Rights of a Beneficiary: Vesting & Enforceable Claims

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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.

Intentional third-party beneficiaries to a contract are indirect parties but receive a benefit from a contract because of the promise of a gift or receives a benefit because of a debt owed through performance by the promisee.

Intentional Third-Party Beneficiaries and Their Rights

Has a flower shop ever delivered you a big bouquet of roses from your sweetheart on Valentine's day? If so, you were the third-party beneficiary to a contract.

A third-party beneficiary is one who received a benefit from the terms of a contract between two principle parties. While the third party did not expressly enter into the contract, the beneficiary becomes part of the contract terms, either incidentally or intentionally.

An incidental beneficiary becomes a party to a contract indirectly but is not intended to be included in the contract. To make the point, let's say a neighbor contracts a local DJ for a party he is hosting in his yard. While the music plays into the night, you benefit from listening to the top tunes. If the DJ changes genre during the set to something that you dislike, there is not much you can do about it but wear earplugs.

That is because you, the incidental beneficiary may receive an indirect benefit from the contract but have no cause to sue if the terms of the original contract are not fully executed.

For our purposes, we will focus on the intentional beneficiary who received benefits from a contract because the principle parties to the contract specifically named the beneficiary as a party. Unlike the incidental beneficiary, the intentional beneficiary does have rights to the contract and can sue for breach of contract should the terms change.

Suppose your friend purchased you a Jelly of the Month Club subscription for your birthday. Your friend contracts the folks at Jelly of the Month Club to have a different flavor of jelly shipped to your home each month for a period of one year.

As the intended beneficiary to this contract, it is your friend's obligation to exchange consideration, or payment, for your monthly delivery and Jelly of the Month Club's obligation to send you a new jar of jelly each month for the term of the contract. Should you not receive Jelly of the Month in the month of June, you have every right to sue for breach of contract, or failing to follow through with the agreed-upon terms.

There are two categories of third-party beneficiaries, and each possesses different rights.

Categories of Third-Party Beneficiaries

Third-party beneficiaries possess rights in two different categories: donee beneficiaries and creditor beneficiaries.

The donee beneficiary benefits indirectly from a contract between two principle parties when one party, the promisee, attempts to give a gift.

Remember the neighbor having the backyard party? A neighbor promises to donate 100 tee shirts to give to all of the guests. The neighbor doesn't have 100 tee shirts, so he will have to order them. The neighbor buys the tee shirts from a third party in order to honor the promise of tee shirts to the neighbor, the second party.

You see, the tee shirt shop is the donee beneficiary and is not actually part of the agreement to bring tee shirts to the party but benefits from the tee shirt order.

In contrast, creditor beneficiaries are third parties to a contract and receive benefits when there is a legal duty for a promise to perform.

An example will help here. Your neighbor wants to hire entertainment for the backyard party. He contacted a talent agency to hire the DJ. While the talent agency does not actually spin records, the agency will contact an available DJ to perform for the evening.

So, the neighbor and the talent agency are the principle parties to the contract. The DJ becomes the creditor beneficiary to the contract. The DJ benefits from the contract between the neighbor and the talent agency because he is specifically named as a third party and the contract is based on performance.

When the DJ agreed to take the gig, that was expressing assent, or an expression of approval. If the neighbor proves to be a deadbeat and not pay the piper, the DJ has a cause of action.

So, how does a third party become vested in a contract?

When Beneficiary's Rights Vest and Claims Are Enforceable

A third-party beneficiary's rights vest, or become an immediate right to present or future enjoyment, of a benefit when one of the following occurs:

  • When assent occurs - agreement by the third party to perform
  • When the third party detrimentally relies on the promise made by the principles in the original contract
  • When stated conditions for vesting have been satisfied by the parties in the original contract

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