What Are Third-Party Rights?

Third-party rights are contractual obligations that benefit a person who is not a party to the original contract. A contract between two or more parties typically concerns matters that directly benefit the parties involved. For example, a contract to perform services benefits the person performing the services and the person receiving services. The former receives payment, and the latter has work done in exchange. A third-party with rights in a contract is a non-party beneficiary to the agreement.

There are two general types of third-party rights: assignments and beneficiary designations. Both concern the transfer of a right or benefit to a person who was not involved with the original contractual agreement. Every jurisdiction has its own laws regarding the enforceability of third-party rights. Generally, however, third-party rights may be enforced under certain conditions. These usually include whether the transfer is in writing, whether the party knows about the agreement, whether the party to the contract changes his mind about the transfer before it happens, and whether the transfer impacts the obligations of the non-transferring party.

Assignments are written transfers of contractual rights to another person. An example is the assignment of royalties. In this case, an artist is entitled to receive regular payments for the use of his work. Instead of collecting those payments himself, he can assign the payments to someone else. The artist can make this assignment for any reason, including as payment of a debt or to capitalize his interest in another project.

This type of assignment is enforceable by the third-party against the person required to perform under the original contract, as long as the assignment doesn't change the original obligations of that party. For example, a third-party who has been assigned a recording artist's royalties can sue the record company to collect those royalties if the company stops paying. In this scenario, the third-party stands in the place of the artist, who was the original party to the contract. The third-party is not allowed to change the terms of the original contract, however, so he cannot demand a higher royalty percentage from the record company, for instance.

A third-party beneficiary is a person with a right to a benefit under a contract that he did not sign as a party to the transaction and may not even know exists. He has not entered into a written assignment and is merely the intended recipient of a gift. An insurance policy is structured in this way. The policy is a contract between the person paying the premiums and an insurance company. Proceeds from the policy are designated for a third-party beneficiary that has an interest in the contract but is not a party to it.