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Third-Party Beneficiaries & Contracts: Definition & Parties

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  • 0:05 Contract Between Two Parties
  • 1:41 Third-Person Beneficiaries
  • 4:21 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

There are two primary parties to a contract, a promisor and a promisee. However, there are times when a contract actually benefits a third party. These third parties are known as third-party beneficiaries and can be intentional beneficiaries or incidental beneficiaries.

A Contract Between Two Parties

Generally speaking, there are two parties to a contract. The promisor makes the promise and the promisee receives benefits from the promise. The contract between the parties becomes an enforceable instrument when the following six elements are present:

  1. An offer
  2. Acceptance of the offer
  3. Consideration, like money or something else of value to the parties
  4. Mutual intent of both parties to fulfill the contract promises
  5. Capacity
  6. Legally enforceable terms that do not violate law

To make this a bit more clear, let's see what happened when Paulie purchased a pet. Paulie was looking for a new dog. He happened upon Remy's Pet Shop in hopes of finding a cute canine companion for his mother, Mabel. Lo and behold, anxiously vying for Paulie's attention was Lentil, a little Labrador pup. After much negotiation and a few dog licks to Paulie's chin, he and Remy chiseled out a contract.

Paulie, the promisor, offered to pay Remy $500 for Lentil's safe delivery to his mom Mabel's home in another city. Remy, benefiting from the promise, accepted the offer and the deal was done. Paulie paid in cash, both were in sound mind and both intended to do what they promised. This is a cut-and-dry contractual agreement with only two parties, an offer, acceptance, consideration, intent, and mutuality all wrapped up in a legal document. Sometimes, there are third parties to a contract that can make the contract seem a bit more difficult. But it is not difficult to understand the relationships at all.

Third-Person Beneficiaries to a Contract

Third-party beneficiaries are non-parties to a contract that receive rewards from a contract either directly or indirectly. There are two kinds of third-party beneficiaries: an intentional beneficiary and an incidental beneficiary.

When a non-party to a contract receives benefit from the agreement directly, this is known as an intentional beneficiary. This party's name is generally stated within the contract and has as much a right to sue for breach of contract as the primary parties.

Mabel was the intentional beneficiary of the contract between Paulie and Remy in the sale of Lentil. Paulie purchased the pooch but named Mabel as the owner of the dog. Arrangements were made to have the dog delivered to her home where the dog will reside. If Remy does not deliver Lentil to Mabel's home in a timely manner as agreed upon, Mabel holds rights to the contract. Further, if Remy delivers a cat instead, Mabel can sue for breach of contract, or non-performance of the promise.

When a non-party to a contract receives a benefit from a contract and is not specifically named, their benefit is considered incidental and they do not hold any rights to the contract. The incidental beneficiary received a reward simply by serendipity.

Fortunately, Remy delivered little Lentil to Mabel's home safe and as promised. Lentil turned out to be quite a noisemaker. In fact, every time a leaf blew by the window, Lentil would let out a ferocious bark that can be heard for blocks. Mabel's neighbor Harriet loved having Lentil around. She felt safe knowing that such a loud Labrador lived right next door. She no longer worried about prowlers because Lentil's bark was enough to scare a ghost away!

Harriet was the incidental beneficiary of the contract between Paulie and Remy. To say it in another way, because Paulie bought Lentil from Remy for Mabel, Harriet benefitted from having the services of a guard dog in the next yard. If Mabel was to take Lentil on a long vacation and Harriet could no longer rely on Lentil's brutal bark, Harriet would have no cause of action. In fact, even if Harriet's home was ransacked in Lentil's absence, she could not sue Paulie, Remy, or Mabel for anything. Harriet benefitted from Lentil's bark indirectly simply because of Lentil's proximity to her house. Nothing further is owed to Harriet.

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