Definition

Companies may find that they have liabilities to an agency or other organization with which it has had no direct transaction. This is known as third-party liability, and it can arise for various reasons.

Example

Suppose that a company, as a third party to transactions between its employees and the government, withholds income and social security taxes from paychecks.

Until those amounts are paid, the firm owes them to the government.

Similar arrangements exist for sales taxes collected from customers and other payroll withholdings for such things as union dues, payroll savings plans, charitable contributions, and insurance premiums.

Frequently Asked Questions

What is third-party liability?

Third-party liability, in general, is a legal term that refers to an individual or business entity who suffers damage due to the activities of another, but has not been directly involved with said activity. In tort law, this may include any individual who does not have contractual relations with the parties involved in a particular situation, yet is liable for damages.

What are examples of third-party liability?

One example is when a farmer leaves out food for stray animals, but the animals aren't hers. The liability lies with whoever owns the animal because it was their negligence that led to the strays being in that situation. Another example might be if an individual is negligent when driving his or her car, damaging another person's property.

What are some other types of third-party liability?

There are many other examples of third-party liability. For example, when a person is injured in someone else's home due to the negligence of the homeowner, or if they are injured on another person's private property due to negligent maintenance. If you fall in someone else's store because the floor was wet and slippery, or if you slip on ice outside of their property, these would also be examples of third-party liability.

What is the difference between indirect and direct liability?

The main distinction between these two types of legal liability is that, in cases of direct liabilities, the defendant has created a situation which poses serious harm to another party. Indirect liabilities refer to those cases where such dangers do not exist. In the case of third-party liability, the defendant has not committed an offense themselves. However, they have been involved in a circumstance where another party has taken advantage of their lack of involvement and caused harm indirectly.

Is a stranger automatically liable for damages that result from negligence?

No, a stranger is only automatically liable for damages if they have an obligation to intervene or protect another party.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.