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 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.

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.

Incidental 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 contracting party. For example, if party A, Andrew, hires party B, Bethany, to renovate his (Andrew's) house, and insists that Bethany use a particular house painter—party C, Charlie—because that house painter has an excellent reputation, then the house painter is an incidental beneficiary. Neither Andrew nor Bethany is entering into the contract with the particular intent to benefit Charlie. Andrew simply wants his house properly renovated; Bethany simply wants to be paid to do the renovation. If the contract is breached by either party in a way that results in Charlie never being hired for the job, Charlie nonetheless has no rights to recover anything under the contract.

Intended beneficiary

The distinction that creates an intended beneficiary is that one party - called the promisee - makes an agreement to provide some consideration to a second party - called the promisor - in exchange for the promisor's agreement to provide some product, service, or support to the third party beneficiary named in the contract. The promisee must have an intention to benefit the third party - but this requirement has an unusual meaning under the law. Although there is a presumption that the promisor intends to promote the interests of the third party in this way, if party A, Andrew, contracts with party B, Bethany, to have a thousand killer bees delivered to the home of Andrew's worst enemy, party C, Charlie, then Charlie is still considered to be the intended beneficiary of that contract.

There are two common situations in which the intended beneficiary relationship is created. One is the creditor beneficiary, which is created where Andrew owes some debt to Charlie, and Andrew agrees to provide some consideration to Bethany in exchange for Bethany's promise to pay Charlie some part of the amount owed.

The other is the donee beneficiary, which is created where Andrew wishes to make a gift to Charlie, and Andrew agrees to provide some consideration to Bethany in exchange for Bethany's promise to pay Charlie the amount of the gift. Under old common law principles, the donee beneficiary actually had a greater claim to the benefits this created; however, such distinctions have since been abolished.