Third-Party Beneficiary

Definition

A third-party beneficiary is a person who is not a party to a contract but who is the intended beneficiary thereof and may therefore enforce it.

Purpose

The purpose of recognizing a third-party beneficiary is to allow an individual who benefits from a contract, despite not being directly involved, to have the right to enforce the contract terms. This ensures that the intended benefits are delivered as agreed upon by the original parties.

Examples of Use

1. Insurance Policies: A life insurance policy names a beneficiary who can claim the insurance proceeds upon the insured's death, despite not being a party to the contract.
2. Trust Agreements: Beneficiaries of a trust can enforce the terms of the trust agreement even though they did not create the trust.
3. Service Contracts: In some service agreements, a third party who is intended to receive the service benefits may enforce the contract terms if the service provider fails to deliver.

Related Terms

• Contract: A legally binding agreement between two or more parties.
• Beneficiary: A person who derives advantage from something, especially a trust, will, or life insurance policy.
• Assignor/Assignee: The assignor transfers rights or benefits to the assignee, who may then enforce those rights.

Notes

• Legal Rights: The third-party beneficiary's rights to enforce the contract must be explicitly stated or clearly intended in the contract terms.
• Types: There are two types of third-party beneficiaries: intended beneficiaries, who have enforceable rights, and incidental beneficiaries, who do not.