Third Party Beneficiary Explained

A third party beneficiary is a party to an agreement who both parties agree should obtain benefits, but who is not one of the parties which entered into the agreement. For example, if Rudi agrees to give Mary a convertible as a gift, the car company would be a literal third party beneficiary of the contract because it would obtain a benefit from the contractual relationship formed between Rudi and Mary.

However, in the eyes of the law the car company is not a true third party beneficiary because neither Rudi nor Mary intended for the car company to benefit. Identifying a legal third party beneficiary is dependent upon drawing a distinction between an intended third party beneficiary and an incidental third party beneficiary. The claims of an incidental third party beneficiary are not recognized in a court of law, although the legal standing of an intended third party beneficiary is granted greater weight.

The concept of a third party beneficiary is more common in contract law than in other fields of law. in probate or estate law, however, a third party beneficiary may be identified in the event a trust is formed from the assets of the estate.

A related but also in accurate use of the term third party beneficiary is due to calling the persons and communities that are aided by development aid projects. This is inaccurate because the Organization is actually the beneficiary of the funds. However, since the benefit is passed along the person who uses the service, the term third party beneficiary is sometimes appropriated to refer to these people.

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