Question

Tom hires Hank to do some roofing on his house for $3000. Hank owes Tom's wife $500 for the last payment on a car he bought from her a few months ago. They talk to her and she agrees that Hank will give Tom a $500 credit on his bill to reflect payment of that debt. But Tom is still a little short of cash. Tom recently won two Elton John concert tickets in a radio contest, and knows that Hank and his wife love Elton John. So they agree that Tom will also get a credit of $300 in exchange for those tickets. Finally, Tom knows that Hank is a strong PETA supporter. Tom's employer has a matching gift program that will triple the amount of any contribution made by employees to a charity. Tom suggests that he'll contribute $100 to PETA in Hank's name, but that with his employer's contribution, it will triple to $300. Hank agrees to give Tom another $300 credit on his bill.

Who are the intended third party beneficiaries of this agreement? Remember: A third party beneficiary is a someone who was NOT a party to the contract but stands to benefit from it.

Who are the incidental third party beneficiaries of this agreement?

 Who is the creditor third party beneficiary?

Who is the donee third party beneficiary?

Which third party beneficiaries can enforce the agreement? Which ones can't?

Answer 1

• The intended third party beneficiaries of the agreement are Tom’s wife and PETA. Intended beneficiary is the one directly affected by the agreement but is not part of the face to face contract between 2 parties. Tom’s wife is owed $500 which will be offset by a credit given to her husband’s bill. She will get $500 back in the form of a discount for her husband so she is benefitting from this contract and becomes and intended third party beneficiary. PETA also is an intended beneficiary of this agreement because it will get $300 after Hank agrees to give a credit to Tom for same amount.
• The incidental third party beneficiary of this agreement is Hank’s wife who will get Elton John concert ticket only after Hank gives a $300 credit to Tom as per their agreement. She will benefit only when both parties-Tom and Hank fulfil the agreement requirements. So an Incidental third party beneficiary is anyone who indirectly benefits from a contract but has no right to claim those benefits.
• A creditor third party beneficiary is a person who is paid a debt of the promise by the promisor. In this scenario, Tom’s wife is owed a $500 payment for the car and Hank promises to pay off the $500 to Tom in terms of credit for the house roofing. Tom’s wife can legally sue Hank if Tom does not get the required credit from Hank.
• A donee beneficiary in this situation is PETA where no one is obliged to PETA for any debt repayment; however the terms of agreement between Tom and Hank ensure that PETA is benefitted. If either Tom or Hank don’t fulfil the terms of agreement, then PETA benefits cannot be taken away.

2. Third party beneficiaries are the ones which indirectly benefit from the agreement but are not parties to a contract or agreement. They are mainly of two types: Incidental beneficiary and Intended beneficiary where the incidental beneficiary has the right to enforce the agreement.

A person who is not a direct party to a contract i.e. not a promisor or a promisee, cannot enforce the contract or agreement because he/she doesn’t have a private agreement usually made between two parties. However there is an exception to this rule. If the person is benefiting from the contract enforcement at any time, then he/she becomes an intended beneficiary of the contract. Thus an intended beneficiary has the right to enforce an agreement to which he/she may not be directly part of but stands to benefit from it. An intended beneficiary is of two types: creditor or done. The terms of benefit for such beneficiaries can be altered by the two main parties of the agreement so the intended beneficiary can exercise the rights of the contract but the contract decides the extent of the rights as specified in the contract.

If the beneficiary is affected indirectly by the contract then he/she is called incidental beneficiary and thereby has no right over the agreement implementation. For example government contracts benefit the public in general but they are only incidental beneficiaries and cannot sue the party which breaches the agreement. Thus incident beneficiary cannot enforce the agreement.