Third Party Contracts: Everything You Need to Know
Third party contracts are agreements that involve a person who isn't a party to a contract but is involved with the transaction.3 min read
Third party contracts are agreements that involve a person who isn't a party to a contract but is involved with the transaction. This person may be a buyer representing one of the parties.
About Third Party Contracts
Think of a third-party as individual who isn't directly involved with a transaction but may be affected by it. The third-party generally has no legal rights in the transaction unless the contract is for their benefit.
Third Party Beneficiary
A contract is drawn up and the parties to the contract want a third-party to be able to sue if the contract promise isn't fulfilled. This person is considered a third-party beneficiary. In other words, when a contract results in benefits for the third person, they become a third-party beneficiary with the authority to have the contract enforced.
An example of a third-party beneficiary contract is one drawn up with a life insurance company. With a contract, the insurance company has made a promise to the person being insured that the insurance company will pay the beneficiary. Using the life insurance contract as an example, you have a policy and your spouse is the beneficiary. You die, which results in your spouse receiving proceeds from the policy.
In the event the insurance company refuses to pay according to the terms of the contract, he or she has the right to file a lawsuit against the insurance company. This action can be brought even though the person wasn't a party to the contract.
There's also the situation where the contract's beneficiary is a class of people versus a specifically named person. An example would be a contract between an employer and a union. In this situation, one of the individuals covered by the union contract is able to file suit even though he or she isn't specifically named.
Before a third-party beneficiary can file suit, the contract must be clear the intent on the contract is involves direct benefits of a third person.
When a contract is performed, everyone who may benefit from the contract is not entitled to file a lawsuit as a third-party beneficiary. These persons are referred to as incidental beneficiaries and have no rights regarding the contract. In court, it would be determined that the beneficiary had no "standing" to file a suit if the contract was broken.
An assignment refers to one person who is party to a contract (the assignor) transfers their rights to another person known as the assignee. The assignee may sue the contract directly versus the person named as the assignor. The originator of the contract is referred to as the obligor. There are basically no formal requirements for an assignment unless a statute is in place with specific requirements. If any words in the contract show intent to transfer rights, that's enough to constitute an assignment.
If the assignment doesn't include any consideration, it doesn't negate the validity of the assignment. This is because an assignment is a transfer of a right, not a contract.
Assignments may be made for several reasons:
- The assignment may be a gift.
- An assignment may be made for future money.
- Any contract can be assigned as long as the obligor gives permission.
- A contract for personal services can't be assigned unless all parties agree.
- A contract may prevent the assignment of any rights. In some courts, a contract that prohibits assignments is binding and any assignment made violating the prohibition has no effect.
- The assignor isn't relieved of contract obligations due to an assignment. Only the other party to the contract may relieve them.
When it comes to an assignment of a right to the money, the prohibition of the assignment is generally considered invalid. If assigning a right for the performance of personal services would increase the obligor's burden in performing the contract, an assignment is typically not permitted. A contract that involves the performance of personal services can only be assigned with the obligor's permission.
The delegation of the duties of a contract refers to the transfer of those obligations. The person named in the contract responsible for the duty is known as the delegate. Although the delegate must perform the contract, the delegator (or the person originally contracted to perform) remains liable for the performance.
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