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.

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.

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