Brief Fact Summary. The shareholders of a corporation adopted a resolution providing for monetary payments to the spouse of any shareholder that died. The shareholders eventually rescinded this agreement and the guardian of one of the shareholder's spouses sued.
Synopsis of Rule of Law. "[T]he parties to a third party beneficiary contract may rescind, vary or abrogate the contract as they see fit, without the approval of the third party, at any time before the contract is accepted, adopted or acted upon by a third party beneficiary."
Under Indiana law,the parties to a contract entered into for the benefit of a third person may rescind, vary, or abrogate the contract as they see fit, without the assent of the third person, at any time before the contract is accepted, adopted, or acted upon by the third person, and such rescission deprives the third person of any rights under or because of such contract.View Full Point of Law
Issue. Does a third party beneficiary have a cause of action where the promisor(s) and promise(s) modify an agreement affecting the rights of the third party beneficiary?
Held. The court first observes that the rule now is "that modification on the part of the promisor and promisee is ineffective only if the agreement so provides, unless the third party beneficiary has changed his position in reliance on the promise or has accepted, adopted or acted upon it." The court recognized that "the parties to a third party beneficiary contract may rescind, vary or abrogate the contract as they see fit, without the approval of the third party, at any time before the contract is accepted, adopted or acted upon by a third party beneficiary." As such "[a] rescission prior to the required change in position by a third party deprives that third party of any rights under or because of the contract." Applying these rules to the facts before it, the court recognized that the February 15, 1971 resolution rescinding the July 29, 1964 resolution was valid based on Indiana law, even though the parties to the original agreement did not reserve the right to amend it. The only way the February 15, 1971 would be valid is if Ms. Scott "had not accepted, adopted or acted upon the original widow's resolution."
• The court then tries to define the word "acceptance." The court observes "[a]cceptance may be an overt act, or the adoption of a benefit which is a question of intent and thereby also a factual determination." It then lays out the following rule from Restatement (Second): "the power of promisor and promisee to vary the promisor's duty to an intended beneficiary is terminated when the beneficiary manifests assent to the promise in a manner invited by the promisor or promisee." The court concludes Ms. Scott did not accept the July 29, 1964 resolution because she said in testimony during the trial that she forgot about it.
Discussion. This court offers an informative discussion about the rights of third party beneficiaries and how they have evolved over time.