Define: Third-Party Beneficiary

A third-party beneficiary refers to an individual who can receive advantages from a contract despite not being a signatory. The individuals who signed the contract are known as the promisor and promisee. The promisor makes commitments to benefit the third-party beneficiary, while the promisee bears the cost of these commitments. There are two categories of third-party beneficiaries: intended and incidental. Intended beneficiaries are individuals whom the promisor and promisee intended to benefit, either as a gift (donee) or to settle a debt (creditor). Incidental beneficiaries are individuals who happen to receive benefits but were not intended to do so. The third-party beneficiary can only enforce the contract if their rights have vested, meaning they are aware of the contract, have agreed to it, or have relied on it. Once their rights have vested, they can take legal action against the promisor for failing to fulfil their promises. The promisor can defend themselves by claiming that the promisee did not uphold their promises. The promisee can only be sued if the third-party beneficiary relied on their promises.

A third-party beneficiary refers to an individual who is not a party to a contract but can still derive benefits from it. The individuals who enter into the contract are known as the promisor and promisee. The promisor makes promises to benefit the third-party beneficiary, while the promisee is responsible for fulfiling those promises. For instance, if a mother purchases medical insurance for her son, the mother is the promisee, the son is the third-party beneficiary, and the insurance company is the promisor. There are two categories of third-party beneficiaries: intended and incidental. An intended beneficiary is someone whom the contracting parties intended to benefit. Within the category of intended beneficiaries, there are two types: donee and creditor. A donee beneficiary is someone whom the promisee intends to benefit without expecting anything in return. On the other hand, a creditor beneficiary is someone whom the promisee owes money to, and the promisor pays off that debt. An incidental beneficiary is someone who benefits from the contract but was not intended to do so. The rights of the third-party beneficiary are not enforceable until they become vested. Vesting occurs when the beneficiary becomes aware of the promise and either agrees to it, takes legal action to enforce it, or relies on it. Once vested, the beneficiary has the right to sue the promisor for breach of contract. The promisor can defend themselves by claiming that the promisee did not fulfil their obligations under the contract. However, the beneficiary cannot sue the promisee unless they relied on the promise. For example, if a father promises to pay for his daughter’s college tuition, and the daughter is aware of the promise and relies on it, her rights become vested. If the father fails to fulfil his promise, she can take legal action against him for breach of contract. The father can defend himself by arguing that the daughter did not fulfil her obligations, such as maintaining good grades. The contracting parties have the ability to modify or cancel the contract if the beneficiary’s rights have not yet vested. Once vested, the contract cannot be altered without the consent of the beneficiary.

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This glossary post was last updated: 17th April 2024.