[MUSIC] In this lesson, we're going to discuss third party beneficiaries. A third party beneficiaries are people who receive benefits under a contract but aren't actually parties to a contract. So there are some important questions that we need to ask about these people. What is a third party beneficiary? Are there different types? Can they enforce contracts? If so, when? [MUSIC] Now, we already know that the parties to a contract receive various forms of benefits, right? You pay money to somebody, they receive a benefit. You obtain some good or some service, you receive a benefit. If you are one of the parties to a contract, we know that you receive benefits, but contracts don't only benefit the parties to the contract. What we call third-party beneficiaries, sometimes receive benefits from a contract. So, say for instance a company decides to build a factory in your town, and you operate a gas station or a restaurant in that town. That's great, right? You receive some benefits from that even though you are not a party to any of the contracts related to construction of that factory, you're not employed there or anything like that. So our question in this lesson is, what rights do third-party beneficiaries have? Specifically, can they enforce contracts? Now the example we're going to use as we go through this little lesson is of a company that buys some cheap land from a city to build, say, a new headquarters, a factory, something like that. And the agreement between the company and the city, that's the contract. That agreement, though, say it requires the company to use part of that land, because they got a really good deal on it, to build a community center on the land for the local citizens. And maybe, in the community center, they're required to give some space to the local library to use rent-free. So that's our example. Now the library gets some benefit from this contract, right? They're not a party to the contract, the local citizens get a benefit from the contract. They're not parties to the contract. What rights do they have to enforce this contract? Now it really depends on what type of beneficiary each of these third parties is. There are two types, intended beneficiaries and incidental beneficiaries. And depending on which type you are, you have different enforcement rights to a contract when you're not a party to that contract. So in our example, the library is what we call an intended beneficiary. They're specifically called out in the contract between the company and the city as receiving a benefit, right? So the library gets some space to use in this community center, they get to use it rent free. It's in the contract that they get this benefit. They are intended, by the parties to the contract to receive a benefit. They are an intended beneficiary. Now incidental beneficiaries are all other third parties who receive some benefits from a contract but is just kind of a coincidence. They're not specifically identified in the contract as receiving those benefits. So examples are, if you build a brand new headquarters building. If there are gas stations close by, restaurants in the neighborhood. I mean they all get benefits from the increased traffic, the increased business, the boost of the economy, but they are not intended beneficiaries. So only intended beneficiaries can enforce agreements as third parties. Now when we say enforce agreements we mean, well, if one of the parties decides not to perform its obligations under that contract, an intended third party beneficiary can actually take that party to court and force them to perform their contractual obligations. But, the third party's rights must have vested. Now when we say rights must have vested, we mean the third party has to either have known about their intended benefits and taken some action to accept it. So in our example of the library receiving space rent free, the library has to have known that the contract between the company and the city called for this space to be given to the library, and the library has to have accepted it. It can be as simple as saying, that's great, we're looking forward to moving into this space once it's constructed. It could be as complicated as them signing some sort of document affirmatively accepting the offer of this rent free space. But the important thing that the intended beneficiary knew of the benefits and accepted that benefit. The other way an intended beneficiary's rights can vest is, if even if they don't make any sort of affirmative acceptance, if the beneficiary materially alters its position and anticipation of receiving the benefit. So on our example, suppose the library never had any sort of formal acceptance of the offer of rent fee space. But, maybe the library bought a whole bunch of new books, or computers, or office equipment that it was intending to put into this new space. It materially altered its position, it spent money, it acquired capital, it hired employees. Whatever it did in anticipation of receiving the benefit. In that case, its rights have vested and it can enforce the agreement. Now with regards to incidental beneficiaries, they have no rights to enforce agreements to which they are not parties. So if you own a restaurant across the street from the new football stadium that's being built in your neighborhood, hey, that's great you're going to get a lot of business. But if they decide not to build it, tough luck, you can't enforce it. You're an incidental beneficiary, your benefit is not contemplated by the parties to the agreement. So you can only sit back and hope that they fulfill their obligations, because you have no right to enforce it. Now, frequently, the question arises of how do you determine who's an intended beneficiary, who's an incidental beneficiary? There are really two questions to ask in order to make this determination. First, in the contract, did the party specifically identify the benefit? So, in our example in the contract the company and the city specifically identified that there will be a community center built and that there would be space there that would be intended to benefit the community. Second question, did the party specifically identify the third party beneficiary? So in our contract, the company and the city specifically said the library would receive this benefit. Since the benefit was specifically identified, the third party was specifically identified, they are an intended beneficiary. And pretty much all other beneficiaries from this contract would be incidental beneficiaries. So those are the rights of third party beneficiaries. If you're an intended beneficiary, and one of the parties to the contract doesn't fulfill its obligations, you can take them to court and sue to enforce it even though you're not a party to that contract. If you're an incidental beneficiary, you can't, you basically have no rights, you have to hope and pray that everyone fulfills their obligations so that you can receive the benefit that you're hoping for. [MUSIC]
