Third-Party Beneficiary Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Third-Party Beneficiary, written in plain English, along with examples of how it is used.

What is Third-Party Beneficiary?

Someone (third party) who has been beneficary to the contract though not a direct party to contract and having the right to sue.Normally the third party has no legal rights unless he is the beneficiary of such contract or agreement.

History and Meaning of Third-Party Beneficiary

A third-party beneficiary refers to a person who is not a direct party to a contract, agreement or settlement but has some rights and benefits under it. Third-party beneficiary law originated under contract law and has evolved alongside it. The law recognizes third-party beneficiary rights under a contract if a clear express or implied intent to benefit a third party can be found. This doctrine evolved in recognition of the fact that parties to a contract are not the only ones who may have a legal interest in the performance of the agreement.

Examples of Third-Party Beneficiary

  1. A customer purchases a car from a dealership and under the sales agreement, the dealership is required to provide a warranty that covers the car for a certain period of time. If during the warranty period, the car has a mechanical failure and the dealership refuses to fix it, the customer can sue the dealership. The customer would be considered a third-party beneficiary of the warranty agreement.
  2. An insurance policyholder who is not the actual policyholder but was identified as an intended beneficiary can make a claim upon the death of the policyholder.
  3. A parent, who is the divorced spouse of a life insurance policyholder and the primary custodial parent of a minor child named as a beneficiary under the policy, can bring a claim to enforce the child's rights as a third-party beneficiary of the policy.

Legal Terms Similar to Third-Party Beneficiary

  1. Assignment - refers to the transfer of contractual rights to a third party.
  2. Novation - the transfer of one party’s rights and obligations under a contract to a third party.
  3. Express Contract - an agreement in which the parties explicitly state the terms and conditions of their contract.