Donee Beneficiary

A donee beneficiary receives the benefit of a contract between two other parties as a gift from one of the parties to the contract. While donee beneficiaries stand to benefit from the fulfillment of a contract, they are not technically party to the contract.

The donee beneficiary’s relationship to the parties in the contract distinguishes them from other types of third-party beneficiaries. Namely, a donee beneficiary’s claim to benefit from the contract amounts to a gift from one of the contractual parties. As with other situations involving third-party beneficiaries, donee beneficiaries have the legal right to demand benefits promised to them once their rights to the contract have vested.

When an individual draws up a life insurance plan, the insured individual names one or more donee beneficiaries to receive payment in the event of the insured’s death. The insurance company and the insured individual enter the contract, with the insurance company acting as promisor and the insured as the promisee. The insurance company technically owes a benefit to the insured individual. The named beneficiaries act as third parties and the insured individual intends for them to receive the benefit as a gift, rather than as repayment for a debt.

The U.S. legal system generally recognizes two types of third-party beneficiaries to contracts, differentiated by the rights of each type of beneficiary to enforce a contract. Incidental beneficiaries have no legal right to enforce a contract because no party to the contract intends that they benefit. For example, if a wedding party contracted with a caterer to provide food and insisted that they serve a specific brand of local wine, the winery would be an incidental beneficiary. A breach of contract would result in a loss of revenue for the winery, but it would have no legal standing to enforce anything in the contract.

When one or both parties to a contract intend for a third party to benefit, the third party becomes an intended beneficiary. Most of the time, contracts state this intent explicitly. Donee beneficiaries fall into this category, as do creditor beneficiaries. A creditor beneficiary receives the benefit of a contract as a repayment for a debt owed by one of the parties in the contract. For example, if John owes Sally $100, he might enter a contract to mow his neighbor’s lawn four times and have the neighbor pay Sally $25 after every mowing. If Sally agrees, she becomes a creditor beneficiary because she collects the payment contractually due to John as payment of the debt John owes Sally.

Legally, both classes of intended beneficiaries may pursue legal enforcement of the contract. Donee beneficiaries typically may only pursue enforcement from the promisor once the promisee has met the obligations outlined in the contract. Since the promisee technically owes a creditor beneficiary something prior to entering the contract, creditor beneficiaries typically have legal avenues to go after payment from both parties.