What Is a Third-Party Agreement?

A. Lyke

Contracts are usually agreements between two named parties. Third-party agreement is a legal term that refers to a party added to a contract, between the two other parties. Unlike the two main contract parties, a third-party might not be named in the document. This type of agreement can come in many forms, and the specifics of the agreement depend on the contractual situation.

Third-party agreement is a legal term that refers to a party added to a contract, between the two other parties.
Third-party agreement is a legal term that refers to a party added to a contract, between the two other parties.

When the assignment of who is responsible to carry out the contract is in question, a third-party agreement often designates the party that will take over the duties or obligations of a contract signer, should the signer be unable to fulfill the terms. This type of third-party agreement not only allows the transference of duty to fulfill the contract, it also bestows upon the third-party any rights granted to the original contract signer. In most cases, a clause is also included to indicate the circumstances that would cause the original signer’s responsibilities and rights to transfer to the third-party.

Sometimes, a third-party agreement is created to indicate that the performance of the contract will result in a benefit to a person that did not sign the contact. Benefits to third parties are usually expected, and left out of contracts, unless one of the signers wants to designate a specific benefit to a specific third-party. To be able to enforce the contract, a third-party must be able to prove that the contract was drawn for her benefit. Otherwise, the benefit is considered incidental and the contract is only enforceable by the original signers.

Banks are common third parties because many contracts involve payment and banks hold the funds for payment, which includes the bank as an unnamed third-party agreement. The name of the contract signers’ bank and method of payment are usually withheld from the contract because banks have a duty to pay when the institution receives a properly drawn check and the person’s account has sufficient funds to cover it. Insufficient funds or improperly drawn checks are the responsibility of the signer, not the third-party bank, however.

Third-party agreements are a major part of securities law. In business, the term 'securities' refers to stocks, bonds, and similar forms of investment. Under security law, usually only third-party non-clients sue the security-issuing business. This is because the people who buy and hold the securities are actually third-party beneficiaries in contractual agreements between the stock-issuing business and the investment banker facilitating the sale of the stock.

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Discussion Comments

Keep in mind that the concept of privity of contract comes into play here. For example, let's say Joe agrees to sell John his car for $10,000. John intends to give the car to his daughter, Sue. Joe and John form a contract, but Joe changes his mind and refuses to deliver the car.

At that point, Joe is in breach. Who can file suit against Joe and force him to perform? In that scenario, only John can. If Sue files a suit, the principal of privity of contract will preclude her from any rights under the contract because she was not a party to it. Sure, she can argue that Joe's breach caused her harm, but she probably can't file suit to enforce the contract and that only makes sense. If Joe didn't know the contract was put together to essentially benefit Sue, then it's hard to argue that he owes her a duty under the contract.

Third party agreements, then, get around the general privity of contract concept.

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