Third Party Beneficiaries

In contracts law, a party who was not an original party to a contract may still have the right to sue on the contract in certain situations. This may be the case regardless of whether they were specifically named in the original contract. This outside party is known as a "third party beneficiary". 1

Intended Beneficiaries

In California, the general rule is that a third party may be entitled to damages from the breach of a contract they are not a party to if they can prove the contracting parties intended for the third party to benefit from their contract. As mentioned above, a third party beneficiary need not be mentioned in the contract if they can show what the contracting parties intended to benefit the third party. Courts will instruct juries to look at the contract as a whole and the circumstances under which it is made to determine whether a third party is intended to benefit. For example, if Party A contracts with Party B to deliver a new swimming pool to Party C, then Party C was the intended beneficiary of that contract though he was never a party to the original contract.2

Incidental Beneficiaries

Unlike intended beneficiaries, a third party that has a mere "incidental" or remote interest in a contract between other parties will not have an enforceable right to sue upon breach of the agreement. For example, an insurance policy maintained by a lessor commercial property owner may only incidentally benefit a lessee restaurant owner in the event of an insurance dispute.3

Has the right "vested"?

One has a "vested" right when they have a secured right to present or future enjoyment of a particular asset that cannot be taken away by a third party, even if they do not possess it yet. To determine whether a third party beneficiary right has vested, one must determine if the beneficiary knows of and has detrimentally relied on the rights created; if the beneficiary expressly assented to the contract at the request of one of the parties; or if the beneficiary files a lawsuit to enforce the contract. Once this right has vested, a party to the contract cannot rescind or modify the contract.4

Conclusion

Contract disputes often involve numerous parties with varying degrees of enforceable rights. When negotiating or reviewing an agreement, it is important to expressly state the intentions of the parties on the face of the contract and ascertain whether any third parties may benefit from your agreement.