A third party beneficiary contract is expressly made between two parties to benefit a third person. Although the third person is neither a promisee, nor does he give consideration in the contract, he may have a right to enforce the contract or receive proceeds from it. The right to enforce the contract arises only when the third party is an intended beneficiary. The third party is an intended beneficiary when the promisee agrees to provide consideration to the promisor if the promisor will provide the third party with some benefit.
A situation in which this type of contract commonly occurs is called the creditor beneficiary.
In this scenario, Party A owes a debt to Party C.
Party A will decide to pay a benefit to Party B, in exchange for Party B’s agreement to pay the debt to C on Party A’s behalf. The other situation in which this commonly occurs is the donee beneficiary. In this situation, Party A wishes to make a gift to Party C. Party A agrees to provide consideration to Party B if Party B will pay the amount of the gift on behalf of Party A. It is important to note that the promisor (Party A) may opt to sue the promisee (Party B) if he does not pay the benefit to the third party.
While the third party has the power to enforce a contract in which he is an intended beneficiary, the third person cannot enforce a contract in which he is an incidental beneficiary. Like an intentional beneficiary, and incidental beneficiary stands to benefit from a contract that is made between two parties.
The difference is that in the case of an incidental beneficiary, it is not the intent of the two contracting parties to confer a benefit upon the third party. For example, Party A wants to hire Party B to be her wedding planner only if Party C is hired as the florist. Here, Party A has a direct interest in having a successful wedding, and B wants A to use his planning services. Neither party seeks to benefit Party C, so C does not have a right to enforce this contract.