enforceable rights.
  5. Can the original parties change the contract after naming an intended beneficiary?
    They generally cannot do so once the beneficiary’s rights have vested without that beneficiary’s consent.

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