On behalf of himself and other similarly situated options investors, Rick Lockwood sued defendant, Standard & Poor’s Corporation (Standard & Poor’s)
On behalf of himself and other similarly situated options investors, Rick Lockwood sued defendant, Standard & Poor’s Corporation (Standard & Poor’s), for breach of contract. Lockwood alleged that he and other options investors suffered lost profits on certain options contracts because Standard & Poor’s failed to correct a closing stock index value. Standard & Poor’s compiles and publishes two composite stock indexes, the “S&P 100” and the “S&P 500” (collectively the S&P indexes). The S&P indexes are weighted indexes of common stocks primarily listed for trading on the New York Stock Exchange (NYSE). Standard & Poor’s licenses its S&P indexes to the Chicago Board Options Exchange (CBOE) to allow the trading of securities options contracts (S&P index options) based on the S&P indexes (the license agreement). S&P index options are settled by the Options Clearing Corporation (OCC). The exercise settlement values for S&P index options are the closing index values for the S&P 100 and S&P 500 stock market indexes as reported by Standard & Poor’s to OCC following the close of trading on the day of exercise. In his complaint, Lockwood alleged that at approximately 4:12 P.M. on Friday, December 15, 1989, the last trading day prior to expiration of the December 1989 S&P index options contracts, the NYSE erroneously reported a closing price for Ford Motor Company common stock. Ford Motor Company was one of the composite stocks in both the S&P 100 and S&P 500. At approximately 4:13 P.M., Standard & Poor’s calculated and disseminated closing index values for the S&P 100 and S&P 500 stock market indexes based on the erroneous price for Ford stock. The NYSE reported a corrected closing price for Ford Motor at approximately 4:18 P.M. Standard & Poor’s corrected the values of the S&P 100 and S&P 500 stock market indexes the following Monday, December 18, 1989. In the meantime, however, OCC automatically settled all expiring S&P index options according to the expiration date of Saturday, December 16, 1989. OCC used the uncorrected closing index values to settle all expiring S&P index options. Due to the error, Lockwood alleges that the S&P 100 index was overstated by 0.15 and he lost $105. Lockwood claimed investors in S&P 500 index options suffered similar losses. Lockwood filed a class action on behalf of “all holders of long put options and all sellers of short call options on the S&P 100 or S&P 500, which were settled based on the closing index values for December 15, 1989, as reported by Standard & Poor’s,” claiming that the options holders could recover in contract as third-party beneficiaries of the license agreement between Standard & Poor’s and the CBOE. Are the members of the class action suit entitled to recover? Explain.
In an intended third-party beneficiary contract, the beneficiary is explicitly promised certain benefits but they are not part of a contract. They are just receivers of the benefits.
An intended third-party beneficiary occurs when one or more given conditions is satisfied:
Performance or services are directly provided to the third party.
The third party has the authority to control the details of the performance.
The contract clearly states the names and designations of the beneficiaries.
Here, none of above-mentioned conditions, which can make Individual R liable for claiming losses, are fulfilled.
The third-party beneficiary contract is a contract wherein two parties are binding to a legal contract, resulting in the benefit of a third party, the beneficiary. The legal contract must explicitly mention the name of beneficiary under the provisions or clauses of a contract.
Here, Company S&P has a license agreement with Company CB, which does not mention any provisions or clauses associated to the indented third-party beneficiary. So, Individual R cannot enforce the contract and claims of losses as a third-party beneficiary.