Lawrence v. Fox (1859) created the third-party creditor beneficiary category under which a third party could sue. In that case, Holly owed Lawrence $300. Holly then loaned $300 to Fox in exchange for Fox’s promise to pay Lawrence $300. The New York Court of Appeals held that Lawrence, as a third-party beneficiary (more specifically, a creditor beneficiary), could directly sue Fox in order to enforce Fox’s agreement with Holly. Like a trust arrangement, in which the trustees promise to pay the beneficiary, Holly and Fox’s contract implied a promise by Fox to Lawrence; thus, it became Fox’s contractual duty to pay Lawrence. Both parties to the contract, Holly and Fox, had intended that Lawrence, the third party, benefit.
third-party beneficiary
Definition
A person who is neither a promisor nor promisee in a contractual agreement, but stands to benefit from the contract’s performance. A third-party beneficiary may legally enforce that contract, but only after his or her rights have already been vested (either by the contracting parties’ assent or by justifiable reliance on the promise).
According to the Restatement (First) of Contracts § 133 (1932), there are three classes of third-party beneficiaries:
"(a) a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the promise of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary;
"(b) a creditor beneficiary if no purpose to make a gift appears from the terms of the promise in view of the accompanying circumstances and performance of the promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, or a right of the beneficiary against the promisee which has been barred by the Statute of Limitations or by a discharge in bankruptcy, or which is unenforceable because of the Statute of Frauds;
"(c) an incidental beneficiary if neither the facts stated in Clause (a) nor those stated in Clause (b) exist."
Definition from Nolo’s Plain-English Law Dictionary
A person who is not a party to a contract, but has legal rights to enforce the contract or share in proceeds because the contract was specifically intended for that person's benefit. For example, a grandparent contracts to buy a car for a grandchild. If the seller refuses to go through with the deal after receiving payment, the grandchild may sue, even though not a party to the contract. Compare: incidental beneficiary.
Definition provided by Nolo’s Plain-English Law Dictionary.
August 19, 2010, 5:25 pm
“A third-party beneficiary may sue for breach of a contract made for his benefit. (Carson Pirie Scott & Co. v. Parrett (1931), 346 Ill. 252, 257, 178 N.E. 498.) A third-party may only sue for breach of contract, however, if the contract was entered into for the party’s direct benefit; if the third-party’s benefit is merely incidental, he has no right of recovery on the contract…. Whether a third-party is a direct beneficiary depends on the intention of the parties, which must be ‘gleaned from a consideration of all of the contract and the circumstances surrounding the parties at the time of its execution.’ Parrett, 346 Ill. at 258.” J. Dunn, Alaniz v. Schal Associates, 175 Ill.App.3d 310 (Ill. 1988).
