Making Your Intentions Clear: Drafting Contracts Involving Potential Third Party Beneficiaries
March, 2007
by William P. Pistorius and
Introduction
Clausen Miller attorneys William P. Pistorius and Tiffany J. Tracy were recently successful in securing dismissal with prejudice of a breach of contract action against a client filed by an entity claiming third party beneficiary status. While it may have seemed obvious to the third party who brought suit against our client that it was intended to benefit from the contract, the court disagreed.
Before signing a contract, it is important to consider whether either of the parties intends to benefit anyone other than the actual signatories to the agreement. If either party wants to avoid strangers to the contract suing to enforce the terms of the agreement, language to that effect should be included. On the other hand, if either party intends for a “third party” to benefit, the contract should contain terms clearly identifying the third party and expressing the parties’ intention in unambiguous language. While the parties to a contract may implicitly understand that a third party will benefit from their agreement, a court analyzing the contract language down the road may well decide to the contrary. If the contract language is determined to be unambiguous, the contracting parties will not be able to explain at a later date what they “really meant” to say.
Case Study
Our client, an environmental remediation company, entered into two separate agreements with the owners of real estate to perform a site assessment and, later, a subsurface drilling investigation. After this work was completed, the property was sold to a third party. When environmental contamination on the property was allegedly discovered following the sale, the third party sued our client for breach of contract. The real estate purchaser’s legal theory was that, because the contracts between our client and the previous property owners were entered into to benefit any subsequent purchaser of the real estate, the plaintiff was an intended third party beneficiary who was entitled to sue for breach of the contract. The plaintiff claimed damages including costs of remediation, and diminished value of the property.
Under Illinois law, and in many other jurisdictions, there is a strong presumption that parties to a contract intend its provisions to apply only to them and not to third parties. A third party may be entitled to sue for breach of contract if the third party is specifically identified and the contracting parties clearly indicate an intent to benefit the third party. It is also possible, even if a party is not specifically named in a contract, for a third party to acquire rights if that party is otherwise sufficiently described or designated in the contract.
In our case, the plaintiff was not named in the contracts. This was an obvious point that could not be disputed. However, the plaintiff argued that the only purpose for the work performed by our client under the contracts was to benefit a potential purchaser of the real estate. Unfortunately for the plaintiff, neither contract made reference to the sale of the real estate, or to an unidentified subsequent purchaser. Accordingly, Clausen Miller attorneys William P. Pistorius and Tiffany J. Tracy were successful in having the plaintiff’s claim dismissed with prejudice.
Learning Point
When drafting a contract, consider whether any individuals or entities who will not be signing the agreement are intended to benefit from, and acquire rights under, the contract. If such is the case, the contract should include a term specifically identifying that third party and expressing the parties’ clear intentions in this regard. On the other hand, if the parties do not wish to confer rights upon, or face potential exposure from, third parties, an equally clear provision to the contrary should be included. For example, the parties should state that the terms of the agreement shall be binding upon and inure to the benefit of the contracting parties only, and that the parties do not intend any other individuals or entities to be obligated by or benefit from the agreement.
Please contact William P. Pistorius at wpistorius@clausen.com, or Tiffany J. Tracy at ttracy@clausen.com, if you would like additional information on this issue.
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