Third-party Contract Beneficiaries

By Rudman Winchell Attorney Christopher B. Hatch

Frequently, an individual or entity not a party to a specific contract may be affected by a breach to that contract.  For example, a municipality may contract with a landscaper to periodically remove brush and other shrubbery encroaching on a road.  A homeowner uphill from that road gains a benefit from this contract as it improves his view of the nearby lake.  At one point, the landscaper refuses to remove the brush due to a dispute with the municipality regarding payment.  Does the uphill homeowner have grounds to sue either the municipality or the landscaper for damages considering he no longer has a view of the lake?  Normally, someone who is not a party to a contract does not have standing (the legal right) to enforce or challenge the validity of contract or seek damages for its breach.

Maine law holds that a third party may sue to enforce a contract only if it is an intended beneficiary of the contract.  An intended beneficiary is created when one party to a contract, called the promisee, makes an agreement to provide some consideration to another party to a contract, called the promisor, for the benefit of a third-party.  This third-party must either be named in the contract itself or the intention to benefit the third-party must be clear and definite in the circumstances surrounding the execution of the contract.   See Denman v. Peoples Heritage Bank, Inc., 704 A.2d 411, 415 (1998).  A party who stands to benefit from a contract but is not an intended beneficiary to the contract, like the uphill neighbor in the example above, is an incidental beneficiary and has no right to seek enforcement of a contract or damages for its breach.

Anytime a beneficiary attempts to enforce a contract in court, the burden is on them to prove that they were an intended beneficiary to the contract.  If a party to a contract is paying another party and it is intended to benefit a third-party, it is wise for the paying party, the promisee, to explicitly state in the contract that it is for the benefit for that third-party and that such third party has a right to enforce the contract.  Such language will allow the intended beneficiary to enforce the contract.

 

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