Franchisee’s Breach of Contract Claims Dismissed for Lack of Standing as Third-Party Beneficiary
A federal court recently granted a third-party supplier’s motion to dismiss a franchisee’s lawsuit, holding that the franchisee was not an intended third-party beneficiary of the contract between the supplier and the franchisor.
Background
In Belvidere Pizza, Inc. v. McCain Foods USA, Inc., Hampshire Pizza, Inc. (“Hampshire”) was the franchisor of various pizza restaurants and provided franchisee support, including purchasing and contracting services on their behalf. Belvidere Pizza, Inc. (“Belvidere”) was a Hampshire franchisee.
In 2022, Hampshire entered a Food Service Contract with McCain Foods USA, Inc. (“McCain”), a food supplier. The contract required McCain to provide Hampshire with at least 90 days’ written notice before increasing prices. The underlying dispute arose when, a few months into the contract, McCain raised its prices and provided Hampshire with only six days’ notice.
As a result, Hampshire and Belvidere jointly filed a class action suit in the U.S. District Court for the Northern District of Illinois against McCain on behalf of all parties who had paid a price increase under a contract containing the 90-day notice term. They alleged that although Belvidere was not a party to the contract, it was intended “for the direct benefit of third parties, namely the members/franchisees.” Subsequently, McCain moved to dismiss Belvidere’s claims, arguing that Belvidere was not an intended third-party beneficiary under the contract.
The Court Granted the Supplier’s Motion to Dismiss the Franchisee Lawsuit
The Court granted the motion to dismiss. Illinois law imposes a “strong presumption against conferring contractual benefits on noncontracting third parties.” In other words, for a noncontracting party to hold either party of a contract liable for its breach, the contract must contain express language identifying the third party or the specific class to which they belong. It is insufficient that the contracting parties merely “knew, expected, or intended that others would benefit from the agreement.”
Because Belvidere was not a party to the contract, and the contract did not reference its franchise or otherwise establish that Belvidere was intended to benefit, the Court dismissed all of Belvidere’s claims against McCain.
Alternatively, Belvidere argued that there was an implied contract between itself and McCain and claimed entitlement to recovery under unjust enrichment. However, the Court did not reach the merits of this argument because Belvidere improperly pled unjust enrichment by “referencing the existence of a contract” in its claim. Illinois law does not allow for a plaintiff to incorporate by reference prior allegations of the existence of a contract in support of a claim for unjust enrichment.
Key Takeaway
This case highlights an important point for parties contracting in Illinois: courts will not confer contractual rights on someone who is not a party to the contract, unless there is clear and express language identifying the party and establishing that the contract was intended for its benefit. Therefore, franchisors who intend for their franchisees to have enforceable rights under contracts negotiated on their behalf should ensure the contract explicitly names or clearly describes those franchisees.
