Sunday, December 19, 2010

Third Party Beneficiary

Under contract law concept of privity only the parties to a contract can sue to enforce the contract. An exception to that is called a third party beneficiary.  A third party beneficiary is someone who has the right to sue on a contract, even though they are not a party to the contract where they would have privity.  In most commercial agreements a third party beneficiary is created by the parties to the agreement agreeing that another party is an intended beneficiary to the contract and they agree to give that third party the right to enforce the contract.

A Buyer who is a Third Party Beneficiary to a contract between their Supplier and a Subcontractor would be able to enforce that Supplier/Subcontractor contract against either the Supplier or the Subcontractor.  The reason why a Buyer would want those rights can be two fold.  If the Buyer needs the Subcontractor to perform, they could proceed directly against the Subcontractor especially if the Supplier was not taking the actions needed.  The Buyer could also proceed against the Supplier to make sure that the Supplier meets their obligations under the contract so there is performance by the subcontractor or to force the Supplier to enforce their rights against the Subcontractor. 
This would apply irrespective of the commodity you are purchasing whether it’s for goods, services or licensing software.

Why do you need to be a Third Party Beneficiary?

When you are dealing with and relying upon other parties, you don’t control all the circumstances around that relationship. There can easily be circumstances or facts in their relationship that could impact one or both of them performing or it could impact the one of the parties being willing to pursuing actions against the other party to ensure their obligations are met. Being a third party beneficiary takes those influences out of the equation and provides the Buyer the rights to enforce the performance they were promised or relied upon.

To be a Third Party Beneficiary, you would normally place an obligation on the Supplier to make you a third party beneficiary. For example:

Supplier agrees that it shall make Buyer a Third Party beneficiary for the contract between Supplier and ______ and such agreement and shall provide Buyer the right to enforce the terms of that agreement on such purchases on a joint and several basis.

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