Third-Party Beneficiaries to a Contract - Explained
Non-Parties Who Have Rights in a Contract
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Who are the Beneficiaries of the Contract?
The parties to the contract are the primary beneficiaries. In general, individuals who are not parties to a contract have no rights to sue to enforce the contract or to get damages for a breach of contract. There are, however, exceptions to this rule. It is possible for third parties to have rights in a contract. A third-party beneficiary may have rights under a contract if the original parties to the contract intend for the agreement to benefit the third party and that intent is demonstrated in the agreement. This may happen at the time of the contract, or a third party may also acquire rights in an already executed contract if one party to the contract validly transfers those rights to the third party.
- Example: I enter into a contract with ABC Corp to provide them consulting services. As part of the agreement, ABC Corp is to make payments for those services directly to XYZ Corp. Because XYZ Corp is a named (intended) beneficiary, it has rights under the contract that are enforceable against ABC Corp.
The extent of the third party's rights is determined by her status as either a donee beneficiary or creditor beneficiary.
Next Article: Assignment of a Contract Back to: CONTRACT LAW
What is a Donee Beneficiary?
A donee beneficiary is a third party who receives contractual rights as a gift from the promisee. If a promisee makes a contract for the benefit of a donee beneficiary and the promisor fails to perform, the third-party may not bring an action against the promisee (individual transferring the contract), but may bring an action against the promisor (individual obligated under the contract). Since the transfer to the beneficiary is a gift, there are no grounds for recourse against the promisee.
- Example: ABC Corp has an obligation to pay me. I instruct ABC Corp to make the payments directly to you. The payments to you are a gift to help your business get started. If ABC Corp refuses to pay you, you may enforce your right to payment against ABC Corp. You cannot, however, sue me if ABC fails to pay.
What is a Creditor Beneficiary?
A creditor beneficiary is a third party who receives contractual rights from the promisee as satisfaction of a debt. When a promisor fails to perform under the subject contract, the creditor beneficiary can bring an action against the promisee, as the value of the consideration transferred is gone. The promisee may also bring an action against the promisor, as her rights have been harmed by the promisors failure to perform.
- Example: ABC Corp has an obligation to pay me. I instruct ABC Corp to make the payments directly to you. The payments to you are in satisfaction of a debt I owe to you for services you have already performed. If ABC Corp refuses to pay you, you may enforce your right to payment against ABC Corp. You can also sue me if ABC fails to pay.
Why do you think that the rules change depending on whether the beneficiary is intended vs unintended? Donee vs creditor beneficiary?
Big Corp does business with Town Corp. Town Corp is the lifeblood of many smaller businesses in its town. These businesses exist to provide goods and services to Town Corp. Big Corp has a dispute with Town Corp which results in Big Corp breaking off relations with Town Corp and, in turn, breaching a major purchasing contract. The loss of Big Corp as a purchaser is detrimental to Town Corp and they are forced to reduce their output. This affects all of the businesses in Town Corps town. What legal options exist for the small businesses in Town Corps town?
- Generally, for an individual to have rights in a contract, they must be an identified party in the contract or an intended beneficiary. Generally, this means the beneficiary must somehow be named or identified as having a right of performance. In this scenario, the smaller businesses are not in privity of contract with Big Corp. They are not named in the agreement, and are thus not intended beneficiaries. As such, these business likely have no cause of action against Big Corp for breaches its agreement with Town Corp.
- What is a Contract?
- Contract Theory Definition
- Meeting of the Minds
- Doctrine of Utmost Good Faith
- Aleatory Contract Definition
- What are the sources of contract law?
- Restatement of Contracts
- Uniform Commercial Code
- Convention on Contracts for the International Sale of Goods (CISG)
- What is a Unilateral Contract vs a Bilateral Contract?
- What is an Express Contract vs an Implied Contract?
- What are the requirements to form a Contract (Offer, Acceptance, Consideration)?
- What is an Enforceable Contract vs. a Valid Contract?
- What is a Void Contract vs a Voidable Contract?
- Adhesion Contract
- What is Mental Capacity to contract?
- What is the requirement of a Lawful Purpose?
- What are common types of Voidable Contract?
- When does an offer to contact terminate?
- Counterparty Definition
- Mirror Image Rule?
- Rule for Sale of Goods
- Silence is Not Acceptance?
- Mailbox Rule
- Shrink-wrap Agreement Definition
- Click-Wrap Agreement Definition
- What is Consideration?
- What is Promissory Estoppel?
- When is a contract required to be in writing Statute of Frauds?
- What type of writing satisfies the statute of frauds?
- Exceptions to the Statute of Fraud
- Documents Under Seal
- Who Can Sign Contracts on Behalf of a Company?
- E-Sign Act
- Privity of Contract
- Who are third-party beneficiaries to a contract?
- What is assignment and delegation of a contract?
- When is a party's Duty of performance?
- Aleatory Contract
- What is an Executed contract vs an Executory contract?
- Inchoate Definition
- Evergreen Contract
- What is Performance, Substantial Performance, and Breach of a contract?
- What is performance of a Divisible Contract?
- When is a party's duty of performance discharged?
- What are conditions to Contract (Precedent & Subsequent)?
- Abandonment Option (Contract) Definition
- Cooling Off Rule Definition
- What is tender performance of a contract?
- What are Impossibility and Impracticability
- What is a Frustration of Purpose?
- Waiver or Release from Contract
- Accord and Satisfaction
- Force Majeure Clause
- What is a Breach of Contract?
- Repudiation (Contract) Definition
- Anticipatory Repudiation
- Acceleration Clause (Contracts) Definition
- What methods exist for resolving a breach?
- What remedies exist for a breach of contract?
- Rescission (Contract)
- Exculpatory Clause
- Hold Harmless Clause
- What is Efficient Breach?
- Organization of a Contract
- How to Read the Contract
- Contract Representations & Warranties
- Contract Covenants
- What rules does a court follow in interpreting a contract?
- Allonge Definition
- What is the Parol Evidence Rule?
- What is a complete integration vs a partial integration?
- Exceptions to the Parol Evidence Rule
- Patent and Latent Ambiguity in a Contract
- Service Level Agreement Definition
- Offtake Agreement