Be Clear if You Want to Have a “Third-Party Beneficiary” in Your Contract


In a prior post, I noted that if you want all disputes between contracting parties to be resolved in one and only one specific forum, it is imperative to expressly state this with great clarity in your agreement.  In light of the Massachusetts Appeals Court’s recent decision in Try Switch, Ltd. v. Endurance International Group, a similar approach should be taken if a contracting party wants a non-party to be a bona fide “third-party beneficiary” who is legally permitted to enforce some right or obligation under that contract.

In Try Switch, the plaintiff sued Endurance International Group in the Massachusetts Superior Court for breach of contract, and Endurance moved to dismiss for improper venue.  More specifically, Endurance argued that it was the third-party beneficiary of a contract between Try Switch and ValueClick International, and that contract included the following provision:

The exclusive forum for any actions related to this agreement shall be in the [c]ourts in Dublin, Ireland.

While the Superior Court agreed with Endurance and dismissed the case, the Appeals Court reversed.  In doing so, the Appeals Court first acknowledged that even though no Massachusetts case addresses the issue as to whether a non-party to a contract can enforce a contractual forum selection clause, other jurisdictions generally allow true third-party beneficiaries to do so.  The Appeals Court then went on to note that:

Under Massachusetts law, a contract does not confer third-party beneficiary status unless the ‘language and circumstances of the contract’ show that the parties to the contract ‘clearly and definitely’ intended the beneficiary to benefit from the promised performance.

In the Try Switch-ValueClick contract, however, Endurance was not specifically identified anywhere therein.  Further, while there was a reference to “advertisers” in that contract, nothing suggested that Endurance was such an advertiser. Accordingly, the Appeals Court found no basis for concluding that Endurance was an intended third-party beneficiary of the Try Switch-ValueClick contract and reversed the Superior Court’s order of dismissal.  (Endurance has since requested Further Appellate Review by the Massachusetts Supreme Judicial Court, but the SJC has yet to decide if it will consider the matter.)

Because it is not unusual for a contracting party to want a non-party (often an affiliate or some other related entity) to be able to take advantage of and enforce various contractual rights and obligations, Try Switch sends an important message to in-house counsel:  be clear, be express and be explicit.  In other words, if in-house counsel want a third party to benefit from a contract, it is important to state right in the agreement that:

XYZ Company is an intended third-party beneficiary of this Agreement.

Likewise, depending upon the particular circumstances, it may also be wise to expressly state what rights and obligations are intended to benefit the third party and provide some context so as to make it clear why it makes sense for that third party to so benefit.  Indeed, taking the extra time to add such unequivocal and explanatory language could go a long way to avoiding needless legal fees, like those expended by the parties in Try Switch.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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