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?

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.