Contracts/Third-party beneficiary

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.

Intended vs. incidental beneficiary

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

There are two common situations where such a 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.