Third-Party Beneficiary

A third-party beneficiary contract arises when two parties enter an agreement to benefit the 3rd person.

Traditionally, the requirement of “privity” restricts the 3rd party from enforcing a contract where he is not a party.

The requirement for being in the contract was eliminated by the court with the introduction of a third-party beneficiary agreement.

Sometimes, the third party is not bound to any conditions in the contract and has independent rights in the deal. 

The recognition of the third-party beneficiary rights can lead to certain problems like the 3rd party beneficiary law should allow equitable recovery without the enforcement rights where every party receives some benefits from the contract. 

Secondly, it is important to preserve the rights of the original parties to change the contract without nullifying the protection of 3rd party rights. 

Earlier the courts had to struggle to define and classify the basis for the third party.

Later they found that such a beneficiary cannot be classified into the two and to eliminate the confusion, flexible term “intent to benefit” was added. 
 
Since the third party was not in privity with the original parties, the court recognized its rights to maintain an action on a contract for their benefit.

Some countries may use the term “intention” to justify decisions. 

Some of the terms/regulations are mentioned below -

• Most of the early cases use in the background related to the beneficiaries of the insurance (or commodities insurance) contract but earlier they remained silent about the insured rights, hence, the court started the provision to prevent the insured from modifying the contract without the consent of the beneficiary. 

• The 3rd party was classified into Dones (the one who received gift promise) and creditors (those who received a promise to discharge the promisee’s duty). 

• Those who did not fall in any of the categories had no rights under the contract. 

• The restatement structure was later modified as it was unable to provide a workable method to determine the rights of the 3rd party. 

• The restatement Second features many conditions, that allowed recovery to Third-party beneficiaries (especially, to those who did not fit in the two categories). 

• It introduced the “intent to benefit” which resolves many problems related to the initial approaches and it also provided an appropriate opportunity to eliminate the automatic vesting provision applicable in the two categories. 

• If the contract is silent, the power to modify terminates when the beneficiary materially changes his position. 

• Many parties enter the third party contract with specific rights without giving the primary purpose of the contract as the primary purpose will unnecessarily restrict the original parties’ freedom of contract. 

• Also, to benefit from such platforms, one should provide the basic reasons for the parties to enter the contract and recognition of the third party’s right to put in force the subjective intentions of both parties.