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Dottie Perry
Dottie Perry
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Identifying Third Party Beneficiary Claims: Suing on a Contract You Didn’t Sign

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Contracts create rights and obligations, which are typically enforceable by and against the parties, or signatories, to the contract. Under some circumstances, contracts can create third-party beneficiaries, delegates, and assignees, who are non-signatories to the contract, but have rights and obligations arising out of the contract as if they were.*

Contracts that intend to confer a benefit on a third party (someone who is not a signatory to the contract) create third-party beneficiary situations. The third-party who stands to benefit as a direct result of the obligations created by the contract, despite not owing any obligations under the contract, is owed a legal obligation by the parties to the contract. The most common third-party beneficiary is an insurance policy beneficiary: the person who receives insurance proceeds pursuant to a life insurance policy upon the death of the policyholder is a third-party beneficiary. The insurance policy confers a benefit on (and the insurance company owes an obligation to) the third-party, despite the third-party never having entered into a contract with the insurer.

If a party breaches a contract that was intended to benefit a third-party, thereby damaging the third-party, the third-party has a third-party beneficiary contract claim. The third-party is entitled to sue to recover damages from the party causing the breach. However, this right is not wide-open and unfettered. The right of the third party beneficiary to maintain a contract action against the signatories must spring from the terms of the contract. The terms, or language of the contract, must clearly intend to confer a benefit on the third-party. This intention can be expressed by or inferred from a specific reference to the third-party or from broad language that identifies a certain class of beneficiary the third-party is a member of. However, an incidental, collateral or consequential benefit is insufficient to create a third-party beneficiary action. The third-party must know of and rely on the contract for his rights under the contract to vest.

*This post does not deal with delegations or assignees, but the Uniform Commercial Code has specific language governing the rights and duties of those two types of nonparties that is useful to refer to when determining legal obligations by and to them.