At a rodeo, a hat maker agrees to deliver 500 hats for $75 each and to pay a tannery owner a portion of the price for a prior debt. The hat maker later modifies the agreement to no longer pay the tannery owner, but the tannery owner does not know of the modification. The brother of the hat maker informs the tannery owner after the modification. Is the tannery owner bound by the modification?

• A. Yes, the modification binds all parties regardless of knowledge.
• B. No, because the tannery owner did not rely on the August 20 agreement.
• C. Yes, because oral modifications can bind third parties with notice.
• D. No, because the modification required new consideration.

Answer: (B)

The key idea is how a third-party beneficiary’s rights react to a contract modification. A third party who is intended to benefit from a contract can gain enforceable rights, but those rights vest only if the promisee and promisor intend to benefit the third party and the third party either (a) knows about the contract and assents or (b) relies on the promise (or takes action in reliance) or (c) later sues to enforce the promise. Until one of those vesting events happens, the third party isn’t bound by changes to the contract.

Here, the tannery owner is a third-party creditor beneficiary of the hat contract because the hat maker agreed to pay part of the price to discharge a prior debt. The modification to drop that payment changes the obligations between the hat maker and the other party, but it does not automatically bind the tannery owner unless their rights have vested. The tannery owner did not know about the modification and did not rely on it before it occurred, so their rights did not vest. Therefore, the modification isn’t binding on them, even though oral modifications can be enforceable between the original two parties in good faith under the UCC.

If the tannery owner had known about the modification in advance and relied on it or otherwise had his rights vest, the modification could bind him. But with no knowledge or reliance, the correct result is that the tannery owner is not bound by the modification.