Key Takeaways

  • An incidental beneficiary benefits indirectly from a contract but has no legal standing to enforce it.
  • Only intended beneficiaries—creditor or donee—can sue for breach of contract.
  • Incidental beneficiaries often gain advantages by chance, not by the contracting parties’ intent.
  • Courts look at the contract’s language, the circumstances, and the parties’ intent to distinguish between intended and incidental beneficiaries.
  • While incidental beneficiaries can’t claim contract rights, their position highlights the importance of clear contract drafting to avoid disputes.

An incidental beneficiary is someone who benefits from a trust or contract without intent.

What Are Incidental Beneficiaries?

Someone that indirectly benefits from the enforcement of a contract or trust is known as an incidental beneficiary. For example, if your parent receives a gift or inherits money from your grandparent, and that gift then benefits your entire family, you are an incidental beneficiary because the gift was not originally intended for you.

As another example, let's assume that one person hires another for the purpose of renovating a home. Now, let's say that the person doing the renovation insists you handle a specific task, such as painting, because of your reputation. In this instance, you would be an incidental beneficiary because you are benefiting from the relationship between the homeowner and the renovator without actually being involved in their contract.

Contract law covers two different types of third-party beneficiaries:

  • Incidental beneficiaries.
  • Intended beneficiaries.

Intended beneficiaries have the right to enforce a contract they benefit from when the contract is breached.

For a third-party beneficiary to bring a lawsuit for breach of contract, they must establish four important facts:

  • A contract between two parties exists.
  • The clear purpose of the contract is to benefit the third party or the class of persons to which the third party belongs.
  • One of the two parties have breached the contract.
  • The third party was damaged by the breach.

Incidental beneficiaries do not have the legal right to enforce a contract after it has been breached.

Identifying Incidental Beneficiaries in Practice

Courts typically determine whether someone is an incidental beneficiary by examining the intent of the contracting parties at the time the agreement was formed. The analysis often involves:

  • Contract Language: Clear wording stating who is entitled to benefits can prevent unintended third-party claims.
  • Purpose of the Agreement: If the contract’s main goal is to serve the contracting parties rather than the third party, the third party is likely incidental.
  • Surrounding Circumstances: Courts may consider the commercial context, relationship between parties, and whether the benefit to the third party was predictable or merely coincidental.

For example, if a municipality hires a contractor to repave roads, local businesses may experience increased traffic and profits. While they benefit, these businesses are incidental beneficiaries because the contract was not designed for their direct advantage.

Intended Beneficiary Information

An intended beneficiary is created when one party agrees to provide consideration to another party in exchange for a benefit provided to the third party. The benefit received by the third party is usually monetary, although it can also be a service. There are two ways that an intended beneficiary can be created.

A creditor beneficiary is when one party agrees to cover the debts of the second party that are owed to the third party. While this may seem confusing, it's actually quite simple.

For example, if you are required by law to pay child support and your sibling contracts with you to cover these debts, your child, who is receiving the payments is considered the creditor beneficiary. If these payments stop, your child may be able to sue your sibling for failing to uphold their contractual obligations.

The other common type of intended beneficiary is known as a donee beneficiary. In these cases, the first party wishes to give a gift to the third party and agrees to give consideration to the second party in exchange for payment of the gift.

A good example of a donee beneficiary is the recipient of a life insurance policy payout. The second party, the insurance company, agrees to provide a payout to the third party upon the death of the first party in exchange for monthly premium payments. If the beneficiary of the policy does not receive payment, they can sue the insurance company even though they were not a part of the contract.  

Legal Distinction Between Intended and Incidental Beneficiaries

The key difference lies in enforceable rights: intended beneficiaries can sue to enforce the contract, while incidental beneficiaries cannot. Courts often apply the Restatement (Second) of Contracts § 302, which states that a beneficiary is intended if recognition of their right is appropriate to effectuate the contracting parties’ intent, and either:

  1. Performance will satisfy an obligation of the promisee to the beneficiary (creditor beneficiary), or
  2. The promisee intends to give the beneficiary the benefit of the promised performance (donee beneficiary).

Incidental beneficiaries fall outside these definitions. They may still benefit in substantial ways, but the law treats their gains as byproducts, not rights. This distinction is crucial in disputes involving government contracts, commercial arrangements, or large projects where many people indirectly benefit.

Breach of Contract

When the promisor of a contract breaches the contract, the third party has the ability to file a lawsuit against the promisor. However, because the contract between the promisor and promisee defines the third party's rights, the promisor is allowed to use the same defenses available when being sued by the promisee. The following are some of the defenses available to the promisor:

The promisor may also defend themselves using the legal excuses for non-performance of a contract:

  • Illegality.
  • Failure of consideration.
  • Frustration of purpose.
  • Impossibility.

Because the promisor can defend themselves in exactly the same way they would when being sued by the promisee, they also have the ability to file counterclaims against the third-party beneficiary. However, the liability of the third party cannot be more than what the amount owed by the promisor as defined by the contract.

In simpler terms, if the promisee owes the promisor money, damages awarded to the third party can be reduced based on the amount still owed to the promisor. If the amount of money owed to the promisor exceeds the value of the contract, the third party may not be awarded any money. However, the third party will not and cannot be forced to assume a debt.

Why Incidental Beneficiaries Cannot Enforce a Breach

Even if an incidental beneficiary suffers harm when a contract is breached, they lack legal standing to sue because the law does not recognize them as having enforceable rights. This is based on the principle that contract obligations are created by mutual consent of the parties involved. Recognizing claims from incidental beneficiaries could create unpredictable liabilities for contracting parties.

For example, if a supplier fails to deliver materials to a contractor, a nearby café that loses business due to construction delays is an incidental beneficiary. The café owner cannot sue the supplier for breach, because the contract’s purpose was not to benefit the café.

Frequently Asked Questions

  1. What is an incidental beneficiary in contract law?
    An incidental beneficiary is a person or entity that benefits from a contract indirectly, without being the intended recipient of those benefits.
  2. How is an incidental beneficiary different from an intended beneficiary?
    Intended beneficiaries are explicitly meant to benefit from a contract and can enforce it in court, while incidental beneficiaries have no such legal rights.
  3. Can an incidental beneficiary sue for breach of contract?
    No. Incidental beneficiaries lack standing to sue because the contract was not made with the intent to benefit them directly.
  4. How do courts decide if someone is an incidental beneficiary?
    Courts review the contract language, the purpose of the agreement, and the surrounding circumstances to determine the parties’ intent.
  5. Why does the law deny incidental beneficiaries enforcement rights?
    To preserve contractual certainty and avoid expanding liability beyond the scope agreed upon by the contracting parties.

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