The term third-party beneficiary refers to an entity that is not a party to a contract, but has the right to share in the proceeds from the agreement. Third-party beneficiaries are eligible to share in the proceeds from a contract after specific conditions have been fulfilled.
A beneficiary can be an individual or business that ultimately receives an asset of some kind. Also known as an incidental beneficiary, a third-party beneficiary is an individual or business that receives an asset even though they were not involved in the agreement providing the proceeds.
A commonly cited example is an automobile insurance contract. The owner of the car enters into an agreement with an insurance company to provide coverage if the car were damaged in an accident. However, in the event of an accident, the real beneficiary of this contract is not the insured but the automobile repair shop. In this example, the business repairing the automobile is a third-party beneficiary because they receive the proceeds from the insurance policy, not the insured.
Third-party beneficiaries can also be a business or person that has the legal right to enforce a contract. For example, a parent may enter into an agreement to lease a car that is ultimately used by their daughter. If the automobile dealer does not fulfill its obligation under the lease agreement with her parents, the daughter can bring about a lawsuit as a third-party beneficiary, forcing the dealership to honor the contract they have with her parents.