Lead Opinion
Opinion
Plаintiffs brought this class action on behalf of themselves and other disadvantaged unemployed persons, alleging that defendants failed to perform contracts with the United States government under which defendants agreed to provide job training and at least one year of employment to certain numbers of such persons. Plaintiffs claim that they and the other such persons are third party beneficiaries of the contracts and as such are entitled to damages for defendants’ nonperformance. General demurrers to the complaint were sustained without leave to amend, apparently on the ground that plaintiffs lacked standing to sue as third party beneficiaries. Dismissals were entered as to the demurring defendants, and plaintiffs appeal.
We affirm the judgments of dismissal, As will appear, the contracts nowhere state that either the government or defendants are to be liable to persons such as plaintiffs for damages resulting from the defendants’ nonperformance. The benefits to be derived from defendants’ performance were cleаrly intended not as gifts from the government to such persons but as a means of executing the public purposes stated in the contracts and
The complaint names as defendants Socoma Companies, Inc. (“So-coma”), Lady Fair Kitchens, Incorporated (“Lady Fair”), Monarch Electronics International, Inc. (“Monarch”), and eleven individuals of whom three are alleged officers or directors of Socoma, four of Lady Fair, and four of Monarch. Lady Fair and the individual defendants associated with it, a Utah corporation and Utah residents respectively, did not appear in the trial court and are not parties to this appeal.
The complaint alleges that under 1967 amendments to the Economic Opportunity Act of 1964 (81 Stat. 688-690, 42 U.S.C. §§ 2763-2768, repealed by 86 Stat. 703 (1972)) “the United States Congress instituted Special Impact Programs with the intent to benefit the residents of certain neighborhoods having especially large concentrations of low incоme persons and suffering from dependency, chronic unemployment and rising tensions.” Funds to administer these programs were appropriated to the United States Department of Labor. The department subsequently designated the East Los Angeles neighborhood as a “Special Impact area” and made federal funds available for contracts with local private industry for the benefit of the “hard-core unemployed residents” of East Los Angeles.
On January 17, 1969, the corporate defendants allegedly entered into contracts with the Secretary of Labor, acting on behalf of the Manpower Administration, United States Department of Labor (hereinafter referred to as the “Government”). Each such defendant entered into a separate contract and all three contracts are made a part of the complaint as exhibits. Under each contract the contracting defendant agreed to lease space in the then vacant Lincoln Heights jail building owned by the City of Los Angeles, to invest at least $5,000,000 in renovating the leasehold and establishing, a facility for the manufacture of certain articles, to train and employ in such facility for at least 12 months, at minimum wage rates, a specified number of East Los Angeles residents certified as disadvantaged by the Government, and to provide such employees with opportunities for promotion into available supervisorial-managerial positions and with options to purchase stock in their employer corporation. Each contract providecLfof the lease of different space in the building and for the manufacture ofa different kind of product. As consideration, the Government agreed to pay each defendant a stated amount in installments. Socoma was to hire 650 persons and receive $950,000; Lady Fair was to hire 550 persons and receive $999,000; and Monarch was to hire 400 persons and receive $800,000. The hiring of these persons was to be completed by January 17, 1970.
The complaint contains 11 causes of action. The second, fourth, and sixth causes of action seek damages of $3,607,500 against Socoma, $3,052,500 against Lady Fair, and $2,220,000 against Monarch, calculated on the basis of 12 months’ wages at minimum rates and $1,000 for loss of training for each of the jobs the defendant contracted to provide. The third and fifth causes of action seek similar damages for the 139 persons whose jobs were terminated by Socoma and the 90 persons whose jobs were terminated by Lady Fair. The first, seventh, and eighth causes of action seek to impose joint liability on Socoma, Lady Fair, and Monarch as joint venturers, alleging that they negotiated the contracts through a common representative and entered into a joint lease of the Lincoln Heights jail building. The ninth, tenth, and eleventh causes of action seek to impose the liability of the corporate defendants upon their officers and directors named as individual defendants, alleging that the latter undercapitalized their respective corporations and used the same as their alter egos.
Each cause of action alleges that the “express purpose of the [Government] in entering into [each] contract was to benefit [the] certified disadvantaged hard-core unemployed residents of East Los Angeles [for whom defendants promised to provide training and jobs] and none other, and those residents are thus the express third party beneficiaries of [each] contract.”
The general demurrers admitted the truth of all the material factual allegations of the complaint, regardless of any possible difficulty in proving them (Alcorn v. Anbro Engineering, Inc. (1970)
Plaintiffs contend they are third party beneficiaries under Civil Code section 1559, which provides: “A сontract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” This section excludes enforcement of a contract by persons who are only incidentally or remotely benefited by it. (Lucas v. Hamm (1961)
A person cannot be a creditor beneficiary unless the promisor’s performance of the contract will discharge some form of legal duty owed to the beneficiary by the promisee. (Hartman Ranch Co. v. Associated Oil Co. (1937)
A person is a donee beneficiary only if the promisee’s contractual intent is either to make a gift to him or to confer on him a right against
Unquestionably plaintiffs were among those whom the Government intended to benefit through defendants’ performance of the contracts which recite that they are executed pursuant to a statute and a presidential directive calling for programs to furnish disadvantaged persons with training and employment opportunities. However, the fact that a Government program for social betterment confers benefits upon individuals who are not required to render contractual consideration in return does not necessarily imply that the benefits are intended as gifts. Congress’ power to spend money in aid of the general welfare (U.S. Const., art. I, § 8) authorizes federal programs to alleviate national unemployment. (Helvering v. Davis (1937)
Even though a person is not the intended recipient of a gift, he may nevertheless be “a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in obtaining the promise ... is ... to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary.” (Rest., Contracts, § 133, subd. (l)(a) (italics supplied); Gourmet Lane, Inc. v. Keller (1963)
The present contraсts manifest no intent that the defendants pay damages to compensate plaintiffs or other members of the public for their nonperformance. To the contrary, the contracts’ provisions for retaining the Government’s control over determination of contractual disputes and for limiting defendants’ financial risks indicate a governmental purpose to exclude the direct rights against defendants claimed here.
Each contract provides that any dispute of fact arising thereunder is to be determined by written decision of the Government’s contracting officer, subject to an appeal to the Secretary of Labor, whose decision shall be final unless determined by a competent court to have been fraudulent, capricious, arbitrary, in bad faith, or not supported by substantial evidence. These administrative decisions may include determinations of related questions of law although such determinations are not made final. The efficiency and uniformity of interpretation fostered by these administrative procedures would tend to be underminеd if litigation such as the present action, to which the Government is a stranger, were permitted to proceed on the merits.
In addition to the provisions on resolving disputes each contract contains a “liquidated damages” provision obligating the contractor to refund all amounts received from the Government, with interest, in the event of failure to acquire and equip the specified manufacturing facility, and, for each employment opportunity it fails to provide, to refund a stated dollar amount equivalent to the total contract compensation divided by the num
It is this absence of any manifestation of intent that defendants should pay compensation for breach to persons in the position of plaintiffs that distinguishes this case from Shell v. Schmidt (1954)
Moreover, contrary to plaintiffs’ contention, section 145 of the Restatement of Contracts does preclude their recovery because the services which the contracts required the defendants to perform were to be rendered to “members of the public” within the meaning of that section. Each contract recites it is made under the “Special Impact Programs” part of the Economic Opportunity Act of 1964 and pursuant to a presidential directive.
In providing for special impact programs, Congress declared that such programs were directed to the solution of critical problems existing in particular neighborhoods having especially large concentrations of low-income persons, and that the programs were intended to be of sufficient size and scope to have an appreciable impact in such neighborhoods in arrest
The fact that plaintiffs were in a position to benefit more directly than certain other members of the public from performance of the contract does not alter their status as incidental beneficiaries. (See Rest., Contracts, § 145, illus. 1: C, a member of the public cannot recover for injury from B’s failure to perform a contract with the United States to carry mail over a certain route.)
For the reasons above stated we hold that plaintiffs and the class they represent have no standing as third party beneficiaries to recover the damages sought in the complaint under either California law or the general contract principles which federal law applies to government contracts.
The judgments of dismissal are affirmed.
McComb, J., Sullivan, J., and Clark, J., concurred.
Notes
The fourth, fifth, and tenth causes of action, being directed solely against non-appearing defendants, to wit, Lady Fair and its officers and directors, are not before us on this appeal.
The corresponding language in the Tentative Drafts of the Restatement Second of Contracts (1973), section 145, is: “[A] promisor who contracts with a government or governmental agency to do an act for or render a service to the public is not subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform unless ... the terms of the promise provide for such liability . . . .”
The language omitted in this quotation and the quotation in the accompanying text relates to the creditor beneficiary situation in which the government itself would be liable for nonperformance of the contract. As noted earlier, plaintiffs do not claim to be creditor beneficiaries.
Comment a of section 145 of the Tentative Drafts of the Restatement Second of Contracts points out that these factors—retention of administrative control and limitation of contractor’s liability—make third party suits against the contractor inappropriate: “Government contracts often benefit the public, but individual members of the public are treated as incidental beneficiaries unless a different intention is manifested. In case of doubt, a promise to do an act for or render a service to the public does not have the effect of a promise to pay consequential damages to individual members of the public unless the conditiоns of Subsection (2) (b) [including governmental liability to the claimant] are met. Among factors which may make inappropriate a direct action against the promisor are arrangements for governmental control over the litigation and settlement of claims, the likelihood of impairment of service or of excessive financial burden, and the availability of alternatives such as insurance.” (Italics supplied.)
In contrast to Shell, supra, is City & County of San Francisco v. Western Air Lines, Inc., supra,
The same is true of the Tentative Draft of section 145 of the Restatement Second оf Contracts which declares that the general rules on third party beneficiaries “apply to contracts with a government or governmental agency except to the extent that, application would contravene the policy of the law authorizing the contract or prescribing remedies for its breach” and that “[i]n particular” the limitations of section 145, including those set forth in footnote 2, supra, apply to a government contractor’s liability to a member of the public for nonperformance of a service to the public.
The contracts recite:
“Whereas, the Secretary of Labor is authorized by delegation from the Director of the Office of Economic Opportunity, dated June 17, 1968, approved by the President of the United States on June 27, 1968 (33 F.R. 9850, July 9, 1968), to enter into contracts to provide for Special Impact Programs, pursuant to Title ID of the Economic Opportunity Act of 1964, as amended, hereinafter referred to as the Act, directed to the solution of the critical problems existing in particular communities and neighborhoods within urban areas of the Natiоn having especially large concentrations of low-income persons and
“Whereas, the President of the United States on October 2, 1967, launched a major test program to mobilize the resources of private industry and the Federal Government to help find jobs and provide trailing for thousands of the Nation’s hard-core unemployed, or under-employed, by inviting private industry throughout the country to join with the agencies and departments of the Federal Government in assuming responsibility for providing training and work opportunities for such seriously disadvantaged persons.
“Now Therefore, pursuant to the aforesaid statutory authority, and the directive of the President, the parties hereto, in consideration of the mutual promises herein expressed, agree as follows: . . .”
Section 2701 declares: “Although the economic well-being and prosperity of the United States have progressed to a level surpassing any achieved in world history, and although these benefits are widely shared throughout the Nation, poverty continues to be the lot of a substantial number of our people. The United States can achieve its full economic and social potential as a nation only if every individual has the opportunity to contribute to the full extent of his capabilities and to participate in the workings of our society. It is, therefore, the policy of the United States to eliminate the paradox of poverty in the midst of plenty in this Nation by opening to everyone the opportunity for education and training, the opportunity to work, and the opportunity to live in decency and dignity. It is the purpose of this chapter to strengthen, supplement, and coordinate efforts in furtherance of that policy.
“It is the sense of the Congress that it is highly desirable to employ the resources of the private sector of the economy of the United States in all such efforts to further the policy of this chapter.”
Former section 2763 provided: “The purpose of this part is to establish special programs which (1) are directed to the solution of the critical problems existing in particular communities or neighborhoods (defined without regard to political or other subdivisions or boundaries) within those urban areas having especially large concentrations of low-income persons, and within those rural areas having substantial out-migration to eligible urban areas, and (2) are of sufficient size and scope to have an appreciable impact in such communities and neighborhoods in arresting tendencies toward dependency, chronic unemployment, and rising community tensions.”
This illustration is repeated in Tentative Drafts, Restatement Second of Contracts, section 145, illustration 1.
In the absence of controlling provisions in the federal Constitution, statutes or regulations, the United States government’s rights and obligations under its contracts are ordinarily construed according to general contract law rather than the law of any particular state. (Priebe & Sons v. United States (1947)
Dissenting Opinion
I dissent. The certified hard-core unemployed of East Los Angeles were the express, not incidental, beneficiaries of the contracts in question and, therefore, have standing to enforce those contracts.
Civil Code section 1559 provides that “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties theretо rescind it.” The general principles applicable to such contracts are set forth in Shell v. Schmidt,
Applying the foregoing principles to the instant case I conclude that plaintiffs are express beneficiaries of the contracts between defendants and the government and are therefore entitled to enforce, the contracts.
The majority contend that the congressional purpose in enacting the Economic Opportunity Act of 1964 (including the subsequent amendments thereto creating the Special Impact Program), and the government’s purpose in executing the instant contracts with defendants pursuant to the act, was to benefit only the general public and particularly the local neighborhoods where these programs were to be implemented. Although mem
The majority err in the above conclusion because the congressional purpose was to benefit both the communities in which the impact programs are established and the individual impoverished persons in such communities.
The intent of the contracts themselves is expressed in their preambles: “Whereas, the Secretary of Labor is authorized ... to enter into contracts to provide for Special Impact Programs . . . directed to the solution of the critical problems existing in particular communities and neighborhoods within urban areas of the Nation having especially large concentrations of low-income persons; and [Í] Whereas, the President of the United States on October 2, 1967, launched a major test program to mobilize the resources of private industry and the Federal Government to help find jobs and provide training for thousands of the Nation’s hard
In accord with this expressed intent, the substantive provisions of the contracts confer a direct benefit upon the class seeking to enforce them. The contracts call for the hiring of stated numbers of hard-core unemployed from the East Los Angeles Special Impact Area for a period of at least one year at a starting minimum wage of $2.00 per hour for the first 90 days and a minimum wage of $2.25 per hour thereafter, or for the prevailing wage for the area, whichever is higher. In addition to requiring appropriate job training for such employees, the contracts also require “That the Contractor will arrange for the orderly promotion of persons so employed into available supervisory-managerial and other positions, and will arrange for all contract employees to obtain a total ownership interest not exceeding thirty (30) percent in the Contractor through an appropriate stock purchase plan . . . .” The scope of the stock purchase plans is detailed in each of the contracts.
In Lucas v. Hamm,
Although the contracts may also benefit particular communities and neighborhoods, this fact does not preclude the maintenance of the action by plaintiffs as intended beneficiaries of the contracts. It is not necessary under Civil Code section 1559, supra, that a contract be exclusively for the benefit of a third party to give him a right to enforce its provisions. (Hartman Ranch Co. v. Associated Oil Co.,
The majority, relying on Restatement of Contracts section 145, and City & County of San Francisco v. Western Air Lines, Inc.,
• The majority’s reliance on Restatement of Contracts section 145, and City & County of San Francisco v. Western Air Lines, Inc., supra,
The express language of this provision indicates that it applies only to a promise to do an act or render a service to “some or all of the members of the public.” The section deals solely with the promisor’s duty to give compensation to “such” members of the public. The type of government contract to which section 145 applies is therefore distinguishable from the contracts in the instant case. Here, the contracts specify a particular class
In addition, as indicated by comment a to section 145 of the Restatement, that section is merely a special application of the principles stated in Restatement section 133 which provides in part that “(1) Where performance of a promise in a contract will benefit a person other than the promisee, that person is, . . . (a) a donee beneficiary if it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed or asserted to be due from the promisee to the beneficiary . . . .”
The language of section 133, standing alone, could reasonably suggest that members of the general public are “donee beneficiaries” under any contract whose purpose is to confer a “gift" upon them. Section 145 qualifies this broad language and treats the general public merely as incidental, not direct, beneficiaries under contracts made for the general public benefit, unless the contract manifests a clear intent to compensate such members of the public in the event of a breach. Section 145 does not, however, entirely preclude application of the “donee beneficiary” concept to every government contract. Whenever, as in the instant case, such a contract expresses an intent to benefit directly a particular person or ascer
In City & County of San Francisco v. Western Air Lines, Inc., supra, 204 Cal.App.2d 105, defendant airline was held to be merely an incidental beneficiary of contracts providing that an airport “ ‘will operate . . . for the use and benefit of the public, on fair and reasonable terms and without unjust discrimination.’” (P. 118, Italics added.) Nothing in the various contracts and assurances involved in the case “shows any intent of the contracting parties to confer any benefit directly and expressly upon air carriers such as the defendant.” (P. 120.) The court stated that “To recover as a third-party beneficiary, one must show that the contract in question was made expressly for his benefit. [Citations.]” (P. 120.)
The rationale for the Western Air Lines rule is set out in Ukiah v. Ukiah Water and Imp. Co.,
Since in Western Air Lines the government contract at issue was not made expressly for the benefit of defendant but instead to benefit the general public, that case was correctly decided under Restatement of Contracts section 145. However, an interpretation to which the contracts in the instant case “are reasonably susceptible and which is pleaded in the complaint or could be pleaded by proper amendment” {ante, p. 400), in light of the legislative intent and the language of the contracts themselves, is that they were made expressly for the benefit of a particular class of persons, namely the class consisting of the certified hard-core unemployed of East Los Angeles.
Western Air Lines holds that a member of the general public cannot recover under a contract made for thе public benefit unless there appears an intent in the contract that the promisor shall compensate the public for injuries caused by the promisor’s performance or failure to perform. (204 Cal.App.2d at pp. 120-121.) That case does not stand for the proposition that an express beneficiary, or a class of express beneficiaries, may not enforce the contract unless it expressly declares that the parties so intended. On the contrary, under the rules set forth in Shell v. Schmidt, supra,
The majority contend that the inclusion of liquidated damage clauses in each of the contracts limits defendants’ financial risks and was intended to preclude thе assertion of third party claims. {Ante, p. 402.) Yet, these clauses simply provide for various refunds of monies advanced by the government in the event of a default. These so-called “liquidated' damages” clauses nowhere purport to limit damages to the specified refunds. Nothing in the contracts limits the right of the government or, more importantly, plaintiffs’ class, to seek additional relief. As I noted above, the fact that the government could also sue for breach of the contracts does not affect the rights of third party beneficiaries. (Shell v. Schmidt, supra,
A contract of employment ordinarily confers upon the employee the expectation that he will obtain the work bargained for. The measure of damages for the breach of such a contract, however, is not the award of the job, but is the amount of salary the employee would have earned for the agreed-upon period of service less the amount which the employer affirmatively proves the employee has earned, or with reasonable effort might have earned, from other employment. (Parker v. Twentieth Century-Fox Film Corp.,
It is my conclusion, thereforе, that the trial court erred in sustaining the demurrer without leave to amend. I would order the trial court to determine the propriety of plaintiffs’ class action prior to proceeding upon the merits of the complaint.
Tobriner, J., and Mosk, J., concurred.
Evidence of Congress’ purpose to aid the individual impoverished persons in such communities can be gleaned from 42 United States Code Annotated section § 2701, wherein Congress declared that if our country is to achieve its full potential, “every individual" must be given “the opportunity for education and training, the opportunity to work, and the opportunity to live in decency and dignity.” Congress implemented this general policy of assisting our impoverished citizens in various ways, including the Special Impact Program involved in this case. Yet, contrary to the majority, nothing indicates that Congress’ exclusive purpose in doing so was to assist the neighborhoods and communities in which these persons live. It seems clear that Congress intended both the communities and the individuals to be direct beneficiaries of the program. It is incorrect to label one as an intended direct beneficiary and the other as merely incidental.
In the contracts, the defendants agreed to provide training and jobs to a specified class of persons, whom plaintiffs represent. The government’s express intent, therefore, was to confer a benefit, namely training and jobs, upon an ascertainable identifiable class and not simply the general public itself.
Comment c to section 133 of the Restatement of Contracts states in part that “By gift is meant primarily some performance or right which is not paid for by the recipient and which is apparently designed to benefit him.” Thus, section 133 states essentially the same rule as that enunciated in Shell v. Schmidt, supra,
Section 135 of the Restatement of Contracts, supra, provides: “Except as stated in § 140 [giving the promisor the protection against the third party beneficiary of any defenses he has against the promisee], (a) a gift promise in a contract creates a duty of the promisor to the donee beneficiary to perform the promise; and the duty can be enforced by the donee beneficiary for his own benefit; (b) a gift promise also creates a duty of the promisor to the promisee to render the promised perfоrmance to the donee beneficiary.”
The tentative draft of section 145 in Restatement Second of Contracts (The American Law Institute, Restatement of the Law Second, Contracts, Tentative Draft No. 3 [April 18, 1967], p. 76), also supports the conclusion that this provision of the Restatement does not bar plaintiffs’ action. The tentative draft states: “In particular, a promisor who contracts with a government or governmental agency to do an act for or render a service to the public is not subject to contractual liability to a member of the public for consequential damages resulting from performance or failure to perform unless (a) the terms of the promise provide for such liability; or (b) the promisee is subject to liability to the member of the public for the damages and a direct action against the promisor is consistent with the terms of the contract and with the policy of the law authorizing the contract and prescribing remedies for its breach.” (Italics added.) Comment a to the draft of section 145 explains the rationale for the section in part as follows: “Subsection (2) applies to а particular class of contracts the classification of beneficiaries in § 133. Government contracts often benefit the public, but individual members of the public are treated as incidental beneficiaries unless a different intention is manifested. ” (Italics added.)
Comment c to the tentative draft of section 145 states further that “Government contractors sometimes make explicit promises to pay damages to third persons, and such promises are enforced. If there is no explicit promise, and no government liability, the question whether a particular claimant is an intended beneficiary is one of interpretation, depending on all the circumstances of the contract.” (Italics added.) Thus, under the tentative draft, section 145 is not an outright prohibition of the enforcement of governmental contracts by third parties absent the enumerated conditions. Comment c makes it clear that the question as to a particular claimant is one of interpretation, and that, where, as here, the contract manifests an intent to benefit a particular third party, liability is properly imposed upon the promisee in favor of such third party.