Illinois courts have long recognized that contracts can provide a benefit to a third person. However, in recent years the law regarding when a third party may sue for breach of contract has changed. In 1997, in the case Olson v. Etheridge et al, the Illinois Supreme Court adopted the modern vesting rule, making it more difficult for a third party beneficiary to prevail on a breach of contract suit. The modern vesting rule allows parties to a contract to amend or rescind their agreement so long as there is no detriment to a vested third party beneficiary.
In Olson, the sellers sold all of their stock in their business to a group of buyers pursuant to a stock purchase agreement and a promissory note. One of the buyers (“Buyer I”) later sold his stock to Buyer II, subject to Buyer I’s original agreement with the sellers. Buyer II began making payments to sellers, but later entered into an assumption agreement with Buyer I, resulting in the discharge of Buyer II’s obligation to the sellers. When Buyer I stopped making payments to the sellers, they brought suit against both Buyer I and Buyer II. The sellers alleged they were entitled as third party beneficiaries to enforce the agreement between Buyer I and Buyer II. The Illinois Supreme Court held the sellers were vested third party beneficiaries and able to sue for Buyer I’s breach of his agreement with Buyer II.
Illinois law provides that if a contract is entered into for the direct benefit of a third person, and the promisor intends to be directly liable to that third party, the third party beneficiary may sue for a breach of the contract in his or her own name. This is known as the “vesting” rule. This is true even though the third party beneficiary was not a party to the contract. The vesting rule presents the third party beneficiary with an avenue by which he or she can enforce rights provided for in the contract.
The vesting rule provides that the original contracting parties cannot modify or discharge the rights of the third party without the beneficiary’s assent once vesting has occurred. In Olson, the court stated that vesting can occur in three ways: (1) when the third party materially changes position in justifiable reliance on the promise; (2) when the third party brings suit on the promise before receiving notice of a modification; or (3) when the third party manifests assent to the promise. Unless one of these three events has occurred, the contracting parties may discharge or modify the duty owed to a third party by a subsequent agreement.
For example, in Orr v. Orr, the Illinois Appellate Court found that a child of divorced parents could enforce a provision in the divorce decree that obligated the father to pay for the child’s college education. The court reasoned that the provision in the divorce decree conferred third party beneficiary status upon the child, thereby giving the child standing to enforce the agreement.
Another example of third-party beneficiary status can be found in Resnik v. Curtis & Davis, Architects & Planners, Inc. In that case, the Supreme Court of Illinois found the state of Illinois (“State”) was a third party beneficiary of a contract between the Illinois Building Authority and an architectural firm that had a contract to build a jail. The Court held the contract displayed the intent of the parties to make the State a third party beneficiary and the State could enforce the contract.
If you have any questions concerning your rights as a third party beneficiary, or whether it is possible for you to amend an existing contract without affecting a third party beneficiary’s rights, please contact a member of the firm.