## Facts

- In 1979, four sellers sold all stock of a John Deere dealership corporation to three buyers, including Dean Etheridge, under a stock purchase agreement and promissory note requiring annual payments with interest and providing default remedies; the stock was pledged as security and held in escrow.
- In 1983, Etheridge sold one-half of his corporate stock to August Engelhaupt under a separate agreement in which Engelhaupt agreed to assume one-half of Etheridge’s obligations under the 1979 sale documents, including payments owed to the sellers.
- The 1983 agreement directed Engelhaupt to make certain installment payments directly to the sellers, though the sellers did not sign that agreement.
- Etheridge later became indebted to a bank and assigned to the bank his rights against Engelhaupt under the 1983 agreement.
- Etheridge, Engelhaupt, and the bank then executed a settlement agreement under which Engelhaupt paid a lump sum to the bank and, in exchange, the bank released Etheridge and Etheridge released Engelhaupt regarding claims arising from the 1983 agreement.
- The sellers alleged Engelhaupt’s assumed obligation required payments for their benefit that were not fully satisfied and that the settlement improperly extinguished their rights as intended third-party beneficiaries.
- The trial court granted summary judgment for the sellers against Engelhaupt, and the appellate court affirmed, applying an Illinois rule that third-party beneficiary rights vest immediately and cannot be altered without the beneficiary’s assent.

## Issues

1. Whether Illinois should retain the rule that third-party beneficiary rights vest immediately upon contract formation and are irrevocable without the beneficiary’s assent.
2. Whether the contracting parties may discharge or modify duties owed to an intended third-party beneficiary by later agreement before the beneficiary’s rights vest through reliance, suit, or requested assent.
3. Whether summary judgment for the sellers was proper under the correct vesting standard.

## Decision

- The Illinois Supreme Court rejected the immediate-vesting rule and adopted Restatement (Second) of Contracts § 311.
- The court held that, absent contract language making third-party beneficiary rights irrevocable, the contracting parties may modify or discharge the duty without the beneficiary’s assent until the beneficiary (a) materially changes position in justifiable reliance, (b) sues on the promise, or (c) manifests assent at the request of the promisor or promisee.
- The court reversed the judgment granting summary judgment to the sellers and remanded for further proceedings because the lower courts had applied the superseded rule and the record did not resolve vesting under § 311.

## Legal Principles

- Intended third-party beneficiary rights are not automatically irrevocable upon contract formation.
- Unless a contract makes beneficiary rights irrevocable, the promisor and promisee retain power to modify or discharge duties owed to a beneficiary by later agreement until vesting occurs.
- Vesting occurs when the beneficiary materially changes position in justifiable reliance on the promise, brings suit to enforce it, or manifests assent at the request of a contracting party.
- Summary judgment is improper where the controlling vesting inquiry under § 311 has not been applied and material facts bearing on vesting remain unresolved.

## Conclusion

The Illinois Supreme Court replaced an automatic vesting rule for third-party beneficiaries with Restatement (Second) § 311, holding that contract duties benefiting a third party may be modified or discharged by the contracting parties before the beneficiary’s rights vest through reliance, suit, or requested assent, and remanded for application of that standard.


Olson v. Etheridge, 177 Ill. 2d 396, 686 N.E.2d 563 (Ill. 1997)