When Is Someone A Third Party Beneficiary?
In a typical contract, there are parties to the contract. The parties are the people or entities that sign or agree to the contract, and who generally get something from the contract. When the contract is breached or goes unfulfilled, either party can then sue to enforce the terms of the contract.
But there are certain times when someone who has nothing to do with a contract and who never signed or agreed to the contract can sue when the contract is breached. This seems impossible—but it’s not.
When is Someone a Third Party Beneficiary?
Often, parties can sign a contract that benefits someone else, who is not a party to the contract. That “non-party” is called a third party beneficiary. Because the beneficiary is deriving a benefit of the contract, and has lost something when the contract is breached, the third party has standing to sue.
Not everybody is a third party beneficiary—in order to be able to sue when you haven’t signed a contract, the beneficiary must meet certain criteria:
- The clear intent of the contracting parties must be to have benefitted the beneficiary
- One of the contracting parties breached the agreement
- The third party sustained damages or losses because of the breach
A court will often ask whether the parties that did contract intended to give the third party the right to sue if the contract is breached. Sometimes, that right has to be expressly or clearly expressed in the contract.
The third party beneficiary must be a clear intended beneficiary; someone who just happens to receive some tangential or side benefit will not be considered a beneficiary to a contract.
Note that third party beneficiary law goes only one way—the third party’s right to enforce the agreement. It does not allow someone that is a party to a contract to sue a third party beneficiary—in other words, the fact remains that in order to be sued under a contract, you must have signed or agreed to it.
Types of Third Party Beneficiaries
Releases often have third party beneficiaries. For example, if you and I sign a release that says you release me and “my family,” my family are third party beneficiaries, even though they did not all sign our release.
Often, contracts may have indemnification agreements, where someone agrees to indemnify a party, as well as that party’s successors, beneficiaries, or subsidiary companies. All those companies are third party beneficiaries—even though they didn’t all sign the contract.
If parties want to make sure that someone cannot enforce a contract, they should specifically say in their business contracts that a particular person or company is not an intended third party beneficiary with the ability to sue.
Call the West Palm Beach business litigation attorneys at Pike & Lustig today for help with your business contracts and agreements.
