When two parties enter into a contract, it is natural for them to be the ones who would benefit from it. But there are instances where a third party can also benefit from a contract, and this is called a third-party beneficiary contract.

A third-party beneficiary contract is a legal agreement between two parties where a third party gains rights and benefits from the contract. In this type of contract, the third party has the right to enforce the terms of the contract, even if they are not a signatory to the agreement.

There are three types of third-party beneficiary contracts, and each has specific features that are important to understand.

1. Creditor Beneficiary Contracts

In a creditor beneficiary contract, the third party is a creditor of one of the parties to the contract. This means that the third party has a pre-existing legal claim against the contract`s promisor or one of the parties to it.

For example, a company may contract with a supplier to provide raw materials needed for production. If the supplier fails to deliver the materials, the company may suffer losses. In this case, the company can include a creditor beneficiary clause in the contract with the supplier, allowing a third-party debt collector to be involved in the contract.

2. Donee Beneficiary Contracts

A donee beneficiary contract is an agreement where the third party is intended to directly benefit from the contract`s performance. In other words, the contract is specifically designed to provide a gift or benefit to a third party.

For example, a parent may enter into a contract with a dance school to provide dance lessons to their child. In this case, the child is the donee beneficiary of the contract, as the contract is intended to provide benefits to them.

3. Incidental Beneficiary Contracts

Incidental beneficiary contracts are agreements in which the third party benefits from the contract`s performance but is not the intended beneficiary. This means that the third party may benefit from the contract`s performance, but the agreement is not specifically designed to provide direct benefits to the third party.

For example, a person may contract with a contractor to build a house. The contract may require the contractor to use materials that are certified to be safe. If a neighbor benefits from the use of such materials, they are an incidental beneficiary of the contract.

In conclusion, third-party beneficiary contracts are important legal agreements used to provide benefits to third parties. Understanding the different types of third-party beneficiary contracts and their features can help you determine the appropriate contract to use in any given situation.