In general, if there is a dispute about a contract, the only parties that are able to file a lawsuit for breach of contract are the parties that entered into the contract. Occasionally, however, there is a so-called “third-party beneficiary” to a contract. When such a party exists, that party may be entitled to sue for breach of contract and collect damages.

Whether such a third-party beneficiary exists depends on the intent of the contracting parties and it is important to draft business contracts carefully to avoid inadvertent third-party liability. A good corporate attorney can help. Here is a quick primer on the doctrine of third-party beneficiaries to a contract.

San Diego Corporate Law: What is a Third-Party Beneficiary to a Contract?

In general, a third party may be the intended beneficiary of a contract if that is the intent of the contracting parties. As an example, assume this is the contract:

Contract For Sale of Car: Seller, being the current owner of CAR, agrees to sell CAR to buyer for $xxxx.xx (“Purchase Price”). Seller and Buyer agree and understand that Buyer is buying CAR for BEST FRIEND and seller agrees, upon payment of Purchase Price, to deliver CAR to address of BEST FRIEND.”

Under this contract, California courts will give effect to the intent of the parties. In this example, the intent is clearly expressed that BEST FRIEND is the third-party beneficiary of the contract. If Seller fails to deliver the CAR after payment of the purchase price, then both the buyer and the BEST FRIEND will be able to sue for breach of contract.

San Diego Corporate Law: No “Incidental” Third Party Beneficiary Allowed

In general, the intent to benefit a third party must be intended and clearly expressed in the contract. However, the name of the intended beneficiary need not be stated.

On the other hand, under California law, so-called “incidental beneficiaries” are not allowed. An incidental beneficiary is someone or some business who will benefit in some way if the contract is performed, but not directly. In our example, let’s assume that BEST FRIEND is married with kids. The spouse and kids would be incidental beneficiaries since they would ultimately benefit from the BEST FRIEND owning a car.

A recent unpublished case provides a good example. See Burgoyne v. Calegari & Morris, Case No. A146746 (Cal. App. 1st Dist. March 14, 2018). In Burgoyne, a law firm had two equity partners. During the relevant time period, one of the lawyers owned a majority interest in the firm. Shortly before the other lawyer — Burgoyne — was to become an equal partner, the majority partner decided to expel Burgoyne from the law firm because they were not working well together. A termination notice was emailed to Burgoyne. The lawyers had a written partnership agreement that provided that an “outside certified public accountant” would calculate the money due as the “Payout Amount” under the agreement.

A month after Burgoyne’s expulsion, the firm hired an accounting firm — Calegari & Morris — which provided a calculation of the Payout Amount. Burgoyne disputed the calculation and sued Calegari & Morris, asserting that he — Burgoyne — was a third-party beneficiary of the contract between the law firm and Calegari & Morris. The Court of Appeals said “no.”

The Court of Appeals stated the rule which is:

“The test for determining whether a contract was made for the benefit of a third person [here — Burgoyne] is whether an intent to benefit a third person appears from the terms of the contract. If the terms of the contract necessarily require the promisor [here — Calegari & Morris] to confer a benefit on a third person, then the contract, and hence the parties thereto, contemplate a benefit to the third person. But “it is not enough that the third party would incidentally have benefited from performance.” (citations omitted)

The court concluded — as a matter of law — that Burgoyne was not a third-party beneficiary of the promises made by the accounting firm to the law firm. By its terms, the contract between Calegari & Morris and the law firm required calculations for the LAW FIRM, not for Burgoyne. Even though Calegari & Morris was aware that, if the law firm was satisfied with the accounting, payment would be made by the law firm to Burgoyne, such did not convert the accounting work into work for Burgoyne. According to the court, that simply made Burgoyne an incidental beneficiary of the accounting.

San Diego Corporate Law: Legal Lessons

The legal lessons from Burgoyne is two-fold: If you want your contract to benefit a third party, such should be clearly stated in the contract, and just because some event might occur with respect to a third party as a result of you performing under a contract does not create a third-party beneficiary.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2015, 2016 and 2017 by and “best of the bar” for the last three years by the San Diego Business Journal. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. He can assist you with any corporate needs for your business and/or the drafting/review of any and all business contracts and agreements. Mr. Leonard can be reached at (858) 483-9200 or via email.

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