Legal Definitions - creditor beneficiary

A creditor beneficiary is a third party who benefits from a contract made between two other parties. In this arrangement, one party (the "promisee") has an existing debt or obligation to the third party (the "creditor beneficiary"). The other party to the contract (the "promisor") then agrees with the promisee to fulfill that obligation directly to the creditor beneficiary. Essentially, the contract is specifically intended to satisfy a debt owed by the promisee to the third party.

Because the contract is made for their direct benefit, the creditor beneficiary has the legal right to enforce the promise made by the promisor, even though the creditor beneficiary was not a direct party to the original agreement.

• Example 1: Business Acquisition and Debt Assumption

  Imagine that TechSolutions Inc. owes Software Innovations LLC $75,000 for custom software development. TechSolutions Inc. then sells a portion of its business to Global Enterprises Corp. As part of the acquisition agreement, Global Enterprises Corp. specifically promises TechSolutions Inc. that it will pay the $75,000 directly to Software Innovations LLC on TechSolutions Inc.'s behalf.

  In this scenario, Software Innovations LLC is the creditor beneficiary. TechSolutions Inc. (the promisee) had an existing debt to Software Innovations LLC. Global Enterprises Corp. (the promisor) made a contract with TechSolutions Inc. to satisfy that debt. If Global Enterprises Corp. fails to pay, Software Innovations LLC can directly sue Global Enterprises Corp. to recover the $75,000.

• Example 2: Personal Loan Repayment

  Sarah borrowed $5,000 from her friend, Michael, to help cover unexpected medical expenses. Later, Sarah's wealthy uncle, Uncle John, decides to help Sarah out. Uncle John tells Sarah that he will pay Michael the $5,000 that Sarah owes him as a gift to Sarah. Uncle John then contacts Michael and explicitly promises to send him a check for $5,000 next week to clear Sarah's debt.

  Here, Michael is the creditor beneficiary. Sarah (the promisee) had a debt to Michael. Uncle John (the promisor) entered into an agreement with Sarah (and communicated his promise to Michael) to pay Sarah's debt to Michael. If Uncle John fails to send the check, Michael could potentially enforce this promise against Uncle John directly.

• Example 3: Construction Project Payment Bond

  A general contractor, MegaBuild Co., hires a subcontractor, ElectricalWorks Ltd., to handle all electrical installations for a new commercial building. To protect itself and ensure that all suppliers are paid, MegaBuild Co. requires ElectricalWorks Ltd. to obtain a payment bond from a surety company, SecureSurety Inc. This bond is a contract where SecureSurety Inc. guarantees that if ElectricalWorks Ltd. fails to pay its material suppliers (e.g., WireSupply House for copper wiring), SecureSurety Inc. will pay those suppliers directly.

  WireSupply House (and other material suppliers) are creditor beneficiaries. ElectricalWorks Ltd. (the promisee) has an obligation to pay its suppliers. SecureSurety Inc. (the promisor) entered into a contract (the payment bond) with ElectricalWorks Ltd. specifically to ensure these suppliers are paid. If ElectricalWorks Ltd. defaults on its payments, WireSupply House can directly claim payment from SecureSurety Inc. under the terms of the bond.