Third party reliance: Overview, definition, and example
What is third party reliance?
Third party reliance refers to the situation where a third party (a person or entity not originally involved in an agreement or contract) depends on the representations, promises, or actions made by one or more parties in the agreement. In legal terms, third party reliance occurs when someone outside the original contract or transaction relies on the statements or actions of the parties involved, typically in making decisions or taking actions that impact their own interests.
This concept is particularly relevant in contracts, securities, and business transactions where third parties, such as investors, customers, or contractors, are affected by the terms or representations made by the primary parties to the agreement. In many cases, third party reliance can create legal obligations or potential liabilities if the representations made to the third party are found to be false or misleading.
Why is third party reliance important?
Third party reliance is important because it highlights the legal responsibility of parties in an agreement to be truthful and transparent, as their actions can have an impact on others who are not directly part of the contract. If third parties are relying on certain information to make decisions, those providing the information must ensure that it is accurate, and they may be held liable if the third party suffers harm or loss due to false or misleading statements.
For businesses, understanding third party reliance is essential when making public statements, entering into contracts, or representing products or services to potential clients, investors, or other stakeholders. Similarly, individuals and third parties need to be aware of what they are relying on and whether they are justified in doing so.
Understanding third party reliance through an example
Imagine a company publishes a prospectus for its new investment fund, highlighting the potential returns and safety of the investment. Investors, who are not part of the company’s internal agreements, rely on the accuracy of the statements made in the prospectus to decide whether to invest. If the information provided turns out to be inaccurate, leading to financial losses for the investors, the company could be held responsible due to third party reliance.
In another example, a contractor enters into a contract with a supplier, and the supplier represents that certain materials meet specified safety standards. A customer who buys the product made from these materials may rely on the supplier’s representation, assuming the materials are safe. If the materials are found to be defective or unsafe, the supplier could be held liable for damages caused to the customer, as the customer relied on the supplier’s statements.
An example of a third party reliance clause
Here’s how a clause related to third party reliance might appear in an agreement:
"The Seller acknowledges that the Buyer may rely on the representations made in this Agreement and any associated marketing materials, and that the Seller is responsible for the accuracy of the information provided. The Seller agrees to indemnify and hold harmless the Buyer and any third party who may rely on the accuracy of the representations made herein."
Conclusion
Third party reliance plays a significant role in many legal and business transactions. It ensures that when a third party relies on information or representations made by the primary parties, those parties are held accountable for the accuracy and integrity of their statements. This principle protects third parties and promotes transparency, fairness, and trust in business and legal relationships. Understanding third party reliance is essential for all parties involved in agreements to ensure they fulfill their obligations and avoid potential liabilities.
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.