Third Party Beneficiary Flashcards, test questions and answers

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What is Third Party Beneficiary?

A third-party beneficiary is a person or entity who may have the right to sue on a contract, even though that person or entity was not party to the contract. A third-party beneficiary may be either a donee beneficiary (i.e., one who receives a benefit) or a creditor beneficiary (i.e., one to whom another’s duty is owed). The law of contracts recognizes that it is sometimes beneficial for contracting parties to allow someone else to benefit from their agreement, and thus provides certain protections for third-party beneficiaries. When two parties enter into an agreement, they may agree to provide benefits to someone outside of the contractual relationship by naming them as a third-party beneficiary. In this situation, the non contracting party will have legal rights under the contract even though they are not officially a party in it. For example, if Person A and Person B enter into an agreement where Person B agrees to pay for Person A’s medical bills, then Person C can be named as the third-party beneficiary of this agreement in order for them to receive those payments without being directly involved in any way with either of the two contracting parties. The rights afforded by being named as a third party beneficiary vary depending on what type of contract you are dealing with and which state you are in; however, generally speaking most states recognize three basic types: donee beneficiaries (who receive something), creditor beneficiaries (who owe something) and incidental beneficiaries (who merely benefit indirectly from the contract). Donees are generally entitled to full performance from both parties while creditors only have recourse against one of them; whereas incidental beneficiaries usually cannot sue at all if something goes wrong with performance under the agreement. In conclusion, having someone designated as a third-party beneficiary can be very beneficial when entering into an agreement between two other people or entities because it gives that person certain legal rights without having them actually become part of the contractual relationship itself. Because there are different types of third-parties who can benefit from these arrangements and their entitlements vary depending on state law it is important for anyone considering entering into such an arrangement to understand exactly what type of protection they will get before signing anything binding.