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A third party beneficiary is someone who stands to benefit from a contract which he or she has not signed. The most classic example of a third party beneficiary appears in a life insurance policy. The insurance policy is between an individual and the insurance company, but a third party is the one who will receive the insurance payment in the event that loss of life occurs. Under contract law, third party beneficiaries have the right to sue one or both parties involved if a breach of contract occurs.
Contract law can get extremely complex. In the case of third party beneficiaries, a distinction is made between an incidental beneficiary and an intended beneficiary. Incidental beneficiaries are people who happen to benefit indirectly from a contract. The contract is not established for the purpose of conferring a benefit to the incidental beneficiary, but he or she stands to gain nonetheless. When a contract is specifically designed to confer a benefit to someone else, that person is the intended beneficiary.
Third party beneficiaries are intended beneficiaries, which means that someone must be able to prove that he or she is an intended beneficiary when a lawsuit is brought to court. If, for example, Party X agrees with Party Y that an Apple computer will be purchased for Party Z, the Apple company is an unintended beneficiary with no rights to sue if the contract is breached. Party Z, however, could sue if Parties X and Y failed to fulfill the contract.
There is also a distinction between a creditor and a donee when discussing third party beneficiaries. If a third party beneficiary is a creditor, it means that the contract is entered into to discharge a debt of some form. Donees are people who are given a gift or award under the contract; in the case of life insurance, the beneficiary of the policy is a donee beneficiary.
The potential award for a third party beneficiary who opts to sue can vary, depending on the precise language of the contract and the situation. Most contracts which involve third party beneficiaries are very carefully constructed with the goal of protecting both parties. In some instances, it is routine for people to be forced to sue for benefits under such contracts. For example, a passenger in a car accident, considered a third party beneficiary of the car insurance policy, may not get compensation for pain and suffering from the insurance company unless he or she sues the company.