Key Takeaways

  • A third party beneficiary clause specifies whether someone not directly part of a contract can enforce its terms.
  • There are three main types of third-party beneficiaries: donee, creditor, and incidental, with only intended beneficiaries (donee or creditor) having enforcement rights.
  • Courts often look at intent—both expressed in the contract and inferred from surrounding circumstances—to determine enforcement eligibility.
  • Well-drafted clauses can explicitly grant or deny third-party enforcement rights, preventing unintended legal claims.
  • Sample clauses often state that no third party may rely on or enforce the agreement unless expressly named.

A third-party beneficiary is a person who has the right to file a lawsuit to enforce a contract even if they are not a party to the contract.

Basics of Third-Party Beneficiaries

In most cases, the only parties that are legally allowed to enforce a contract in court are those who made the contract. Contracts legally bind the parties that have signed the agreement, and these parties have the ability to sue for damages if the contract is breached. If someone else is affected by a breach of contract, they may not have the ability to file a civil lawsuit if they aren't a party to the contract. However, there is an exception to this rule.

 When the terms of a contract aren't fulfilled, third-party beneficiaries may be able to enforce the contract in court. Third-party beneficiaries are people who were not given consideration in a contract but still have the right to enforce the contract. While the third-party beneficiary is not actually a party to the contract, they stand to benefit from the contract if it is fulfilled.

The rights of the third party must be vested before they will be allowed to enforce a contract. For instance, if the third party can prove that their benefits were intended and not incidental, they should be able to file a claim if a contract's terms are not met. A third-party beneficiary exists when a contract is formed for the purpose of benefiting someone other than the parties that agreed to the contract. If you receive an incidental benefit, you would not be considered a third party because the contract was not written with your benefit in mind.

Third parties have rights only when certain requirements are met:

  • There must be a valid contract in place.
  • The parties that created the contract must have done so for the express or implied purpose of benefiting another person.
  • The intended beneficiary must be listed in the contract and the benefit he or she will be provided cannot be revoked.
  • The third party should be alerted to the existence of the contract.

The Restatement (First) of Contracts Section 133 (1932) lists three different third-party beneficiary classes:

Third-party beneficiaries must be intended and cannot be incidental. If the contract does not expressly state intent to benefit the third party, other evidence can be used to prove intent. Some factors that may be considered include the following:

  • The third party's identity.
  • The nature of the contract.
  • The duty to the third party created by the contract.

If the third party can prove he or she belongs to a class of people that a contract was made to benefit, he or she should be able to recover his or her benefits. A third-party beneficiary will only be allowed to legally enforce a contract once certain requirements have been met.

For example, let's assume that one person agrees to purchase a car for another. This person alerts the car dealer who then orders the car. If the person that agreed to make the purchase fails to follow through, the dealer, who is the third party, can file a lawsuit because he or she will be damaged by the failure to fulfill the contract.

 Another example of a third-party beneficiary having the ability to enforce his or her rights involves insurance policies. If an individual purchases an insurance policy for the benefit of another person, the third party is still entitled to his or her insurance benefits if the person who bought the policy dies. The third party may also be able to sue the insurance company if they don't uphold the contract.

Determining Intended Beneficiary Status

Courts determine whether someone qualifies as an intended beneficiary by examining contract language and the surrounding circumstances. While explicit mention in the contract is the strongest evidence, intent may also be inferred from:

  • The overall purpose of the agreement.
  • The relationship between the parties and the alleged beneficiary.
  • Whether the performance of the contract directly and substantially benefits the third party.

For example, in construction contracts, a subcontractor may claim rights if the agreement between the owner and general contractor shows clear intent to benefit them. However, if the benefit is merely incidental—such as a neighboring property’s value increasing due to construction—the party cannot enforce the contract.

Courts may also apply Restatement (Second) of Contracts §302 standards, which require that recognition of the third party’s right be appropriate to effectuate the parties’ intent, and that performance will satisfy an obligation to the beneficiary or give them a direct benefit.

Purpose and Function of a Third Party Beneficiary Clause

A third party beneficiary clause clarifies whether an individual or entity who is not a direct party to the agreement has the right to rely on or enforce its provisions. This clause serves two main purposes:

  1. Granting Enforcement Rights: It can expressly identify certain third parties as intended beneficiaries with legal standing to enforce the contract. For example, in a credit or insurance agreement, the clause might specify that the beneficiary is entitled to enforce payment obligations or claim benefits.
  2. Limiting Enforcement Rights: Alternatively, it may explicitly state that no third party has rights under the agreement, which prevents unintended claims and narrows enforcement to the contracting parties only.

A well-drafted clause should:

  • Clearly name any intended beneficiaries.
  • Specify the scope of their rights.
  • State whether consent is required for amendments affecting their rights.
  • Address when their rights vest or terminate (e.g., upon satisfaction of a loan or completion of an obligation).

Such clarity reduces ambiguity and litigation risk, ensuring the parties’ intentions are honored.

Third-Party Lawsuit Example

A good example of a third-party lawsuit took place in Massachusetts. In this case, the Endurance International Group was sued for breaching a contract. Endurance sought a dismissal of the case due to improper venue. In particular, Endurance claimed that the third party was only allowed to bring legal action in Dublin, Ireland, due to a provision in the contract. While the Massachusetts Superior Court initially ruled in favor of Endurance, this ruling was reversed by the Appeals Court.

The Appeals Court's reasoning was that other jurisdictions had allowed third-parties to enforce contracts outside of the venue stated in the contract, meaning this practice was also allowed in Massachusetts despite the lack of previous cases.

Sample Third Party Beneficiary Clause Language

Contracts frequently include standardized language to address third party rights. Below is a typical limiting clause:

“Except as expressly provided in this Agreement, no person or entity other than the parties hereto shall be entitled to rely upon or enforce this Agreement, and this Agreement is not intended to confer any rights or remedies upon any person other than the parties and their permitted successors and assigns.”

Alternatively, a granting clause might read:

“The parties agree that [Named Beneficiary] is an express third party beneficiary of this Agreement and shall be entitled to enforce its provisions to the extent necessary to protect its rights under Sections 7 and 9 hereof. No amendment or waiver affecting these provisions shall be effective without the written consent of [Named Beneficiary].”

These clauses help set clear boundaries on enforcement and ensure the parties’ expectations are enforceable in court.

Frequently Asked Questions

  1. What is a third party beneficiary clause?
    It’s a contract provision that specifies whether someone who is not a party to the agreement has the right to enforce its terms.
  2. Can all third parties enforce a contract?
    No. Only intended beneficiaries, such as donee or creditor beneficiaries, can enforce a contract. Incidental beneficiaries cannot.
  3. How do courts decide if someone is an intended beneficiary?
    Courts review the contract’s language and context to determine if the parties clearly intended to benefit that person or entity.
  4. Should contracts always include a third party beneficiary clause?
    Yes, including one can prevent disputes and clearly define who, if anyone, has enforcement rights.
  5. Can third party rights be revoked?
    Yes, unless the beneficiary’s rights have vested—meaning they have relied on the contract or legal conditions for enforcement have been met.

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