1. What Is a Third-Party Beneficiary?
2. Specifics for Third-Party Beneficiaries
3. Examples

A third-party beneficiary contract is an agreement between two parties where a third party (the beneficiary) stands to benefit from the contract.

As the name suggests, a beneficiary is a person who stands to receive some type of benefit. For example, a beneficiary receives an inheritance from being named in a will. Another example is a person — named as a beneficiary on the policy — who receives money in the event of an insurance policy payout. 

What Is a Third-Party Beneficiary?

A third-party beneficiary is neither the contract's promisor or promisee. However, the beneficiary can benefit from the contract's performance. The beneficiary can take legal action to enforce a contract only after his or her rights have been vested (by either justifiable reliance on the contractual promise or the assent of the contracting parties).

The beneficiary can be either an incidental or intended beneficiary.

Incidental beneficiaries aren't specifically named in the contract but can still benefit from it. They hold no rights to the contract. They simply get a reward from the agreement by chance.

Intended beneficiaries receive direct benefits from the contract. Usually, they're named somewhere in the agreement, and they're entitled to sue for contract breach in the same way as a primary party.

If intended beneficiaries decide to sue, they must prove they were indeed intended beneficiaries. In this instance, the agreement must have intended to benefit them by putting their name somewhere in the contract. Two specific situations often involve intended beneficiaries: a donee beneficiary and a creditor beneficiary.

Specifics for Third-Party Beneficiaries

Even though a third party isn't actually a party in the contract, he or she may still benefit from the execution of the agreement. Certain standards must be met for a third-party beneficiary to have the legal rights to enforce a contract. 

Usually, third-party beneficiaries are not simply incidental ones; instead, they're intended to receive a benefit. If the contract doesn't expressly state an intention to benefit a third party, other evidence may be used to show intent.

Factors that go into consideration to show intent include the following:

  • Who the alleged beneficiaries are
  • The nature of the contract
  • The duty created toward the beneficiaries

Beneficiaries may be eligible to recover funds if they can show they were intended to benefit from the contract. For instance, one court holds that someone can enforce an agreement's terms if the following conditions are met:

  • The contractual parties haven't otherwise agreed.
  • The parties' intention for contract performance was to benefit the beneficiary.

The contract's terms or the circumstances surrounding its performance indicate one of the following:

  • The performance satisfies a duty or obligation owed to the beneficiary from the promisee.
  • The intention of the promisee is to benefit the beneficiary with the promised performance.

Examples

Terry agrees to buy a car and then give it to Ellen as a gift. Terry asks the car dealer, Tom, to order the car. When it arrives, Terry refuses to honor the contract by paying for the car. Tom can then sue for damages because the contract breach hurts him financially, although he's not a party to the contract.

A contract is created when a person purchases an insurance policy. The agreement is between the insurance company and the person buying the policy. However, a third party is the one who stands to receive insurance payments. This is the third-party beneficiary in the event the person who purchased the policy passes away. The beneficiary has the legal right to receive benefits and is entitled to sue if the contract isn't upheld.

Grandpa enters into an agreement with a car dealer to buy a Jaguar to give to his grandson as a graduation gift. If the dealer accepts a down payment and then doesn't go through with the sale, the grandson can sue the dealer as a third-party beneficiary. He would sue for specific performance of the agreement.

Contracts can be complex, so if you have any questions or concerns about one, it's best to consult with a professional skilled in contract law. You want to protect your rights as much as possible, so having someone explain everything you need to know can be a big advantage.

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