Third Party Beneficiaries

 

By Albert L. Kelley

 

Third party beneficiaries are people who are not parties to a contract, but receive the benefit from it. Because they are the recipients of the benefits, they are entitled to enforce the contract including being able to file a lawsuit on it.

 

 

An example of a third party beneficiary contract is a life insurance policy. The person who contracts with the insurance company can’t enforce the contract — they’re dead! It can only be enforced by the person that the money is owed to.

 

 

Generally, the parties who enter a third party beneficiary contract can change the terms to modify or destroy the interest of the third party, if the interest has not yet vested. In other words, using the life insurance example, a person is free to change the beneficiaries of their insurance policy at any time before they die. They also are free to let the policy lapse. However, once the rights have vested, the contract cannot be modified without the consent of the beneficiary.

 

 

Just because a person may benefit from a contract, they are not necessarily allowed to enforce the contract. In many contracts, third parties may benefit even though they are not the intended beneficiary. If I agree to buy a car from a new car dealer, the manufacturer benefits as well. However, the manufacturer is not a third party beneficiary; the purpose of the contract is not to benefit the manufacturer. If I don’t complete the sale, the manufacturer cannot sue me. They are what we call an incidental third party beneficiary. Incidental third party beneficiaries receive indirect benefits but cannot enforce the contract.

 

 

Assignees to a contract are treated differently. Generally, an assignment is only a transfer of rights, not obligations; that is referred to as a delegation of duties. It is possible to assign a contract, but not delegate duties. For instance, a tenant may assign his rights in a lease to another person, but still be responsible for paying the rent. If the new tenant doesn’t pay the rent, the landlord can look to the original tenant for the money. The assignment itself is not a contract and thus no consideration is necessary. The underlying contract may require that an assignment must be in writing, must be approved by the other party, or may not allow assignment at all. As a general rule, when a contract is for the performance of personal services, the contract may not be assigned. The question is how personal the contract is. If the service is very personal, the contract cannot be assigned; if less personal, it may be assignable.

 

 

If you assign the rights and delegate the duties, it essentially changes the parties to the contract. Again, if the contract is for personal services, the duties are rarely delegatable. This is because the contract is for a specific person to perform the services. If you contract to have someone cater your wedding, you probably don’t want them to delegate their duties to another person, such as McDonald’s or Kentucky Fried Chicken.

 

 

While assignments are generally allowed unless otherwise stated in the agreement, delegation of duties are not allowed unless specifically stated.

 

 

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is so the author of “Basics of Business Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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