third-party beneficiary contract

third-party beneficiary contract

A contract formed between two parties, but some or all of the contract is for the benefit of a third party who owes no obligations under the contract.The classic third-party beneficiary contract is a life insurance policy, which is intended to benefit a survivor. In real estate, the concept frequently comes up as aggrieved individuals attempt to claim they are third-party beneficiaries of contracts among property owners, surveyors, appraisers, or developers and therefore are entitled to sue for breach of contract.

Example: Linda wants to obtain a home equity loan. The bank hires an appraiser to determine the value of her home. The appraiser finds that Linda has no equity, and the property has actually declined in value since she purchased it 5 years earlier. Linda is turned down for her loan request. She sues the appraiser for negligence and for breach of his contractual obligations to per- form his job in a good and professional manner. The court dismisses all claims because the appraiser did not owe any duty to Linda, so there could be no negligence. In addition, she was not a party to the contract between the bank and the appraiser, so there could be no breach of contract. Finally, she was not a third-party beneficiary because the contract was not for her benefit, but for the bank's protection. (Like the insanity defense in criminal law, the third-party beneficiary theory is often employed, but seldom successful.)