What Is a Third Party Beneficiary to a Contract

As with any legal document, contracts can be complex and difficult to navigate through. One term that often comes up is the concept of a “third party beneficiary.” But what does that mean, exactly?

In simple terms, a third party beneficiary is someone who benefits from a contract between two other parties. For example, suppose Company A hires Company B to perform a service. Company A is the “primary beneficiary” of the contract – they are the ones receiving the service. But if Company B agrees to provide that service at a lower price than usual because they have a pre-existing relationship with Company C, then Company C is a third party beneficiary of the contract.

The concept of third party beneficiaries is important because it can impact how a contract is enforced or interpreted. For example, suppose that Company A and Company B have a dispute over the terms of their contract. If Company C is a third party beneficiary, they may have the right to sue either Company A or Company B to enforce the terms of the contract. However, if Company C is not a third party beneficiary, they would not have any legal standing to bring a lawsuit.

There are two types of third party beneficiaries: intended beneficiaries and incidental beneficiaries. An intended beneficiary is someone who the parties explicitly intended to benefit from the contract when they created it. For example, in the scenario above, if Company A and Company B specifically agreed that Company C would receive a discount on the service provided by Company B, then Company C would be an intended beneficiary.

On the other hand, an incidental beneficiary is someone who happens to benefit from the contract, but was not specifically intended to do so. For example, if Company B provides a service to Company A, and that service indirectly benefits Company C (such as by improving the overall industry or market), then Company C would be an incidental beneficiary.

It`s important to note that just because someone benefits from a contract doesn`t necessarily mean they are a third party beneficiary. For example, if Company A and Company B enter into a contract, and Company C later buys Company A, then Company C may benefit from the contract, but they are not a third party beneficiary since they were not part of the original agreement.

In conclusion, a third party beneficiary is someone who benefits from a contract between two other parties. It`s important to distinguish between intended and incidental beneficiaries, as this can impact how a contract is enforced. If you`re unsure about whether someone is a third party beneficiary to a contract you`re involved in, it`s best to consult with a legal professional.

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