ABC Seller agrees to sell 100 widgets to XYZ Buyer for $10 per widget. This agreement creates a contract, which largely governs the rights and obligations of ABC Seller and XYZ Buyer. However, contracts such as this often impact additional entities or individuals beyond the parties themselves. For example, ABC Seller may need to contract with a manufacturer, who in turn may need to contract with components manufacturers, to honor XYZ Buyer’s order. ABC Seller and/or XYZ Buyer may need to contract with a shipping company to deliver the widgets. To the extent XYZ is selling the widgets to an end user, the end user will also benefit from the contract between ABC and XYZ. In North Carolina, as in many states, such non-party businesses are referred to as third party beneficiaries, and their rights and obligations depend on whether the third party beneficiary is a donee beneficiary, a creditor beneficiary, or an incidental beneficiary.
Determining the Category of Beneficiary
A third party beneficiary to a contract is considered a donee beneficiary when the purpose in obtaining the promise of performance is to make a gift to the beneficiary. A third party beneficiary is a creditor beneficiary when the purpose in obtaining the promise of performance is to satisfy an obligation to the beneficiary. Both donee beneficiaries and creditor beneficiaries are considered intended beneficiaries – the parties to the contract intended to confer a direct benefit upon the third party(ies). All other third party beneficiaries are incidental – although they benefit from the performance of the parties’ contractual obligations, their benefit was not intended by the parties to the contract.
The distinction between intended (donee and/or creditor) beneficiaries and incidental beneficiaries is a key question because North Carolina permits intended beneficiaries to enforce a contract and/or sue for its breach, whereas incidental beneficiaries cannot.
Determining if the Benefit is Intended
To establish a claim as an intended third-party beneficiary of a contract, a claimant must show:
- That a contract exists between two or more entities;
- That the contract is valid and enforceable; and
- The parties to the contract intended to confer a direct, and not incidental, benefit to the third party.
Evidence of the third element can include whether the third party is designated or named in the contract as a beneficiary thereof (e.g., in a franchise agreement or, in some cases, the owner of property designed pursuant to a contract between construction company and architect).
Potential Theories of Recovery for Incidental Beneficiaries
Incidental beneficiaries may still be able to recover damages against the parties to a contract pursuant to which they received a benefit. For example, the owner of a home could potentially sue a subcontractor for negligence if the subcontractor failed to perform its duties with the applicable duty of care. However, to the extent the homeowner’s benefit is considered incidental, the homeowner could not sue to enforce the contract or to recover damages for the subcontractor’s breach thereof.
If you have questions regarding a breach of contract dispute or your rights as a third party beneficiary to a contract, please give us a call at (704) 457-1010 to schedule a consultation. For more information regarding our firm, attorneys, and practice areas, please visit http://www.lindleylawoffice.com/.