Third-Party Beneficiaries: Do They Matter?
This post starts with the reminder we often end our posts with: what you read in the Resolution Point website is NOT a substitute for legal counsel! Please consult a lawyer to learn how the law would apply to your specific situation!
What is a Third-Party Beneficiary?
Ok, now that we’re clear on the disclaimer, let’s talk about a fairly technical concept that doesn’t seem to get much attention in discussions about divorce agreements: “third party beneficiaries”. First, what does the phrase mean? If you look at Law.com, you’ll find the following definition: “n. a person who is not a party to a contract but has legal rights to enforce the contract or share in proceeds because the contract was made for the third party’s benefit.”
Just in case that was too easy to read, the Legal Law Institute’s web site gets more legalistic: “A person who is neither a promisor nor promisee in a contractual agreement, but stands to benefit from the contract’s performance. A third-party beneficiary may legally enforce that contract, but only after his or her rights have already been vested (either by the contracting parties’ assent or by justifiable reliance on the promise).” (The Legal Law Institute is a small research, engineering, and editorial group housed at the Cornell Law School in Ithaca, NY.)
How About An Example?
Perhaps an example would really make this clearer. Suppose that Moné and Danny enter into an agreement. Danny agrees to post this article on our website. In exchange, Moné agrees to pay $1.00 to each reader who “Likes” it on Facebook. (Don’t get your hopes up; we don’t have that agreement! Sorry.) So as you can tell since you’re reading this, Danny did his part of the agreement, but Moné doesn’t pay you or anyone else the $1.00. Clearly, Danny can sue Moné for breaking her promise under our agreement. But can you sue Moné as well?
You can if you’re considered a “third-party beneficiary” of our agreement. One prerequisite for being a third-party beneficiary is that your reliance on our agreement has to be reasonable. Essentially, your claim as “third-party beneficiary” won’t work if we make it clear to you that there are no third-party beneficiaries to our agreement.
Why Does It Matter?
So why does this matter in let’s say your divorce agreement? Suppose you and your spouse agree that, as part of your divorce, you commit to share equally the cost of higher education for Sally, your 3-year-old child. And let’s suppose that, despite your written agreement, you and your now ex-spouse decide 15 years from now that maybe Sally isn’t ready for college yet. Sally’s college is not going to be at your expense, at least not now. But let’s also suppose that Sally found your divorce agreement a year ago and stopped worrying about whether she had to get a job and earn any money for school–she knew she was set for college. Could she then sue the two of you for breach of your agreement, after all she justifiably relied on your commitments to each other, right?
It’s situations like this that cause many written agreements to contain wording that puts potential third-party beneficiaries on notice that the agreement doesn’t intend anyone to be a third-party beneficiary. Now, a third-party would have trouble saying that reliance on the agreement is justified.
Many divorce agreements specifically disclaim any third-party beneficiaries with respect to higher education expenses. But how about commitments to pay for health insurance for children who are older than 19? What about commitments on how car expenses for children might be shared? Or agreements to repay certain debts to other people? In each case, the two of you might agree to reduce the obligations you each have, but would you want someone else saying that they have a stake in what you do under your agreement? The answer is “probably not!”
“No Third-Party Beneficiaries” Clause
Consider whether your agreement should make it clear that there are NO intended third-party beneficiaries of any provision in the agreement.
This is all crystal clear and straight-forward, right? Well maybe not. Maybe there are situations where having a third-party beneficiary is a good thing. Consider what happens when there are life insurance proceeds. We’ll revisit the idea of third-party beneficiaries as it relates to potential beneficiaries of life insurance proceeds in another post. Tantalizing, huh? Stay tuned! (UPDATE: You can read part 2 by clicking here.)
Oh, and did we remember to tell you that nothing in our website should be considered legal advice? Please consult an attorney to see whether a “no third-party beneficiaries” clause might be appropriate in your agreement.