Contracts/Third-party beneficiary: Difference between revisions

A third party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract, despite not having originally been a party to the contract. This right arises where the third party is the party is the intended beneficiary of the contract, as opposed to an incidental beneficiary. It vests when the third party relies on or assents to the relationship, and gives the third party the right to sue either the promisor or the promisee of the contract, depending on the circumstances under which the relationship was created.

Intended vs. incidental beneficiary

In order for a third party beneficiary to have any rights under the contract, he must be an intended beneficiary, as opposed to an incidental beneficiary. The burden is on the third party to plead and prove that he was indeed an intended beneficiary.

An incidental beneficiary is a party who stands to benefit from the execution of the contract, although that was not the intent of either party. For example, if party A hires party B to rennovate party A's house, and insists that party B use a particular house painter - party C - because that house painter has an excellent reputation, then the house painter is an incidental beneficiary. Neither party A nor party B is entering into the contract with the particular intent to benefit party C. A simply wants his house properly rennovated; B simply wants to be paid to do the rennovation. If the contract is breached by either party in a way that results in party C never getting hired for the job, party C nonetheless has no rights to recover anything under the contract.

Similarly, if party A were to promise to buy party B a Cadillac, and were to later go back on that promise, General Motors would have no grounds upon which to recover for the lost sale.

There are two common situations where the intended beneficiary relationship occurs. One is the creditor beneficiary, which is created where party A owes party C money, and party A agrees to provide some consideration to party B in exchange for party B's promise to pay party C some part of the amount owed. The other is the donee beneficiary, which is created where party A wishes to make a gift to party C, and party A agrees to provide some consideration to party B in exchange for party B's promise to pay party C the amount of the gift.

Vesting of rights

The third party beneficiary's rights must have vested in order for him to be able to sue to enforce those rights. The test is whether the third knows of and has justifiably relied on the rights created, or has assented to the contract at the request of one of the parties.

Breach and defenses

Where a contract for the benefit of a third party is breached, the third party can sue. Defenses to a suit by a third party beneficiary include any defense that the promisor .

Either the third party beneficiary can sue the promisee, or the promisor - but he can not sue both. A donee beneficiary can not sue the promisee A creditor beneficiary can sue the promisee on the preexisting debt, that is, they can still sue on the original debt owed.

Rights that accrue to the promisee

The promisee can also sue the promisor for failing to pay the third party beneficiary.