Third-Party Beneficiaries & Contract Enforcement in Texas

Most people assume that contracts consist of only two parties, but Contract Law is more complex than that. In fact, there can be additional parties that reap benefits from a contract’s performance and suffers when that contract is breached. This is known as a third-party beneficiary.

Third-Party Beneficiaries Categories

A third-party beneficiary can be either a donee or a creditor. A donee would benefit from a contract free of charge and not in exchange for a service they provided, as where a creditor is one where an obligation is owed by the promise - such as a home lender. Thus, there are two kinds of third-party beneficiaries: an “intentional or intended” beneficiary and an “incidental” beneficiary. 

An incidental beneficiary is a person or legal entity that is not party to a contract and becomes an unintended third-party beneficiary to the contract through acts or implications which benefits the third party. An incidental beneficiary typically does not have any legal rights under the contract.

Importantly, parties can contract within the body of an agreement that no third-party beneficiaries are intended created by the agreement thus avoiding unintended liability.

Third-Party Beneficiary & Contract Rights

It should be known that both a donee and creditor beneficiary can enforce contract rights so as long as they’re intended beneficiaries. The one named as the beneficiary on a life insurance policy is a great example of an intended beneficiary. In general, an intended beneficiary is one that is:

• Identified in the contract; or
• Receives performance directly from the promisor; or circumstances demonstrate that the promise will give the beneficiary the benefit from the contract.

For instance, a case in 2012, Logan-Baldwin v. L.S.M. General Contractors, Inc., hired LSM for renovations. LSM then hired Henry Isaacs, a subcontractor, to do the roofing. Henry Isaacs then hired Hal Brewster for additional assistance. Brewster ended up causing damage to the said home, causing the homeowners to in return have to fix the damages. The homeowners sued LSM and Isaacs for a breach of contract. Isaacs tried to argue that the homeowners did not have standing to enforce that subcontract with LSM because they were not intended third-party beneficiaries of the subcontract.

Ultimately the court disagreed with Isaacs and stated that the homeowners were in fact intended third-party beneficiaries and had standing for the suit. The court reasoned that those circumstances indicated that the homeowners were intended third-party beneficiaries by looking at the contract as a whole. 

Third-Party Beneficiary Vesting Rights in a Contract

In order for a third-party beneficiary to enforce a contract, their rights under the agreement must have been vested, meaning the rights must have come into existence. A contract becomes enforceable by the third-party upon vesting.  Before a third-party beneficiary’s rights are vested, the original parties that contracted can modify their contract however they see fit.

Once the rights have been vested, the original parties can’t change the contractual rights without the beneficiary’s agreement beforehand.  A third-party beneficiary’s rights vest when any of the following occur:

• The beneficiary assents to the promise in a contract in the manner requested by the parties;
• The beneficiary sues to enforce the contract’s promise; or
• The beneficiary materially changes position in justifiable reliance on the contract’s promise.

A third-party beneficiary is not consider an outsider to the contractual agreement, but rather an central beneficiary who's rights are legally protected and enforceable.