January 22, 2020 Contract Boilerplate Series

Third-Party Contract Beneficiaries: What Did the Parties Intend?

Careful attention to the interests of third parties and the contracting parties’ intent will help avoid unintended results.

By Paula M. Bagger

Sometimes a stranger to a contract (not a party or a party’s successor or assignee) will claim the right to enforce the contract or some limited portion of it. When this happens, the arcane and sometimes confusing law of third-party beneficiaries comes into play.

Generally speaking, a non-party seeking to enforce a contract right must demonstrate that the contracting parties intended that it benefit from performance under the contract despite the fact that it neither made nor received a promise. Beyond that deceptively simple statement, however, lies a maze of rules and exceptions that are applied, sometimes inconsistently, in a variety of situations. When drafting a contract, then, it is best to follow a three-step approach to the problem of third-party beneficiaries: (1) identify situations in which the issue is likely to arise; (2) determine what the parties to the contract intend; and (3) draft a clear statement of that intention.

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