Privity is between the promisor and promise — the individuals who are the contracting parties. Some contracts draw in people other than the parties to the agreement. For example, a third-party beneficiary is not a contracting party, but can still receive a benefit from the performance of the contract. 

A person who is not an original party to a contract can rarely take action to enforce it or sue for breach of contract because no privity exists between the third party and the contracting parties. An intended third-party is an exception to this rule. If the person is an intended third-party beneficiary and their rights in the contract are vested (their interests are secured), they have the same rights as those who are parties to the contract.  

Intended and Incidental Beneficiaries 

An intended beneficiary is a third-party identified in the contract that the parties to the agreement meant to give a benefit to. This benefit can come as performance or money. While the intended beneficiary may be named in the contract to have contractual rights, that intended beneficiary not necessary for them to be identified at the time of the contract’s formation. That intended beneficiary may still enforce the contract, even though the promise was not made directly to them. 

Third-party intended beneficiaries can be one of the following:

• Donee beneficiary — A donee beneficiary gratuitously benefits from a contract, rather than in exchange for a service they provided.
• Creditor beneficiary — A creditor beneficiary is a person to whom a debt is owed by the promisee and paid by the promisor. If any party to the contract breaches the promise, a creditor can sue both the promisor and promisee.  

If a beneficiary to a contract is neither a donee nor a creditor, they may be classified as an incidental beneficiary. An incidental beneficiary is a person who the contracting parties did not intend to benefit when they entered into the contract, but happened to receive a benefit. Incidental beneficiaries are not named in the contract or intentionally included in the agreement. The incidental beneficiary has no rights to enforce the contract and cannot sue in the event of a breach. 

When Do a Third-Party’s Beneficiary Rights Vest?

When a third-party beneficiary has contractual rights, they usually include all the rights in the agreement. In order for a third-party beneficiary to enforce a contract, their rights must have “vested.” Vesting means that the beneficiary knows about the promise and the parties begin to render a performance. Vesting may also occur when a beneficiary sues to enforce the promise under the contract, relies on the promise to their detriment, or the contract has express terms regarding vesting rights. Typically, a pre-condition must have been met before the contract has been breached for a right to vest.  

Third-Party Beneficiary Clauses

A third-party beneficiary clause in a contract expressly states that the performance of a contract confers rights to a third-party who is not an original party to the agreement. Similarly, a no-third-party beneficiary clause can be used to specify that performance of the contract does not confer contractual rights to a third party. When drafting a contract, it’s best to include a clause that clarifies whether third-party beneficiaries will have rights — or whether the contracting parties do not wish to confer any rights.  

Contact an Experienced New York Business Attorney

Matters involving third-party beneficiaries to a contract can be legally complex. It’s vital to have a knowledgeable business law attorney by your side who can best advise you regarding your rights. Brinen & Associates provides skillful counsel to business owners and entrepreneurs for a wide array of issues involving contracts, including those involving third-party beneficiaries. Call (212) 330-8151 or send us a message to learn more about how we can help.