July 25, 2014
To understand this question, imagine that Perry & Debby sign a contract. Debby promises to paint Perry's fence. Debby breaches the contract by failing to paint the fence. We know that Perry can sue Debby. But what about Tina, Perry's neighbor, who was not a party to the contract? Obviously the answer is probably "No." We would call Tina a "third-party" because she was not one of the parties to the contract. Generally speaking, third-parties, or non-parties to a contract, cannot sue. That makes sense. Perry was injured, not Tina, so why should Tina ever be allowed to sue Debby?
One circumstance where Tina could sue Debby is if she were an "intended third-party beneficiary" of the contract. For example, let's say Perry owes Tina money. He's short on cash but is able to make a deal with Debby that Debby will paint Tina's fence. Tina likes this idea and will forgive the debt. Here, Debby's performance is intended to benefit Tina -- she's painting Tina's fence. If Debby doesn't paint Tina's fence, Tina will probably be allowed to sue Debby for breaching the contract, even though Tina was not a party to the contract.
You will want to look at the Restatement (Second) of Contracts and to read cases of course, but usually on a law school examination where there is an intended beneficiary one party owes money to the third-party or the party has a reason to want to donate the benefit of the performance to the third-party. For example, when a husband names his wife as the beneficiary of a life insurance policy, the wife is the intended third-party beneficiary of the contract between the husband and the insurance company.
On a law school examination you should also be prepared to distinguish incidental beneficiaries of a contract from intended beneficiaries. Sometimes a third-party will benefit from parties performing according to a contract but that benefit is merely incidental - - it is not the intention of the contracting parties. For example, let's say Tina hires Perry to fix her car. She needs a new brake. Debby, an auto-parts supplier, is late delivering her weekly shipment of parts to Perry and this slows down the repair job. Under these circumstances, sure, Tina would like Debby to deliver parts on time, but Tina is probably just an incidental beneficiary of the agreement between Perry and Debby.
Below is a short video discussing intended third-party beneficiaries.