Third-party beneficiary
A third-party beneficiary is someone outside a contract who can still enforce it because the parties intended it to benefit them.
What it means
Normally only the parties who sign a contract can enforce it. A third-party beneficiary is the exception: someone outside the contract whom the parties intended to benefit, and who can therefore sue to enforce it. Someone who only benefits by chance, called an incidental beneficiary, usually cannot.
For example, a company hires an IT contractor to build a system that its subsidiary will run. If the contract names the subsidiary as a beneficiary, the subsidiary may be able to sue the contractor directly over defects. Indemnity clauses also often protect the other party’s affiliates, officers and employees, which makes them beneficiaries of that promise.
Many contracts include a “no third-party beneficiaries” clause saying only the signing parties have rights, often with exceptions for people covered by an indemnity. This limits who can bring claims. Whether someone counts as an intended beneficiary is decided under state law, so a clear clause removes guesswork for both sides.
What to watch for
- Check whether the contract says there are no third-party beneficiaries.
- Look for exceptions naming affiliates, customers, lenders or indemnified people who can enforce certain terms.
- Consider whether naming more beneficiaries increases the number of people who could bring claims against you.
- See whether your own affiliates or end clients need rights under the contract, and whether they are named.
Example clause
This Agreement is for the sole benefit of the parties and their permitted successors and assigns, and nothing in it gives any other person any legal or equitable right, except that the Indemnified Parties are intended third-party beneficiaries of Section 9.
Only the two signing parties can enforce this contract, except that the people covered by the indemnity can enforce that section.