What Is a Third Party Beneficiary?

A third party beneficiary is a person who will benefit from a contract made between two other parties. The third party beneficiary is not a party to the contract itself, but if the contract is fulfilled, the third party stands to realize a benefit. Under certain circumstances, the third party has legal rights to enforce the contract or share in its proceeds. For example, if they can prove that they were an intended beneficiary and not an incidental beneficiary.

Third Party Beneficiary Explained

A third party beneficiary stands to benefit from the execution of a contract even though they are not actually a party to the contract. There are certain standards that need to be met for the third party beneficiary to have legal rights to enforce a contract or to share in the proceeds.

For example, Mary agrees to buy a car as a gift for Katie. If the dealer is notified and orders the car, but Mary refuses to go through with the contract, the dealer can sue for the damages. This is because the dealer would be financially hurt, even though he is not a party to the contract. In terms of insurance policies, when an individual buys an insurance policy, a contract is formed between this individual and the insurance company, but a third party will receive the insurance payments. If the individual who bought the policy and whose name the policy is under passes away, the third party beneficiary has legal right to receive the insurance benefits and to sue either party if the insurance contract is not upheld.