When to use a no third-party beneficiary clause in a contract?

When to use it

Use this clause when the parties want to make clear that only the contracting parties—and the successors and assigns the contract permits—may enforce the agreement. It is especially useful in commercial agreements where performance may benefit customers, affiliates, employees, lenders, vendors, or other outsiders, but the parties do not intend to give those people a right to sue for breach.

Courts generally distinguish an intended beneficiary, who may have enforcement rights, from an incidental beneficiary, who merely benefits from performance. The contract’s language and purpose matter, so an express no-third-party-beneficiary provision can help document the parties’ intent.[2]

This Agreement benefits only the Parties and their permitted successors and assigns. It creates no third-party beneficiary rights.

Common uses and cautions

• Use it in services, supply, licensing, financing, and other agreements where the parties want to limit contractual enforcement to themselves and authorized successors or assignees.
• Check the rest of the agreement for provisions that appear to grant rights to someone else—for example, an express right for an indemnified affiliate or a lender to enforce a particular provision. Add a clear carve-out if that is intended.
• Do not rely on it to eliminate rights created by law or rights arising on another basis, such as an assignment. Its effect depends on governing law and the full contract.
• Make “permitted successors and assigns” consistent with the agreement’s assignment clause. Otherwise, the two provisions may point in different directions.

Courts may look to the agreement’s text and purpose in deciding whether a nonparty was intended to benefit; a recent Delaware Chancery decision, for example, treated the agreement’s lack of third-party-beneficiary language as relevant to whether nonparties could enforce it.[1]