People often assume that a contract only involves the parties who sign it, but others’ fortunes may also flourish or suffer from the execution of the contract. These outside entities are called third-party beneficiaries, and they could have the right to share in the proceeds or enforce the agreement if the contract was drafted at least in part to benefit the third party.
The third-party may not previously know the agreement existed and need not sign it. Nevertheless, the involved parties may add a clause to identify a third-party beneficiary who will benefit from the contract. It has broad applications, ranging from a bank owed money for a loan or the beneficiary of a life insurance policy.
Three kinds of beneficiaries
There are three classes of third-party beneficiaries:
- Donee beneficiary: The third party may benefit from the promise of the gift or benefit as part of the agreement outlined in the contract.
- Creditor beneficiary: This third party receives the benefit of a contract as payment for a debt owed by one of the contract’s parties.
- Incidental beneficiary: This third party is neither a donee nor a donor.
Not all claims are valid
Just because a party believes that they have a stake in the execution of the contract does not mean that they are a third-party beneficiary who has the power to enforce an agreement. The contract’s intent is the controlling factor in whether they are beneficiaries.
It may not be clear-cut
The laws surrounding these definitions can be quite complex, so many turn to a business law attorney who understands the rights of third-party beneficiaries.