Olson v. Etheridge

Brief Fact Summary. The Plaintiffs, Karen Olson and others (Plaintiffs), brought an action to enforce two agreements: as parties to one agreement and as third party beneficiaries to the other.

Synopsis of Rule of Law. In the absence of language in a contract making the rights of a third party beneficiary irrevocable, the parties to a contract “retain power to discharge or modify the duty by subsequent agreement,” without the assent of the third party beneficiary at any time until the third party beneficiary materially changes position in justifiable reliance on the promise, sues on the promise, or manifests assent to the promise at the request of the promisor or promisee.

Facts. The Plaintiffs sold a business to a group of buyers including the Defendants, Dean Etheridge (Ethridge) and August Engelhaupt (Engelhaupt) (Defendant). The terms of this sale were contained in Agreement I. Later, Etheridge sold half of his shares to Engelhaupt pursuant to Agreement II. Both agreements provided for annual installment payments to the Plaintiffs. In Agreement II, Engelhaupt assumed half of Etheridge’s liability to the Plaintiffs. Subsequently, Etheridge transferred his payment rights against Engelhaupt to Princeton Bank, to which Etheridge was indebted. Thereafter, Etheridge, Engelhaupt and Princeton Bank entered into a settlement agreement, Agreement III. Pursuant to this agreement, Engelhaupt paid a sum of money to Princeton Bank. In return, Princeton Bank released its claim against Etheridge and Etheridge released its claim against Engelhaupt. The Plaintiffs initiated this action, claiming that they were third party beneficiaries of Agreement II and therefore,
Engelhaupt owed $76,500 to them.

Issue. Did the trial court properly enter summary judgment for the Plaintiffs on the theory that they were third party beneficiaries?

Held. No. Under prior law, third party beneficiary rights vested immediately and could not subsequently be altered or extinguished through a later agreement. The problem with such a rule is that it appeared to restrict the freedom to contract. The fundamental principles of contract law encourage the freedom to contract. Therefore, the adoption of a new rule was warranted. The rule adopted was from section 311 of the Second Restatement, which substantially states that in the absence of language in a contract making the rights of a third party beneficiary irrevocable, the parties to a contract “retain power to discharge or modify the duty by subsequent agreement,” without the assent of the third party beneficiary at any time until the third party beneficiary materially changes position in justifiable reliance on the promise, sues on the promise, or manifests assent to the promise at the request of the promisor or promisee. Thus, summary judgment was inappropriate and the case was reman
ded for the resolution of certain factual issues relating to summary judgment.

Discussion. Third party beneficiary rights are freely modifiable unless the beneficiary has changed his position in reliance on a promise, has sued on the promise, or has manifested assent to the p