Biggins v. Shore

565 A.2d 737, 523 Pa. 148, 1989 Pa. LEXIS 390

Opinions

OPINION ANNOUNCING THE JUDGMENT OF THE COURT

FLAHERTY, Justice

*.

This case requires us to reconsider our long-standing adherence to section 142 of the Restatement of Contracts, which makes a contractual gift to a donee beneficiary irrevocable upon execution of the contract, in contrast with section 311 of the Restatement (Second) of Contracts, which permits revocation of the gift at any time before the donee manifests reliance or acceptance. We hold that abandonment of Restatement § 142 would work an injustice on the parties in this case, and that there is no need to adopt Restatement (Second) § 311 merely to align ourselves with the “weight of authority” in other jurisdictions.

The facts are as follows. The appellee, Marie T. Biggins, is the widow of the late Robert A. Biggins, formerly a partner in the appellants’ realty firm. On October 29, 1979, Biggins departed the firm and sold his interest to appellants Shore and Guerra. Paragraph 4 of the sales agreement recited the consideration Biggins was to receive for his share of the partnership:

4. The consideration for this sale, payable in cash to Biggins by S-G, is as follows:

(a) Eight Thousand ($8,000.00) Dollars upon execution of this Agreement, as earned draws.

(b) Six Thousand Nine Hundred Thirty-two ($6,932.00) Dollars on or before August 15, 1981.

(c) Eleven Thousand ($11,000.00) Dollars on or before August 15, 1982.

(d) Commencing June 1, 1980, S-G shall pay to Biggins for life the sum of Thirty-five ($35.00) Dollars on each settlement held on or after June 1, 1980 on any type of transaction, said sum to be paid within five (5) days after settlement. Upon the death of Biggins, the said Thirty-five ($35.00) Dollars payment shall continue and be paid to Marie T. Biggins for her life. In the event of the death of Biggins and Marie T. Biggins within six (6) years of the date of this agreement, the Thirty-five ($35.00) Dollars payment shall be paid to Robert G. Biggins, as Trustee for Anthony Biggins, Thomas Biggins and Jonathan Biggins. These payments to Robert G. Biggins shall continue for a period of six (6) years.

Paragraph 4(d) of the contract thus prescribed that part of the purchase price for Biggins’s interest in the firm was to be paid to Biggins and his wife for life. Marie T. Biggins was therefore a third-party donee beneficiary under the sales agreement.

In 1982, however, Biggins drafted the following memorandum:

3 June 1982

To: Murray J. Shore and Angelo D. Guerra

From: Robert A. Biggins

Subject: Award of Options under an Agreement dated 26 October 1979 between Robert A. Biggins, Murray J. Shore and Angelo D. Guerra

(1) I hereby award you the following Options to be exercised by you within 30 days of notification of my death opting for either A or B Option.

(A) Keep in full force and effect Paragraph 4B, 4C and 4D under the above mentioned Agreement.

(B) Change Paragraph 4C of the Agreement to read: Upon the death of Biggins, pay the sum of (fifteen) $15.00 Dollars to St. Joseph’s Preparatory School 18th and Girard Avenue, Philadelphia, Pa., on each settlement for a period of not less than (three) 3 years. Change Paragraph 4A and Paragraph 4C to read as follows: Any sums of money not paid to Robert A. Biggins under Paragraph 4B and 4C shall not be paid to the estate of Robert A. Biggins but a lump sum of $500.00 (Five Hundred) Dollars shall be paid to St. Joseph’s Preparatory School if the sum payable to Robert A. Biggins shall excede [sic] $500.00. Any sums payable to Robert A. Biggins under $500.00 shall be paid to St. Joseph’s Preparatory School.

(2) If you chose to exercise Option B, I hereby release you from all claims that may be brought against you and release you from from [sic] the obligations of Option A.

(3) All other Terms and Conditions of the Agreement shall remain in full force and effect.

My hand and seal affixed 3 June 1982.

s/ Robert A. Biggins

Biggins sealed the memorandum in an envelope marked “To be opened only at the death of Robert A. Biggins,” and gave the envelope to his former partner, appellant Angelo D. Guerra. After Biggins died on May 17, 1984, Mr. Guerra’s wife opened the envelope and found the memorandum. Appellants Shore and Guerra chose to make reduced payments to St. Joseph’s under Option B of the memorandum rather than the payments to Biggins’s widow under paragraph 4(d) of the original contract.

Mrs. Biggins brought suit to enforce her rights under the original contract. The appellants answered that the contract had been modified by the 1982 memorandum and that Mrs. Biggins was entitled to nothing. Mrs. Biggins responded that the alleged modification was ineffective, and moved for summary judgment, which was granted.

Superior Court affirmed, Biggins v. Shore, 365 Pa.Super. 237, 529 A.2d 487 (1987), holding that the rights of Mrs. Biggins, a donee beneficiary of the original contract, vested indefeasibly upon the execution of the contract and could not be destroyed by a subsequent modification of the contract by the contracting parties.¹ The court based its holding on Logan v. Glass, 136 Pa.Super. 221, 7 A.2d 116 (1939), aff'd per curiam, 338 Pa. 489, 14 A.2d 306 (1940), which is a restatement of the long-standing rule that a donee beneficiary’s contractual rights vest immediately, that they may not be modified by the contracting parties unless the power to modify has been expressly reserved in the contract, and that the donee beneficiary has a right of action to enforce the benefit conferred by the contract. This is the same rule expressed in the Restatement of Contracts, § 142.² Under this rule, Mrs. Biggins was clearly entitled to summary judgment, as the original 1979

contract reserved no power to modify her rights as donee beneficiary.

Appellants, however, would have us adopt instead the “modern” rule set forth in the Restatement (Second) of Contracts, § 311,³ which permits modification of the rights of a donee beneficiary prior to acceptance of or reliance on the gift, unless the contract specifically prohibits modification. In this way, the Restatement (Second) eliminates the distinction between creditor and donee beneficiaries, combining both categories under the designation “intended third party beneficiaries,” and treats all intended third party beneficiaries in the same way that creditor beneficiaries were treated under the original Restatement. If we were to adopt the so-called modern rule, then summary judgment in favor of the appellee would be improper, and we would have to remand the case for a determination of whether Mr. Biggins’s attempted modification or discharge of her rights was effective under Restatement (Second) of Contracts, § 311.

. The rule embodied in the original Restatement has been the settled law of this Commonwealth for at least one hundred fifty-two years. A distinction between donee and creditor beneficiaries was recognized by this Court prior to 1837. In Blymire v. Boistle, 6 Watts 182 (1837), it was held that a creditor beneficiary could not sue upon a promisor’s duty to indemnify a debtor-promisee, whereas a donee beneficiary could enforce a contract in which the promisor undertakes to confer a gratuitous benefit. The Court noted that "there appear to be reasons of substantial justice in favor of [the distinction], as well as the authority of decided cases.” Id. at 184.

In the Blymire case, Blymire promised Gladstone to pay Gladstone’s debt to Boistle. When Blymire failed to pay Boistle, Boistle sued on Blymire’s promise to Gladstone, and obtained judgment against Blymire in the trial court. In reversing, this Court explained that Boistle, as a creditor beneficiary, still had a cause of action against Gladstone on the original debt, independent of the Gladstone-Blymire contract, and thus did not need a right of action against Blymire in order to be protected. Moreover, Gladstone, the promisee, had a right of action against Blymire for the indemnity promised. Were Boistle permitted to sue Blymire on the contract, Blymire would be liable both to Gladstone, the promisee, and to Boistle, the creditor beneficiary. In the words of the late Mr. Justice Sergeant:

If then by this action Blymire is liable also to Boistle, he may be twice sued. Who should be preferred? or might not Blymire in one event, be compelled to pay both? The equity of the case would be, and chancery would decree, that Blymire should pay but once, and that the money should go to Boistle on his releasing Gladstone. But in two common-law suits against Blymire it might be difficult to effect this equity. The suits must, therefore, be by Gladstone against Blymire, and by Boistle against Gladstone, and thus Blymire would be released by one payment to Gladstone, and Gladstone exonerated by paying Boistle; unless one suit should be brought in the name of Gladstone for the use of Boistle against Blymire.

Id. In further explanation of the rule, the Court stated:

[W]hen a debt already exists from one person to another, a promise by a third person to pay such debt, being for the benefit of the original debtor, and to relieve him from the payment of it, he ought to have a right of action against the promisor for his own indemnity; and if the promisor were also liable to the original creditor, he would be subject to two separate actions at the same time, for the same debt, which would be inconvenient, and might lead to injustice.

Id. The converse of this rule, that a donee beneficiary does have a right of action against the promisor in a third-party beneficiary contract, id., has been consistently applied, and has been justified by the fact that the donee beneficiary has no cause of action against the promisee, for there is no debt independent of the contract, as well as by the fact that in an action by the promisee against the promisor, the promisee might recover only nominal damages, he not being entitled to indemnification.

The rule of Blymire v. Boistle was restated in Brill v. Brill, 282 Pa. 276, 279-80, 127 A. 840 (1925), as follows:

[I]f the promise be to pay money to a third person, but it is made for the benefit and in relief of the other party to the agreement, the third person obtains no rights under the contract. If, on the other hand, the promise to pay to the third person is not for the benefit of the other party to the contract but for that of the third person himself, the latter has a legal and equitable interest in the contract which enables him to enforce rights thereunder, even though he himself was not a party to the consideration paid to the promisor.

Brill held that the rights of the donee beneficiary vested indefeasibly at the time of the contract, and thus could not be modified or terminated by the contracting parties without his consent. Id., 282 Pa. at 283, 127 A. 840.

It is therefore clear that the rule set forth in section 142 of the original Restatement is an accurate statement of the law which has long existed in Pennsylvania. Logan v. Glass, supra, did not “adopt” section 142 of the Restatement, but simply recognized the correspondence of the Restatement rule with the long-standing law of this Commonwealth.

In the face of the foregoing history and purpose of the rule, the appellants offer only one argument for us to abandon a concept which “has been rejected by the Restatement (Second) of Contracts and the weight of authority in this country.” It is asserted that this case demonstrates “the need for, and equitable nature of” the modern rule, because the existing rule “may prevent perfectly proper readjustments in the light of misconduct of the beneficiary, the birth of children, or a family financial crisis.” Brief for Appellants at 12-13, citing Comment F to Restatement (Second) of Contracts § 311.

We disagree. The existing law permits a contracting party, if he intends to make readjustments, to reserve the power to do so when he enters the contract. Section 142 of the Restatement of Contracts begins: “Unless the power to do so is reserved, the duty of a promisor cannot be released____” In similar fashion, section 311 of the Restatement (Second) begins: “Discharge or modification of a duty to an intended beneficiary ... is ineffective if a term of the promise so provides.” In either case, the contracting parties are free to confer a benefit indefeasibly or not, as they wish. The difference, of course, is that in the absence of an express term in the contract, the existing rule makes the gift indefeasible whereas the Restatement (Second) permits modification.

Pennsylvania’s existing rule, unlike the Restatement (Second) position, is consistent with the concept of a gift. When parties enter a contract which confers a gift, there is no reason to suppose that the gift may be withdrawn at a later date. The late Mr. Justice Kephart summarized the history of the rule permitting third party beneficiaries to enforce rights under contracts made for their benefit in Greene County v. Southern Surety Co., 292 Pa. 304, 313, 141 A. 27, 31 (1927), where he concluded: “Whatever the objections to recovery by the sole beneficiary, they are insufficient to overcome the undoubted merit and justice of his cause.” For us now to invert a rule of such ancient standing would work a substantial injustice in this case. Everyone connected with the contract at issue had a right to rely on the long-standing law which prevents discharge or modification of the gift in the absence of a specific reservation of the power to do so. To permit Biggins, from his grave, to destroy the annuity of his widow would not be equitable.

We see no sound reason to change the law and to adopt the new Restatement view; the Restatement (Second) affords no greater freedom of contract than exists at present. Contracting parties may continue to rely on the rule which has existed in Pennsylvania at least since 1837; if they do not intend to convey an indefeasible benefit, they need merely say so in the contract. Accordingly, we affirm the order of the Superior Court.

Order affirmed.

STOUT, Former Justice, did not participate in the decision of this case. NIX, C.J., joins the opinion announcing the judgment of the court, and files a concurring opinion, which ZAPPALA, J., joins. LARSEN and McDERMOTT, JJ., concur in the result. PAPADAKOS, J., files a dissenting opinion.

NIX, Chief Justice,

This case was reassigned to this author.

1 . The court also based its holding on the alternative theory that, even if the parties retained the power to modify the original contract, the attempt to do so pursuant to the 1982 memorandum was ineffective because an option contract expires upon the death of the offeror. Although the hypothesis is correct, see, e.g., Cohen v. Goldberg, 431 Pa. 192, 244 A.2d 763 (1968), the conclusion does not follow, for the 1982 memorandum was not an option contract, despite the lay terminology used by Biggins. An option contract is a promise which limits the promisor’s power to revoke an offer. Verstine v. Yeaney, 210 Pa. 109, 59 A. 689 (1904); Restatement (Second) of Contracts, § 25. Although the 1982 memorandum proposed a modification of the installment payments required under the original contract, the parties did not exchange consideration for a promise not to revoke an offer, and Biggins, in fact, never promised not to revoke his offer.

2 . Restatement of Contracts, § 142, reads:

§ 142. VARIATION OF THE DUTY TO A DONEE BENEFICIARY BY AGREEMENT OF PROMISOR AND PROMISEE.

Unless the power to do so is reserved, the duty of the promisor to the donee beneficiary cannot be released by the promisee or affected by any agreement between the promisee and the promisor, but if the promisee receives consideration for an attempted release or discharge of the promisor’s duty, the donee beneficiary can assert a right to the consideration so received, and on doing so loses his right against the promisor.

3 . Restatement (Second) of Contracts, § 311 reads:

§ 311. Variation of a Duty to a Beneficiary

(1) Discharge or modification of a duty to an intended beneficiary by conduct of the promisee or by a subsequent agreement between promisor and promisee is ineffective if a term of the promise so provides.

(2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by- subsequent agreement.

(3) Such a power terminates when the beneficiary, before he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to it at the request of the promisor or promisee.

(4) If the promisee receives consideration for an attempted discharge or modification of the promisor’s duty which is ineffective against the beneficiary, the beneficiary can assert a right to the consideration so received. The promisor’s duty is discharged to the extent of the amount received by the beneficiary.