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Who are third-party beneficiaries?

People assume that contracts are only between two parties, but others may benefit or suffer from a contract’s performance. These are known as third-party beneficiaries, and they may have legal rights to enforce an agreement or share in the proceeds. They have this right because the contract was drafted to benefit the third party.

They are either a creditor or a donee in a contractual agreement. The creditor is the individual or organization intending to make a gift in the contract, and the donee is the individual or organization that benefits.

The third party need not sign the contract and may not know it existed when created. However, adding a clause to the contract identifying the third-party beneficiary (either a business or individual) who is expected to benefit from the agreement strengthens the contract.

Common examples include:

  • A person buys a life insurance policy, which then pays the third party upon death
  • A parent may make a down payment for a child’s car, but the parent or the child can take legal action if the seller breaches the contract.

Not all claims are valid

Just because a person might receive an incidental benefit from the contract does not automatically empower the third party to enforce the agreement. In other words: the intention must be the controlling factor.

Not sure what to do?

Texas laws surrounding these matters are far from clear, so many need assistance from a business law attorney to understand whether they have rights as a third-party beneficiary.