Third-party beneficiary: Overview, definition and example
What is a third-party beneficiary?
A third-party beneficiary is someone who is not a party to a contract but stands to benefit from it. In business contracts, a third-party beneficiary can receive benefits from the contract's performance, even though they were not directly involved in the agreement.
Why is a third-party beneficiary important?
The third-party beneficiary clause is important because it allows someone outside of the contract to have legal rights or claims related to it. This can be used to protect the interests of individuals or entities that weren’t part of the negotiation but who will benefit from the contract's fulfillment. It also clarifies who has the right to enforce the terms of the contract if the primary parties fail to meet their obligations.
Understanding third-party beneficiary through an example
Imagine a software company, TechSoft, signs a contract with a business, OfficeSolutions, to provide a software license. In the contract, there is a third-party beneficiary clause stating that TechSoft will provide free software updates to any customers of OfficeSolutions for the next year.
In this case, the customers of OfficeSolutions are third-party beneficiaries. While they are not directly involved in the contract, they benefit from the free updates. If TechSoft doesn’t provide the updates, the customers could have the right to enforce the contract's terms.
Example of a third-party beneficiary clause
Here’s how a third-party beneficiary clause might look in a contract:
“The parties acknowledge that the following individuals/entities shall be considered third-party beneficiaries of this Agreement: [Name(s) of third-party beneficiary]. These third-party beneficiaries shall have the right to enforce the obligations of [Party A] and [Party B] as outlined in this Agreement.”
Conclusion
A third-party beneficiary is an individual or entity that benefits from a contract between two other parties. This clause helps clarify who is entitled to enforce the contract and ensures that the interests of those not directly involved are protected. Understanding third-party beneficiary clauses is crucial in ensuring that all parties involved in the contract, including indirect beneficiaries, are clear about their rights.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.